Opinion ID: 2785010
Heading Depth: 3
Heading Rank: 2

Heading: Transfer for the Benefit of an Insider

Text: 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.