Gowan v. Patriot Group, LLC (In Re Dreier LLP)
452 B.R. 391
Bankr. S.D.N.Y.2011Background
- Dreier LLP's Note Fraud generated >$700M; funds flowed through the commingled 5966 Account (Dreier LLP Escrow) used to repay earlier note investors and fund operations.
- District court entered a Preliminary Forfeiture Order, later a Final Order, which listed the 5966 Account funds as forfeitable assets but not necessarily all traceable proceeds.
- Trustee seeks avoidance/recovery of prepetition transfers to Patriot and other defendants under §548 and NYDCL; four cases share common questions.
- Defendants argue the Preliminary Forfeiture Order divested the estate of the funds and that the transfers were trust funds, not estate property.
- The Court holds the Preliminary Forfeiture Order did not divest the estate of funds transferred before the order and did not conclusively establish a trust; issues of ownership/beneficiary require development of facts.
- The court applies a Ponzi-scheme presumption to actual fraudulent conveyance claims and addresses both Code and NYDCL theories, with principal repayments treated differently from excess payments.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did the Preliminary Forfeiture Order divest the estate of funds in the 5966 Account? | Trustee: order did not divest; only funds at entry were forfeited. | Patriot: order divested all funds traceable to fraud. | No, it did not divest the estate. |
| Are transfers to Defendants property of the debtor or trust funds? | Funds were property of the Debtor; not trust funds. | Transfers were trust funds. | Not resolvable on motion; mixed questions of fact and law; proceed. |
| Is the Ponzi-scheme presumption applicable to §548(a)(1)(A) claims? | Presumption applies; transfers tainted by fraud. | Presumption should not apply. | Yes, the presumption applies. |
| Under NYDCL §276, must the Trustee plead transferee’s fraudulent intent as well as the transferor’s? | Only transferor’s intent relevant; Ponzi suffices. | Transferee intent required. | Trustee need only plead transferor's intent at motion to dismiss. |
| Are principal repayments to Patriot avoidable under §548(a)(1)(B) and NYDCL, or only excess payments? | Repayments may be avoided if not for fair value. | Repayment of principal constituted fair value. | Principal repayments are not avoided; excess payments may be. |
Key Cases Cited
- Bernard L. Madoff Inv. Secs., LLC v. Bernard L. Madoff, 440 B.R. 243 (Bankr. S.D.N.Y. 2010) ( Ponzi-related actual fraud pleading standards cited (example))
- In re Manhattan Inv. Fund Ltd., 397 B.R. 1 (S.D.N.Y. 2007) (Ponzi-presumption and good-faith analysis in §548/§277 contexts)
- In re Kovler, 249 B.R. 238 (Bankr.S.D.N.Y. 2000) (mutual fraudulent intent under NYDCL §276 discussed (Correcting Opinion context))
- In re Bayou Grp., LLC, 439 B.R. 284 (S.D.N.Y. 2010) (good-faith/inquiry-notice standards in Ponzi contexts)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (framework for 'fair consideration' and good faith under NYDCL/UFCA)