Article Courtesy of David Simonds, Katherine Lynn, and Edward McNeilly of Hogan Lovells
Kirkland v. Rund (In re EPD Investment Company), No. 22-55944, 2024 WL 3909749 (9th Cir. Aug. 23, 2024)
A divided panel of the United States Ninth Circuit Court of Appeals reconfirmed the so-called Ponzi scheme presumption, holding that the district court, which determined that an individual received fraudulent transfers with “actual intent,” did not err by instructing the jury that the existence of a Ponzi scheme establishes actual intent to defraud creditors and not asking the jury to determine whether the debtor actually intended to defraud creditors.
Debtor Jerrold Pressman (“Pressman”) and his son co-owned EPD Investment Co., LLC (“EPD”). Pressman used EPD to borrow money from individuals in exchange for short-term promissory notes or demand notes. These notes promised above-market annual interest rates. Pressman deposited funds from EPD’s lenders into a single bank account that comingled investor funds and operating funds. EPD would prepare and circulate periodic account statements reflecting the principal balance of the lenders’ loans plus accrued interest. Pressman loaned himself money from EPD funds, which he then used to fund personal business investments and pay personal bills and expenses. Pressman and his son paid themselves $6.8 million from EPD’s bank account over a seven-year period.
Eventually, Pressman was unable to repay his loans to EDP, and there was insufficient revenue from EPD’s business operations to satisfy its obligations to investors without taking on additional investors to repay existing investors. EPD collapsed in 2008, at which time it had approximately $32 million in assets and $70 million in liabilities, although these assets consisted mainly of obligations owed by Pressman and his entities.
Prior to EPD’s collapse, John Kirkland (“John”) loaned $2.1 million to EPD between September 2007 and July 2009. John, an attorney, periodically represented entities controlled or partially owned by Pressman. In return, EPD made mortgage payments on John’s behalf. John later assigned his credit interest in the EPD loans to the “BC Trust,” of which his wife, Ann Kirkland (“Ann”), was the sole trustee. Ann filed secured claims seeking $3.5 million from EPD’s estate, which included interest on the loans John had assigned to the BC Trust.
In 2010, EPD’s creditors commenced an involuntary chapter 7 bankruptcy case against EPD. The chapter 7 trustee filed an adversary proceeding against John individually and Ann in her capacity as trustee of the BC Trust, seeking to avoid transfers made by EPD to John as actual fraudulent transfers.. The district court withdrew the reference of the adversary proceeding from the bankruptcy court. The district court held a six-day jury trial on the trustee’s fraudulent transfer claim against John and Ann. The jury found that (1) EPD was a Ponzi scheme; (2) John was not an insider of EPD; (3) EPD transferred property to John to hinder, delay or defraud creditors; and (4) John received the transfers in good faith and for reasonably equivalent value. The bankruptcy court then entered a final judgment in favor of John.
Ann appealed from the judgment, seeking vacatur of the jury finding that EPD was a Ponzi scheme because such finding would have preclusive effect in a separate claim by the Trustee against Ann seeking to disallow or equitably subordinate BC Trust’s proofs of claim. The main question on appeal to the Ninth Circuit was whether the district court erred by failing to include a mens rea jury instruction, which would have required the jury to find that Pressman knew he was operating a Ponzi scheme in order to establish an actual intent to hinder, delay or defraud creditors.
The Ninth Circuit rejected Ann’s argument that the lower courts erred by failing to include this jury instruction. The panel held that the proposed mens rea instruction was not required because, once the existence of a Ponzi scheme has been established by objective criteria, there arises an irrebuttable presumption of fraudulent intent. Implicit in the jury’s finding that EPD was a Ponzi scheme was a determination that Pressman intended to defraud his investors by operating a scheme that had no legitimate profit-making opportunity. A separate finding that Pressman knew about the scheme and knew it was going to fail was not required. Specifically, the Ninth Circuit noted that the district court’s jury instruction referenced all the essential elements of a Ponzi scheme: consistent funneling of money from new investors to pay old investors where in fact no legitimate profit-making business exists. Therefore, since the jury found these elements were present, the jury could reasonably infer that Pressman had fraudulent intent. The Ninth Circuit also noted that courts generally do not require mens rea when defining a Ponzi scheme in either civil or bankruptcy actions. Therefore, there was no reason for the district court to have provided such an instruction.
The panel also rejected Ann’s argument that there was insufficient evidence at the trial to support the jury’s Ponzi scheme findings. The majority held that there was substantial evidence to support the jury’s findings, including testimony from a forensic accountant who reconstructed EPD’s books and testified that EPD was using investors’ money to pay other investors and evidence that EPD was never profitable. That EPD had invested in a few legitimate businesses did not negate the existence of a Ponzi scheme. The majority rejected Ann’s argument and upheld the jury’s verdict.
The dissent opined that the district court erred in failing to instruct the jury that they needed to find that Pressman ran EPD as a Ponzi scheme with an intent to defraud. In the dissent’s view, without this explicit finding of actual fraudulent intent, the jury was not adequately instructed on what it needed to find to establish the existence of a Ponzi scheme under the Ponzi scheme presumption. Therefore, the dissenting judge would have ruled that the jury did not make a finding of actual fraudulent intent sufficient to prove EPD was a Ponzi scheme.
