By: Chelsea McGee
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In Isaiah v. JPMorgan Chase Bank, the United States Court of Appeals for the Eleventh Circuit held that a court-appointed receiver could not recover a deposit made by principals into various bank accounts within the same financial institution under the Florida Uniform Fraudulent Transfer Act (“FUFTA”) because such a transaction was not a “transfer.”[i] Additionally, according to the court, a receiver does not have standing to bring a claim against a financial institution for aiding and abetting a Ponzi scheme that harmed certain individual investors.[ii] In September 2010, a Florida state court appointed Amir Isaiah (“Isaiah”) receiver of certain entities (the “Receivership Entities”) after finding that the principals had been using the Receivership Entities to perpetrate a Ponzi scheme against investors.[iii] The Ponzi schemers made several fraudulent distributions originating from JPMorgan Chase (“JPMC”) bank accounts belonging to the Receivership Entities.[iv] Upon detection of suspicious activity, JPMC unilaterally closed the bank accounts, but subsequently allowed the Receivership Entities to open new accounts.[v] Following his appointment, Isaiah filed this suit in state court where he sought avoidance and recovery of the fraudulent transfers under FUFTA and damages for JPMC’s aiding and abetting of the Ponzi schemers’ “breach of their fiduciary duties, conversion of the Receivership Entities’ funds, and fraud.”[vi] JPMC subsequently removed the litigation to federal court and the United States District Court for the Southern District of Florida dismissed the action because (i) Isaiah had no standing to recover funds on behalf of the defrauded investors, and (ii) there were no “transfers” as defined under the FUFTA statute.[vii] The Eleventh Circuit affirmed the district court’s ruling and found that it had not erred in dismissing the complaint.[viii]
Under FUFTA, a creditor may avoid a debtor’s fraudulent transfer to the extent necessary to satisfy the creditor’s claim.[ix] To prevail on a fraudulent transfer claim, a creditor must demonstrate (1) there was a creditor to be defrauded, (2) a debtor intending fraud, and (3) a conveyance —i.e., a “transfer”—of property which could have been applicable to the payment of the debt due.[x] Under FUFTA, a “transfer” is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset.”[xi] Here, the Eleventh Circuit found that that a routine bank deposit was not a transfer under FUFTA.[xii] Citing Levine v. Weissing (In re Levine), the court held that determining whether a FUFTA transfer has occurred hinges on whether the debtor has relinquished some interest or control over the asset.[xiii] In this case the only transactions that occurred were deposits, withdrawals and “Intercompany Transfers” between JPMC accounts.[xiv] Because an accountholder can always access the funds it deposits into a bank, it never relinquishes interest or control over the funds it deposited.[xv] As there was no evidence that funds were deposited into any accounts not controlled by the Receivership Entities, the court concluded that these transactions were not transfers under FUFTA.[xvi]
On this appeal, the court was also asked to determine whether the Receivership Entities would have a claim against JPMC for aiding and abetting the Ponzi scheme.[xvii] The court primarily relied on the Florida District Court of Appeals decision in Freeman v. Dean Witter Reynolds, Inc., which held that unless a corporation has at least one honest member of the board the insiders cannot be separated from the corporation itself.[xviii] Using this rationale, the Isaiah Court held that because there was no evidence presented that the Receivership Entities engaged in any legitimate activities or included any honest board members to separate themselves from the actions of the Ponzi schemers, the Receivership Entities were unable to recover from their own fraudulent actions and Isaiah had no standing to bring claims against JPMC on behalf of the Receivership.[xix] Thus, the court ultimately determined that JPMC was not liable to the Receivership Entities over which Isaiah had control.[xx]
In this case, the Eleventh Circuit found that intercompany transactions between accounts with the same owner are not transfers that can be avoided as fraudulent under FUFTA.[xxi] Further, the court held that a court-appointed receiver lacks standing to recover fraudulent funds that belong to defrauded investors.[xxii] The court emphasized that “[t]o allow receivers to bring these types of lawsuits purportedly for the benefit of the entities’ creditors is really to usurp the claims that properly belong to those creditors.”[xxiii]
[i] See Isaiah v. JPMorgan Chase Bank, 960 F.3d 1296, 1305 (11th Cir. 2020).
[ii] See id. at 1307-08 (explaining that Isaiah represents the Receivership Entities controlled exclusively by persons engaging in a benefitting from the Ponzi scheme).
[iii] See id. at 1300.
[iv] See id. at 1300-01.
[v] See id. at 1301 (indicating that although JPMC acknowledged suspicious activity on the accounts, they still allowed the receivers to open new accounts at the bank).
[vi] See id.
[vii] See id. at 1300.
[viii] See id.
[ix] Fla. Stat. § 726.108(1)(a) (West 2013).
[x] Wiand v. Lee, 753 F.3d 1194, 1199-1200 (11th Cir. 2014).
[xi] Fla. Stat. § 726.102(14) (West 2013).
[xii] See Isaiah, 960 F.3d at 1302.
[xiii] See Levine v. Weissing (In re Levine), 134 F.3d 1046, 1050 (11th Cir. 1998).
[xiv] See Isaiah, 960 F.3d at 1302.
[xv] See id. at 1303.
[xvi] See id. at 1303-04.
[xvii] See id. at 1306.
[xviii] See Freeman v. Dean Witter Reynolds, Inc., 865 So.2d 543, 551 (Fla. Dist. Ct. App. 2003) (holding that the present case is indistinguishable from Freeman because both depict the Receivership Entities as the robotic tools of the Ponzi schemers).
[xix] See Isaiah, 960 F.3d at 1307-08.
[xx] See id. at 1308.
[xxi] See id. at 1305.
[xxii] See id. at 1308.
[xxiii] Id. at 1310.