STEPHEN S. MITCHELL, Bankruptcy Judge.
In these actions brought by a chapter 11 trustee to recover payments allegedly made in furtherance of a Ponzi scheme, the defendants have filed motions to dismiss the counts grounded on Virginia's fraudulent conveyance statute for failure to state a claim for relief. Together, the challenged counts seek avoidance and recovery of $47.8 million in payments made to the defendants—who provided "warehouse" funding for mortgage loans originated by one of the jointly-administered debtors—as fraudulent conveyances under § 55-80, Code of Virginia. That statute, however, protects "a purchaser for valuable consideration, unless it appear that he had notice of the fraudulent intent of his immediate grantor," and the issue is whether the complaint must make a plausible showing that the defendants had such notice, or whether lack of notice is simply an affirmative defense. Following oral argument, the court took the issues under advisement. For the reasons stated, the court concludes that notice of the transferor's fraudulent intent is an element that must be alleged in order to state a claim for relief.
On June 9, 2008, Vijay K. Taneja ("the debtor") and four companies controlled by him, including a mortgage loan originator known as Financial Mortgage, Inc. ("FMI"), filed voluntary petitions in this court for reorganization under chapter 11 of the Bankruptcy Code.
The trustee has alleged that mortgage loans originated by FMI, and subsequently sold into the secondary market, lay at the heart of a massive Ponzi scheme orchestrated by Taneja.
The action against Sovereign Bank (as successor to Independence), filed December 9, 2010, seeks avoidance and recovery under § 548, Bankruptcy Code, of $566,865 in payments made to it in the two years prior to the filing of FMI's bankruptcy petition (Count I) and under § 544, Bankruptcy Code and § 55-80, Code of Virginia, of $43,345,244 made to it in the five years prior to the bankruptcy filing (Count II). Avoidance and recovery of $45,000 is separately sought under § 544, Bankruptcy Code and § 55-81, Code of Virginia (Count III). The action against Gateway, filed December 7, 2010, seeks recovery under § 548, Bankruptcy Code, of $3,738,858 in payments made within two years of the bankruptcy filing (Count I) and under § 544, Bankruptcy Code and § 55-80, Code of Virginia, of $4,500,323 in payments made within five years of the bankruptcy filing. The "five year" payment amounts are inclusive of the "two year" payment amounts. As a result, $42,778,379 (or almost 99%) of the trustee's claim against Sovereign hinges on his ability to proceed under § 55-80, Code of Virginia, while only $761,463 (or 17%) of his claim against Gateway is dependent upon the Virginia statute.
The Bankruptcy Code allows a trustee to avoid and recover, as a fraudulent conveyance, payments or other transfers occurring within 2 years prior to the filing of the bankruptcy petition that were made either with actual intent to hinder, delay, or defraud creditors, or, even in the absence of intent to defraud, were made in exchange for less than reasonably equivalent value at a time when the debtor was insolvent. § 548(a)(1)(A) and (B), Bankruptcy Code. In addition, the trustee may exercise any avoidance rights that would
In Count II of the complaints, the trustee is proceeding under § 55-80, Code of Virginia, which provides as follows:
(emphasis added). The complaint sets out at some length facts intended to support the existence of a Ponzi scheme and thereby invoke the so-called Ponzi presumption under which payments made in furtherance of such a scheme are presumed to be fraudulent. Although the complaint includes a number of allegations that arguably support an inference that the secondary market purchasers should have known of the fraud, it makes no allegation that either Sovereign or Gateway had notice of Taneja's fraud or that the payments to them (other than the single $45,000 payment alleged in Count III of the Sovereign complaint) were not made for valuable consideration.
The trustee, however, says that no such allegations are required, because the protection the statute accords a "purchaser for valuable consideration" is in the nature of an affirmative defense, which he is not required to negative in his complaint. See Goodman v. Praxair, Inc., 494 F.3d 458, 466 (4th Cir.2007) (holding that plaintiff did not need to plead facts negating an affirmative statute of limitations defense). The defendants, by contrast, assert that under controlling Virginia law, notice of the debtor's fraud is not merely an affirmative defense, but an essential element that the trustee must both plead and prove.
In support of this argument, the defendants rely primarily on language from the opinion of the Supreme Court of Virginia in Bank of Commerce v. Rosemary and Thyme, Inc., 218 Va. 781, 239 S.E.2d 909 (1978). In that case, Bank of Commerce, a creditor of Rosemary and Thyme, Inc.,
The Supreme Court of Virginia affirmed, holding that under Virginia law an insolvent debtor "may generally make a valid transfer of a portion or the whole of his assets to a bona fide creditor on account of an existing indebtedness ... even though such transfer may be and is intended by the debtor and creditor to give such creditor a preference to the exclusion of others in the distribution of the debtor's assets." Id. at 784, 239 S.E.2d at 912. After extensively analyzing the holdings in two prior cases relied on by the parties, as well as cases from other jurisdictions, the Court concluded that the facts alleged in the bill of complaint were "insufficient in law to support a claim to set aside the transfer." Id. at 789, 239 S.E.2d at 915. In reaching this conclusion, the Court noted that "[i]n order to set aside a preference [as a fraudulent conveyance], the plaintiff must not only prove that the debtor intended to delay, hinder or defraud his other creditors, he must also show that the preferred creditor had notice of such intent." Id. at 784, 239 S.E.2d at 912 (emphasis added). The notice requirement, the Court explained, does not require proof that the creditor had "actual knowledge of the debtor-grantor's fraudulent intent," but only that the grantee had "`knowledge of such facts and circumstances as would have excited the suspicion of a man of ordinary care and prudence, and put him upon such inquiry as to the bona fides of the transaction as would necessarily have led to the discovery of the fraud of the grantor.'" Id. (quoting Crowder v. Crowder, 125 Va. 80, 87, 99 S.E. 746, 748 (1919)). The Court did observe that when a corporation repaid a debt owed directly to one of its own directors, the "debtor-assignor and the creditor-assignee were, in effect, one person," with the result that "the fraudulent intent of the debtor was ascribed to the creditor, and the preference was void." Rosemary and Thyme, at 786, 239 S.E.2d at 914 (emphasis added). But when the preferred creditor "exercised no control over the insolvent corporation and ... had no actual or constructive knowledge of the fraudulent intent of the assignor, ... one of the elements vital to the plaintiff's cause of action under Code § 55-80 is lacking, i.e., that the preferred creditor had notice of the debtor's fraudulent intent." Id. at 787, 239 S.E.2d at 914 (emphasis added).
This court agrees with the defendants that the decision in Rosemary and Thyme clearly establishes that notice of the debtor's fraudulent intent is not merely an affirmative defense to an action under § 55-80, Code of Virginia, but rather is an element of the plaintiff's case that must be alleged in the complaint in order to state a claim for relief.
Separate orders consistent with this opinion will be entered in each adversary proceeding.