Section 548(a)(1)(A) of the Bankruptcy Code (the “Code”) allows the trustee of a bankruptcy estate to avoid a transfer made by the debtor “with actual intent to hinder, delay, or defraud” an entity to which the debtor was or became indebted, as long as the transfer was made within two years of filing. Because it is difficult to prove that a transfer was made with such actual intent, courts have applied the so-called “Ponzi scheme presumption.” In cases involving conveyances in Ponzi schemes, the “Ponzi scheme presumption” allows the court to assume that a transfer was made with the “actual intent to hinder, delay, or defraud,” because “it is impossible to imagine any motive for such conduct other than the actual intent to hinder, delay or defraud.” The presumption applies in cases where a transfer was used to perpetuate a Ponzi scheme or was necessary to the continuance of the scheme.
The first court to explicitly mention and apply the “Ponzi scheme presumption” was the United States District Court for the Southern District of New York, in 2002. In the last ten years, Ponzi scheme cases have come before federal courts across the country, and a black and white analysis has developed. This means that if a transfer was made during the course of a Ponzi scheme, it was clear to the court that there was no rationale to be considered other than that of actual intent to defraud. Recently, however, there has been a shift in some courts’ use of the Ponzi scheme presumption, affecting how it is applied.
The shift is partly a result of bankruptcy trustees in Ponzi scheme cases requesting the application of the presumption in more attenuated situations—situations where the transfers in question are not clear and classic Ponzi scheme transfers (clear and classic being, for instance, payments to old investors to attract new ones). Recently, for example, two Florida District Courts have declined to apply the Ponzi scheme presumption, because the trustees in these newer cases were trying to expand the presumption’s limits, and the courts could imagine possible motives for the transfers other than fraudulent intent.
This article will focus on the nature of the Ponzi scheme presumption, including how it has been and should be applied. Part I will provide an overview of Section 548(a) of the Code and the Ponzi scheme presumption. Part II will examine the case law that has previously applied the Ponzi scheme presumption. Using the cases that have delved into a thorough analysis, it will show how a black and white approach was taken, because the cases were clear-cut. Part III will argue that a black and white rule for applying the Ponzi scheme presumption is ineffective when a case is borderline or unclear in the sense that it is not obviously motivated by fraudulent intent.