Let’s say three “innocent” lenders, A, B, and C, lent a scammer $100,00, $200,00, and $500,000, at Date 1(A), Date 2(B), and Date 3(C), at 10%(A), 22%(B), and 1,600%(C).
Let’s say each respectively received payments back of $4,000(A), $100,000(B), and $100,000(C) before the scheme imploded and accounts were frozen.
Let’s say the scammer ran some legitimate business for which he received $100,000 and he used money borrowed from Lenders B and C, but not A for that business. Finally, let’s say $200,000 remains on accounts owned by the fraudulent enterprise for redistribution. Who should get how much of that money?
This is a trick question. There is no answer. You could write a book about it.
Courts are sometimes (and some would say very often) called upon to answer questions that manifestly have no right answer — the most obvious (and heart-rending) being the decision of what is to be done with children when families disintegrate, presenting several permutations of “not-so-great-but-what-can-you-do” solutions.
Compared to the Solomonic Dilemma³, figuring out which lender/fraud victim gets how much from a limited fund presumably feels fairly inconsequential, but it still complicated. There will be those feeling doubly wronged (by the Court and by the scammer) no matter what.
This week, recently appointed Minnesota Court of Appeals Judge Margaret H. Chutich (along with Judges Schellhas and Kalitowski) affirmed Dakota County Judge Joseph T. Carter’s distribution in the case arising out of the First United/Corey Johnston $135 million Ponzi scheme that targeted lenders around Minnesota and nearby states.
The district court used the “net-investment method” for asset distribution rather than the “principal-and-interest method.” The latter method, one fraud victim/bank (National Bank) argued, would take into account that the Ponzi schemer had some legitimate business for which it repaid “true debt” with “actual revenue received.” ”Legitimate profit,” it was argued, should be paid to the lender to whom it was owed, not put into a pot for “equitable distribution.”
The district court has broad discretion in distributing receivership assets and National Bank has failed to demonstrate that it abused that discretion by adopting the net-investment method. The district court’s findings reflect a thorough understanding of the factual record and the applicable caselaw. It noted that there would be “winners” and “losers” under both distribution methods, and that “no matter which [method] is chosen, some of the parties’ expectations will have been frustrated.” See Byers, 637 F. Supp. 2d at 168 (“An equitable plan is not necessarily a plan that everyone will like.” (quotation omitted)). The district court conducted numerous rounds of briefing, heard multiple oral arguments, and made detailed factual findings before concluding that the net-investment method would provide the most equitable result for all the victims, a determination that is supported by the record.