OPINION
Appellant, The National Bank (National Bank), appeals the district court’s distribution of funds recovered from a Ponzi scheme under a net-investment distribution method. Because the district court did not abuse its discretion in selecting that method, we affirm.
FACTS
Beginning in 2002, First United Funding, LLC (First United) and Corey Johnston sold loan participations to banks, promising imрressive returns. A loan participation is a common banking practice in which a bank participant provides funds to a lender, which then lends the funds to a borrower. First United and Johnston were, in fact, conducting a fraudulent scheme by overselling the loan partic-
In September 2009, Community First Bank, a victim of the Ponzi scheme, commenced this action, seeking a temporary restraining order and appointment of a receiver. The suit expanded to include 19 victim banks that collectively were owed approximately $135 million' in unpaid principal, interest, and fees. In October 2009, the district court appointed Lighthouse Management Group, Inc. (Lighthouse or the receiver) as the receiver to recover and to liquidate assets to pay the participant banks’ outstanding claims.
The reсeiver recommended, and the district court approved, a pro rata distribution method with the goal of treating all participant banks “equitably as they relate to each other.” The banks, however, disagreed over the specific type of pro rata method that the receiver should use to cаlculate the distributions — the net-investment method or the principal-and-interest method. Under the net-investment method, a bank’s claim amount is based on the amount a bank has invested, minus any funds it has recovered. Every dollar that First United had paid a bank is subtracted from the bank’s principal investment, regardless of whether it was considerеd an interest or principal payment when the payment was made. The principal-and-interest method, by contrast, bases a bank’s claim on the amount each bank was owed on the date that the receiver was appointed. Under both methods, the receiver would then determine each bank’s ratablе, or proportional, distribution, based on the ratio of the bank’s individual claim to the total claims.
The receiver’s method of calculating the banks’ claims has a major impact on the amount to be recovered by some of the banks. This difference' is caused by the varying amounts of interest and fees that the banks hаd collected over the course of dealing with First United. For example, banks that invested with First United for long periods of time, such as National Bank, have received more interest and fee payments. Under the net-investment method, all those payments would be deducted from their claim amount.
Lighthouse ultimately proposed a net-investment distribution plan. After an evi-dentiary hearing, multiple rounds оf briefing, and several oral arguments concerning the method of distribution, the district court entered final judgment approving
ISSUE
Did the district court abuse its discretion by approving the receiver’s net-investment distribution method and claims calculations for compensating victims of a Ponzi scheme?
ANALYSIS
A receivership is an equitable remedy, in which the court has the discretion “to do what is best for all concerned.” Minn. Hotel Co., Inc. v. ROSA Dev. Co.,
Minnesota caselaw does not specifically address distribution methods to remedy a Ponzi scheme; federal courts, however, have reviewed such decisions for an abuse of discretion. Quilling v. Trade Partners, Inc.,
Propriety of the Net-Investment Distribution Method
Here, insufficient funds are available for the participant banks to recover the full amount of their original investments; the district court had to determine, therefore, an equitable way to distribute the available funds among the banks. The district court concluded that a “net investment plan would provide a more equitable distribution of assets to the participants than a [principal] and interest plan.” See S.E.C. v. Byers,
Legitimate Profits
First, National Bank contends that the district court erred by not considering $84.6 million that First United made in “legitimate profits” during the Ponzi scheme. National Bank asserts that it should not have these profits treated as a reductiоn of its principal under the net-investment method. The receiver counters that National Bank misconstrues the record by calling the $84 million profit, stating: “[T]he $84 million figure is revenue, not income, and is dwarfed by the losses First United sustained on loans and funds withdrawn by Johnston to fund his lavish lifestyle.”
The record demonstrates that the district court carefully considered National Bank’s argument, acknowledging that
Because of the pervasive nature of the fraud, the district court determined that the nеt-investment method was the most equitable distribution method:
For the same reasons that a pro rata distribution was embraced in general terms, it would be inequitable to reward the parties who were fortunate enough to experience “legitimate” profits in the midst of a pervasive fraud.
... [I]t would be inequitable to separate the “legitimate” and “illegitimate” activities of First United, and to functionally trace the alleged profits of the victims. Rather, it is better to view each of the parties as similarly situated, victims of a scheme whereby the fraudster indiscriminately worked towards a dishonest end.
Under the principal-and-interest method advocated by National Bank, every dollar that one bаnk would be allowed to count as “legitimate profit” would be a dollar that another bank would not receive as repayment of its principal investment. See In re Bernard, L. Madoff Inv. Secs. LLC,
To support its argument that the district court erred in adopting the net-investment method and ignoring legitimate profits, National Bank relies heavily on Beacon Associates Management Corp. v. Beacon Associates LLC I,
Second, the Beacon court did not conclude that a principal-and-interest distribution method was the proper distribution method because there were some legitimate profits, as National Bank argues. Rather, the court noted that, because there were some legitimate profits, there were downfalls to both of the proposed distribution methods: “[W]hile application of the Valuation Method allows Madoff-related ‘fictitious profits’ to inflate member interests, application of the Net Investment Method would strip investors of legitimate gains from Beacon’s significant noii-Madoff investments.” Id. at 464. Ultimately, the court held that it was bound by the parties’ operating agreemеnt, not principles of equity, to adopt the valuation method for distributions. Id. Thus, Beacon does not limit the district court’s dis
Principles of Equity
National Bank also argues that the district court failed to follow principles of equity by adopting an inequitable distribution method that preferred certain banks, namely the ones thаt had more recently invested with First United, over other banks.
After careful consideration of the facts and circumstances of thе victim banks, the district court approved a methodology that it believed would treat “each of the parties as similarly situated victims.” See S.E.C. v. Wang,
Modified Netr-Investment Method
National Bank proposed a modified net-investment method that it believed more “fairly and equitably” distributed the funds recovered by the receiver. National Bank
The district court has broad discretion in distributing receivership assets and National Bank has failed to demonstrate that it abused that discretion by adopting the net-investment method. The district court’s findings reflect a thorough understanding of the factual record and the applicable caselaw. It noted that there would be “winners” and “losers” under both distribution methods, and that “no matter which [method] is chosen, some of the parties’ expectations will have been frustrated.” See Byers,
National Bank advocates for the principal-and-interest method because, under that method, it would receive a greater distribution. In an unfortunate situation such as this, however, each bank’s recovery comes at the expense of another victim’s recovery. The district court acted within its discretion in adopting the net-investment method and finding that it would “serve the bеst interests of the parties.” See Durham,
DECISION
The district court did not abuse its discretion by adopting the net-investment distribution method to allocate funds to the victims of a Ponzi scheme.
Affirmed.
Notes
. Named after Charles Ponzi, an infаmous Boston swindler, a “Ponzi Scheme” is a term for a fraudulent plan where money taken from later participants is paid to earlier participants to create the false appearance that the scheme is generating returns. See Cunningham v. Brown,
. Under the principal-and-interest method, National Bank's claim would bе approximately $18.3 million and it would likely recover $10.4 million, whereas under the net-investment method, National Bank's claim would be approximately $10 million and it would likely recover $8.6 million.
. Additionally, because the funds were co-mingled, National Bank was unable to establish that the particular payments it received are traceable to legitimate revenue.
. National Bank cites extensive Minnesota caselaw for the proposition that creditors are entitled to a ratable distribution of an insolvent bank's assets. We note that 'this case does not present a typical debtor-creditor relationship because the banks' relationships with First United' were based 'on fraudulent agreements. More importantly, however, the district court did adopt a ratable distribution — the net-investment method.
. Lighthouse initiated separate fraudulent transfer claims against banks that had conducted business with First United. In that separate action, the district court found that some of the fraudulent-transfer claims were barred by the six-yеar statute of limitations. National Bank argues that it is inequitable to offset its claim with interest it collected more than six years ago, when the receiver is not allowed to “claw back” interest other banks earned in that time frame. The statute of limitations is generally used as a defense to a filed lawsuit and no fraudulent-trаnsfer claims have been asserted against National Bank. Additionally, courts in other jurisdictions have held that the statute of limitations does not prevent the court from limiting the claim of a party that is seeking affirmative equitable relief from the court. See In re Madojf,