Alert: Minnesota Supreme Court Rejects the Ponzi Scheme Presumption

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February 19, 2015

On February 18, the Minnesota Supreme Court rejected the “Ponzi Scheme Presumption”  that had been the foundation for so many “claw back” claims against banks and other financial institutions receiving credit repayments from the likes of Tom Petters, Corey Johnston and others.  Briggs and Morgan attorneys Kevin Decker and Ben Gurstelle defended a lender in the matter, which involved claims brought by a receiver for a purported Ponzi schemer whose fraudulent lending practices left him unable to repay his debts.

In the new decision, Finn v. Alliance Bank, the state's high court rejected the receiver's "Ponzi scheme presumption" theory by which the receiver would have had the courts strip the banks of traditional defenses.  In effect, the court ruled that lenders are entitled to summary judgment when the transactions at issue involve legitimate loans that were repaid in the normal course.

The Finn litigation stems from Corey Johnston, operating by and through First United Funding LLC (FUF), who sold loan participations to many banks. Part of Johnston’s operation involved overselling participations, or selling participations in loans that did not exist at all. When his scheme collapsed, Johnston and FUF were placed into receivership. The receiver subsequently sued many banks seeking to recover the interest the banks received related to their participations. The receiver's claims took the form of "actual" and "constructive" fraudulent transfer actions under the Minnesota Uniform Fraudulent Transfer Act, Minn. Stat. §§ 513.41-.51 (MUFTA).

At the district court, one lender was found liable on summary judgment despite facts showing that it had purchased a participation in a legitimate loan with a real borrower and had been repaid according to the terms of the contract. In that case, the district court ruled that a “Ponzi scheme presumption” applied to render the transfer fraudulent under MUFTA regardless of the good faith and value provided by the lender in return for the repayment.

The Finn court rejected the "Ponzi scheme presumption" and directed that summary judgment be entered for the lender.  The justices unanimously ruled that fraudulent transfer claims cannot prevail, under a Ponzi scheme presumption or otherwise, when the facts show that the transfer was part of a legitimate loan with an actual borrower and repayment was made in the normal course.

This new precedent resets the balance of power in the arena of "claw back" litigation.  Under the legal standards articulated by the Finn court, lenders will have traditional defenses restored even when allegations of a Ponzi scheme are presented.  The decision breaks from an increasing prevalence of other courts around the country that have been adopting the "Ponzi scheme presumption" in ruling for the receivers and bankruptcy trustees. Briggs represents a number of banks and other financial institutions in similar matters.