Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Friday, April 13, 2012

Legislative Protection for Charities Caught by Ponzi Clawbacks

Posted by Kathy Bazoian Phelps   

On April 3, 2012, Minnesota Governor Mark Dayton signed a new law, Chapter 151, House File 1384, designed to protect nonprofits from having to pay back donations made by Ponzi perpetrators and other fraudulent sources.  The new law actually restricts a trustee’s recovery in three distinct ways.

First, it amends Minnesota Statutes § 513.41 to exempt charitable organizations from returning transfers made outside of a two year statute of limitations.  The current statute of limitation on fraudulent transfer lawsuits is six years.  The new statute effectively shortens the statute of limitations by amending the definition of a “transfer” to exclude any transfer more than two years before the commencement of the action, as follows:

“Transfer” does not include a contribution of money or an asset made to a qualified charitable or religious organization or entity unless the contribution was made within two years of commencement of an action under sections 513.41 to 513.51 against the qualified charitable or religious organization or entity and [the transfer was either an actual or a constructive fraudulent transfer].

Second, even within the two years before the action is commenced, recovery of constructive fraudulent transfers is restricted in amount according to a formula that further narrows the definition of a “transfer,” as follows:

A transfer of a charitable contribution to a qualified charitable or religious organization or entity is not considered a [constructive] transfer . . . if the amount of that contribution did not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution was made; or the contribution exceeded that amount but the transfer was consistent with practices of the debtor in making charitable contributions.
Those familiar with the Bankruptcy Code will recognize that this precise limitation applies to a trustee’s recovery under § 548(a)(2).  As a result, substantial case law is available that should assist in interpreting and applying this new Minnesota restriction.  This case law is thoroughly reviewed in § 3.02[5] of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, by Kathy Bazoian Phelps and Hon. Steven Rhodes.

The third way in which the new Minnesota statute restricts a trustee’s recovery is that these limits are given immediate effect and are applied to existing lawsuits, as follows:

This section is effective the day following final enactment and applies to a cause of action existing on, or arising on or after, that date.
Reactions to the new law have been as expected.  Doug Kelley, the trustee in the Thomas Petters bankruptcy case pending in Minnesota, had sued several charities, including the Minnesota Teen Challenge for $2.3 million and the College of St. Benedict for $2 million.  He has been quoted as saying that the new law could possibly bar him from collecting between $200 million and $450 million.  He also reportedly expressed concern that the law will turn Petters’ investors into two-time victims by reducing their recoveries.
On the other side, the College of St. Benedict told the Minneapolis Star Tribune that it “accepted and spent the donations in good faith from 2003 to 2006 to further its mission,” and added,  “We are gratified that a bill recently passed by the 2012 Minnesota Legislature and awaiting the governor’s signature recognizes the position of nonprofits in such situations.”

It will be interesting to whether other states follow Minnesota’s lead on this important question. The new Minnesota law is available here.

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