On September 3, 2013, the Minnesota Court of Appeals rendered a significant victory for banks facing “clawback” claims in litigation arising out of so-called Ponzi schemes. Briggs and Morgan attorneys Kevin Decker and Ben Gurstelle defended a lender in the matter, which involved claims brought by a receiver for a purported Ponzi schemer whose fraudulent lending practices left him unable to repay his debts. In the new decision, Finn v. Alliance Bank, the appellate court recognized the lenders' entitlement to dismissal of constructive fraudulent transfer claims when such claims are raised more than six years after the transactions at issue. The court also ruled that lenders are entitled to summary judgment when the transactions at issue involve legitimate loans that were repaid in the normal course.
The Finn litigation stems from Corey Johnston, operating by and through First United Funding LLC (FUF), who sold loan participations to banks. Part of Johnston’s operation involved overselling participations, or selling participations in loans that did not exist at all. When his scheme collapsed, Johnston and FUF were placed into receivership. The receiver subsequently sued many banks seeking to recover the interest the banks received related to their participations. Of relevance to the appellate proceedings, the receiver's claims took the form of "actual" and "constructive" fraudulent transfer actions under the Minnesota Uniform Fraudulent Transfer Act, Minn. Stat. §§ 513.41-.51 (MUFTA).
At the district court, several of the lenders were dismissed from the litigation on account of the strict six-year statute of limitations of Minn. Stat. § 541.05, subd. 1(2) governing liabilities “created by statute.” One lender who was not dismissed was found liable on summary judgment despite facts showing that it had purchased a participation in a legitimate loan with a real borrower and had been repaid according to the terms of the contract. In that case, the court ruled that a “Ponzi scheme presumption” applied to render the transfer fraudulent under MUFTA.
On appeal, the court ruled that the constructive fraudulent transfer claims were indeed untimely, but found that the actual fraudulent transfer claims were not subject to a strict six-year limitations period because the theory of actual fraudulent transfer was said to pre-date the statute and thus liability was not “created by statute.” Instead, the court held, a discovery period applied under Minn. Stat. § 541.05, subd. 1(6) so as to potentially extend the limitations period for actual fraudulent transfer claims. Importantly, however, the Finn court ruled that such actual fraudulent transfer claims cannot prevail, under a Ponzi scheme presumption or otherwise, when the facts show that the transfer was part of a legitimate loan with an actual borrower and repayment was made in the normal course.
This new precedent presents an opportunity for lenders to regain footing in a field of litigation where courts had increasingly been ruling for the receivers and bankruptcy trustees. Briggs represents a number of banks and other financial institutions in similar matters.