Picking up where the Supreme Court left off in Lexmark when it decried the use of “prudential standing,” three judges on the Eleventh Circuit said that the district court should have dismissed for failure to state a claim rather than having dismissed a receiver’s tort claims for lack of standing. See Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014).

The appeals court explained in a concurring opinion by all three judges that the distinction is more than semantic. Lack of standing results in dismissal for lack of Article III subject matter jurisdiction and therefore ordinarily requires dismissal without prejudice.

When the plaintiff has no claim under state law, dismissal is ordinarily with prejudice, the appeals court said.

The Florida Ponzi Scheme

A group of affiliated companies conducted a $78 million Ponzi scheme that defrauded 700 investors who thought it was a legitimate foreign exchange trader. When the fraud was uncovered, the CFTC and the Justice Department jumped in and shut down the business. Two individuals were convicted and are serving lengthy prison sentences.

The federal district court appointed a receiver for the companies. The receiver filed suit against an individual who was a majority owner and a director. The suit made claims against the owner for fraudulent transfers under Florida law and for common law tort claims, likewise under Florida law.

The lawsuit alleged fraudulent transfer claims against the broker through which the fraudsters had been making foreign exchange trades. The complaint had common law tort claims against the broker, the owner and a software developer, who allegedly aided in sending false statements to the investors.

The district court dismissed the claims across the board, reasoning that the receiver lacked standing to bring both fraudulent transfer and tort claims against all defendants. The receiver appealed.

The Opinion for the Court on Fraudulent Transfer

Writing for the appeals court in his March 19 opinion, Circuit Judge William Pryor said that a “federal equity receiver appointed in the wake of a Ponzi scheme stands in the shoes of the Ponzi estate.” He went on to say that the “receiver has standing to complain about the injuries that the Ponzi entities suffered, not the injuries of the investor-victims,” citing the Eleventh Circuit’s opinion in Isaiah v. JPMorgan Chase Bank, N.A., 960 F.3d 1296, 1306 (11th Cir. 2020).

According to Judge Pryor, it “is well-settled that a receiver for a Ponzi estate has standing to maintain fraudulent-transfer claims on behalf of the estate.” Id. He traced the rationale of Isaiah to a Seventh Circuit Decision by Richard A. Posner, Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir. 1995). He paraphrased Judge Posner as having held:

When the perpetrators are removed and a receiver is appointed in their place, the corporate structures are no longer the “evil zombies” of the perpetrator; they are “[f]reed from his spell” and regain standing to sue for the return of money fraudulently transferred. Id.

In dismissing the fraudulent transfer claims, Judge Pryor said that the district court cited Isaiah but failed to recognize the distinction between tort and fraudulent transfer claims. He explained that Isaiah dismissed tort claims for lack of standing. He said that “Ponzi receivers must meet additional criteria to have standing to maintain tort claims against third parties.”

Judge Pryor reversed dismissal of the fraudulent transfer claims and remanded for further proceedings. He explained:

After [the companies were] freed from the control of [the fraudsters] and [the receiver] was appointed in their place, [the companies] regained standing to assert fraudulent-transfer claims.

The Opinion for the Court on Tort Claims

With regard to the receiver’s tort claims, Judge Pryor said that Isaiah also controls. He said that Isaiah, which involved tort claims arising from a Ponzi scheme, held that the receiver lacked standing because the torts were imputed to the receiver.

Judge Pryor said that Isaiah “also explained that tort and fraudulent-transfer claims must be treated differently for standing purposes: fraudulent transfers are ‘cleansed through receivership’ as a matter of course, but common-law torts by third parties are not.” He went on to explain that a receiver would have standing to bring tort claims if it were an “‘honest corporation[] with rogue employees.’” Isaiah, supra at 1308.

To have standing, Judge Pryor said that “the receiver must allege the presence of innocent decision-makers within the corporation to whom fraudulent conduct could be reported.” Id. at 1307.

In the case on appeal, the receiver alleged that the companies were wholly controlled by the fraudsters and were not honest companies with rogue employees.

Judge Pryor reversed dismissal of tort claims with prejudice and remanded with instructions to dismiss without prejudice.

The Concurring Opinion

Circuit Judge Stanley Marcus penned a concurring opinion joined by the other two judges on the panel. He said, “I join in full the Court’s opinion and agree that our precedents compel the conclusion that [the receiver] lacked standing to bring his Florida common-law tort claims.”

Judge Marcus said he was writing “separately to explain that I think this use of the term ‘standing’ is mistaken.” He explained that standing is an Article III concept of subject matter jurisdiction that requires the existence of a case or controversy. Citing Lexmark, he said that “the Supreme Court has walked back the concept of ‘prudential standing.’”

Quoting an Eleventh Circuit opinion after Lexmark, he said that the Supreme Court “‘effectively abolished prudential standing (sometimes referred to as statutory standing) as a jurisdictional doctrine that would give rise to a Rule 12(b)(1) dismissal without prejudice.’ Newton v. Duke Energy Fla., LLC, 895 F.3d 1270, 1274 n.6 (11th Cir. 2018).” He explained the practical difference between a dismissal for lack of standing and a dismissal for failure to state a claim:

A dismissal for failure to state a claim is a merits decision and is generally made with prejudice, barring the plaintiff from bringing the same suit again. See Fed. R. Civ. P. 41(b). A dismissal for lack of standing, on the other hand, is a non-merits decision and so is generally without prejudice and does not have any preclusive effect.

Judge Marcus called Isaiah “the type of mistaken jurisdictional holding the Supreme Court has eschewed. Isaiah reasoned that a Ponzi corporation did not have standing to sue for Florida common-law torts.” Under Florida law, he went on the explain that a receiver for a Ponzi scheme has standing to sue for fraudulent transfers but not for torts. He explained that the “receiver is without a cause of action [for tort] precisely because the Florida courts have so ruled, not because the receiver lacks Article III standing.”

“Still,” Judge Marcus said, “we have unambiguously characterized the rule that a receiver may not bring Florida common-law tort claims on behalf of a Ponzi corporation as jurisdictional.” Saying that “we remain bound by decisions we disagree with,” he said it “would be wiser to follow the Supreme Court’s instruction to ‘bring some discipline’ to the use of jurisdictional language, and to recognize that rules like this one do not constrain a court’s power to hear a case, but rather reflect a state court’s decision to police its own causes of action.” [Citation omitted.]