The US Court of Appeals for the Tenth Circuit recently upheld the grant of summary judgment for the receiver of a business that was alleged to have participated in a Ponzi scheme, finding that the clawback of funds was appropriate even from a recipient who was unaware of the fraud. After the Commodity Futures Trading Commission sued Winsome Investment Trust and its founder for running a Ponzi scheme in violation of the Commodity Exchange Act (CEA), the US District Court for Utah appointed a receiver to manage Winsome’s assets. In his investigation of Winsome’s operations, the receiver identified several payments that could be recovered under the CEA or the state Uniform Fraudulent Transfer Act (UFTA), including a total of $90,000 to a Houston-based law firm. From 2006 to 2007, the firm represented a friend of Winsome’s founder in criminal proceedings in New Hampshire, the receiver sued the law firm to recover these legal fees, and the lower court granted summary judgment in favor of the receiver. On appeal, the Tenth Circuit rejected the law firm’s argument that Winsome was the alter-ego of its founder and thus the receiver lacked standing to bring its claim, finding that because Winsome was so completely “possessed” or controlled by its founder, it qualified as a defrauded creditor and was entitled to the remedies provided by the UFTA. The Tenth Circuit also rejected the law firm’s jurisdictional defense, finding that due to the CEA’s provision for nationwide service of process, the traditional “minimum contacts” test of jurisdiction did not apply, and that the law firm had failed to demonstrate that Utah was so inconvenient a forum as to merit dismissal. Further, the Tenth Circuit found that all evidence indicated that Winsome was engaged in a Ponzi scheme, and that the law firm’s ignorance of Winsome’s fraud provided no protection from the UFTA. As a related point, the court noted that the law firm was not a subsequent transferee and could not take advantage of the UFTA’s reasonably equivalent value defense. Lastly, the court rejected the defendant’s statute-of-limitations claim since the plaintiff filed the claim within one year of discovery.
Klein v. Cornelius et al., Case No. 14-4024 (10th Cir. May 27, 2015).