Opinion ID: 2785010
Heading Depth: 2
Heading Rank: 1

Heading: Badges of Fraud

Text: 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. See 11 U.S.C. § 548(a); Minn. Stat. § 513.44(a). In a case that involves numerous entities, it is important to identify precisely whose intent is relevant to the consideration of fraudulent intent. Polaroid is the debtor. Polaroid granted the liens which the trustee seeks to avoid as fraudulent, so the relevant intent is Polaroid’s. Because Petters unilaterally granted these liens on Polaroid’s behalf, 6 The Fifth, Sixth, Ninth, Tenth, and Eleventh Circuits have all utilized the Ponzi scheme presumption. See, e.g., Wing v. Dockstader, 482 F. App’x 361, 363 (10th Cir. 2012) (unpublished); Perkins, 661 F.3d at 626; In re AFI Holding, Inc., 525 F.3d 700, 704 (9th Cir. 2008); Warfield v. Byron, 436 F.3d 551, 558 (5th Cir. 2006); In re Mark Benskin & Co., 59 F.3d 170, 1995 WL 381741, at  (6th Cir. 1995) (unpublished table decision) (per curiam). While the Ponzi scheme presumption has curried favor in federal courts, the Minnesota Supreme Court recently rejected the presumption, holding, “[A]lthough a court could make a rational inference from the existence of a Ponzi scheme that a particular transfer was made with fraudulent intent, there is no statutory justification for relieving the Receiver of its burden of proving . . . fraudulent intent. Instead, fraudulent intent must be determined in light of the facts and circumstances of each case.” Finn v. Alliance Bank, ___N.W.2d ___, ___, Nos. A12-1930, A12-2092, 2015 WL 672406, at  (Minn. Feb. 18, 2015) (internal marks and citation omitted). -8- his intent in transferring the liens was that of Polaroid. See Morris v. Union Pac. R.R., 373 F.3d 896, 902-03 (8th Cir. 2004) (“[A] finding of intent is a highly contextual exercise. . . . When a corporation is involved, the inquiry depends . . . to some extent on the intent of corporate employees, not all of whom will play the same role in every case.”). Thus we consider Petters’s intent here. In conducting its badges of fraud analysis, the bankruptcy court found five of the badges listed in Minn. Stat. § 513.44(b), but observed that the badges “do not lie perfectly on their wording, for this case.” We disagree with Ritchie’s contention that this observation is an acknowledgment by the bankruptcy court that the badges of fraud “do not apply.” Courts may consider any factors they deem relevant to the issue of fraudulent intent: Badges of fraud represent nothing more than a list of circumstantial factors that a court may use to infer fraudulent intent. Given the fact that direct evidence of fraud is rare, a court in most instances can only infer fraud by considering circumstantial evidence. Furthermore, we note that under section 513.44(b), a court is not limited to only those factors or “badges” enumerated, but is free to consider any other factors bearing upon the issue of fraudulent intent. Sholdan, 217 F.3d at 1009-10 (internal citation omitted); see Minn. Stat. § 513.44(b) (explaining actual intent can be determined by considering the listed badges “among other factors”). While we may not totally agree with the bankruptcy court’s analysis and application of all the badges, the bankruptcy court did not err in concluding the trustee was entitled to a presumption of actual fraudulent intent. Assessing the relevant factors, we conclude the circumstances surrounding the TSA “are so unfair [they amount to] evidence of [Petters’s] fraudulent intent.” Jackson, 575 F.2d at 1237. -9-
Perhaps the most salient fact here is Polaroid received no value in exchange for the TSA. See Minn. Stat. § 513.44(b)(8) (“In determining actual intent . . . consideration may be given . . . to whether . . . the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.”). “‘The fact that valuable property has been gratuitously transferred raises a presumption that such transfer was accompanied by the actual fraudulent intent necessary to bar a discharge under clause (4).’” In re Bateman, 646 F.2d 1220, 1222 (8th Cir. 1981) (internal marks omitted) (quoting 1A Collier on Bankruptcy ¶ 14.47 (14th ed. 1978) and applying 11 U.S.C. § 32(c)(4) (1976) (repealed Oct. 1, 1979), which read, “The court shall grant the discharge unless satisfied that the bankrupt has . . . transferred . . . any of his property[] with intent to hinder, delay, or defraud his creditors” (emphasis added)). Polaroid was not a party to the Ritchie loans and received no money from the loans, and Petters executed the TSA to prevent a PGW default. The TSA encumbered Polaroid’s valuable trademarks without bestowing any real benefit on Polaroid. Ritchie argues Polaroid received value in the form of its parent company—PGW—staying viable after PGW was delinquent on the loans. However, the viability of a parent company is not the type of value contemplated by the fraudulent transfer laws. See Minn. Stat. § 513.43(a) (“Value is given for a transfer . . . if, in exchange for the transfer . . . , property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.”); see also, e.g., Stoebner v. Lingenfelter, 115 F.3d 576, 577-79 (8th Cir. 1997) (affirming a jury’s finding that a corporation received no value for payments made on behalf of another corporation, when the two corporations were owned by the same individual). -10-
Another significant badge of fraud is whether “the transfer . . . was to an insider.” Minn. Stat. § 513.44(b)(1). This badge typically is implicated when the debtor, faced with impending insolvency, transfers property to a business partner or relative to place it beyond the reach of his creditors. See, e.g., Citizens State Bank Norwood Young Am. v. Brown, 849 N.W.2d 55, 62-63 (Minn. 2014) (deciding a debtor’s cohabiting ex-wife was an insider); Sherman, 67 F.3d at 1354-55 (affirming the bankruptcy court’s finding that the debtor’s parents were insiders). “[I]f the debtor is a corporation,” the definition of an “insider” includes “a person in control of the [corporation].” Minn. Stat. § 513.41(7)(ii)(C). Polaroid executed the TSA for the sole benefit of Petters—an insider. At the time the lien was executed, Petters’s Ponzi scheme was in a precarious financial position. The pool of willing investors had run dry and his companies were running out of money. One investor had already filed suit against Petters, and Ritchie—holding numerous overdue notes with no payment in sight—was “intense[ly]” demanding collateral. Petters became increasingly anxious during this period as he confronted the reality he would not be able to raise the capital needed to sustain his corporations. The TSA tempered Ritchie and kept the loans—which Petters had personally guaranteed—out of default, at least temporarily. Yet the TSA merely postponed an inevitable default, because PGW had no foreseeable way to repay the Ritchie loans. Petters knew of Polaroid’s money troubles, and the recent transfer of cash to PCI left Polaroid unable to make payments to its vendors. These 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. While the statutory badge of fraud—a “transfer . . . to an insider,” Minn. Stat. § 513.44(b)(1)—does not apply directly, the factual context surrounding the transfer -11- supports an inference of fraudulent intent. Polaroid did not execute the liens to an insider, as the statute suggests, but the liens were executed for the benefit of an insider. Petters signed the TSA on Polaroid’s behalf, but its sole purpose was to protect Petters and his crumbling Ponzi scheme. Like a bankrupt man who transfers his assets to his parents, see Sherman, 67 F.3d at 1354-55, Petters ensured Polaroid’s valuable assets were put to a personally advantageous use. Ritchie urges this court to disregard the circumstances of Petters’s Ponzi scheme, arguing Petters’s common control of PCI, PGW, and Polaroid is “a highly common scenario,” and, “[a]s the 100% owner of Polaroid, Petters could use Polaroid’s assets for any purpose.” Ritchie claims Petters’s “use of Polaroid’s assets for a non-Polaroid purpose [is] not evidence that he intended to defraud Polaroid creditors when granting the Liens.” When viewed in a vacuum, Ritchie’s argument makes some sense. There is nothing per se fraudulent about an individual owning multiple entities and using the assets of one entity for the benefit of another, just as—standing alone—there is nothing fraudulent about a parent transferring assets to a child, see Shea v. Hynes, 95 N.W. 214, 214-15 (Minn. 1903). It is only after considering the facts and circumstances surrounding the transfer and finding “[t]he presence of several badges of fraud,” Citizens State Bank, 849 N.W.2d at 66, that a court can infer intent to defraud. See Sholdan, 217 F.3d at 1009-10; Sherman, 67 F.3d at 1353-54. When considered in conjunction with the other indicia of fraud present in this case, Petters’s execution of the liens for his personal benefit supports the bankruptcy court’s presumption of actual fraudulent intent.
“‘Among the more common badges of fraudulent intent at the time of transfer [is] . . . insolvency or other unmanageable indebtedness on the part of the debtor.’” Nat’l Credit Union Admin. Bd. v. Johnson, 133 F.3d 1097, 1102 (8th Cir. 1998) (quoting FDIC v. Anchor Props., 13 F.3d 27, 32 (1st Cir. 1994) (quoting Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir. -12- 1991) (applying 11 U.S.C. § 548(a)(1)))); accord Minn. Stat. § 513.44(b)(9) (explaining “whether . . . the debtor was insolvent or became insolvent shortly after the transfer was made” is a factor to be considered when determining a debtor’s intent). The parties dispute whether Polaroid was insolvent at the time of the transfer. Polaroid had a cash shortage and was having trouble paying creditors as its debts came due, but Ritchie contends Polaroid’s valuable trademarks put its assets far above its liabilities. We construe the facts in the light most favorable to Ritchie, see Citizens State Bank, 849 N.W.2d at 61, and assume that Polaroid was solvent when it executed the TSA. Regardless, the undisputed facts show Polaroid had serious financial difficulties before it granted the TSA, difficulties which Petters knew. These financial issues only worsened after Polaroid granted Ritchie the liens: the TSA was signed on September 19, 2008, and Polaroid filed for bankruptcy ninety days later on December 18, 2008. Polaroid’s financial struggles and its inability to pay creditors shortly before and after the execution of the TSA necessarily enter into our consideration of whether Petters executed the TSA with the intent to defraud Polaroid’s creditors. See Nat’l Credit Union, 133 F.3d at 1102 (listing “‘insolvency or other unmanageable indebtedness on the part of the debtor’” as a badge of fraud (quoting FDIC, 13 F.3d at 32) (emphasis added)); cf. Sholdan, 217 F.3d at 1010 (deciding the fact that the debtor had filed for bankruptcy “immediately upon the heels of” the allegedly fraudulent transfer was relevant to a finding of intent to defraud).
Also relevant to our inquiry, although not an enumerated statutory badge, is Polaroid CEO Mary Jeffries’s objections to the TSA. At the time the TSA was executed, Polaroid had been operating at a loss and had a cash shortage, causing it to be delinquent on its payments to vendors—a problem exacerbated by Petters’s “loans” of Polaroid money to PCI. In an attempt to alleviate these problems, Polaroid -13- was exploring financing options from a number of different sources. After first receiving a copy of the TSA on September 11, 2008—eight days before the document was signed—Jeffries informed Petters and another PGW official that she opposed the TSA. Jeffries feared the TSA would “ma[k]e it difficult to raise new financing for Polaroid . . . [b]ecause it was taking assets that would otherwise be used as collateral or value in Polaroid in raising capital.” Polaroid’s issuance of a lien on its valuable trademarks over the objection of its own CEO is relevant in attempting to discern Petters’s intent. Ritchie claims “Jeffries’s ‘objection’ to the Liens carries no weight” because she was not aware of the carve-out in the TSA allowing Polaroid to use the trademarks to secure up to $75 million in working capital, which Ritchie alleges was more than sufficient to meet Polaroid’s cash flow needs. To the contrary, Jeffries’s objection gives insight into Petters’s intent in executing the liens because it suggests Petters chose to issue the liens even knowing Polaroid’s CEO feared the liens would thwart Polaroid’s efforts to raise much-needed capital. Jeffries’s lack of knowledge of the carve-out does not change this contention. Polaroid was seeking funding from multiple sources and, at the time the liens were executed, was negotiating with both a potential lender and a potential purchaser of Polaroid stock. The liens, even with the carve-out, reduced the collateral Polaroid had available to secure loans and had the potential to decrease Polaroid’s value to an interested purchaser. Our focus is on Petters’s intent, and Ritchie has presented no evidence suggesting Petters was aware of Jeffries’s lack of knowledge of the carve-out. Petters executed the liens over the objection of Polaroid’s CEO and complicated Polaroid’s efforts to secure capital to repay its creditors.7 7 In addition to the issue of Polaroid’s solvency, the parties dispute whether the encumbered trademarks were “substantially all” of Polaroid’s assets. See Minn. Stat. § 513.44(b)(5). Because this case comes to us at summary judgment, we construe fact disputes in Ritchie’s favor. See Cochrane, 124 F.3d at 981. Even assuming Polaroid was solvent and had assets beyond the encumbered trademarks, the undisputed fact -14- We have no hesitation affirming the bankruptcy court’s grant of summary judgment in favor of the trustee because Petters, acting on behalf of Polaroid, executed the liens with the actual intent to defraud Polaroid’s creditors. Ritchie argues there can be no presumption of fraudulent intent because the trustee cannot prove Polaroid “removed, concealed or absconded with assets following the transfers,” referencing Minn. Stat. § 513.44(b)(6), (7). Even at summary judgment, the law does not require the trustee prove all of the badges. “Once a trustee establishes a confluence of several badges of fraud, the trustee is entitled to a presumption of fraudulent intent.” Kelly, 141 F.3d at 802 (emphasis added). We find sufficient undisputed evidence to support the bankruptcy court’s conclusion that Petters executed the TSA with the intent to hinder, delay, or defraud Polaroid’s creditors.8