Application of the Ponzi Scheme Presumption

To satisfy the intent element of a claim for actual fraudulent transfer for purposes of surviving a motion to dismiss, the plaintiff must either plead the facts establishing the debtor’s intent to hinder, delay or defraud its creditors with particularity (in Federal Court, pursuant to Rule 9 of the Federal Rules of Civil Procedure) or plead that the debtor was being operated as a Ponzi scheme (or other fraudulent enterprise) to invoke the Ponzi Scheme Presumption (a/k/a the Ponzi Presumption).

A Ponzi scheme is a fraudulent arrangement in which an entity makes payments to investors from moneys obtained from later investors rather than from any profits of the underlying business venture.  The fraud consists of funneling proceeds received from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating an illusion a legitimate profitmaking business opportunity exists and inducing further investment.

People v. Dunn-Gonzalez, 47 Cal. App. 4th 899, 906, fn. 2. (Cal. 1996).

Many U.S. Circuit Courts of Appeals have upheld the application of the Ponzi Presumption in actual fraudulent transfer actions brought under state law and the Bankruptcy Code.  See, e.g., Wiand v. Lee, 753 F.3d 1194 (11th Cir. 2014) (applying Florida’s UFTA); Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008) (applying California’s UFTA); SEC v. Res. Dev. Int’l, LLC, 487 F.3d 295, 301 (5th Cir. 2007) (applying Texas’s UFTA); Warfield v. Byron, 436 F.3d 551, 558-59 (5th Cir. 2006) (applying Washington’s UFTA); Wing v. Dockstader, 482 Fed. Appx. 361, 363 (10th Cir. 2012) (applying Utah’s UFTA); Perkins v. Haines, 661 F.3d 623, 626 (11th Cir. 2011) (“With respect to Ponzi schemes, transfers made in furtherance of the scheme are presumed to have been made with the intent to defraud for purposes of recovering the payments under [11 U.S.C.] §§ 548(a) and 544(b).”).

In particular, the Eleventh Circuit, in applying the Ponzi Presumption, has held that “under [Florida’s] UFTA’s actual fraud provision, proof that a transfer was made in furtherance of a Ponzi scheme establishes actual intent to defraud under § 726.105(1)(a) without the need to consider the badges of fraud.”  Wiand v. Lee, 753 F.3d at 1201 and n.3 (“one of the badges of fraud noted in [SEC v. Elliott, 953 F.2d 1560 (11th Cir. 1992)] – the Ponzi scheme operator’s insolvency – is necessarily present in every Ponzi scheme”) (citing Warfield, 436 F.3d at 558 (noting that “a Ponzi scheme . . . is, as a matter of law, insolvent from its inception”) (citing Cunningham v. Brown, 265 U.S. 1, 8 (1924) (“[Charles Ponzi] was always insolvent, and became daily more so, the more his business succeeded.  He made no investments of any kind, so that all the money he had at any time was solely the result of loans by his dupes.”).

Therefore, when a plaintiff proves that transfers are made in furtherance of a Ponzi scheme, the Ponzi Presumption is triggered such that the plaintiff need not prove that the transferor had actual intent to defraud creditors when it made the transfers, which is presumed as a matter of law.  See In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 13 (Bankr. S.D.N.Y. 2007).


Establishing Actual Fraudulent Intent Only Requires Establishing Debtor’s Intent or Existence of Ponzi Scheme.

In In re Bernard L. Madoff Inv. Securities, LLC, 458 B.R. 87, 105 (Bankr. S.D.N.Y. 2011) (“Madoff”), the Bankruptcy Court applying New York law and precedential case law of the Southern District of New York, analyzed the Ponzi Presumption and its effect on the determination of the transferor’s intent.  The Court held that “[a]s a matter of law, the ‘Ponzi scheme presumption’ establishes the debtors’ fraudulent intent as required under both the [Bankruptcy] Code and the NYDCL.”  Id. (citing Gowan v. The Patriot Group, LLC (In re Dreier LLP), 452 B.R. 391, 428 (Bankr. S.D.N.Y. 2011)).

Presented with a motion to dismiss an actual fraudulent transfer claim, the Madoff Court held that:

The Ponzi scheme presumption applies only to the transferor’s intent. See Patriot, 452 B.R. at 424. The Defendants, however, posit that the transferee’s fraudulent intent must be established to state a claim under section 276 of the NYDCL. The District Court rejected this precise argument in Merkin II, explaining that “relevant cases, together with analysis of the statute, convince the Court that, to state a claim under Section 276, a plaintiff need allege fraudulent intent by only the transferor.” 2011 WL 3897970, at *6 (citing Patriot, 452 B.R. at 435) (emphasis added); see also Cohmad, 454 B.R. at 330 (“[I]t is the transferor’s intent alone, and not the intent of the transferee, that is relevant under NYDCL § 276.”) (quoting Patriot, 452 B.R. at 433); Gowan v. Wachovia Bank, N.A. (In re Dreier LLP), 453 B.R. 499, 510 (Bank. S.D.N.Y. 2011) (holding that for the “reasons stated [in Patriot], the plaintiff is only required to plead the fraudulent intent of the transferor under DCL § 276”).


Courts Apply Prior Finding of Fraud and/or Existence of Ponzi Scheme in Determining Debtor’s Intent

The Ninth Circuit Court of Appeals, in Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008), affirmed a District Court determination that it could not retry the issue of fraudulent intent of the debtor for purposes of an actual fraudulent transfer claim where it had entered a prior judgment establishing the debtor’s fraudulent intent at the time of the transfers.  Id. at 773  (affirming summary judgment for receiver holding no issue of triable fact as to debtor’s operation of fraudulent scheme where Court had previously determined in the SEC enforcement action against the debtor that debtor operated a fraudulent scheme); see also In re Madoff, 445 B.R. 206 (S.D.N.Y 2011) (quoting In re Slatkin, 525 F.3d 805, 814 (9th Cir. 2008) (“A debtor’s admission, through guilty pleas and a plea agreement admissible under the Federal Rules of Evidence, that he operated a Ponzi scheme with the actual intent to defraud his creditors conclusively establishes the debtor’s fraudulent intent … as a matter of law”)); Wiand v. Morgan, 919 F. Supp. 2d 1342, 1361 (M.D. Fla. 2013) (entering summary judgment for receiver on actual fraudulent transfer claim based on findings in prior criminal proceeding establishing debtor’s fraudulent intent which led Florida District Court to find that debtor operated a Ponzi scheme at the time of the transfers to transferee and that such transfers were made with the actual intent to hinder, delay, or defraud as required by Florida Statutes Section 726.105(1)(a)).

Moreover, District Courts routinely take judicial notice of guilty pleas and testimony establishing fraudulent conduct in finding actual intent to defraud in fraudulent transfer actions.  See, e.g., La Bella v. Bains, 2012 WL 1976972 (S.D. Cal. May 31, 2012) (granting summary judgment for receiver on claims for actual fraudulent transfer against multiple defendants where court took judicial notice of Ponzi schemer’s guilty plea agreement and found he operated Ponzi scheme with actual intent to defraud creditors under California UFTA); Armstrong v. Collins, 2010 WL 1141158 (S.D.N.Y March 24, 2010) (finding schemer who defrauded investors ran a Ponzi scheme and that entities involved were never solvent based on schemer’s testimony, his guilty plea and expert opinion provided in a prior criminal proceeding) (citations omitted).

In a fraudulent transfer action brought under California’s UFTA, where the District Court for the Southern District of California had not yet made a finding of the existence of a fraudulent scheme, the Court took judicial notice of the pleas and findings from the debtor’s prior criminal proceeding and held that “[t]he existence of a Ponzi scheme may be shown by circumstantial evidence.”  La Bella, 2012 WL 1976972 at *4 (citing In re Agric. Res. & Tech. Group, Inc., 916 F. 2d 528, 534–35 (9th Cir. 1990)).  In La Bella, the plaintiff submitted and the Court considered evidence showing that the debtor operated a fraudulent scheme with no real profits.  See id.  Moreover, in determining that the debtor’s principal operated a Ponzi scheme, the Court took judicial notice of the principal’s guilty plea agreement, wherein he admitted the details of the fraudulent scheme.  See id.  Based on the foregoing, the Court held that the plaintiff had sufficiently demonstrated the existence of a Ponzi scheme operated by the debtor’s principal and, as such, had established the “actual intent” to defraud required for liability under § 3439.04(a)(1).  See id.; see also In re McCarn’s Allstate Finance, Inc., 326 B.R. 843, 851 (M.D. Fla. 2005) (“Even if the information or indictment did not specifically label the fraud a ‘Ponzi scheme,’ if the allegations in the information establish that the debtor ran a scheme whereby the debtor intended to defraud the debtor’s creditors, evidence of a guilty verdict or plea agreement admitting the charges can establish the existence of a Ponzi scheme.”).

Thus, a Court’s findings, holdings and judgments, a jury’s verdict, and a debtor’s pleas in a prior proceeding concerning the debtor’s operation of a Ponzi scheme or other fraudulent enterprise establish, as a matter of law, the debtor’s intent to hinder, delay or defraud its creditors in making transfers while operating such an enterprise.  As such, the plaintiff pursuing an actual fraudulent transfer claim against parties who received such transfers need not prove once again the debtor’s fraudulent intent.