Southern District of New York Bankruptcy Judge Martin Glenn issues an exhaustive opinion that presents a mixed bag of good and bad news for avoidance action defendants who received Ponzi scheme payments. Among the issues addressed in the opinion are: the applicability of the “Ponzi scheme presumption” to actual fraudulent conveyance claims under § 548(a)(1)(A); the lack of a “mutual fraudulent intent” requirement under NYDCL § 276; the inability of the Trustee to pursue claims for constructive fraudulent conveyance under § 548(a)(1)(B) as to repayment of investor principal; and the inability of the Trustee to pursue constructive fraudulent conveyance claims under the NYDCL where repayment satisfied an antecedent debt. Click this link to see a copy of the opinion.
Judge Glenn provides the following summary of the issues and his decisions [reformatted for clarity]:
Two potentially case-dispositive issues are raised in these cases:
(1) whether the forfeiture order, entered by the district court in Marc Dreier’s criminal case upon his guilty plea, had the effect of forfeiting all funds in the 5966 Account, or traceable to the account, including the funds transferred to the defendants before the forfeiture order was entered, thereby precluding the Trustee from recovering the payments to defendants because, as a result of the forfeiture, the funds were not “property of the debtor,” an essential element under federal and state avoidance claims; and
(2) whether the defendants’ deposits into the 5966 Account and the funds repaid to the defendants from the 5966 Account were held by Dreier LLP in an “express trust,” precluding the Trustee from recovering the payments because funds held in an express trust are not “property of the debtor”? Additionally, the defendants’ motions to dismiss raise other arguments, some common to all three cases and some specific to the individual cases.7
This opinion addresses the two potentially case-dispositive issues and the additional common arguments, as well as the case-specific issues in this case. The motions to dismiss in the other two cases are resolved in separate opinions that incorporate this opinion, to the extent applicable, and address case-specific issues raised in each of those cases.
For the reasons explained below, the Court denies the motions to dismiss with respect to the two potentially case-dispositive issues, and grants the motions in part and denies the motions in part with respect to the common arguments and the case-specific issues in this case. As explained, the forfeiture order issue raises only an issue of law, resolved against the defendants in this opinion, and therefore foreclosing the issue to defendants as the cases proceed. The “express trust” issue, however, raises mixed questions of fact and law that cannot be resolved on the motions to dismiss, and must await further developments in these cases.
As to the common issues among the defendants, the Court reaches the following conclusions:
First, the “Ponzi scheme presumption” applies to the transfers made to defendants during the course of Dreier’s fraud sufficient to state a claim for actual fraudulent conveyance under § 548(a)(1)(A) of the Bankruptcy Code.
Second, to state a claim for actual fraudulent conveyance under NYDCL § 276, the Court concludes that the Trustee has adequately pled the fraudulent intent of the transferor and need not plead the fraudulent intent of the transferee— “mutual fraudulent intent” is not necessary.
Third, as to the claims for constructive fraudulent conveyance under § 548(a)(1)(B) of the Bankruptcy Code, the Court concludes that the complaints are dismissed as to the repayment of principal because the Trustee concedes that such repayment extinguished a common law claim, such as restitution, that defendants may have had against the estate; however, the claims for constructive fraudulent conveyance under the Bankruptcy Code are permitted to go forward as to the repayments in excess of principal because the Debtor did not receive “reasonably equivalent value” for such transfers.
Fourth, as to the claims for constructive fraudulent conveyance under the NYDCL, the Court concludes that the Trustee’s concession that the repayment of principal satisfied an antecedent debt precludes, as a matter of law, avoidance of such transfers; under controlling law, whether the defendants lacked “good faith,” an indisputably thorny inquiry, is not an issue under the NYDCL where the transfers satisfied a valid antecedent debt.
Fifth, the Trustee may seek recovery of the repayments in excess of principal because the Debtor did not receive “fair equivalent” value for the transfers.
Sixth, consideration of the defendants’ good faith sufficient to make out an affirmative defense under § 548(c) of the Bankruptcy Code or NYDCL § 278(1) is not appropriate at the motion to dismiss stage.
Seventh, the claims for equitable subordination under § 510(c) of the Bankruptcy Code must be dismissed as premature unless the defendant has filed a claim in the bankruptcy case.