On June 3, 2022, the U.S. Bankruptcy Court for the Northern District of Texas refused to extend the “ponzi-scheme presumption” in connection with an actual intent fraudulent transfer claim because there was no actual ponzi scheme, just the assertion of a “ponzi-like” fraud. Prepetition, the Ford Motor Credit Company provided floorplan financing to a group of debtors that were car dealers. The debtors and certain insiders committed numerous fraudulent acts, and an FBI investigation ultimately led to multiple federal fraud charges against various debtor employees, all of whom pled guilty. The individuals stipulated that they knowingly, and with intent to defraud, obtained financing from Ford Credit through materially false representations or pretenses. The debtors, which were succeeded by a “creditors trustee,” brought an adversary proceeding against Ford Credit asserting, among others, fraudulent transfer claims, and seeking to recover hundreds of millions of dollars. In connection with the actual intent fraudulent transfer claim under Section 548(a)(1) of the Bankruptcy Code, the trustee sought to rely on the “ponzi scheme presumption” to establish actual intent for the over three thousand transfers at issue. If successful, the trustee would have been relieved of the need to prove that each transfer had the requisite fraudulent intent.

The bankruptcy court first looked at the definition of a ponzi scheme which, in the Fifth Circuit, is defined as a “fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger investments.” The bankruptcy court then looked at the cases in the Fifth Circuit applying the ponzi-scheme presumption, finding that in each of them, the court found a “classic ponzi scheme” when allowing the presumption. Applying its review to the case before it, the bankruptcy court found that the debtors were car dealerships and it was common in that industry to finance inventory through large floorplan loans. The debtors generated large sales and had significant revenue. As such, the bankruptcy court found that the debtors never operated a ponzi scheme which, at its core, is an “investment scam.” Ponzi schemes are never legitimate businesses, and investment arrangements are different from debtor-creditor transactions. Thus, the bankruptcy court concluded that the trustee could not rely on the ponzi-scheme presumption so as to be relieved of the burden to prove fraudulent intent as to each alleged fraudulent transfer.

The case is Faulkner v. Ford Motor Credit Co. (In re Reagor-Dykes Motors, LP), No. 20-ap-5005 (Bankr. N. D. Tex. June 3, 2022). Ford Credit is represented by Baker Botts LLP and Phillips Lytle. The trustee is represented by Bracewell LLP and Stricklin Law Firm, P.C. The memorandum opinion is available here.