On a question where the circuits are divided, District Judge Jill N. Parrish of Salt Lake City decided that someone who was paid for making referrals to a Ponzi scheme operator gave value and cannot be liable for receipt of a fraudulent transfer for that reason alone.
The operator of a Ponzi scheme pled guilty to federal criminal charges, and the court appointed a receiver. The receiver sued five defendants, alleging they had received about $600,000 in fees for referring new investors to the operator of the Ponzi scheme.
The receiver sued under Utah’s Uniform Fraudulent Transfer Act, contending that the defendants were in receipt of fraudulent transfers made with “actual intent” to defraud.
The receiver filed a motion for summary judgment.
The defendants conceded it was a Ponzi scheme. The Tenth Circuit has adopted the presumption that transfers in a Ponzi scheme are made with “actual intent” to defraud. In her November 17 opinion, Judge Parrish said that the receiver had therefore met one of her burdens of proof by establishing as a matter of law that the defendants received payments made with actual intent to defraud.
To prevail, however, the receiver was required under Utah law to prove that the defendants did not give reasonably equivalent value and were in good faith. On the summary judgment motion, the receiver did not attempt to show a lack of good faith by the defendants.
Instead, the receiver relied on Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006). There, the Fifth Circuit held that those who are paid for bringing new investors into a Ponzi scheme do not give reasonably equivalent value under the Texas Uniform Fraudulent Transfer Act.
The Eleventh Circuit held to the contrary. In Orlick v. Kozyak (In re Fin. Federated Title & Tr., Inc.), 309 F.3d 1325, 1330–33 (11th Cir. 2002), the appeals court held that recipients of referral fees from a Ponzi scheme are not barred from raising the good faith defense.
The Tenth Circuit had not taken sides on the split, Judge Parrish said.
Judge Parrish agreed with the Eleventh Circuit. She said that the result in the Eleventh Circuit “better accomplishes the aims of the UFTA and better promotes justice and fairness. It would be unwise to declare, as a matter of law, that services provided to a Ponzi scheme may never constitute reasonably equivalent value under the UFTA merely because the transferor is effectuating a fraud on its investors.”
Imposing liability automatically, Judge Parrish said, “would lead to . . . undesirable outcomes . . . — any unsuspecting party who happens to transact or contract with an entity that is later revealed to be a Ponzi scheme would be punished.”
The “better approach,” Judge Parrish said, would distinguish between good faith and bad faith transferees. She refined the concept by saying that those “who receive referral fees knowing that they are helping to defraud investors, or who fail to make further inquiries despite warning signs, should not be permitted to retain the fruits of their bad acts.”
Judge Parrish therefore denied the receiver’s motion for summary judgment. She said that the trier of fact must decide “whether Defendants acted in good faith, and if so, whether the transfers were reasonable payment for the services they provided to” the Ponzi scheme operator.
On a question where the circuits are divided, District Judge Jill N. Parrish of Salt Lake City decided that someone who was paid for making referrals to a Ponzi scheme operator gave value and cannot be liable for receipt of a fraudulent transfer for that reason alone.
The operator of a Ponzi scheme pled guilty to federal criminal charges, and the court appointed a receiver. The receiver sued five defendants, alleging they had received about $600,000 in fees for referring new investors to the operator of the Ponzi scheme.
The receiver sued under Utah’s Uniform Fraudulent Transfer Act, contending that the defendants were in receipt of fraudulent transfers made with “actual intent” to defraud.
The receiver filed a motion for summary judgment.
The defendants conceded it was a Ponzi scheme. The Tenth Circuit has adopted the presumption that transfers in a Ponzi scheme are made with “actual intent” to defraud. In her November 17 opinion, Judge Parrish said that the receiver had therefore met one of her burdens of proof by establishing as a matter of law that the defendants received payments made with actual intent to defraud.
To prevail, however, the receiver was required under Utah law to prove that the defendants did not give reasonably equivalent value and were in good faith. On the summary judgment motion, the receiver did not attempt to show a lack of good faith by the defendants.
Instead, the receiver relied on Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006). There, the Fifth Circuit held that those who are paid for bringing new investors into a Ponzi scheme do not give reasonably equivalent value under the Texas Uniform Fraudulent Transfer Act.
The Eleventh Circuit held to the contrary. In Orlick v. Kozyak (In re Fin. Federated Title & Tr., Inc.), 309 F.3d 1325, 1330–33 (11th Cir. 2002), the appeals court held that recipients of referral fees from a Ponzi scheme are not barred from raising the good faith defense.
The Tenth Circuit had not taken sides on the split, Judge Parrish said.