Minnesota Lawmakers Seek to Protect Nonprofits From Clawbacks

Minnesota lawmakers have passed legislation to protect nonprofits and religious groups from the so-called clawback lawsuits that are a crucial tool for recovering funds stolen from Ponzi-scheme victims.

That’s the idea behind the bill that now sits on the governor’s desk. If signed into law, the bill would limit the odds that these organizations could be sued under a current state law allowing the reversal of payments made in a fraudulent manner, according to the Star Tribune.

It’s an issue that hits close to home for dozens of organizations based in the Land of 10,000 Lakes, where Tom Petters used his business empire to carry out a $3.6 billion-plus Ponzi scheme. Among Petters’s many investors were charitable organizations, and he also donated millions of dollars to local nonprofits and religious groups.

Because the money these organizations received from Petters was tainted by fraud, state laws allow demands to give the money back so it can be fairly distributed among all of his victims. Such clawback lawsuits are often filed by the independent trustees liquidating fraud-tinged business in bankruptcy courts. They say they’re righting the wrong inherent in Ponzi schemes: Early investors are paid from later investors’ dollars, leaving the later investors unpaid.

Still, it definitely doesn’t look good when the lawsuits are filed in bankruptcy court. Charitable organizations say they’ve already put the money to good use and ask why they should suffer when they didn’t know the money they received wasn’t legitimate.

Bankruptcy Beat readers are familiar with the controversy, which has arisen in such major Ponzi bankruptcies as Bernard Madoff and Scott Rothstein in addition to Petters.

In the unwinding of Petters’s empire that’s ongoing in bankruptcy court, trustee Doug Kelley has sued to recover millions of dollars of fraudulently paid out funds. Among the defendants are a number of local charitable organizations and religious groups. In fact, the Star Tribune reported that Kelley recently sued Minnesota Teen Challenge to recover $2.3 million in donations and contributions. The nonprofit works to help teens and adults who struggle with drug and alcohol addictions.

Kelley said if the Minnesota bill is signed into law, it could possibly bar him from collecting more than $200 million. He decried the “unintended consequences” of the legislation, including making other Petters investors two-time victims because the bill could reduce the amount of money they can recover.

The bill is under consideration of Minnesota Gov. Mark Dayton, who has until midnight Tuesday to act, according to Minneapolis CBS affiliate WCCO.

Petters was convicted in 2009 and was sentenced to 50 years in prison for running the Ponzi scheme. The conviction was upheld on appeal, and the Eighth Circuit Court of Appeals earlier this year declined to grant Petters’s request to rehear the appeal.