Jim Silver, a partner at Kelley Kronenberg in Fort Lauderdale, and Aleida Martinez-Molina, a partner at Weiss Serota Helfman Cole & Bierman in Miami.

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."