- Case No. 10-10683 (11th Cir. Oct. 27, 2011)
- For purposes of recovering fraudulent transfers (§ 548(a)), all transfers made in furtherance of a Ponzi scheme are presumed to have been made with fraudulent intent. Therefore, it is presumed that all of the transfers in question are fraudulent transfers (§ 548(a)(1)(A), and applicable state law). The § 548(c) defense requires that the transferee have taken in good faith and for value. In a Ponzi scheme, a defrauded investor gives value in exchange for a return on principal, but not for any transfers in excess of the principal (fictitious profits). Accordingly, any transfers in excess of the amount of a transferee’s principal are recoverable by the trustee. The court rejects the Trustee’s argument that redemption of equity cannot be considered a transfer for value. The cases cited by the Trustee are distinguishable from the present matter, in that the cited cases involve investors returning stock to an insolvent corporation. In those cases, the investors transferred worthless (or almost worthless) stock, which could not result in a transfer for value (as the corporations involved were insolvent). None of the cases cited by the Trustee involved a Ponzi scheme, or fraudulent inducement to invest. The court adopts the Ninth Circuit’s stance that it is substance, and not form, which matters. In other words, the presumption of fraud applies to a Ponzi scheme regardless of the form of the investment. Accordingly, the court affirms the decision of the lower court; each of the defendants provided value up to the amount of the principal invested, and denial of summary judgment motion is appropriate.
- Procedural context:
- The Chapter 11 Trustee sought to recover fraudulent transfers made by Debtors (International Management Associates, LLC, and related entities) to Defendants. The court denied the Trustee’s motion for partial summary judgment on Defendants’ assertion of the § 548(c) affirmative defense. The Trustee filed this appeal.
- Kirk Wright formed Debtors as “hedge funds.” However, Wright actually operated a Ponzi scheme, in which “investors” bought “equity.” Each of the defendants received at least one transfer from at least one debtor, which were supposedly returns of principal and/or profits.
- Edmondson, Martin, and Hodges.
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