On August 23, 2024, a divided panel of the U.S. Court of Appeals for the Ninth Circuit affirmed a jury's verdict for a Chapter 7 trustee in an actual fraudulent transfer claim, which was based on the determination that Jerrold Pressman operated his business, EPD Investment Co., LLC, as a Ponzi scheme. Concluding that the jury was not required to otherwise find that Pressman acted with an intent to defraud, the court held that the jury is permitted to rely on the "Ponzi scheme presumption" that fraudulent intent may be inferred by the mere existence of a Ponzi scheme: if the objective elements of a Ponzi scheme are present—i.e., consistently funneling money from new investors to pay old investors when no legitimate profit-making opportunity exists—then a jury could reasonably infer that the operator of the scheme acted with fraudulent intent because Ponzi schemes, by design, inevitably fail. In other words, "[i]mplicit in the jury's finding that EPD was a Ponzi scheme was its finding that Pressman harbored the intent to defraud his investors by operating a scheme that had no legitimate profit-making opportunity." The Ponzi scheme presumption still applies where, as in this case, EPD made some legitimate investments, as the presence of legitimate investments do not necessarily negate the existence of a Ponzi scheme.
The court noted that there were no cases supporting a requirement that the jury specifically make a finding of fraudulent intent to operate a Ponzi scheme in a fraudulent transfer action and stated that requiring a jury to make such a finding could prove "unworkable" as a practical matter, as bankruptcy trustees will rarely find "direct evidence of the operator's subjective intent to operate a Ponzi scheme." In the present case, the majority found that there was substantial evidence to support the jury's verdict that EPD operated as a Ponzi scheme, including that Pressman commingled funds, used investor funds to personally enrich himself and his family, and that the company was never profitable.
In dissent, Judge Richard R. Clifton concluded that the jury was not properly instructed that a finding of fraudulent intent is required to establish the existence of a Ponzi scheme in the first instance. Judge Clifton asserted that the instruction to the jury was "circular": the jury found the existence of a Ponzi scheme without being instructed that fraudulent intent was required, and then could use the existence of a Ponzi scheme to establish fraudulent intent for purposes of establishing a fraudulent transfer. This presumed fraudulent intent was particularly inapposite under the facts of this case, Judge Clifton reasoned, because the existence of a Ponzi scheme was "far from obvious" where EPD had substantial investments and ultimately collapsed during the Great Recession when many legitimate businesses failed.
The case is In re Kirkland v. Rund, Case No. 22-55944 (9th Cir. Aug. 23, 2024). The trustee is represented by BG Law LLP and Saul Ewing LLP. The defendant is represented by Horvitz & Levy LLP and the Law Office of L. Landau. The opinion is available here.
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