Proposed legislation to shield charities from fraudulent conveyance claims provides unnecessary relief and harms fraud victims.

• Author: Wiand, Burton W.

In recent years, Ponzi schemes have captured national headlines and left a broad array of victims--often individual investors -- devastated by the scheme's aftermath. Trustees, receivers, and others who are appointed to do "cleanup" after these schemes collapse regularly use traditional state laws relating to fraudulent conveyances to recover "false profits" (1) and other proceeds of Ponzi schemers' largesse in order to gather monies to help remediate the damage caused by these schemes. Recently, as these schemes have proliferated, and charities have become frequent targets of claims for the return of purloined funds, charities have turned to state legislatures seeking immunity from the common legal remedies that allow the rightful owners and legitimate creditors to recover fraudulently transferred proceeds.

By definition, a Ponzi scheme is limited in duration, and can survive only so long as new investments exceed outflows to existing investors. Called the "lifeblood" of a Ponzi scheme, new investments are essential to the scheme, and are solicited in a variety of ways by the mastermind, both directly and indirectly. Those who perpetrate Ponzi schemes clearly fall in the definition of "confidence men" and one of the common ways used to generate confidence in themselves, their stature in their communities, and the legitimacy of their businesses is through charitable giving. Large publicized charitable donations often pay off handsomely as new investors are drawn by the perceived connection between the generosity and business success. When the schemes implode in the face of unsustainable redemption and payment obligations--as all Ponzi schemes do--it becomes apparent that these generous acts of charitable giving were not funded from business profits, but instead were made possible simply by stealing money from innocent investors. In the resulting equity receivership or bankruptcy, the court-appointed official is tasked with the recovery of assets that have been fraudulently transferred to third parties, including charitable organizations, and often represents a significant element in efforts to provide restitution for those victims that suffered devastating losses.

However, a proposed set of amendments to the Florida Uniform Fraudulent Transfer Act (FUFTA) would drastically limit creditors' ability to recover fraudulently transferred assets from a charitable organization. The amendments, which would represent an unwarranted reach beyond even that afforded by federal law under the Bankruptcy Code, would essentially protect charitable organizations at the expense of fraud victims. (2) This article will examine the critical differences between the amendments and federal law, as well as argue that a balancing of the equities clearly demonstrates that a receiver or bankruptcy trustee--rather than an elected body--is better equipped to make this decision.

Senate Bill 102 and Current State and Federal Fraudulent Transfer Legislation

Sponsored by Sen. Nancy Detert, R-Venice, SB 102 proposes substantial changes to FUFTA, F.S. 726.101 et seq., under the guise of providing protections similar to those already afforded under the Bankruptcy Code. This is accomplished by 1) inserting definitions for a "charitable contribution" and a "qualified religious or charitable entity"; 2) imposing limitations on the recovery of fraudulent transfers from charitable organizations; and 3) requiring that the fraudulent transfer be made within two years of the commencement of receivership or bankruptcy proceedings in order to be recoverable. As discussed below, these amendments are well beyond the limited protections afforded in the Bankruptcy Code, and instead reflect the unavoidable result that charitable organizations will essentially be permitted to retain money stolen from fraud victims despite being in a much better financial position to recover from such financial devastation. In order to understand the implications of the bill, it is...