Terry v. June (Recovery of Profits plus Principal Investment)

The following alert and the June case contain a helpful discussion on when it might be appropriate to seek the return of fictitious profits plus principal investment.

– Phil Stenger

In Terry v. June, 432 F.Supp.2d 635 (W.D.Va. 2006) (“June”), the District Court held that the admissions, and conviction of the scheme’s perpetrator, will establish the existence of a Ponzi scheme. 432 F.Supp.2d 639. The Court also held that the existence of the Ponzi scheme establishes that the perpetrator was insolvent on the date of the transfer and made the transfer with the actual intent to defraud: both of which may be critical elements in a fraudulent conveyance action. 432 F.Supp.2d at 639-641.

Even if the fraudster acted with actual intent to defraud, and/or was insolvent at the time of the transfers, June recognize that the transferee may avoid liability by showing that he accepted the transfer “in good faith and for a reasonably equivalent value.” 432 F.Supp.2d 641-642, 644. June further contains additional conclusions that could be critical to a Receiver seeking to recover fraudulent transferred property:

    1. Once the actual intent to defraud on the part of the transferor has been established (including through the mere proof of the Ponzi scheme), the burden shifts to the transferee to prove that he received the transfer in objective good faith (including not having knowledge of facts that should have put him on notice) and for reasonably equivalent value.432 F.Supp.2d at 641-42.

 

  1. If a transferee who made a capital investment in the Ponzi scheme establishes the “good faith” defense, he is still only entitled to retain payments up to his principal investment in the scheme:the investment does not serve as “reasonably equivalent value” for the payment of “fictitious profits” (amounts in excess of his capital investment).If the transferee is unable to establish a good faith defense, and actual intent to defraud is established (apparently without reference to the presumption), the entire amount paid to the transferee must be returned, including amounts that represented a return of principal.Id. at 641-43, 644.