The Minnesota Supreme Court recently issued an opinion overturning a legal presumption that permitted victims of financial fraud to forego evidentiary requirements under the Minnesota Uniform Fraudulent Transfer Act (MUFTA) in cases involving Ponzi schemes. As a result, the ruling calls into question the potential recovery of more than $1 billion in alleged false profits from those with relationships to Tom Petters, the mastermind of one of the largest financial frauds in U.S. history, second only to Bernie Madoff.
In 2010, Petters—a prominent Minnesota businessman and CEO of Petters Group Worldwide, a holding company with diverse assets that included Sun Country Airlines and Polaroid—was convicted on counts of fraud, conspiracy, and money laundering in connection with a $3.65 billion Ponzi scheme. Prior to Petters’s conviction, the U.S. Bankruptcy Court for the District of Minnesota appointed a bankruptcy trustee who proceeded to file more than 200 clawback suits against lenders and others in order recoup assets under MUFTA and other available claims.
Prior to the recent ruling, Minnesota courts applied a “Ponzi scheme presumption” to financial transfers between the perpetrator of the Ponzi scheme and beneficiaries of the fraud. As such, those transfers were deemed fraudulent on their face, without a trustee or receiver bearing the evidentiary burden of proving involvement by each individual beneficiary of a fraudulent transfer.
In February, the Minnesota Supreme Court upended that presumption in Finn v. Alliance Bank. In that case, a Minnesota company accused of running fraudulent lending programs collapsed and its founder was convicted of bank fraud. As in the Petters clawback litigation, a court-appointed receiver filed suit against various entities seeking to recover profits from fraudulent transfers, and sought to apply the Ponzi scheme presumption. The district court granted summary judgment in favor of the receiver in reliance on the presumption that profits enjoyed by good-faith investors are recoverable as fraudulent transfers without further proof. Part of that decision was reversed by the Minnesota Court of Appeals and the Minnesota Supreme Court granted certiorari.
On review, the Minnesota Supreme Court found that “MUFTA neither mentions nor defines a ‘Ponzi scheme,’” and “does not contain a provision allowing a court to presume anything based on the mere existence of a Ponzi scheme.” Instead, the court found “the focus of the statute is on individual transfers, rather than a pattern of transaction that are part of a greater ‘scheme.’” As such, “[t]he asset-by-asset and transfer-by-transfer nature of the inquiry under MUFTA requires a creditor to prove the elements of a fraudulent transfer with respect to each transfer, rather than relying on a presumption related to the form or structure of the entity making the transfer.”
The effect of Alliance Bank on the Petters clawback litigation (and other Minnesota litigation) remains to be seen. In prior rulings on Petters-related cases, the bankruptcy court has permitted the Petters trustee to proceed with the Ponzi scheme presumption. As it stands, however, there summary judgment motions remain pending in 64 clawback suits connected with the Petters fraud. At the very least, Minnesota courts will need to reassess those instances where the Ponzi scheme presumption had been relied on and instead weigh the evidence under the prevailing standard of review. In addition, while defendants in clawback litigation may have some new advantages given that the Alliance Bank decision heightens the evidentiary burden on plaintiffs, it also has the potential to increase costs and business disruption as plaintiffs seek use more discovery tactics to establish the factual record.