No Decision From Eighth Circuit On Validity Of Ponzi Scheme Presumption

In Ritchie Capital Mgmt., LLC v. Stoebner, 779 F.3d 857 (8th Cir. 2015), the U.S. Court of Appeals for the Eighth Circuit affirmed a bankruptcy court's decision that transfers of trademark patents were avoidable under section 548(a)(1)(A) of the Bankruptcy Code and Minnesota state law because they were made with the intent to defraud creditors. On a motion for summary judgment, the bankruptcy court had determined that transfers effected as part of a massive, multibillion-dollar Ponzi scheme satisfied both the "Ponzi scheme presumption" of fraud and the more general "badges of fraud" analysis. On appeal, the Eighth Circuit affirmed the rulings below on the basis of the badges of fraud analysis. The court did not find it necessary to address the validity of the Ponzi scheme presumption, writing that "[w]e . . . draw no conclusions as to the validity or future applicability of the Ponzi scheme presumption in the Eighth Circuit."

Avoidance Powers and Proving Fraudulent Intent

Section 548(a)(1) of the Bankruptcy Code authorizes a trustee or debtor-in-possession ("DIP") to avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor within the two years preceding a bankruptcy filing if: (i) the transfer was made, or the obligation was incurred, "with actual intent to hinder, delay, or defraud" any creditor; or (ii) the debtor received "less than a reasonably equivalent value in exchange for such transfer or obligation" and was, after the transfer, insolvent, undercapitalized, or unable to pay its debts as such debts matured. Transfers or obligations may also be avoided under analogous state laws by operation of section 544(b)(1) of the Bankruptcy Code, which empowers a trustee or DIP to "avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim" against the debtor. Examples of such laws are the versions of the Uniform Fraudulent Transfer Act ("UFTA") and the Uniform Fraudulent Conveyance Act ("UFCA") adopted by most states. Like section 548(a)(1), both the UFTA and the UFCA provide for the avoidance of intentionally and constructively fraudulent transfers or obligations. Proving actual intent to defraud under either section 548 or state law can be difficult. Many courts therefore permit plaintiffs to rely on "badges of fraud," a concept developed and applied by English courts since the reign of Queen Elizabeth I, to support a case for avoidance based on actual intent to hinder, delay, or defraud creditors. In general terms, badges of fraud are "circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent." In re Sharp Intern. Corp., 403 F.3d 43, 56 (2d Cir. 2005). While there is no exhaustive catalog of badges of fraud, courts typically look for, among other things, "a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business, inadequacy of...