Finn v. Alliance Bank
2015 Minn. LEXIS 52
| Minn. | 2015Background
- First United Funding, controlled by Corey Johnston, sold loan participation interests; some were fictitious or oversold, and First United commingled proceeds in a Ponzi-like scheme.
- A receiver was appointed to liquidate First United and sued multiple banks under Minnesota’s Uniform Fraudulent Transfer Act (MUFTA), alleging actual fraud (§ 513.44(a)(1)) and constructive fraud (§§ 513.44(a)(2), 513.45).
- Some banks (Respondent Banks) bought legitimate, non-oversold participations and received payments through March 2005; Alliance Bank bought a real Moyes loan participation and received ~ $1.2M more than principal.
- The district court applied a multi-part “Ponzi-scheme presumption,” dismissed some claims as time-barred, granted summary judgment for the Receiver against Alliance Bank, and the court of appeals partly affirmed and partly reversed.
- The Minnesota Supreme Court considered (1) whether MUFTA incorporates the federal-style Ponzi presumption (divided into three components: intent, insolvency, and lack of reasonably equivalent value) and (2) which statute-of-limitations rule applies to MUFTA claims (statute-created liability vs. fraud discovery rule).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether MUFTA incorporates a conclusive presumption that a Ponzi scheme operator acted with actual fraudulent intent for transfers made in furtherance of the scheme | Receiver: existence of a Ponzi scheme conclusively establishes actual intent to defraud | Banks: MUFTA requires proof of intent; badges-of-fraud list controls and no conclusive Ponzi badge exists | Rejected — MUFTA has no statutory conclusive presumption; intent must be proven with badges/facts per transfer |
| Whether MUFTA presumes a Ponzi operator was insolvent at the time of every transfer | Receiver: Ponzi schemes are insolvent as a matter of law, so insolvency need not be proven | Banks: Insolvency is a statutory, temporal inquiry under MUFTA and cannot be presumed for every transfer | Rejected — insolvency cannot be conclusively presumed; MUFTA’s defined insolvency and timing matter |
| Whether payments (profits/interest) from a Ponzi scheme are conclusively not for "reasonably equivalent value" (negating defenses and establishing constructive fraud) | Receiver: investment ‘‘profits’’ are not reasonably equivalent value; contracts with a Ponzi operator are unenforceable as matter of public policy | Banks: payments satisfied antecedent debts under participation agreements; reasonably equivalent value is a fact-specific inquiry | Rejected — no categorical rule; satisfaction of antecedent debt can constitute value and must be assessed on the facts; Alliance Bank entitled to judgment on undisputed facts |
| Applicable statute of limitations for MUFTA claims: statute-created-liability (6 years from transfer) v. fraud discovery rule (6 years from discovery) | Receiver: actual-fraud claims accrue on discovery (fraud rule); court of appeals applied discovery rule to actual fraud and statute rule to constructive fraud | Banks: MUFTA claims are statutory and governed by statute-created-liability limitations | Partially accepted — actual-fraud MUFTA claims are "for relief on the ground of fraud" and accrue on discovery; court did not decide constructive-fraud limitations because those claims were insufficiently pleaded |
Key Cases Cited
- Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) (federal court adopting Ponzi-scheme inferences on elements of fraudulent-transfer claims)
- Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011) (describing Ponzi-scheme presumption and its operation)
- Cunningham v. Brown, 265 U.S. 1 (1924) (historical observation that Ponzi’s specific scheme was insolvent from inception)
- McDaniel v. United Hardware Distributing Co., 469 N.W.2d 84 (Minn. 1991) (statute-of-limitations analysis distinguishing liabilities created by statute from preexisting common-law claims)
- In re Hedged-Investments Associates, Inc., 84 F.3d 1286 (10th Cir. 1996) (example of courts treating investment contracts with Ponzi operators as unenforceable on public policy grounds)