Q: I am a receiver in a Ponzi scheme case. While I know I can sue to recover excess payments made to investors in the scheme, the false profit they were paid, per Donell v. Kowell, 533 F3d 762 (9th Cir. 2008), in my case large sums were paid as referral or broker fees to get investors to invest. Are those payments recoverable in the Ninth Circuit?
A: Yes. While there has been split in cases across the county on the issue, the majority view has been such payments are fraudulent transfers, because no “value” is given for the services rendered. Compare, Warfield v. Byron, 436 F3d 551, 560 (5th Cir. 2006) (“It takes cheek to contend that in exchange for payments he received, the Ponzi scheme benefitted from his efforts to extend the fraud by securing new investments.”); In re Randy, 189 B.R. 425, 441 (Bankr. N.D. Ill. 1995) (“The services conferred no value …); In re Rodriguez, 209 B.R. 424 (Bankr S.D. Tex. 1997); with In re Churchill Mortgage Investment Corp., 206 B.R. 664 (Bankr. S.D.N.Y. 2001); In re Fin Federated Title & Trust, Inc., 309 F3d 125 (11th Cir. 2002) (No per se rule that services furthering Ponzi scheme are without value).
The divergent view is based on how “value” is measured. As explained by the Fifth Circuit in Janvey v. Golf Channel, Inc., 834 3d 570 (5th Cir. 2016), the Bankruptcy Code, and arguably the Uniform Fraudulent Transfer Act, which was modeled after the Code, measures value from the standpoint of creditors, not from that of a buyer in the marketplace. Because soliciting investors in a Ponzi scheme harms creditors, the services are of no value. Other courts and some statutes, such as Texas’ fraudulent transfer statute [Texas Business & Commerce Code §24.004(a)] measure value by the worth of the services in the marketplace. As the Texas statute states what: “the transferor would have sold the assets in an arm’s length transaction”.
Up to now, the Ninth Circuit had not ruled on this issue. However, in a memorandum decision issued in December 2018, Hoffman v. Markowitz, 2018 WL 6735199 (9th Cir. 2018), the Ninth Circuit, without announcing a per se rule, sided with the cases following Warfield v. Byron, supra. holding they were better reasoned. It found, in the case before it, that because the only service the defendant provided was to refer others to the Ponzi scheme, he did not provide “reasonably equivalent value” for the referral fees he received.
Judge Nelson, concurring, would have gone further and held: “the payments are per se voidable because investor referrals do not provide value to the Ponzi scheme. Rather, each referral increases the Ponzi scheme’s liabilities and its inevitable insolvency”. She argued her view was not only consistent with California’s Uniform Voidable Transaction Act but also California Supreme Court authority that value is to be measured from the stand point of creditors, not debtors. Hansen v. Cramer, 39 Cal. 2d 321, 324 (1952).
Peter A. Davidson is a Senior Partner of Ervin Cohen & Jessup LLP a Beverly Hills Law Firm. His practice includes representing Receivers and acting as a Receiver in State and Federal Court.
- Senior Partner
Peter A. Davidson is a Senior Partner in the Bankruptcy, Receivership, and Creditors’ Rights Department.
Since 1977 Peter has represented receivers, plaintiffs and defendants in receivership actions in state and federal court ...
Subscribe
Recent Posts
- Entertainment Vendors Must Certify Safety Training for Employees By: Jared W. Slater
- California Employers Prohibited from Mandatory Religious or Political Meetings | By: Jared W. Slater
- California Expands Reach Of Crown Act to Prevent Discrimination Based On Natural and Protective Hairstyles | By: Cate A. Veeneman
- SB 1340 Allows Enforcement Of Local Employment Discrimination Laws | By: Kelly O. Scott
- Landlord: Look Out and Take Notice | By: Geoffrey M. Gold
- New Cal/OSHA Indoor Heat Standards Require New Prevention Measures and Written Prevention Plan | By: Joanne Warriner
- California Bans All Plastic Bags at Grocery Stores | By: Pooja S. Nair
- FTC’s Nationwide Ban on Non-Compete Agreements Stopped by Federal Court Ruling | By: Cate A. Veeneman
- Can the IRS Obtain a Receiver to Help Collect Taxes Owed? | By: Peter Davidson
- Severing Unconscionable Terms in Employment Arbitration Agreements | By: Jared W. Slater
Blogs
Contributors
Archives
- December 2024
- November 2024
- October 2024
- September 2024
- August 2024
- July 2024
- June 2024
- May 2024
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- February 2023
- January 2023
- December 2022
- November 2022
- October 2022
- September 2022
- August 2022
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- February 2022
- January 2022
- December 2021
- November 2021
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- March 2019
- February 2019
- January 2019
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014