POSHOW ANN KIRKLAND, ET AL V. JASO

Summarized by Solymar Castillo-Morales , Goldman Antonetti & Cordova PSC
1 year 6 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

No. 22-55944 (9th Circuit, Aug 23,2024) Published

Tag(s):

Ruling:

The Circuit Court affirmed the district court’s order affirming a judgment of the bankruptcy court, and remanded for further proceedings, in a fraudulent transfer action in which a jury determined that debtor Jerrold S. Pressman operated his business, EPD Investment Co., LLC (EPD), as a Ponzi scheme.

Procedural context:

The main question in this appeal is whether the district court erred by failing to include a mens rea instruction that would have required the jury to find that Pressman knew he was operating a Ponzi scheme that would eventually collapse. The Court concluded that the proposed mens rea instruction was not required. As the Ponzi scheme presumption reflects, fraudulent intent may be inferred by evidence of the existence of a Ponzi scheme established through objective criteria. Implicit in the jury’s finding that EPD was a Ponzi scheme was its finding that Pressman harbored the intent to defraud his investors by operating a scheme that had no legitimate profit-making opportunity. A trustee’s action to recover assets fraudulently conveyed in the course of a Ponzi scheme does not require that the trustee also prove the Ponzi scheme operator was subjectively aware his Ponzi scheme was destined to fail. Because the evidence at trial was more than sufficient to support the jury’s Ponzi scheme finding, and the district court did not err in its jury instructions or evidentiary rulings, the Court affirmed the judgment below.

Facts:

EPD was forced into Chapter 7 bankruptcy by its creditors. The Trustee, Jason M. Rund, filed an adversary proceeding against Poshow Ann Kirkland (Ann) and her husband, John Kirkland (John), seeking to avoid fraudulent transfers made by EPD to John, who had assigned his interest in EPD to the Bright Conscience Trust. Following a six-day trial of the Trustee’s claims against John, the jury returned a verdict finding that EPD was a Ponzi scheme but that John had received payments from EPD in good faith and for reasonably equivalent value. Judgment was entered in John’s favor. Ann appeals the judgment because the jury’s adverse Ponzi scheme finding will have preclusive effect in the Trustee’s forthcoming trial against Ann to disallow or equitably subordinate BC Trust’s proofs of claim. The Trustee argued that Ann did not have standing to pursue this appeal because she was not a party to John’s jury trial. Ann was not a party to John’s trial because, over her objection, the district court granted the Trustee’s motion to bifurcate the trial of the fraudulent transfer claims against her and John. The panel held that Ann had standing to appeal in light of Ann’s significant involvement in the case and her interest in the issues presented. At trial, the district court instructed the jury that a Ponzi scheme is a financial fraud that “consists of transferring proceeds received from new investors to previous investors, thereby giving investors the impression that a legitimate profit-making opportunity exists, where in fact no such opportunity exists.” The jury was also instructed on the long-standing Ponzi-scheme presumption, which recognizes that a debtor’s actual intent to hinder, delay, or defraud its creditors may be inferred by the mere existence of a Ponzi scheme. The panel rejected Ann’s argument that the district court erred by failing to include a mens rea instruction that would have required the jury to find that Pressman knew he was operating a Ponzi scheme that would eventually collapse. The panel held that the proposed mens rea instruction was not required because, as the Ponzi scheme presumption reflects, fraudulent intent may be inferred by evidence of the existence of a Ponzi scheme established through objective criteria. Implicit in the jury’s finding that EPD was a Ponzi scheme was its finding that Pressman harbored the intent to defraud his investors by operating a scheme that had no legitimate profit-making opportunity. The panel also rejected Ann’s argument that the district court erred by instructing the jury that lenders are investors for purposes of a Ponzi scheme because there is no question that lenders can be victims of a Ponzi scheme as a matter of law. The panel held that the evidence at trial was more than sufficient to support the jury’s Ponzi scheme finding, and that the district court did not err in its evidentiary rulings.

Judge(s):

Richard R. Clifton, Gabriel P. Sanchez, and Edward R. Korman,

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