In Finn and Lighthouse Mgmt. Group, Inc. v. Alliance Bank, et al., — N.W.2d — (Minn. 2015, the Minnesota Supreme Court decided two questions of first impression in Minnesota: 1) does the “Ponzi-scheme presumption” adopted by some federal courts apply to claims brought under MUFTA and 2) whether the statute of limitations governing claims “for relief on the ground of fraud” under Minn. Stat. § 541.05, subd. 1(6) (2014) or the statute governing claims “upon a liability created by statute” pursuant to Minn. Stat. § 541.05, subd. 1(2) applies to claims under MUFTA.
This case deals with First United Funding, LLC’s (“First United”) fraudulent lendings. First United would make loans to borrowers, then turn around and sell “participation interests” in those loans to various financial institutions. Eventually, the amount of sold “participation interests” out-numbered the amount of the underlying loans, although First United was still selling some legitimate interests.
A receiver was appointed and the receiver filed a suit in May 2011 in an attempt to characterize any payments First United made before its collapse as fraudulent under MUFTA and therefore retrieve those payments. The last time any of the banks received a payment from First United was March 2005. The banks sued by the receiver argued that their investments were legitimate and not oversold interests. The banks moved to dismiss arguing that the lawsuit was untimely and failed to state a claim upon which relief could be granted. The district court dismissed the action stating it was untimely under Minn. Stat. § 541.05, subd. 1(2), which applies to actions “upon a liability created by statute.” The district court did, however, rule that the receiver did plead lawful claims against Alliance Bank, who had received payments after the 6 year statute of limitations cut-off based on a “Ponzi-scheme presumption” which was described as “the profits that good-faith investors enjoy in connection with a Ponzi scheme are recoverable as fraudulent transfers.” The district court granted the receiver’s motion for summary judgment and denied Alliance Bank’s motion. Judgment was entered against Alliance Bank for $1,235,388.00.
Does the “Ponzi Scheme Presumption” Apply to Claims Brought Under MUFTA?
Under MUFTA, creditors can recover assets that are transferred with fraudulent intent (also known as “actual fraud”) and transfer that are considered constructively fraudulent (where basically a creditor can show that a debtor made a transfer without receiving reasonably equivalent value).
The receiver wanted the Court to recognize another way to prove fraud through the “Ponzi-scheme presumption” where a creditor could simply prove a fraudulent transfer with evidence of a Ponzi scheme and that the transfer was made as a part of that scheme.
The Court ultimately held that the presumption did not apply to actual fraud claims. It based its decision on a number of factors including that MUFTA did not mention “Ponzi” or “schemes,” MUFTA is set up so that the creditor is required to prove elements of a fraudulent transfer for each transfer, instead of relying on an overall presumption, and “there is no statutory justification for relieving the [creditor] of its burden of proving….fraudulent intent” for actual fraud claims.
The Court also held that it did not apply to constructive claims either. Although MUFTA allows for a presumption that a debtor was insolvent when a transfer was made, and therefore constructively fraudulent, it does not allow that presumption to extend to debtors that operate Ponzi schemes. Secondly, with regards to proving insolvency, a “presumption that a Ponzi scheme is insolvent from its inception may be incorrect….” And lastly, the Court rejected the notion that presumptively a Ponzi scheme cannot receive reasonably equivalent value for the “interest” or “profits” it pays to investors. The Court affirmed the district court’s dismissal of the receiver’s constructive-fraud claims against the banks because the receiver’s complaint was based on an incorrect assumption that the Ponzi Scheme Presumption applied to Minnesota law.
What Statute of Limitations Applies to MUFTA?
There are two options: 1) Minn. Stat. § 541.05, subd. 1(2), which requires a party to file an action “upon a liability created by statute” or 2) Minn. Stat. § 541.05, subd. 1(2), which requires a party to file an action “for relief on the ground of fraud” within 6 years, but has the caveat that the time does not begin to run until the aggrieved party discovers the facts constituting the fraud.
In holding that Minn. Stat. § 541.05, subd. 1(2) applies, the Court stated,
“[T]he fact that the Legislature has codified fraudulent-transfer liability [in the form of MUFTA] does not change the underlying gust and essence of fraudulent-transfer law…nor does it transform it into a liability created by statute, which…does not apply to liabilities existing at common law which have been recognized by statute.”