Eighth Circuit Rejects Ponzi Scheme Presumption to Protect Legitimate Loan Repayments

The Eighth Circuit affirmed the lower courts' dismissal of a bankruptcy trustee's $250 million fraudulent transfer suit against two banks (the Banks), rejecting the so called “Ponzi scheme presumption” that “allows a creditor to by-pass the proof requirements of a fraudulent-transfer claim by showing that the debtor operated a Ponzi scheme and transferred assets 'in furtherance of the scheme.'” Id., at 3, quoting Finn, 860 N.W. 2d, at 646 (Minn. 2015) (construing Minnesota Uniform Fraudulent Transfer Act (MUFTA) and declining to apply Ponzi scheme presumption).

Relevance

The judge-made Ponzi scheme presumption has generated litigation in the past few years. The Eighth Circuit in Stoebner enthusiastically followed the Minnesota Supreme Court's 2015 Finn decision to reach the right result (i.e., rejecting the presumption). In contrast, two years ago, the Fifth Circuit begrudgingly accepted the Texas Supreme Court's similar reading of the Uniform Fraudulent Transfer Act in Janvey v. Golf Channel Inc., 834 F.3d 570, 572-73 (5th Cir. 2016) (because “the Supreme Court of Texas is the authoritative interpreter of [the Texas Uniform Fraudulent Transfer Act] and [because] we are bound by its answer to our certified question when applying that statute,” the defendant's “media-advertising services had objective value and utility from a reasonable creditor's perspective at the time of the transaction, regardless of [the debtor's] financial solvency at the time.”), quotingJanvey v. Golf Channel, Inc., 487 S.W. 3d 560, 581-82 Tex. 2016). The Fifth Circuit in Janvey also ignored the Minnesota Supreme Court's 2015 Finn decision.

Facts

An entity known as PCI “purported to run a 'diverting' business that purchased electronics in bulk and resold them at high profits to major retailers.” 2018 WL 6055636 at 1, quoting Richie Capital Management, LLC v. Stoebner, 779 F.3d 857, 859 (8th Cir. 2015). PCI deceived investors into providing it with financing to acquire merchandise for resale, but never purchased merchandise or sold it to retailers. Like other classic Ponzi schemes, PCI's purported income came from investor loans that PCI used to repay earlier investors. Id., n.1, In re Armstrong, 291 F.3d 517, 520 n.3 (8th Cir. 2002) (a Ponzi scheme is a “fraudulent business venture … in which investors' 'returns' are generated by capital from new investors rather than the success of underlying business venture.”).

PCI also acquired legitimate businesses, including the debtor here in 2005. When the PCI Ponzi scheme later collapsed, the debtor sought bankruptcy relief. The debtor's bankruptcy trustee later sued the Banks under the Minnesota Uniform Fraudulent Transfer Act (MUFTA) to recover $250 million in loan payments they received from the debtor's predecessor, claiming that the debtor was the successor in interest to a PCI affiliate.