Sarah Wilkinson

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

In Kirkland v. Rund (In re Epd Inv. Co., LLC), the United States Court of Appeals for the Ninth Circuit found that the presumption that a debtor has the requisite mens rea— the intent to defraud his creditors—was properly inferred from the mere fact that he operated a business entity that met the objective elements of a Ponzi scheme.[1]

Jerrold S. Pressman and his son, Keith Pressman, owned and operated EPD Investment Co., LLC (“EPD”).[2]During this time, the father-son pair deposited funds “into a single bank account that comingled investor funds with EPD’s operating funds.”[3] EPD offered a “bill-pay service,” in which EPD alleged to make payments on behalf of lenders.[4] A second service included “equipment leases,” in which investors loaned money to “acquire ownership interest in a piece of equipment, and EPD purported to make periodic lease payments.”[5] Instead of providing these services, Jerrold Pressman used EPD’s funds to invest in his personal business ventures such as “ice rinks, night clubs, marketing companies, and a commercial real estate development firm.”[6] Additionally, the Pressmans paid off their personal credit cards, ultimately paying themselves over $6,848,000.[7] To achieve this type of financial fraud, the Pressmans “consistently shift[ed] money from lenders to pay other lenders[,]” in what is commonly known as a Ponzi scheme.[8]

Eventually, the Ponzi scheme collapsed.[9] In 2009, Jerrold Pressman was $48 million in debt and could not repay his loans to EPD.[10] Prior to this collapse, between 2007 and 2009, John Kirkland, a California attorney who periodically represented the Pressmans’ entities, made a series of loads to EPD.[11] Kirkland assigned his credit interest in the EPD loans to “BC Trust,” an entity in which his wife Ann was the sole trustee.[12] EPD was forced into chapter 7 bankruptcy by its creditors, and the United States Bankruptcy Court for the Central District of California appointed Jason Rund as trustee.[13] Rund filed an adversary proceeding against Kirkland individually and Ann Kirkland in her capacity as trustee of the BC Trust “to claw back certain transfers of funds from EPD to the Kirklands executed ahead of bankruptcy.”[14] In a six-day trial against Kirkland in the District Court for the Central District of California, the jury entered a judgment in Kirkland’s favor.[15] The jury found that “EPD was a Ponzi scheme[,] [] John had received payments from EPD in good faith.”[16] Because Ann Kirkland was “a named party in the Trustee’s ongoing adversary action against the BC Trust [and] she testified as a witness in John's trial . . . she [was] subject to the consequences of the jury’s adverse Ponzi scheme finding.”[17] Thus, “the Ponzi scheme finding against Ann” would be used by Rund against her at her upcoming trial.[18] Fearful that the jury’s verdict would “‘bar her recovery of millions of dollars in interest on the loans Kirkland had assigned to the BC Trust,’” Ann Kirkland appealed, “seeking vacatur of the jury finding that EPD was a Ponzi scheme.”[19]

A Ponzi scheme “is a financial fraud that induces investment by promising high returns, usually in a short time period, where in fact no legitimate profit-making business opportunity exists.”[20] Two objective elements must be met to prove the existence of a Ponzi scheme: “(1) the funneling of money from new investors to pay old investors, and (2) no legitimate profit-making business opportunity exists for investors.”[21] Additionally, the court-appointed trustee must prove “actual fraud” or “constructive fraud.”[22] Under the theory of “actual fraud,” the trustee must make a showing that the debtor had the “‘actual intent to hinder, delay, or defraud’ the creditors (the losing investors).”[23] The burden then shifts to the investors “to show that they received the subject transfers in ‘good faith’ and for ‘reasonably equivalent value.’”[24]

During Kirkland’s trial, “the district court instructed the jury that, ‘[f]or the purposes of proving a fraudulent transfer, EPD and Pressman’s actual intent to hinder, delay, or defraud creditors is established if Plaintiff proves that EPD operated as a Ponzi scheme.’”[25] Ann Kirkland’s primary contention was that “the [jury] instruction was erroneous because it omitted a mens rea or fraudulent intent requirement.”[26] This would require the jury “to find that the alleged ‘perpetrator of a Ponzi scheme’ . . . ‘must know that the scheme will eventually collapse as a result of the inability to attract new investors.’”[27] The Ninth Circuit Court of Appeals disagreed.[28] Although objective tests vary across jurisdictions, they have one prominent similarity—“each approach requires the factfinder to assess whether a Ponzi scheme exists by examining the objective characteristics of the scheme itself.”[29] More specifically, because Pressman’s operation of EPD met the objective elements of a Ponzi scheme, his “actual intent to defraud his investors and knowledge that the scheme will eventually fail follows logically and necessarily.”[30] Ann Kirkland’s suggested mens rea instruction would essentially require a trustee to “find direct evidence of the operator’s subjective intent to operate a Ponzi scheme”—a nearly impossible task.[31] Thus, the Ninth Circuit upheld the district court’s finding that “[n]o further mens rea instruction was required as a matter of law.”[32]

The Court’s holding dispenses with the mens rea requirement, lowering the trustee’s prosecutorial burden.[33] A trustee must only prove the jurisdiction’s objective elements of a Ponzi scheme to secure a conviction.[34] The court-appointed trustee serves a particular purpose—“to recover assets or funds from profiting Ponzi scheme investors to equitably redistribute and minimize the losses suffered by losing Ponzi scheme investors.”[35] An actual intent requirement would frustrate this purpose.[36] The practical implications of the Court’s holding abound—while a trustee must still prove the objective elements of a Ponzi scheme, dispensing with the mens rea requirement allows for streamlined judicial proceedings that result in more readily available convictions.[37]