Ponzi schemes and the law of fraudulent and preferential transfers

American Bankruptcy Law Journal

Volumn 72, Issue 2, 1998, Pages 157-186

  McDermott, Mark A ^a  

^a Hopkins and Sutter   (United States)

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EID: 26444587631     PISSN: 00279048     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (131)

1. See Sharon Walsh, The Unraveling of a Safe Bet; SEC Says Firm Bilked Investors of $674 Million, WASHINGTON POST, Aug. 10, 1996, at A1. See also The Bennett Funding Group Chapter 11: Behind the Scenes of the Biggest Ponzi Scheme in U.S. History, 29 Bankr. Ct. Dec. (LRP) No. 6, at A1 (July 30, 1996).
2. See Trustee Files Bennett Liability Schedules, 29 Bankr. Ct. Dec. (LRP) No. 8, at A1 (Aug. 13, 1996).
3. See id.
4. See id. See also In re Bennett Funding Group, Inc., 213 B.R. 227, 229 (Bankr. N.D.N.Y. 1997).
5. See Trustee Files Bennett Liability Schedules, supra note 2, at A1.
6. Id.
7. Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 437 n.17 (Bankr. N.D. Ill. 1995) (citations omitted). See also Jobin v. Matthews (In re M&L Bus. Mach. Co.), 184 B.R. 136, 137 n.1 (D. Colo. 1995); In re Taubman, 160 B.R. 964, 978 (Bankr. S.D. Ohio 1993). The term "Ponzi scheme" is derived from Charles Ponzi, the operator of a fraudulent investment program which collapsed in the early 1920s. See Cunningham v. Brown, 265 U.S. 1, 7-9 (1924) (discussing the collapse of Charles Ponzi's fraudulent investment program).
8. In the absence of bankruptcy proceedings, individual investors may be free to bring their own suits against the Ponzi-scheme operator under state law or petition a state court for appointment of a receiver to liquidate the operator's assets.
9. See 11 U.S.C. §§ 547, 548 (1994); Charley Hannagan, Logjam of Lawsuits, No Bennett Refunds Two Years After Initial Charges, Investors Still Wait For Justice, SYRACUSE HERALD AMERICAN, Mar. 29, 1998, at E1 (in all trustee has filed over 15,000 lawsuits); Editorial, Targets of Lawsuits Another Blast to Bennett Victims, SYRACUSE HERALD-JOURNAL, Mar. 12, 1998, at A14.
10. Although the kinds of investments involved in these cases differed widely, the essence of the investment programs in each was a classic Ponzi scheme. See Sender v. Johnson (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1267 (10th Cir. 1996) (stock options; approximately 1,400 investors ultimately lost $200,000,000 in the scheme); Jobin v. Youth Benefits Unlimited, Inc. (In re M&L Bus. Mach. Co.), 59 F.3d 1078 (10th Cir. 1995) (computer leasing companies); Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589 (9th Cir. 1991) (energy modules); Hayes v. Palm Seedlings Partners (In re Agricultural Research and Tech. Group), 916 F.2d 528 (9th Cir. 1990) (seed-germination facilities); Apostolou v. Fisher, 188 B.R. 958 (N.D. Ill. 1995) (commodities); Brandt v. American Nat'l Bank & Trust Co. (In re Foos), 188 B.R. 239 (Bankr. N.D. Ill. 1995) (radio stations); In re Mary S. Pate, No. 93 B 17792, slip op. (Bankr. N.D. Ill. 1993) (furniture market bonus program).
11. 11 U.S.C. § 548.
12. 7A U.L.A. 430 (1985).
13. 7A U.L.A. 643 (1985).
14. The following states have enacted the UFTA: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Maine, Massachusetts, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Utah, Vermont, Washington, West Virginia, and Wisconsin. 7A U.L.A. 217 (Supp. 1997) (Table of Jurisdictions Wherein the UFTA Has Been Adopted). The UFCA is still in effect in the following states or territories: Maryland, Michigan, New York, Tennessee, the Virgin Islands, and Wyoming. Id. at 159 (Table of Jurisdictions Wherein the UFCA Has Been Adopted). Other states either have statutory or common law versions of the Statute of Elizabeth, 13 Eliz., ch. 5 (1571), which allows avoidance of transfers made with the intent to delay, hinder, or defraud creditors. See Michael L. Cook et al., Fraudulent Transfers, in 17TH ANNUAL CURRENT DEVELOPMENTS IN BANKRUPTCY AND REORGANIZATION, at 607, 617
15. (PLI Comm. L. & Practice Course Handbook Series No. 714, 1995).
16. The primary distinction among the provisions is the applicable statute of limitations. Section 548 of the Bankruptcy Code allows avoidance of only those transfers made within one year prior to the petition date. See 11 U.S.C. § 548(a). In contrast, the UFTA generally allows an avoidance action to be pursued up to four years after the transfer took place. See UFTA § 9, 7A U.L.A. at 665. The UFCA does not itself include a statute of limitations and thus is subject to otherwise applicable law. See Kaliner v. Load Rite Trailers, Inc. (In re Sverica Acquisition Corp.), 179 B.R. 457, 467 (Bankr. E.D. Pa. 1995).
17. Section 544(b) of the Bankruptcy Code specifically allows a trustee to take advantage of state law: "The trustee may avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim . . . ." 11 U.S.C. § 544(b).
18. See infra notes 33-61 and accompanying text.
19. See infra notes 62-70 and accompanying text.
20. 11 U.S.C. § 548(a).
21. Furthermore, a trustee usually seeks to employ the UFTA or the UFCA in a fraudulent transfer action pursuant to § 544(b) of the Bankruptcy Code, which specifically provides that the trustee "may avoid any transfer of an interest of the debtor in property" pursuant to state law. See supra note 16 and accompanying text.
22. See, e.g., Jobin v. Youth Benefits Unlimited, Inc. (In re M&L Bus. Mach. Co.), 59 F.3d 1078, 1081 (10th Cir. 1995) (agreeing with fraudulent transfer defendants that a recipient of property obtained by fraud does not acquire title to the property).
23. Berger, Shapiro & Davis, P.A. v. Haeling (In re Foos), 183 B.R. 149, 160 (Bankr. N.D. Ill. 1995) (interpreting Illinois law and quoting Emily L. Sherwin, Constructive Trusts in Bankruptcy, 1989 U. ILL. L. REV. 297).
24. See id. at 158-59. See generally In re Teranis, 128 F.3d 469, 473 (7th Cir. 1997) (interpreting Wisconsin law); Taylor Assocs. v. Diamant (In re Advent Management Corp.), 104 F.3d 293, 295 (9th Cir. 1997) (interpreting California law); XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1452 (6th Cir. 1994).
25. Foos, 183 B.R. at 159.
26. Id. at 160 (quoting Sherwin, supra note 22, at 315).
27. Id. (quoting Omegas Group, 16 F.3d at 1449). For a discussion of a contrary view of constructive trusts, see Andrew Kull, Restitution in Bankruptcy: Reclamation and Constructive Trust, 72 AM. BANKR. L.J. (forthcoming 1998).
28. Cf. Jobin v. Lalan (In re M&L Bus. Mach. Co.), 167 B.R. 219, 221 (D. Colo. 1994) (holding that funds derived from the operation of a Ponzi scheme are assets of the estate unless an investor can trace investments and impose a constructive trust thereon; untraced, hopelessly commingled funds which the debtor obtained by fraud are property of the estate).
29. Jobin v. Lalan (In re M&L Bus. Mach. Co.), 160 B.R. 851, 857 (Bankr. D. Colo. 1993) (emphasis added), aff'd, 167 B.R. 219 (D. Colo. 1994). See also In re Taubman, 160 B.R. 964, 982 (Bankr. S.D. Ohio 1993) (holding that funds obtained from investors in Ponzi scheme are property of debtor); Dicello v. Jenkins (In re International Loan Network, Inc.), 160 B.R. 1, 11 (Bankr. D.D.C. 1993) (noting the unanimous position of the courts that the debtor has an interest in property transferred through a Ponzi scheme).
30. See XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1452 (6th Cir. 1994) (declining to recognize property interests in bankruptcy based on claims of constructive trust: "Constructive trusts are anathema to the equities of bankruptcy since they take from the estate, and thus directly from competing creditors, not from the offending debtor"). See also David Gray Carlson, Voidable Preferences and Proceeds: A Reconceptualization, 71 AM. BANKR. L.J. 517, 557-559 (1997) (arguing that Ponzi scheme operator has interest in transferred funds to extent that a future trustee may be able to avoid transfer).
31. See, e.g., Cunningham v. Brown, 265 U.S. 1, 11-12 (1924); Jobin v. Youth Benefits Unlimited, Inc. (In re M&L Bus. Mach. Co.), 59 F.3d 1078, 1081-82 (10th Cir. 1995) (stating that the weight of authority "recognizes that property acquired fraudulently does not pass with title, [but] also provides that a claimant must be able to identify or trace the fraudulently deprived funds or property to which he claims ownership"); Danning v. Bozek (In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1217 (9th Cir. 1988) (same); Rosenberg v. Collins, 624 F.2d 659, 663 (5th Cir. 1980) (same); Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 854 (D. Utah 1987) ("[W]e conclude that, when a debtor obtains money by fraud and mingles it with other money so as to preclude any tracing and when the defrauded party does not timely avoid the transaction but accepts benefits under his contract with the debtor, the money is 'property' of the debtor within the meaning of sections 547 and 548 of the Code.").
32. See, e.g., Sender v. Nancy Elizabeth R. Heggland Family Trust (In re Hedged-Invs. Assocs., Inc.), 48 F.3d 470 (10th Cir. 1995); Lalan, 167 B.R. at 221 (funds derived from operation of a Ponzi scheme are considered assets of estate unless investor can trace his investments and impose constructive trust thereon; untraced, hopelessly commingled funds which the debtor obtained by fraud are property of estate). See also Cunningham, 265 U.S. at 11-12 (holding where it was impossible to trace money of debtor's defrauded creditors, they become creditors to extent of their loss; where debtor is dealing with commingled fund of defrauded creditors' deposits, court will not require that first withdrawals from fund be charged against first deposits); Rosenberg, 624 F.2d at 663 (holding that to establish constructive trust relationship between debtor and its investors that excludes property from debtor's estate, investor must prove existence of trust and trace identity of his property).
33. In Sender v. Nancy Elizabeth R. Heggland Family Trust (In re Hedged-Investments Associates, Inc.), a Ponzi scheme investor invested $200,000 in a limited partnership that ultimately became a debtor. The investment was to be invested in a fund operated by the general partner of the limited partnership, which also ultimately became a debtor. 48 F.3d at 470. When the trustee of the general partner sued the investor to recover amounts which the investor received on his investment, the investor argued that the monies deposited with the general partner by the limited partnership created a trust under Colorado law and therefore did not constitute property of the general partner, but remained that of the limited partnership. Id. at 474. However, the Tenth Circuit concluded that, because there was no way to trace the funds which the investor invested with the limited partner, the funds constituted property of the estate of the general partner which the trustee could recover from the investor. Id.
34. See 11 U.S.C. § 548(a)(2)(A) (1994); UFTA § 4, 7A U.L.A. 652 (1985).
35. See UFCA §§ 3-6, 7A U.L.A. 448-509 (1985).
36. Neither the Bankruptcy Code nor the UFTA define "reasonably equivalent value." However, § 3 of the UFCA provides that "fair consideration" is given for property either: (i) when, in exchange for such property, "as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied," or (ii) when such property "is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property . . . ." UFCA § 3, 7A U.L.A. at 448 (emphasis added).
37. See Sender v. Buchanan (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1286, 1290 (10th Cir. 1996) (holding that a debtor operating a Ponzi scheme does not receive reasonably equivalent value in exchange for any amounts it transfers to an investor in excess of the investor's principal investment); Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995) (holding that a debtor does not receive fair consideration under Illinois version of UFCA for transfers of fictitious profits paid pursuant to Ponzi scheme); Eby v. Ashley, 1 F.2d 971, 973 (4th Cir. 1924) (amounts paid in excess of principal amounts deemed without consideration); Scholes v. Ames, 850 F. Supp. 707, 715 (N.D. Ill. 1994) (holding that payments received in good faith by investors in a fraudulent investment scheme in excess of the principal invested were "voluntary gifts" and hence fraudulent conveyances that could be recovered by receiver), aff'd sub nom., Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995); In re Taubman, 160 B.R. 964, 987 (Bankr. S.D. Ohio 1993) (holding that transferees did not give debtor value in exchange for transfers they received in excess of amounts they invested); Jobin v. Lalan (In re M&L Bus. Mach. Co.), 160 B.R. 851, 858 (Bankr. D. Colo. 1993) ("[F]or this excess received by an investor in a Ponzi scheme the Debtor does not receive a reasonably equivalent value, nor does the investor give value for this excess."); Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 857 (D. Utah 1987) ("We conclude that the debtors received a 'reasonably equivalent value' in exchange for all transfers to a defendant that did not exceed the defendant's principal undertaking but, to the extent a defendant received more than he gave the debtors, the debtors did not receive a reasonably equivalent value"). See also In re Baker & Getty Fin. Servs., Inc., 88 B.R. 792 (Bankr. N.D. Ohio 1988) (following Independent Clearing House); Lawless v. Anderson (In re Moore), 39 B.R. 571, 573 (Bankr. M.D. Fla. 1984) (finding no reasonably equivalent value for fictitious profits in the absence of contrary authority). But see Johnson v. Studholme, 619 F. Supp. 1347, 1347 (D. Colo. 1985) (holding receiver of Ponzi scheme could not recover profits from investors based solely on theory of equity without establishing any investor committed fraud or participated in scheme), aff'd sub nom., Johnson v. Hendricks, 833 F.2d 908 (10th Cir. 1987); Emerson v. Maples (In re Mark Benskin & Co.), 161 B.R. 644, 650 (Bankr. W.D. Tenn. 1993) (holding that debtor received no value from transfers to investor, without distinguishing between return of investment and fictitious profit); Smith v. Shoemaker (In re Smith), 120 B.R. 588, 591 (Bankr. M.D. Fla. 1990) (holding investments in Ponzi scheme constituted "good consideration" under Florida law for any return investors received in excess of investments; court did not address concept of "reasonably equivalent value" under the Code).
38. See Merrill, 77 B.R. at 859. See also Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 440 (Bankr. N.D. Ill. 1995) (holding that brokers' efforts in finding investors for the debtor's Ponzi scheme did not constitute value to the debtor in exchange for commissions paid to the brokers); Dicello v. Jenkins (In re International Loan Network, Inc.), 160 B.R. 1, 13 (Bankr. D.C. 1993) (holding that transfers received by investors in excess of their initial investment were not for reasonably equivalent value; expenses incurred by investors in connection with activities related to Ponzi scheme, money invested on behalf of others, and services provided by investors also did not constitute value to debtor).
39. See, e.g., Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589 (9th Cir. 1991); Merrill, 77 B.R. at 857. See also Rosenberg v. Collins, 624 F.2d 659 (5th Cir. 1980); Scholes v. African Enter., Inc., 854 F. Supp. 1315, 1326 (N.D. Ill. 1994) (holding that when debtor's expenditure of funds obtained from investors coincided with intent to dissipate funds in a manner inconsistent with fiduciary responsibilities as a partner, indebtedness arose in favor of those investors against debtor for purposes of determining fair consideration). Courts base the investor's claim upon the concept of restitution, rather than simply upon the investor's contract with the debtor, because courts will not enforce a contract which is based upon a fraud. See, e.g., Wyle, 944 F.2d at 589; Floyd v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424, 434 (Bankr. S.D. Tex. 1997).
40. Section 101(5) of the Bankruptcy Code defines a "claim" as follows: (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured . . . . 11 U.S.C. § 101(5) (1994). Section 101(12) defines "debt" as a "liability on a claim." Id. § 101(12). The UFTA and the UFCA contain almost identical definitions. See UFTA § 1, 7A U.L.A. 643 (1985); UFCA § 1, 7A U.L.A. at 430.
41. Section 548(d)(2)(A) of the Bankruptcy Code provides that "value" means "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." 11 U.S.C. § 548(d)(2)(A). Similarly, § 3 of the UFTA states that "value" is given for a transfer if, in exchange for the transfer, "property is transferred or an antecedent debt is secured or satisfied . . . ." UFTA § 3, 7A U.L.A. at 650. See also UFCA § 3, 7A U.L.A. at 448.
42. See Jobin v. McKay (In re M&L Bus. Mach. Co.), 84 F.3d 1330, 1340-41 (10th Cir. 1996) (holding that because the debtor's payments to investors reduced the amount of the investors' claims for rescission and restitution, the payments were for reasonably equivalent value); Wyle, 944 F.2d at 595 (holding that investors exchanged reasonably equivalent value when their rights to restitution were proportionately reduced by payments received); Jobin v. Cervenka (In re M&L Bus. Mach. Co.), 194 B.R. 496, 501 (D. Colo. 1996) ("[C]ases addressing the issue have held that a defrauded investor in a Ponzi scheme gives 'value' to the debtor in the form of a dollar-for-dollar reduction in the investor's restitution claim against the Ponzi scheme."); Merrill, 77 B.R. at 861 ("The extent to which a defendant 'gave value' for a particular transfer is essentially the flip side of the question . . . whether the debtor received a 'reasonably equivalent value' in exchange for the transfer . . . . To the extent that a defendant received amounts less than or equal to his undertaking, he 'gave value' to the debtor in exchange for the transfers. The consideration for the transfers was satisfaction of the debt created when the defendant advanced the debtor money or other property, and, under section 548(d) satisfaction of an antecedent debt is 'value.'"); Levey v. Razee (In re Mary S. Pate), No. 95 A 985, slip op. (Bankr. N.D. Ill. Feb. 21, 1997) (holding transfers to investors in Ponzi schemes are exchanges for value to the extent of the investments); Dicello, 160 B.R. at 12 (holding that value is given for return of principal investment because debtor owes a debt for return of the investment; payments up to amount of original investment therefore satisfied antecedent debt); Jobin v. McKay (In re M&L Bus. Mach. Co.), 155 B.R. 531, 541 (Bankr. D. Colo. 1993) (stating that value may take form of reduction in investor's restitution claim), aff'd, 84 F.3d 1330 (10th Cir. 1996).
43. See McKay, 84 F.3d at 1340-41; Wyle, 944 F.2d at 595; Jobin v. Ripley (In re M&L Bus. Mach. Co.), 198 B.R. 800, 807-08 (D. Colo. 1996); Cervenka, 194 B.R. at 501-02.
44. See McKay, 84 F.3d at 1340-41 (holding (i) that a subjective good faith test is appropriate for the purpose of allowing a claim for rescission and reasonably equivalent value under § 548(a)(2)(A) of the Bankruptcy Code; (ii) that in light of the bankruptcy court's factual finding that the investor did not have actual knowledge of the fraud, the investor had a colorable claim for rescission and restitution; and (iii) that the lower courts properly concluded that the debtor's payments reduced the amount of this claim and that the debtor received a reasonably equivalent value for those payments); Wyle, 944 F.2d at 596 n.7 ("If investments were made with culpable knowledge, all subsequent payments made to such investors within one year of the debtors' bankruptcy would be avoidable under section 548(a)(2) regardless of the amount invested, because the debtors would not have exchanged a reasonably equivalent value for the payments."); Cervenka, 194 B.R. at 501-02 (holding that bankruptcy court erred in applying an objective test for good faith under § 548(a)(2); courts apply a subjective test of good faith in determining whether an investor has a claim for restitution in assessing whether a debtor received a "reasonably equivalent value").
45. This subjective good faith standard may create some tension with the language of the Bankruptcy Code and the UFTA. The UFCA, consistent with the 1898 Bankruptcy Act, provides that "fair consideration" is given only when property is transferred "in good faith." See UFCA § 3, 7A U.L.A. at 448; Bankruptcy Act of 1898, Pub. L. No. 55-171, § 67d(1)(e), 30 Stat. 544, 564 (repealed 1978). In contrast, the drafters of the Code and the UFTA chose to delete references to "good faith" when defining "reasonably equivalent value." Section 548 of the Bankruptcy Code simply states that a trustee may recover sums transferred to an investor if, among other things, the debtor received "less than a reasonably equivalent value." 11 U.S.C. § 548(a)(2)(A). Similarly, the UFTA only provides that a transfer is fraudulent if, among other things, the debtor made the transfer "without receiving a reasonably equivalent value." UFTA § 4(a)(2), 7A U.L.A. at 653. Indeed, far from making good faith an element of reasonably equivalent value in the context of constructive fraud, the UFTA makes good faith relevant only to causes of action based upon intentional fraud, providing in § 8(a) that "[a] transfer or obligation is not voidable under Section 4(a)(1) [intentional fraud] against a person who took in good faith . . . ." Id. § 8(a), 7A U.L.A. at 662. Given the deletion of good faith from the definitions of reasonably equivalent value in the Bankruptcy Code and the UFTA, it could be argued that good faith should be irrelevant in cases based upon constructive fraud arising under those statutes. On the other hand, if the consideration for a transfer is satisfaction of an antecedent debt, there must be a legally enforceable debt, and since the courts have allowed Ponzi investors only an equitable right to repayment, there simply may be no debt owing if the investors acted in bad faith: bad faith may be seen as canceling any equitable right to payment.
46. See, e.g., Ransier v. Public Employees Retirement Sys. (In re Cottrill), 118 B.R. 535, 537 (Bankr. S.D. Ohio 1990) (noting that "the Trustee has the burden of establishing that the transaction was fraudulent" and holding that the trustee failed to meet his burden regarding the issue of value).
47. See, e.g., Barrett v. Commonwealth Fed. Sav. & Loan Assoc., 939 F.2d 20 (3d Cir. 1991) (holding that the debtor received the reasonably equivalent value of property sold at foreclosure sale for 69.5 percent of its fair market value). See also BFP v. Resolution Trust Corp., 512 U.S. 1247 (1994) (holding that reasonably equivalent value for foreclosed property is price actually received at foreclosure sale, assuming sale satisfies state foreclosure law requirements).
48. See, e.g., Sender v. Buchanan (In re Hedged-Invs. Assocs., Inc.) 84 F.3d 1286, 1290 (10th Cir. 1996) ("Because [the investor] had no claim against [the debtor] for damages in excess of her original investment, [the debtor] had no debt to [the investor] for those amounts. Therefore, the transfers could not have satisfied an antecedent debt of [the debtor], which means [the debtor] received no value in exchange for the transfers. Since [the debtor] received no value for the transfers, a fortiori, it did not receive reasonably equivalent value . . . ."). Similarly, in Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995), Judge Posner, interpreting the Illinois version of the UFCA, discussed the transfer of Ponzi scheme profits as follows: Phillips [the transferee] is entitled to his profit only if the payment of that profit to him, which reduced the net assets of the estate now administered by the receiver, was offset by an equivalent benefit to the estate. It was not. A profit is not offset by anything; it is the residuum of income that remains when costs are netted against revenues. The paying out of profits to Phillips not offset by further investments by him conferred no benefit on the corporations but merely depleted their resources faster . . . . He should not be permitted to benefit from a fraud at [another creditor's] expense merely because he was not himself to blame for the fraud. 56 F.3d at 757 (citations omitted).
49. Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 852 n.14 (D. Utah 1987).
50. However, one district court decided not to follow this "netting" rule given the facts before it. See Scholes v. Ames, 850 F. Supp. 707, 713-15 (N.D. Ill. 1994), aff'd, Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995). The Ames court held that a Ponzi investor was not entitled to set off payments received in excess of an initial investment against losses incurred in subsequent related investments because the claims arose out of independent transactions. As a result, the investor in Ames was not allowed to set off a profit of $17,000, obtained on his initial investment with the debtor, against the $25,000 loss he suffered when a subsequent investment was never repaid. It should be noted, however, that the court's reasoning was based in part upon the fact that the $25,000 investment was part of a $100,000 investment by an entirely separate investor, which that investor was seeking to recover from the estate in its entirety. The court noted that disallowance of the setoff avoided the danger of double recovery. 850 F. Supp. at 714. Nonetheless, the rule established by the court was broader than was necessitated by these facts, resulting in potential liability of the transferee despite being a net loser.
51. Section 548(a)(2)(B) of the Bankruptcy Code provides that a transfer is voidable if the debtor received less than a reasonably equivalent value therefor and (i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; (ii) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or (iii) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured. 11 U.S.C. § 548(a)(2)(B) (1994). Section 5 of the UFTA provides as follows: (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation. (b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent. UFTA § 5, 7A U.L.A. 657 (1985). The UFCA provides as follows: Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration. UFCA § 4, 7A U.L.A. 474 (1985). Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent. Id. § 5, 7A U.L.A. at 504. Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors. Id. § 6, 7A U.L.A. at 507.
52. Section 101(32)(A) of the Bankruptcy Code defines "insolvent," for entities other than municipalities and partnerships, as follows: [a] financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of - (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title; . . . . 11 U.S.C. § 101(32)(A).
53. UFTA § 2(b), 7A U.L.A. at 648.
54. UFCA § 2, 7A U.L.A. at 442.
55. Lehmann, 56 F.3d at 755 (holding that the claims of investors made a Ponzi scheme insolvent from beginning); Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 871 (D. Utah 1987) ("By definition, an enterprise engaged in a Ponzi scheme is insolvent from day one."); Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 441 (Bankr. N.D. Ill. 1995) (holding that a Ponzi scheme made the debtor insolvent from the scheme's inception, as a matter of law); Emerson v. Maples (In re Mark Benskin & Co.), 161 B.R. 644, 650 (Bankr. W.D. Tenn. 1993) (same); Dicello v. Jenkins (In re International Loan Network, Inc.), 160 B.R. 1, 12 n.15 (Bankr. D.C. 1993) (in the context of a summary judgment motion, the court found that the debtor had failed to demonstrate the existence of a genuine issue of fact regarding insolvency, but also stated that because the debtor operated a Ponzi scheme, the court could have found the debtor to be insolvent from its inception as a matter of law).
56. "The promised rates of return, because they are in excess of any real investments, render a ponzi scheme operator insolvent from the inception of the scheme. As the scheme progresses and more and more investors are promised returns, the operator becomes more insolvent." In re Taubman, 160 B.R. 964, 978 (Bankr. S.D. Ohio 1993) (citation omitted).
57. See 11 U.S.C. § 548(a)(2)(B)(i); UFTA § 5, 7 A U.L.A. at 657; UFCA § 4, 7A U.L.A. at 474.
58. See Jobin v. McKay (In re M&L Bus. Mach. Co.), 155 B.R. 531, 535 n.7 (Bankr. D. Colo. 1993) ("Some courts have found that, '[b]y definition, an enterprise engaged in a Ponzi scheme is insolvent from day one.' As Debtor was an established business and continued to conduct legitimate business, at least to some degree, up until the date of the Petition, this Court cannot adopt such a blanket statement in the present case.") (citations omitted), aff'd, 84 F.3d 1330 (10th Cir. 1996).
59. See 11 U.S.C. § 548(a)(2)(B)(ii); UFTA § 4(a)(2)(i), 7A U.L.A. at 653; UFCA § 5, 7A U.L.A. at 504.
60. See 11 U.S.C. § 548(a)(2)(B)(iii); UFTA § 4(a)(2)(ii), 7A U.L.A. at 653; UFCA § 6, 7A U.L.A, at 507.
61. Emerson, 161 B.R. at 650 ("[T]he fact that the debtor operated primarily if not exclusively on fraudulently obtained funds establishes that the debtor had little if any legitimate operating capital. It would seem axiomatic that the debtor was operating its business with unreasonably small capital."); Taubman, 160 B.R. at 986 ("The court determines, in the circumstances of this bankruptcy case, that insolvency constitutes unreasonably small capital per se.").
62. Taubman, 160 B.R. at 978 ("As a result of the absence of sufficient, or any, assets able to generate funds necessary to pay the promised returns, the success of such a scheme guarantees its demise because the operator must attract more and more funds, which thereby creates a greater need for funds to pay previous investors, all of which ultimately causes the scheme to collapse."). The Taubman court ultimately decided not to invoke such a presumption in a Ponzi scheme case, holding instead that, in determining whether a debtor intended to incur debts beyond its ability to pay, the court must undertake an inquiry into the debtor's subjective intent. The court found such intent based upon circumstantial evidence. The evidence in the case demonstrated that: (i) the debtor was continually insolvent during the time that it operated the Ponzi scheme; (ii) no assets existed and there was no other source of funds other than new investors' funds; (iii) to acquire the funds to make the promised returns to existing investors, the debtor induced new investors to provide her with funds or induced existing investors to roll over their prior investments; (iv) funds from new investors were commingled with the existing funds in the debtor's accounts; (v) the debtor often lacked the necessary funds to pay monthly bills on a current basis and make payments due investors; (vi) the debtor frequently bounced checks; and, (vii) as time passed, the debtor increasingly received angry calls and visits from investors. Id. at 984-84. As can be seen from this list of factors, there is considerable overlap in the various elements of a cause of action for constructive fraud; indeed, the court found that the debtor's insolvency - which should have been sufficient in and of itself for constructive fraud - was only one of several factors bearing on the debtor's intent. Id.
63. But see Rafoth v. Bailey (In re Baker & Getty Fin. Servs., Inc.), 88 B.R. 792 (Bankr. N.D. Ohio 1988) (indicating that a trustee may only recover sums in excess of investor's principal payments, even under an actual fraud theory).
64. 11 U.S.C. § 548(a)(1).
65. Under the UFTA, a transfer made by a debtor is fraudulent if the debtor made the transfer "with actual intent to hinder, delay, or defraud any creditor of the debtor." UFTA § 4(a)(1), 7A U.L.A. at 652. Under the UFCA, "[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent . . . ." UFCA § 7, 7A U.L.A. at 509.
66. See infra notes 71-103 and accompanying text.
67. Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995); Hayes v. Palm Seedlings Partners (In re Agricultural Research and Tech. Group, Inc.), 916 F.2d 528, 535 (9th Cir. 1990) (holding that a debtor's actual intent can be inferred from the mere existence of a Ponzi scheme); Plotkin v. Pomona Valley Importers, Inc. (In re Cohen), 199 B.R. 709, 717 (B.A.P. 9th Cir. 1996) (same); Jobin v. Ripley (In re M&L Bus. Mach. Co.), 198 B.R. 800, 806 (D. Colo. 1996) (the only inference to be drawn from the operation of a Ponzi scheme is actual intent to defraud); Levey v. Razee (In re Mary S. Pate), No. 95 A 985, slip op. at 6 (Bankr. N.D. Ill. Feb. 21, 1997) (holding that a debtor running a Ponzi scheme possesses actual intent to hinder, delay and defraud creditors); Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 438 (Bankr. N.D. Ill. 1995) (same); Brandt v. American Nat'l Bank (In re Foos), 188 B.R. 239, 244 (Bankr. N.D. Ill. 1995) ("[W]hen a debtor is operating a Ponzi scheme he knows that he is going to defraud certain investors as sooner or later he will run out of money. Therefore, when an action is brought to recover payments that were part of the Ponzi scheme it is reasonable to presume an intent to defraud."); Jobin v. Waukau (In re M&L Bus. Mach. Co.), 166 B.R. 723, 724 (Bankr. D. Colo. 1993) (same); Taubman, 160 B.R. at 983 (holding that it is appropriate to find actual intent from debtor's active participation in Ponzi scheme); Jobin v. Lalan (In re M&L Bus. Mach. Co.), 160 B.R. 851, 857 (Bankr. D. Colo. 1993) ("[I]n a Ponzi scheme the only inference a court can make is that the Debtor had the requisite intent to hinder, delay or defraud under § 548(a)(1)."), aff'd, 167 B.R. 219 (D. Colo. 1994).
68. Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 860 (D. Utah 1987) (citations omitted).
69. See Barber v. Union Nat'l Bank (In re KZK Livestock, Inc.), 190 B.R. 626 (Bankr. C.D. Ill. 1996) (because the case involved a debtor with a legitimate business in addition to a check kiting scheme, a question of fact was presented as to whether the debtor acted with actual intent to defraud a particular creditor, precluding summary judgment for trustee).
70. See Hayes, 916 F.2d at 537 ("[E]vidence pertaining to reasonably equivalent value is germane to a finding of actual intent."); Jobin v. McKay (In re M&L Bus. Mach. Co.), 155 B.R. 531, 539-40 (Bankr. D. Colo. 1993) (court may rely on circumstantial evidence in support of a finding of actual intent), aff'd, 84 F.3d 1330 (10th Cir. 1996).
71. See, e.g., Lehmann, 56 F.3d at 762 (holding that the debtor's plea agreement, admitting charges of fraud, was admissible in a receiver's fraudulent transfer action against an investor); Floyd v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424, 433 (Bankr. S.D. Tex. 1997) (holding that the debtor's criminal conviction based on the operation of a Ponzi scheme conclusively established fraudulent intent); Martino, 189 B.R. at 439 (holding that the debtor's intent to defraud Ponzi investors was established by, among other things, a jury verdict finding the debtor guilty of fraud); Emerson v. Maples (In re Mark Benskin & Co.), 161 B.R. 644, 648-50 (Bankr. W.D. Tenn. 1993) (finding that the debtor's intent to defraud was established by guilty pleas to related criminal charges).
72. 11 U.S.C. § 548(c) (1994).
73. UFTA § 8(a) provides, in part, that "[a] transfer or obligation is not voidable under Section 4(a)(1) [intentional fraud] against a person who took in good faith and for a reasonably equivalent value UFTA § 8(a), 7A U.L.A. 662 (1985).
74. Section 3 of the UFCA provides that "fair consideration" is given for property either (i) when, in exchange for such property, "as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied;" or (ii) when such property "is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property . . . ." UFCA § 3, 7A U.L.A. 448 (1985).
75. See supra notes 38-41 and accompanying text.
76. The question of whether value has been given, for purposes of the defense to a claim for intentional fraud, appears to be analyzed by courts in the same fashion as whether reasonably equivalent value has been given for purposes of establishing constructive fraud. But see Jobin v. McKay (In re M&L Bus. Mach. Co.), 164 B.R. 657 (D. Colo. 1994) (indicating standards are different, although not specifying how).
77. Jobin v. McKay (In re M&L Bus. Mach. Co.), 84 F.3d 1330, 1338 (10th Cir. 1996) (holding that the defendant carries burden of proving good faith); Hayes v. Palm Seedlings Partners (In re Agricultural Research and Tech. Group, Inc.), 916 F.2d 528, 535 (9th Cir. 1990) (same); Jobin v. Cervenka (In re M&L Bus. Mach. Co.), 194 B.R. 496, 503 (D. Colo. 1996) (same); Jobin v. Waukau (In re M&L Bus. Mach. Co.), 166 B.R. 723, 724 (D. Colo. 1993) (holding that the burden is on the defendant investor to establish both that value was given and that the challenged transfers were taken in good faith).
78. See, e.g., McKay, 84 F.3d at 1338 (stating that good faith under § 548(c) should be measured objectively; if circumstances would place a reasonable person on inquiry of debtor's fraudulent purpose and diligent inquiry would have discovered a fraudulent purpose, then the transfer is fraudulent); Jobin v. Ripley (In re M&L Bus. Mach. Co.), 198 B.R. 800, 810 (D. Colo. 1996) (same); Cervenka, 194 B.R. at 503 (holding objective test for good faith applies under § 548(c) of Bankruptcy Code); Waukau, 166 B.R. at 724 (adopting objective standard for good faith by examining what defendant "knew or should have known" rather than examining solely what defendant asserts was subjective knowledge of transaction); Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 862 (D. Utah 1987) (same). See also McKay. 164 B.R. at 662-63 (holding defendant had no defense against trustee's avoidance action based on Ponzi scheme where defendant knew or should have known of debtor's fraudulent purposes).
79. Plotkin v. Pomona Valley Imports, Inc. (In re Cohen), 199 B.R. 709, 719 (B.A.P. 9th Cir. 1996) (holding that one lacks good faith if possessed of enough knowledge of facts to induce a reasonable person to inquire further); Hayes, 916 F.2d at 536 (holding that if circumstances would place a reasonable person on inquiry of debtor's fraudulent purpose and diligent inquiry would have disclosed fraudulent purpose, then transfer is fraudulent); Merrill, 77 B.R. at 862 ("'[T]he presence of any circumstance placing the transferee on inquiry as to the financial condition of the transferor may be a contributing factor in depriving the former of any claim to good faith unless investigation actually disclosed no reason to suspect financial embarrassment.'") (quoting 4 LAWRENCE P. KING ET AL., COLLIER ON BANKRUPTCY ¶ 548.07[2], at 548-68 (15th ed. 1987)).
80. See, e.g., Scholes v. Lehmann, 56 F.3d 750, 759 (7th Cir. 1995) (stating that in cases of actual fraud, an investor "is not entitled to keep any part of the money she received from the corporations - provided, we emphasize, that she knew or should have known of [the debtor's] fraudulent intent.") (emphasis added); Hayes, 916 F.2d at 535-36 (determining issue of good faith requires courts to look to whether transferee knew or should have known, not what transferee actually knew from subjective point of view).
81. See supra notes 42-44 and accompanying text. See also Cervenka, 194 B.R. at 502 (holding that a subjective, not objective, test of culpable knowledge should have been applied to determine whether an investor was entitled to a claim for restitution, the reduction of which constituted reasonably equivalent value).
82. See Ripley, 198 B.R. at 808 (holding that the subjective standard is derived from state restitution law). However, not all courts have adopted different standards. See Jobin v. Lalan (In re M&L Bus. Mach. Co.), 160 B.R. 851, 858 (Bankr. D. Colo. 1993) (adopting the objective standard of good faith, contrary to other courts, in case involving good faith defense raised under § 548(c) to trustee's constructive fraud claim under § 548(a)(2)), aff'd, 167 B.R. 219 (D. Colo. 1994).
83. See, e.g., Cervenka, 194 B.R. at 502 (reversing a bankruptcy court's grant of summary judgment to the trustee on the issue of an investor's subjective good faith because there was a genuine issue of material fact based on the investor's affidavit that he thought debtor was operating legitimate investment program).
84. See infra notes 95-102 and accompanying text.
85. See, e.g., Lalan, 160 B.R. at 859 (a Ponzi-scheme investor did not act in good faith in pursuing a supposedly risk-free investment promising profits of 125 percent to 512 percent).
86. See infra notes 91-103 and accompanying text.
87. See id.
88. See id.
89. Cf. Jobin v. Ripley (In re M&L Bus. Mach. Co.), 198 B.R. 800, 808 (D. Colo. 1996) (investor did not actually know of existence of Ponzi scheme despite fact that debtor told investor that returns depended upon investments from others).
90. Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 862 (D. Utah 1987) ("The test is whether the transaction in question bears the earmarks of an arm's length bargain.").
91. See Levey v. Razee (In re Mary S. Pate), No. 95 A 985, slip op. at 16 (Bankr. N.D. Ill. Feb. 21, 1997) (investors should have known that "something was not right," when, among other things, the debtor began bouncing checks to each investor and gave one investor a check and told him not to cash it until notified).
92. 56 F.3d 750 (7th Cir. 1995).
93. Id. at 760.
94. Levey, No. 95 A 985, slip op. at 14.
95. Merrill, 77 B.R. at 862 (citation omitted).
96. 84 F.3d 1330 (10th Cir. 1996).
97. Id. at 1332.
98. Id. at 1338-39. McKay's experience may have been critical to the court's ruling. McKay had attended college for three years and studied business administration and bookkeeping. He also operated his own construction business, a commercial and industrial real estate business, served as cotrustee for a family trust with assets in excess of $3,000,000, and owned a personal portfolio including a variety of stocks, bonds, mutual funds, raw land and promissory notes. Id. at 1333.
99. Jobin v. Cervenka (In re M&L Bus. Mach. Co.), 194 B.R. 496 (D. Colo. 1996).
100. See id. at 503.
101. See id.
102. See id. Similarly, the United States Bankruptcy Court for the District of Colorado, in yet another case involving the same Ponzi scheme, found that the investor failed by a "wide margin" to establish good faith under § 548(c), based upon the investor's testimony that he had owned his own business since 1975, had purchased stock in a publicly traded corporation, discounted what a friend told him about the debtor's investment opportunity because "there was no way to make money that quick without a catch," and that he did not see any of the contracts of the debtor in which he supposedly was investing, did not ask for copies of the debtor's financial records, did not ask about assets and liabilities of the debtor or for any other written financial information, never spoke to an attorney, a stock broker, or an accountant prior to investing, and that it was always his understanding that he faced no risk in investing in the program "even if the contracts he was supposedly investing in fell through." Jobin v. Lalan (In re M&L Bus. Mach. Co.), 160 B.R. 851, 858-59 (Bankr. D. Colo. 1993), aff'd, 167 B.R. 219 (D. Colo. 1994). See also Jobin v. Ripley (In re M&L Bus. Mach. Co.), 198 B.R. 800, 810 (D. Colo. 1996) (concluding that the defendant's education and experience as an investor, the circumstances of his initial introduction to and investment with the debtor, the high interest rates promised, and the lack of financial information reviewed by defendant precluded a finding that he acted in good faith). But see Hirsch v. Cahill (In re Colonial Realty Corp.), 210 B.R. 921 (Bankr. D. Conn. 1997) (denying trustee's summary judgment motion where defendant's affidavit placed his good faith in issue).
103. 916 F.2d 528, 539-40 (9th Cir. 1990).
104. The facts that defendant-investors may prove in support of the apparent regularity of a Ponzi scheme, and hence their good faith, are reflected in the few decisions ruling in the defendants' favor. Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 862 n.29 (D. Utah 1987), reversed an award of summary judgment in favor of a trustee, finding several facts from which an inference could be drawn that the defendants received payments in good faith, including: (i) false representations by the debtors that were meant to induce reliance, and actions of defendants from which one might infer actual reliance; (ii) the defendants' lack of sophistication, demonstrated by the small amounts of money they invested, by the jobs some of them held, and by the fact that many defendants appeared pro se; and (iii) the receipt of payments under their contracts which may have allayed any suspicion that the debtor was not carrying on an actual business). Similarly, in Plotkin v. Pomona Valley Imports, Inc. (In re Cohen), 199 B.R. 709, 719 (B.A.P. 9th Cir. 1996), the court held that dealers who sold cars to a Ponzi debtor at retail, which the debtor then transferred to investors, were good faith transferees of the purchase prices, since there were no facts to put the dealers on inquiry notice of the debtor's fraudulent intent.
105. The determination of whether a Ponzi debtor has any interest in funds transferred is the same whether a trustee is attempting to recover the funds as fraudulent or as preferential transfers. See supra notes 19-32 and accompanying text.
106. The preference period is extended to one year in the case of insiders. 11 U.S.C. § 547(b)(4)(B) (1994). For a discussion of when a transfer takes place for purposes of these time limits, see Barnhill v. Johnson, 503 U.S. 393 (1992).
107. Section 547(b) provides, in part, as follows: Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property - (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made - (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if - (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. 11 U.S.C. § 547(b).
108. See, e.g., Wootton v. Barge (In re Cohen), 875 F.2d 508, 509 (5th Cir. 1989).
109. See supra note 38 and accompanying text. However, the investor must be in privity with the Ponzi debtor in order to be a creditor. In Sender v. Johnson (In re Hedged-Investments Associates, Inc.) 84 F.3d 1267 (10th Cir. 1996), a defendant invested 560,000 with a limited partnership, understanding that his investment would be placed in a fund operated by the partnership's general partner. The trustee in the general partnership's bankruptcy brought a preference action against the investor to recover the amounts that the defendant received from the fund. The court held that the trustee failed to establish a preference because the defendant could not be considered a creditor of the general partner-debtor merely on the basis of his equity investment in the limited partnership-debtor. This is true because limited partners do not have "claims" as defined by § 101(5) of the Bankruptcy Code. More importantly, the investor did not become a creditor of the general partner merely by virtue of his equity interest in the limited partnership, since the two businesses were separate entities. The defendant's equity interest in the partnership did not make him a creditor of the general partner. 84 F.3d at 1272. See also Jobin v. Lalan (In re M&L Bus. Mach. Co.), 160 B.R. 851 (Bankr. D. Colo. 1993) (rejecting Ponzi defendant's argument that he was joint venturer of debtor and not a creditor; defendant did not have joint interest in property or contract rights of debtor, and there was no agreement that defendant would share in any losses of venture; defendant clearly invested money and received postdated checks, one for principal and the other for return on investment), aff'd, 167 B.R. 219 (D. Colo. 1994).
110. 11 U.S.C. § 101(10).
111. See supra notes 40-41 and accompanying text. See also Danning v. Bozek (In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1219 (9th Cir. 1988) (rejecting an investor's argument that transfers from Ponzi debtor were not on account of antecedent debt; since the investor held a claim against the debtor when he transferred funds to debtor, the subsequent transfer to the investor was on account of an antecedent debt).
112. Wootton, 875 F.2d at 510 (payments received by an investor in excess of the amount invested were not preferences because the investor had no claim against the debtor for the excess payments). But see Rosenberg v. Collins, 624 F.2d 659, 663-64 (5th Cir. 1980) (allowing a trustee to recover preference from investor without addressing whether payments received were on account of an antecedent debt).
113. See supra notes 42-44 and accompanying text.
114. See supra notes 54-55 and accompanying text.
115. 11 U.S.C. § 547(f).
116. See, e.g., Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 872 (D. Utah 1987) (finding, after considering a hypothetical liquidation of the debtor's estate, that, although the trustee had not demonstrated what percentage of their debts investors were likely to recover, it was clear that their recovery would be less than 100 percent).
117. See 11 U.S.C. § 547(c).
118. Id. § 547(c)(1).
119. Id. § 547(c)(4).
120. Id. § 547(a)(2).
121. Id. See Floyd v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424, 432 (Bankr. S.D. Tex. 1997).
122. Jobin v. McKay (In re M&L Bus. Mach. Co.), 155 B.R. 531, 538 (Bankr. D. Colo. 1993), aff'd, 164 B.R. 657 (D. Colo. 1994).
123. See id. See also Jobin v. Ripley (In re M&L Bus. Mach. Co.), 198 B.R. 800, 804-05 (D. Colo. 1996) (discussing the new value defense).
124. 11 U.S.C. § 547(c)(2).
125. See, e.g., Henderson v. Buchanan, 985 F.2d 1021, 1025 (9th Cir. 1993) (holding that because a Ponzi scheme is not a business, transfers related to the scheme are not within the ordinary course of business); Danning v. Bozek (In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1219 (9th Cir. 1988) (transfers made in a Ponzi scheme are not made in ordinary course of business); Graulty v. Brooks (In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.), 819 F.2d 214, 216 (9th Cir. 1987) (same); In re Taubman, 160 B.R. 964, 991 (Bankr. S.D. Ohio 1993) ("Ponzi schemes are not legitimate businesses which Congress intended to protect by enactment of § 547(c)(2)."); Henderson v. Allred (In re Western World Funding, Inc.), 54 B.R. 470, 478 (Bankr. D. Nev. 1985) (holding that the ordinary course defense could not be applied to fraudulent investments and repayment transactions because, to apply the defense, would immunize these activities and lend judicial support to Ponzi schemes by rewarding early investors at the expense of later victims).
126. See, e.g., Jobin v. McKay (In re M&L Bus. Mach. Co.), 84 F.3d 1330, 1339-40 (10th Cir. 1996) (rejecting a bright-line rule that § 547(c)(2) has no application in context of Ponzi schemes, but holding that the payment of profits was not in the ordinary course, because an ordinary business does not pay fraudulent profits); Sender v. Elizabeth R. Heggland Family Trust (In re Hedged-Invs. Assocs., Inc.), 48 F.3d 470, 475 (10th Cir. 1995) (refusing to adopt a blanket rule prohibiting application of the ordinary course defense within context of Ponzi schemes, so that transfers made to noninvestor-creditors, in the ordinary course of business and according to ordinary business terms, may be protected by the defense); Ripley, 198 B.R. at 806 (Ponzi investors were not protected by ordinary course of business defense); Levey v. Razee (In re Mary S. Pate), No. 95 A 985, slip op. at 11 (Bankr. N.D. Ill. Feb. 21, 1997) (same); Inskeep v. Grosso (In re Financial Partners, Ltd.), 116 B.R. 629, 637-38 (Bankr. N.D. Ill. 1989) (same).
127. McKay, 84 F.3d at 1339-40 (holding that noninvestor creditors of a Ponzi scheme were entitled to the ordinary course defense to extent that payments are made to them according to ordinary business terms in ordinary course of business). The bankruptcy court in McKay stated that the underlying purpose of the ordinary course defense was "to leave undisturbed routine and normal financial transactions so as to protect customary business and credit relationships formed, or occasioned, as part of lawful commercial activity." 155 B.R. at 535.
128. Jobin v. McKay (In re M&L Bus. Mach. Co.), 164 B.R. 657, 664 (D. Colo. 1994) (citation omitted) (quoting Duvoisin v. Evans (In re Southern Indus. Banking Corp.), 159 B.R. 224, 227 (Bankr. E.D. Tenn. 1988)).
129. McKay, 155 B.R. at 535.
130. See id. The court stated: When we have a company that is insolvent, not making money, reporting false profits and paying what it is falsely reporting, I hardly feel that that is an obligation or a payment made in the ordinary course of any reputable business. Certainly it's not one made according to ordinary business terms. Id. at 537 n.14 (quoting Sender v. Greenlee, No. 91-1930-CEM, slip op. at 16 (Bankr. D. Colo. June 11, 1992)). The court found that the defendant "has not provided any evidence whatsoever, or advanced the argument, that his ordinary business, or financial affairs, involves lending at usurious and illegal interest rates, or otherwise taking promissory notes with usurious, illegal and unenforceable interest rates." Id. at 537.
131. McKay, 164 B.R. at 664.