You Can't Cheat an Honest Man - James Walsh [148]
Similarly, if there is a question about a recipient’s innocence at the time he received a payment under a Ponzi scheme, avoidance of the transfer might be sought. This claim usually requires a court to consider the good faith of an investor who wished to retain payments, or portions of payments, received from the debtor.
Exceptions to the Code Rules
A common problem in pyramid schemes is that goods, services and cash are often shuffled among many people—including some who have little or no involvement in the underlying scheme.
The law gives innocent bystanders a break. Subsequent transferees (that is, transferees of the initial transferee), who take for value without knowledge of the original fraudulent transfer are not liable for any recovery. Nor are their subsequent good faith transferees liable. The Bankruptcy Code does not define “good faith.” As a result, courts applying the good faith exception have generally refused to formulate precise definitions. However, after noting that “[g]ood faith is an intangible and abstract quantity with no technical meaning,” Black’s Law Dictionary states that the term includes not only “honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage” but also “freedom from knowledge of circumstances which ought to put the holder on inquiry.”
The Eighth Circuit Court of Appeals has written that “a transferee does not act in good faith when he has sufficient knowledge to place him on inquiry notice of the debtor’s possible insolvency.”
So, a transferee who reasonably should have known of a debtor’s insolvency or of the fraudulent intent underlying the transfer is not entitled to the good faith defense.
The In re Independent Clearing House court explained (in a mixed anatomical metaphor) the determination of good faith in a manner that emphasized objective factors: “The test is whether the transaction in question bears the earmarks of an arm’s length bargain.”
Bankruptcy Crimes
Often, Ponzi perps will try to hide money from a scheme in the days...or hours...before filing bankruptcy. This is certainly a major concern that burned investors have after the scheme collapses.
The Bankrupcty Code provides criminal penalties for any person who,
in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation.
People charged with these crimes sometimes answer that, for an act of bankruptcy fraud to constitute a predicate act under RICO, an actual bankruptcy case must have been filed. However, the Code also allows criminal charges against a person who merely transfers or conceals assets “in contemplation of a case... or with intent to defeat the provisions of [the Code].”
All that it requires is that the defendant transfer assets with the ultimate intent to defraud a bankruptcy court, whether or not such proceedings ever actually commence.
Fraudulent Conveyance
Without any doubt, the claim most often made in Ponzi scheme bankruptcies—in fact, in all bankruptcies—is fraudulent conveyance. But this claim is harder to make stick that might first seem.
For a bankruptcy trustee to avoid a transfer as fraudulent, four elements must be satisfied:
1) the transfer must have involved property of the bankrupt company;
2) the transfer must have been made within one year of the filing of the petition;
3) the bankrupt