You Can't Cheat an Honest Man - James Walsh [125]
In the absence of explicit agreement, title passes to the buyer when and where “the seller completes his performance with reference to the physical delivery of the goods.” When people were talking about bolts of fabric or barrels of rum, these distinctions were easy enough to understand and apply. When people are talking about investments in securities, things can get a little fuzzy.
The relationship between a creditor and the Ponzi scheme company is usually pretty clear. The relationship between an investor or distributor and the company is more problematic—and determined in many cases by how title to goods has passed. In short, this issue deals with who owned the investment capital, who owned the assets of the enterprise and when did these items exchange hands.
This distinction often comes into play when commercial creditors of a Ponzi scheme company are battling with investors for who should come first in the resolution. It’s especially important when the Ponzi scheme involves multiple levels of salespeople or distributors. The result can be a complicated hash of people trying to take whatever money or goods are left when the scheme collapses.
One often-used tool for clearing up the complication is the so-called “dominion” or “control” test. This standard requires “dominion over the money or other asset, the right to put the money [or asset] to one’s own purposes” such as to “invest in lottery tickets or uranium stocks.” On this issue, one court has written:
Logic and equity require that ordinary market-price sales by retail merchants acting in good faith not be contorted beyond commercial practice for the purpose of expanding the merchant’s status as a captive risk taker.
So long as a merchant has no reason to suspect a customer’s Ponzi scheme or other skullduggery, sales made under ordinary commercial terms will usually be viewed as legitimate transactions between merchant and customer. Simply because they claim they are “owed money too,” burned investors can’t nullify the honest debts of dishonest companies.
Fraudulent Transfers
In the wake of a collapsed Ponzi scheme, people will rush to claim “fraudulent transfer” in the hope of getting some of their money back. However, the circumstances that support a fraudulent transfer are more limited than most people think. A major source of misunderstanding is that the word “fraudulent” has such pejorative connotations that it becomes difficult for most people to think dispassionately about it. According to federal law, fraudulent transfers are subdivided into actually fraudulent transfers and constructively fraudulent transfers. The key distinction between these two types is the intent of the transferors. Intent is essential to actually fraudulent transfers; it’s immaterial to constructively fraudulent transfers.
Bankruptcy law, which controls many of the elements of fraudulent transfer, states that a court or court-appointed trustee may:
avoid any transfer of an interest of the [bankrupt Ponzi company] that was made or incurred on or within one year before the date of the [scheme’s collapse.]
This goes for deals with creditors as well as deals with other investors. However, in order to nullify the transfer, the court has to show that the perp did one of three things:
1) made the transfer or incurred the obligation with intent to hinder, delay, or defraud any entity to which the company was or became indebted;
2) received less than a reasonably equivalent value in exchange for such transfer or obligation; or
3) became insolvent or intended to incur debts that would be beyond its ability to pay as a result of the deal.
(The first activity constitutes an actually fraudulent transfer; either the second or third constitute constructively fraudulent