On a second appeal, the Colorado Supreme Court decided a question of first impression about the Colorado Uniform Fraudulent Transfer Act. Ac-cording to an opinion released Sept. 17, an innocent investor in an equity-type Ponzi scheme is not entitled to keep any profits from their investment. Because an investor is not guaranteed any prof-its at all and CUFTA does not include time value of money in its definition of “value,” the court has reasoned in Lewis v. Taylor, the time value of their investment alone does not provide “reason-ably equivalent value” in exchange for profits.
The underlying case concerns a court appointed receiver’s efforts to recover profits from a multi-million-dollar hedge fund that turned out to be a Ponzi scheme. Manager Sean Mueller used money from new investments rather than any actual profits to pay out withdrawals to investors. This case’s defendant, Steve Taylor, invested $3 million and withdrew that initial investment plus an additional $487,305.29.
After the fund’s collapse, the trial court appointed plaintiff C. RandelLewis as a receiver to collect and dis-tribute assets among investors who lost money. Lewis sued Taylor under section 38-8-105(1)(a) of CUFTA to re-cover Taylor’s gains from the fund.
At the heart of the parties’ dispute is one part of a two-prong affirmative defense CUFTA provides. Under the statute, a “transfer . . . is not voidable under section 38-8-105(1)(a) against a person who took in good faith and fora reasonably equivalent value.” Lewis and Taylor do not dispute that transfers from the hedge fund were fraudulent or that Taylor withdrew his money in good faith as an innocent investor. In question is whether Taylor provided reasonably equivalent value in exchange for his withdrawal over his initial $3 million investment.
Under the law, Taylor is entitled to keep his base investment. Taylor has argued he is also entitled to some money beyond his initial $3 million, because regardless of whether the hedge fund was fraudulent or not, his money sitting in the fund for over a year carries time value.
But the trial court granted summary judgment in favor of Lewis, concluding Taylor did not provide reasonably equivalent value in exchange for his gain withdrawal. The Court of Appeals reversed the decision in 2017, concluding the trial court made a mis-take by not considering the time value of Taylor’s $3 million investment when determining whether he provided reasonably equivalent value in exchange for his profits. The appeals court remanded for further fact-finding by the trial court.
In its reversal, the Supreme Court concluded CUFTA does not include time value of money in its definition of“value,” although the statute does not specifically define “reasonably equivalent value.” The court based its interpretation on the difference between equity investments and other types that come with contractual returns, such as interest payments.
According to the statute, value is given for a transfer if property is transferred or an antecedent debt is secured or satisfied.“We note that the statutory scheme does not identify the time value of money as a source of value,” wrote Justice William Hood in the opinion. “Had the legislature wanted to make the affirmative defense sweep so broadly, it could have done so explicitly.” Hood added that because equity investors do not have a guarantee of any return at all, even for the time value of their investments, investors who with draw gains on their investment have not provided any value in exchange.
“In these circumstances, he provides no property that actually yields any true profit,” the opinion reads. “And in pay-ing the investor more than he invested, the Ponzi schemer doesn’t satisfy an antecedent debt or a claim that the investor has because the investor has no right to any return on investment. Thus, CUFTA does not define ‘value’ to include the time value of money.”
Podoll & Podoll partner Richard Podoll, who represents Taylor, said he believes the Supreme Court intends for the decision to have very narrow application to whether the time value of money alone can be considered reasonably equivalent value in the con-text of equity investments that turnout to be Ponzi schemes.“You can’t cite this for the proposition that in any context, there’s no time value to money,” he said. “And I think the Supreme Court was very careful not to publish an opinion that could be construed that broadly.You can imagine the unnecessary litigation that would lead to if there was actually Supreme Court precedent that money had no time value.”
He said he believes that while the legislature should address how to approach fallout from a Ponzi scheme’s collapse, he said such legislation doesn’t belong under CUFTA. Po-doll’s side has argued CUFTA’s purpose is to keep debtors from placing assets beyond the reach of creditors, not to give courts the ability to impose equity among winning and los-ing investors after a Ponzi scheme falls apart.
By press time, Podoll said no decision has been made whether he will petition the Supreme Court for re-hearing on the case. Michael Gilbert, counsel representing Lewis, could not be reached for comment.
Justice Melissa Hart authored the sole dissent. She argued the majority should have considered each individual transfer made to Taylor over the life of his investment, rather than his total withdrawal as a single sum and the Ponzi scheme as a whole. She referenced a Texas Supreme Court decision that interpreted application of the state’s Uniform Fraudulent Transfer Act to Ponzi schemes. In JanVey v.Golf Channel, Inc., the court reasoned“[v] alue must be determined objectively at the time of the transfer and in relation to the individual exchange at hand rather than viewed in the con-text of the debtor’s entire enterprise, viewed subjectively from the debtor’s perspective, or based on a retrospective evaluation.”
Hart wrote that because Taylor’s investment agreement allowed him to withdraw either principal or interest at anytime from the funds in his investment account, he established a claim to the amount requested with each withdrawal. She added each time Mueller’s hedge fund paid out a claim, it satisfied an antecedent debt in accordance with the Taylor’s investment agreement he entered upon his initial investment. She continued that the concealed intent of a defrauding transferor should not factor into whether an investor receives a transfer in exchange for reasonably equivalent value. “Rather — like section-109’s requirement of good faith — reasonably equivalent value is a separately calculable factor that should be analyzed exclusively from the vantage point of the innocent transferee,” Hart wrote. “The consequence of the majority’s approach is that no innocent investor in a Ponzi scheme would ever be entitled to assert a section-109(1) affirmative defense. Nothing in CUFTA suggests that result.”
Hart added factoring in fraudulent intent of the transferor disregards the CUFTA provision’s purpose to provide a complete defense to a fraudulent transfer’s innocent recipient.
“As harsh as it may appear to leave investors who did not cash out their in-vestment accounts, as Taylor did, with less than they believe they are due, permitting a receiver to obtain judgments against those who withdrew and dis-posed of funds they believed they were rightfully entitled to is equally unfair,”she wrote. “It is also unwise as it under-mines the finality of investment trans-actions, which, in turn, will discourage market participation.”
— Julia Cardi