The following is a case update written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, analyzing a recent decision of interest:
The Eleventh Circuit Court of Appeals held that the court-appointed receiver for entities that operated as a Ponzi scheme did not adequately allege fraudulent transfer claims where the complaint did not allege the transfer of funds to third parties. The court further held that the receiver lacked standing to pursue aiding and abetting claims because of the imputation of conduct to the receiver. Isaiah v. JPMorgan Chase Bank, 960 F.3d 1296 (11th Cir. June 1, 2020).
To view the full opinion, click here.
Isaiah, the court-appointed receiver (the “Receiver”) for Coravca Distributions, LLC and Timeline Trading Corp. (the “Receivership Entities”), filed a complaint against JP Morgan Chase Bank, N.A. (the “Bank”) to avoid and recover fraudulent transfers under the Florida Uniform Fraudulent Transfer Act (“FUFTA”) and for damages based on aiding and abetting the torts of breach of fiduciary duty, conversion and fraud. A Florida state court appointed the Receiver after determining that the Receivership Entities operated as a Ponzi scheme.
The Receivership Entities deposited sums from investors into accounts at the Bank as part of operating the Ponzi scheme. In May 2010, the Bank closed the accounts after the Bank’s anti-money laundering section detected suspicious activity, but the Bank allowed the Receivership Entities to open new accounts and to transfer the funds to accounts at other banks.
The Bank filed a motion to dismiss the complaint which the District Court granted. As to the fraudulent transfer claims, the District Court held that the claims alleged did not constitute fraudulent transfers because the transfers alleged were transfers between the Receivership Entities’ accounts and the funds remained funds of the Receivership Entities. As to the aiding and abetting claims, the District Court held that the complaint did not adequately allege that the Bank had actual knowledge of the Ponzi scheme. The Eleventh Circuit affirmed, although on different grounds for the aiding and abetting claims.
The fraudulent transfer claims under the FUFTA (Fla. Stat. § 726.108(1)(a)) for fraudulent transfers made with actual intent are similar to other state UFTA statutes and the Bankruptcy Code and require that a transfer was made with the actual intent to hinder, delay or defraud a creditor of the debtor. Citing to Nationsbank, N.A. v. Coastal Utilities, Inc., 814 So. 2d 1227, 1230 (Fla. Dist. Ct. App. 2002), the court stated that “[w]hile the definition of transfer is broad, the statute plainly requires a plaintiff to show that the debtor either disposed of his asset or relinquished some interest in that asset.”
The Receiver’s primary argument was that the deposits into the accounts and between the Receivership Entities’ accounts constituted transfers. The Eleventh Circuit stated that “[w]e disagree that a routine bank deposit constitutes a transfer to the bank within the meaning of the FUFTA” because the Receivership Entities did not dispose of assets or relinquish interests in assets when they deposited funds into the accounts. The court also stated that it was unable to locate any allegation in the complaint that the funds were transferred to third-party accounts at the Bank, including in nearly 100 pages of exhibits detailing activity in the accounts, and that “[b]ecause Isaiah’s FUFTA claims against JPMC are based only on the Receivership Entities’ movement of funds into and among their own bank accounts, the District Court correctly determined that the complaint failed to allege a fraudulent transfer to JPMC within the meaning of the FUFTA.”
The Eleventh Circuit also disagreed with the Receiver’s argument that the District Court applied the mere conduit defense. The court stated that “[t]o be clear, the District Court did not apply the mere conduit defense in dismissing Isaiah’s FUFTA claim, and neither do we. Rather, the District Court did not need to reach that question because it held, as we do here, that Isaiah failed to allege any applicable FUFTA transfer and so, as a threshold matter, failed to even state a FUFTA claim.” Notably, the court stated that the mere conduit defense is a judicially created exception under the equitable powers of bankruptcy courts and “[n]either this Circuit nor the Florida courts have decided whether this equitable defense should also apply in statutory actions under FUFTA, and for the reasons set forth above, we need not decide that question either.”
As to the aiding and abetting claims, the court stated that the Receiver lacked standing to pursue the claims because the acts of the principals of the Ponzi scheme were imputed to the Receiver. Citing to Freeman v. Dean Witter Reynolds, Inc., 865 So. 2d 543, 550-551 (Fla. Dist. Ct. App. 2003), the court stated that the Receiver may bring fraudulent transfer claims, but lacks standing to bring common law tort claims “unless the corporation in receivership has at least one honest member of the board of directors or an innocent stockholder, the fraud and intentional torts of the insiders cannot be separated from those of the corporation itself…” The court found that “[t]his case is indistinguishable from Freeman” and that “[l]ike in Freeman, Isaiah’s ability to pursue these claims is barred not by the doctrine of in pari delicto, but by the fact that the Receivership Entities were controlled exclusively by persons engaging in and benefitting from the Ponzi scheme, and so the Receivership Entities were not injured by that scheme.” The court also stated that the aiding and abetting claims are claims that the creditors of the Ponzi scheme may bring separately and “[t]o allow receivers to bring these types of lawsuits purportedly for the benefit of the entities’ creditors is really to usurp the claims that properly belong to those creditors.”
Based on the Eleventh Circuit’s description of the allegations in the complaint, it is unclear why the Receiver included fraudulent transfer claims against the Bank. To the extent that funds were transferred from the Receivership Entities’ accounts to third parties, the Receiver had viable fraudulent transfer claims against those third parties.
In the Freeman case cited by the Eleventh Circuit, the Florida District Court of Appeal stated that the receiver’s “ability to pursue the remaining counts is not affected so much by the doctrine of in pari delicto as it is by the factual history of this Ponzi scheme.” Freeman at 550. The outcome of the court’s analysis is that receivers for Ponzi schemes in the Eleventh Circuit may pursue fraudulent transfer claims and claims against the Ponzi scheme’s principals, but generally may not pursue third parties for common law torts based on the fraud unless there is an honest officer, director or shareholder.
The Ninth Circuit agrees that receivers have standing to pursue fraudulent transfer claims. See Donell v. Kowell, 533 F.3d 762, 777 (9th Cir. 2008). As to common law claims, in F.D.I.C. v. O’Melveny & Myers 61 F.3d 17, 19 (9th Cir. 1995), the Ninth Circuit stated in dicta that “[w]hile a party may itself be denied a right or defense on account of its misdeeds, there is little reason to impose the same punishment on a trustee, receiver or similar innocent entity that steps into the party’s shoes pursuant to court order or operation of law. Moreover, when a party is denied a defense under such circumstances, the opposing party enjoys a windfall. This is justifiable as against the wrongdoer himself, not against the wrongdoer’s innocent creditors.” The statement by the Ninth Circuit in O’Melveny relates to the defense of in pari delicto, whereas the Eleventh Circuit’s opinion turns on standing. However, the same principle applies: that the receiver is an innocent and independent fiduciary and court-appointed receivers arguably should have standing. Although the Eleventh Circuit states that the claims against third parties belong to creditors and not the Receiver, claims against banks, accountants and attorneys assisting in perpetrating a Ponzi scheme are general claims that arguably harmed the company itself and relate to all creditors rather than a single creditor. In practice, if a receiver does not file suits against the third parties participating in the fraud, few, if any, of the creditors are likely to file lawsuits against the third parties. Therefore, the result of precluding standing to pursue common law torts is to provide those third parties a windfall at the expense of the receivership estate and its creditors.
These materials were written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.