U.S. Eleventh Circuit - The FindLaw 11th Circuit Court of Appeals Opinion Summaries Blog

Court Upholds Investors' Fraudulent Transfers Affirmative Defense

The Eleventh Circuit Court of Appeals jumped on the Kirk Wright Ponzi scheme adjudication bandwagon this week, finding that a bankruptcy trustee could not avoid and recover transfers for value that had been made to investors in the scheme.

Kirk Wright formed the International Management Associates, LLC, and several related entities (the Debtors) purportedly to manage and operate them as hedge funds, each of which was structured either as a limited liability company or a limited partnership.

In reality, Wright used the Debtors to operate a Ponzi scheme.

After the scheme was uncovered, a receiver filed voluntary petitions in the bankruptcy court seeking relief for each of the Debtors under Chapter 11 of the Bankruptcy Code. A consolidated plan of liquidation was approved and William F. Perkins was appointed as Plan Trustee.

Perkins instituted a number of adversary proceedings in the bankruptcy court to avoid and to recover distributions that had been made to the investors in the Debtors. Perkins claimed that transfers to the investors prior to the collapse of the Ponzi scheme were "fraudulent transfers" under federal law and applicable state law.

The investors asserted an affirmative defense under 11 U.S.C. § 548(c), claiming that the transfers were "for value."

Perkins moved for partial summary judgment. The bankruptcy court denied the motion, effectively upholding the availability of the investors' affirmative defense. The Eleventh Circuit Court of Appeals affirmed the district court this week.

Transfers made in furtherance of a Ponzi scheme are presumed to have been made with the intent to defraud, but the law provides a transferee with an affirmative defense where the transferee acts in good faith and "[gives] value to the debtor in exchange for such transfer."

Here, Perkins agreed that the investor defendants purchased limited partnerships from the Debtors at a time when the Ponzi scheme was already in operation, and a claim for fraud or restitution was created in favor of the investors based on the Debtors' fraudulent activity.

Accordingly, the court ruled that, under AFI Holding and the general rule, later transfers from the Debtors up to the amount of the investment satisfied the investor defendants' restitution or fraud claims and provided value to the Debtors.

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