This case is the product of yet another dispute in the extensive, multi-billion dollar fraud perpetrated by Tom Petters. In 2005, as the sole board member of Petters Group Worldwide, LLC (“PGW”), Petters directed the acquisition of Polaroid, which operated independently and legitimately as a going concern. In late 2007 and early 2008, Polaroid and other Petters companies began experiencing financial difficulties. In January 2008, PGW approached Ritchie about a loan and the next day, Ritchie loaned $31 million to PGW to pay debts of Polaroid and PGW. In February, Ritchie made a number of additional loans totaling $115 million, and in May, Ritchie loaned PGW and Petters Company, Inc. another $12 million. Polaroid was not a signatory to any of the Ritchie loans and while the initial loan to PGW was used to pay debts of Polaroid, the proceeds of the loans did not go to Polaroid.
In September 2008, all of the loans were in default and Ritchie demanded collateral to secure the loans. Days before Petters was raided by the FBI, he executed a Trademark Security Agreement (“TSA”) granting Ritchie liens on several Polaroid trademarks in exchange for Ritchie’s agreement to extend the repayment dates on PGW’s loans. Polaroid filed for bankruptcy 90 days later, and sued Ritchie arguing the TSA was unenforceable as the result of an actual fraudulent transfer.
Since “proof of actual intent to hinder, delay or defraud creditors may rarely be established by direct evidence, courts infer fraudulent intent from the circumstances surrounding the transfer.” Ritchie Capital Mgmt., LLC et al. v. Stoebner, No. 14-1154, 2015 WL 1020736, at *3 (8th Cir. Mar. 10, 2015) (citation omitted). The Uniform Fraudulent Transfer Act, as enacted in Minnesota contains a number of “badges of fraud” for the court’s consideration in determining actual fraudulent intent. “Once a trustee establishes a confluence of several badges of fraud, the trustee is entitled to a presumption of fraudulent intent” and the burden shifts to the transferee “to prove some legitimate supervening purpose for the transfers at issue,” such as that the transferee took the transfer in good faith and for value. Id. (citations omitted).
However, a “Ponzi scheme presumption” would allow the court to “bypass the badges of fraud analysis and infer actual fraudulent intent if it (1) finds the existence of a Ponzi scheme, and (2) determines the transfer was made in furtherance of that scheme.” Id. at *4. The Eighth Circuit observed that while a number of circuits have recognized such a presumption, the Minnesota Supreme Court recently rejected the notion of a Ponzi scheme presumption. Id. at n.8 (citing Finn v. Alliance Bank, ––– N.W.2d ––––, ––––, Nos. A12–1930, A12–2092, 2015 WL 672406, at *8 (Minn. Feb. 18, 2015)). Confining its analysis to the bankruptcy court’s findings of actual fraud under a badges of fraud analysis, the Eighth Circuit declined to address the validity or applicability of the “Ponzi scheme presumption” in the Eighth Circuit.
“Fraudulent transfer law focuses on the intent of the debtor. If the debtor transfers its assets with the intent to defraud its creditors, the transfer can be avoided as fraudulent.” Id. at *4. “Courts may consider any factors they deem relevant to the issue of fraudulent intent,” and are not limited to only those factors or “badges” enumerated in the statute. Id. The bankruptcy court found several badges of fraud present. Affirming the bankruptcy court and concluding that the circumstances surrounding the TSA evidenced Petters’s fraudulent intent, the Eighth Circuit found that Polaroid received no value for the TSA, the TSA was solely for Petters’s benefit, it was executed at a time when Polaroid was insolvent or experiencing unmanageable indebtedness and Polaroid’s own CEO opposed the TSA.
Badge 1 – Lack of Reasonably Equivalent Value. “Perhaps the most salient fact” is that Polaroid received no value in exchange for the TSA. Id. at *5. Polaroid was not a party to the Ritchie loans, did not receive any of the funds from the loans and the TSA was executed to prevent PGW’s default. The “viability of a parent company is not the type of value contemplated by the fraudulent transfer laws.” Id.
Badge 2 – Transfer for the Benefit of an Insider. The Eighth Circuit found that Polaroid executed the TSA “for the sole benefit of Petters – an insider.” Id. at *6. At the time he signed the TSA, Petters’s Ponzi scheme was on the verge of collapse: Petters’s companies were running out of money, there was a shortage of willing investors, one investor had already sued Petters and Ritchie was demanding collateral. Id. At least temporarily, the TSA kept Ritchie at bay and the PGW loans out of default.
While the statutory badge of fraud – a “transfer . . . to an insider” does not apply perfectly, the Eighth Circuit explained that fraudulent intent was supported by the circumstances surrounding the transfer because Polaroid did not execute the liens to an insider, but for the benefit of an insider. Id. at *6. Such “dire circumstances indicate the transfer of the liens was nothing more than a desperate attempt to maintain a crumbling Ponzi scheme at the expense of Polaroid’s creditors.” Id.
Badge 3 – Polaroid’s Insolvency or Unmanageable Indebtedness. Prior to granting the TSA, Petters knew Polaroid had “serious financial difficulties.” Polaroid had a cash shortage and was having trouble paying creditors. Its financial issues only worsened after the TSA. Indeed, Polaroid filed for bankruptcy ninety days after its execution. The Eighth Circuit held that Polaroid’s financial difficulties and the inability to pay its creditors were appropriately considered in determining the TSA was executed with the intent to defraud Polaroid’s creditors.
Badge 4 – Polaroid’s CEO’s Objection. While it is not one of the statutory badges, the Eighth Circuit found it significant that Polaroid’s CEO opposed the TSA. Stressing that the focus is on the intent of Petters, the execution of the TSA suggested Petters chose to grant the liens despite knowing Polaroid’s CEO was concerned it would compromise Polaroid’s ability to obtain much needed capital. Id. at *8.
The Eighth Circuit concluded that Petters, acting on behalf of Polaroid, executed the TSA with actual intent to defraud Polaroid’s creditors. While this decision leaves open the question of whether a “Ponzi scheme presumption” exists in the Eighth Circuit, it reminds creditors that the focus in any actual fraudulent transfer analysis is the intent of the Debtor and in conducting this analysis, the court may consider any relevant factors.