Can Trustee Recover Fraudulent Transfer To A Charitable Organization...

People who receive money from Ponzi schemes usually have to return the money if the Ponzi organizer filed bankruptcy. The bankruptcy trustee typically pursues recipients of Ponzi profits as transferees of fraudulent transfers made by the Ponzi organizer. What happens when the Ponzi organizer donates part of Ponzi profits to a charity?

In this Florida bankruptcy case a Ponzi scheme bilked investors out of approximately $170 million to $350 million. The Ponzi organizer then donated $62,000 to a church. The church deposited the money in its general operating account. The Ponzi organizer filed Chapter 7 bankruptcy. The bankruptcy trustee sought to avoid the donation of Ponzi profits to the church and recover the $62,000 from the church.

The bankruptcy court found that the donation to the church was a fraudulent transfer. . The bankruptcy law permits trustees to recover money paid to “initial transferees” of fraudulent transfer. Courts have held that a recipient of a fraudulent transfer is an “initial transferee” only if the recipient exercises legal control over the assets such that they have the right to use the asset received for their own purposes rather than serve as a conduit for the assets. Recipients that act as a fiduciary such as banks or brokers are not initial transferees.

This bankruptcy court found that the church recipient was not an “initial transferee” despite the deposit into the church’s general bank account. The court said that the church was not free to used the money as it wished because donations were being collected for a charitable project which is how the Ponzi money ultimately was spent.

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