Decision Limits Receivers' Power to Recover Torts Damages from Third Parties in Fraud Cases
"What happens when these things collapse, everyone looks for people with deep pockets," said James Silver, a partner at Kelley Kronenberg in Fort Lauderdale.
June 03, 2020 at 04:20 PM
4 minute read
The U.S. Court of Appeals for the Eleventh Circuit ruled that a receiver appointed for a closely held corporation does not have standing to recover tort damages from third parties alleged to have aided and abetted a fraud tied to a Ponzi scheme.
The Court of Appeals this week ruled in favor of JPMorgan Chase Bank against Amir Isaiah, the court-appointed receiver for two entities whose principals allegedly engaged in a Ponzi scheme: Coravca Distributions and Timeline Trading, according to the opinion.
The principals of the two Miami-based companies told investors they could reap huge profits by trading in Venezuelan and U.S. currency, the opinion stated. Isaiah sued JPMorgan Chase Bank, as he sought to recover funds that were fraudulently diverted from Coravca and Timeline bank accounts in connection with the Ponzi scheme.
Isaiah's complaint in the action against JPMorgan attempted to recover funds under the Florida Uniform Fraudulent Transfer Act. These funds were diverted from bank accounts that the two companies had maintained at JPMorgan, according to the opinion. Isaiah also sought to collect tort damages from JPMorgan for allegedly aiding and abetting breach of fiduciary duty, conversion and fraud. Isiah asserted that JPMorgan helped to facilitate the Ponzi scheme, based on JPMorgan allegedly being aware of suspicious banking activity.
The U.S. District Court in Miami dismissed the complaint under Federal Rule of Civil Procedure 12. It held that Isaiah failed to allege an "applicable conveyance or fraudulent transfer" in support of his fraudulent transfer claim. In addition, Isaiah failed to sufficiently show JPMorgan had actual knowledge of the Ponzi scheme to support his aiding and abetting claims, which resulted in the Court of Appeals affirming the ruling of the District Court.
The Court of Appeals discussed prior rulings analyzing whether a receiver has standing to pursue damages arising from a Ponzi scheme in which the principals of a corporation engaged, including Freeman v. Dean Witter Reynolds and Wiand v. Lee. In Freeman, the Second District Court of Appeal explained there are certain types of recovery actions that a corporate receiver can maintain, such as an action against the perpetrators of the fraud or recipients of fraudulent transfers of corporate funds, so that the corporation has the funds that were wrongfully taken from it restored. Once the Ponzi schemers are removed and the receiver is appointed, the entity is "cleansed" to pursue these types of claims, per Wiand.
However, Freeman held that common law tort claims against third parties to recover damages caused by the Ponzi schemers cannot be pursued by a receiver, unless there is one honest member of the board of directors or an innocent stockholder of the corporation. The rationale is that in this type of closely held corporation owned and controlled by the Ponzi schemers, the corporation is not deemed to be an entity separate and distinct from the Ponzi schemers.
In Freeman, the Second DCA explained it this way: "The corporation was entirely the robot or the evil zombie of the corporate insiders."
|Read the Court of Appeals opinion:
|James D. Silver, a partner at Kelley Kronenberg in Fort Lauderdale, said the results of this case make it more difficult for bankruptcy trustees and court-appointed receivers to prevail on claims against professionals, such as lawyers with legal malpractice insurance, who have "deep pockets."
"This case gives the defendants that were sued in those cases some powerful arguments to try and defeat those claims," Silver said.
Aleida Martinez-Molina, a partner at Weiss Serota Helfman Cole & Bierman in Miami, said that receivers have their limits. She told the Daily Business Review the receivership orders dictate what a receiver can and cannot do. It is the receivership order that the attorneys' craft at the beginning of the receivership which controls the scope of the receiver's powers.
"The opinion cited the receivership order for the limitations placed on the receiver," Martinez-Molina said. "I cannot overstate the importance of the receivership order and what it says and how it says it. It is another lesson for those seeking to implement receivership or receivers."
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View All'They Got All Bent Out of Shape:' Parkland Lawyers Clash With Each Other
Courts of Appeal Conflicted Over Rule 1.442(c)(3) When Claims for Damages Involve a Husband and Wife
Families Settle Court Battle Over Who Owns Parkland Killer's Name, Likeness
4 minute readCOVID-19 Death Suit Against Nursing Home Sent to State Court, 11th Circuit Affirms
Law Firms Mentioned
Trending Stories
- 1Infant Formula Judge Sanctions Kirkland's Jim Hurst: 'Overtly Crossed the Lines'
- 2Election 2024: Nationwide Judicial Races and Ballot Measures to Watch
- 3Guarantees Are Back, Whether Law Firms Want to Talk About Them or Not
- 4How I Made Practice Group Chair: 'If You Love What You Do and Put the Time and Effort Into It, You Will Excel,' Says Lisa Saul of Forde & O'Meara
- 5Abbott, Mead Johnson Win Defense Verdict Over Preemie Infant Formula
- 6How Much Does the Frequency of Retirement Withdrawals Matter?
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250