The collapse of a Ponzi scheme usually follows a familiar pattern. When the scheme is exposed, the company created by the schemer—which is usually little more than a sham entity—is placed into receivership or declares bankruptcy (or both). A receiver or bankruptcy trustee is then tasked with recovering any funds belonging to the estate so that they may be distributed to creditors. As part of this process, these court-appointed parties step into the shoes of the company and may bring any litigation that the company itself could have brought. Bankruptcy trustees are also granted the exclusive right to bring “general claims” on behalf of the entities’ creditors.
This process creates a thorny question: who may seek recovery from a third party alleged to have been involved in the fraud? Creditors that lent funds to sham companies often pursue claims against financial institutions that banked the schemers on aiding-and-abetting theories. Yet receivers and trustees also often bring these claims, leading to duplicative litigation and the question of who properly “owns” the claim.
A recent decision by the U.S. District Court for the District of Minnesota provides important guidance on this question. Ritchie v. JPMorgan Chase & Co., No. 14-cv-04786, 2021 WL 2686079 (D. Minn. June 30, 2021) untangles who has standing to bring claims against a third party alleged to have aided and abetted a Ponzi scheme. As the Court explains, “general” claims for loss of funds belong exclusively to court-appointed bankruptcy trustees. Third parties may only bring particularized claims that arise from injuries “directly traceable” to the defendant’s conduct. Ritchie thus serves as a touchstone in disputes over standing in Ponzi litigation.
I. The Petters Ponzi Scheme and Plaintiffs’ Attempt to Recover From Third Parties.
Ritchie involved a Ponzi scheme run by Thomas Petters through various sham companies. Following the collapse of the scheme, Petters and his companies were placed into receivership and a number of the companies declared bankruptcy. Bankruptcy trustees and a receiver were appointed and pursued hundreds of claims in an attempt to recover creditors’ funds. Among these claims were adversary proceedings against JPMorgan Chase; as part of the settlements for these proceedings, the court entered bar orders permanently enjoining Petters’s creditors from asserting any claims that belonged to the trustees or receivers or were derivative of such claims.
The Ritchie plaintiffs, certain Cayman Island-based special purpose entities known collectively as “Ritchie,” loaned hundreds of millions of dollars to Petters and one of his companies. Ritchie alleged JPMorgan Chase, which also lent funds to Petters’s company and provided other banking services, knew of the scheme but consciously avoided informing Ritchie so the scheme would continue operating long enough for it to be reimbursed. Ritchie asserted claims for aiding-and-abetting fraud or conversion, fraudulent transfer, negligence, breach of fiduciary duty, and unjust enrichment against various JPMorgan entities as well as a financial consultancy named Richter that allegedly performed due diligence on PCI.
II. The Ritchie Court Holds Aiding-and-Abetting, Fraudulent Transfer, and Unjust Enrichment Claims Are “General Claims” Belonging to Trustees.
On June 30, the Court issued an opinion dismissing Plaintiffs’ claims in full. The crux of the Court’s decision concerns who has standing to bring claims arising from a creditor’s losses against a third-party financial institution: the creditor itself or the court-appointed trustee. As the Court explained, “general claims—those with no particularized injury arising from them—that can be brought any creditor of the debtor, must be brought by the trustee, for the benefit of all creditors. In contrast, particularized claims are specific to a plaintiff, in that the injury is ‘directly traced to’ the non-debtor’s conduct.”
As to the aiding-and-abetting claims, plaintiffs argued these claims never belonged to PCI and were “direct and particularized” because no other creditor lent funds based on the specific misrepresentations at issue. Defendants, on the other hand, argued the claims were generalized and “derivative of the Petters bankruptcy estate.”
The Court held the aiding-and-abetting claims “were the property of the bankruptcy estates.” The Court noted plaintiffs “largely take issue with misrepresentations made by Petters to Ritchie and the allegations do not concern particularized conduct by JPMC or Richter toward Ritchie or any unique harmed suffered by Ritchie from interactions with JPMC or Richter.” Indeed, “the alleged loss of Ritchie’s funds was a result of the collapse of Petters’s Ponzi scheme,” not from any defendants’ specific conduct, and thus “Ritchie’s claims allege the same kind of harm—a loss of funds—that affected all creditors of the Petters entities.” As a result, the Court held the aiding-and-abetting claims “are derivative claims, over which the Trustees had exclusive standing to pursue” and, in fact, had pursued previously against JPMorgan Chase.
The Court reached the same conclusion with respect to the fraudulent transfer and unjust enrichment claims. Ritchie sought to “reclaim” an alleged $6.5 million payment made from one of the Petters entities to JPMorgan Chase on the theory that Ritchie lent the funds to the Petters entity, which then transferred the money to JPMorgan Chase. The Court explained that “the allegations demonstrate that the money was presumptively the property” of the Petters company which, “in turn, is one of the debtors.” Thus, the Court held “Ritchie cannot bring a claim that is based on the transfer of the debtor’s property” because “the Trustees had exclusive standing” to bring such claims.
III. Even Where a Plaintiff Has Standing, Allegations Against Third Parties Face a High Hurdle to Survive Motions to Dismiss.
The Ritchie Court’s decision is most notable for its careful parsing of who has standing to bring what claim when creditors and court-appointees bring parallel litigation. But the decision also provides a reminder of the pleading standards applicable to claims against third parties and the high hurdle plaintiffs face when attempting to hold third party financial institutions liable for providing banking services to individuals and entities later discovered to be fraudsters. Following its discussion of standing and a separate analysis of New York’s statute of limitations, the Court detailed why—even if Ritchie had standing and brought timely claims—the complaint warranted dismissal for failure to state a claim.
The Court prefaced its discussion with a reminder of the heightened requirements for pleading fraud and deception. Additionally, aiding-and-abetting claims require allegations that give rise to a plausible inference of actual knowledge of the fraud, not merely awareness of “red flags” or constructive knowledge. The Court held there were “no specific allegations that JPMC had actual knowledge” of Petters’s fraud, and as a result the aiding-and-abetting claims against it failed. As for Ritchie’s negligence and breach of fiduciary duty claims, the Court held Ritchie failed to allege a special relationship that would give rise to a duty to warn of a suspected Ponzi scheme. The Court confirmed that typical bank-depositor and creditor-borrower relationships did not suffice to form a special relationship, which would create a duty to warn. The Court further dismissed Ritchie’s fraudulent transfer claims because the complaint did “not sufficiently allege a lack of good faith or that JPMC was motivated by an intent to defraud creditors in furtherance of Petters’ fraudulent scheme.” Lastly, the Court dismissed the unjust enrichment claim as duplicative because it sought “redress for the same injury allegedly caused by JPMC’s fraudulent transfer.”
IV. Ritchie’s Impact
Ritchie provides a useful guidepost in untangling who has standing to bring a claim following the collapse of a Ponzi scheme. Where the claim is “general” in nature, such as the loss of funds that all creditors suffer, it belongs exclusively to the court-appointed bankruptcy trustee. Only when a claim arises an injury “directly traceable” to the defendant’s particular conduct can another party bring the claim. Counsel defending financial institutions and other third parties that are inevitably swept into the tide of litigation that follows a collapsed Ponzi scheme should pay careful attention to the types of claims being brought and consider whether the party bringing the claims has standing to do so.