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Federal Court of Justice: Positive knowledge of Ponzi scheme implies creditor’s knowledge of wilful discrimination

The Federal Court of Justice (BGH, 8 January 2015, IX ZR 198/13) acknowledged the creditor’s positive knowledge of a Ponzi scheme run by the debtor when enforcing a claim for the repayment of an investment as a material sign of evidence that the creditor intends to discriminate other creditors pursuant to § 133 (1) German Insolvency Code (InsO) and that the debtor was aware of that.

The court’s decision is based on following facts: The defendant invested an amount of DEM50,000 by way of the acquisition of bearer notes, issued by the insolvent company. On the due date, the insolvent company did not repay the investment but a partial and rather small amount of the accrued interest. The defendant’s attorney requested the repayment of the investment in full. After that, the insolvent company made the requested repayment in a total amount of €26,994.64 by two instalments. The insolvency administrator of the insolvent company challenged these two payments.

According to the court decision of the previous instance, both § 130 InsO (Contestation due to congruent coverage) and § 133 (Contestation due to wilful disadvantage) InsO were not applicable since the defendant was not aware of the illiquidity of the insolvent company and the awareness of the defendant’s attorney could not be proved. Therefore, the claim was rejected.

The Federal Court of Justice disagreed with the previous instance and acknowledged the insolvency administrator’s right to challenge the two payments.

Although the Federal Court of Justice agreed, that the insolvency administrator did not prove the defendant’s positive knowledge of the illiquidity of the insolvent company at the time the respective payments have been made, the Federal Court of Justice acknowledged that it is sufficient to prove the defendant’s positive knowledge of circumstances which have indicated the impending illiquidity. Given this knowledge the defendant also knew that the repayments would trigger a disadvantage for other creditors of the insolvent company and that the insolvent company knew this as well. Therefore, the Federal Court of Justice acknowledged the insolvency administrator’s right to challenge the repayments pursuant to § 133 (1) InsO.

Pursuant to § 133 InsO, a transaction made by the debtor during the last ten years prior to the request to open insolvency proceedings, or subsequent to such request, with the intention to disadvantage its creditors may be contested if the other party was aware of the debtor’s intention on the date of such transaction. Such awareness shall be presumed if the other party knew of the debtor’s imminent insolvency, and that the transaction constituted a disadvantage for the creditors.

The Federal Court of Justice stated that such intention to disadvantage the creditors and the knowledge of the other party of this intention as subjective facts can hardly be proved directly but by proving the circumstances indicating the (impending) illiquidity. If both creditor and debtor are aware of the (impending) illiquidity, it can be assumed that the debtor intends to disadvantage its creditors when transferring money to a certain creditor and that at the same time the respective creditor is aware of the debtor’s intention.

In the present case, the insolvent company was at least facing an impending illiquidity at the time the respective payments had been made.

According to the Federal Court of Justice, the defendant was aware of the impending illiquidity, as his attorney was aware of the situation and as the knowledge of the attorney was attributable to the defendant pursuant to § 166 (1) German Civil Code.

The defendant’s attorneys represented 120 investors in legal proceedings against the insolvent company. They had uploaded an article published in the Financial Times Deutschland regarding the payment delays of the insolvent company on their website. This article contained the statement of one of the defendant’s attorneys, that the insolvent company ran a Ponzi Scheme.

Basically, due to the duty of secrecy, the knowledge of attorneys gained in other cases is not attributable to other (uninvolved) clients. However, this general rule does not apply if the respective attorney gained his knowledge from generally accessible sources like it was the case in the present case.

Therefore, the defendant`s attorney and thus the defendant itself was aware of the fact, that the insolvent company issued the bearer notes within a Ponzi scheme.

Pursuant to the Federal Court of Justice, a Ponzi scheme is always fragile and it is therefore just a matter of time until its collapse. Therefore, a company which sets up such a Ponzi scheme constantly faces an impending illiquidity.

A creditor who has positive knowledge about the Ponzi scheme has therefore knowledge about the impending illiquidity. If the creditor demands and receives payments from such a Ponzi scheme running company, this creditor is aware of the fact, that the payment he receives might be the one leading to the collapse. Hence, such creditor is aware of the debtor’s intention to disadvantage its creditors.

The Federal Court of Justice therefore decided in the favor of the insolvency administrator and reversed the previous instance’s judgment.

Practice guide

The Federal Court of Justice has for the first time explicitly stated, that the knowledge of the existence of a Ponzi scheme leads automatically to the knowledge of not only the impending illiquidity but also to the creditor’s knowledge of the debtor’s intention to disadvantage its creditors.

Furthermore the judgment grants protection for the creditors of a Ponzi scheme, as they were all treated equally. It will be more and more difficult for certain creditors to win the race in terms of receiving money before the collapse.

Apart from the legal relevance, this judgment might trigger problems for smaller law firms which might not be able to secure that a court won’t attribute the knowledge of one attorney to the clients of another attorney. It is therefore recommendable to consider carefully the law firm to be engaged for taking legal actions against such companies with hundreds or even more aggrieved creditors.

Permanent link to this article: http://blogs.dlapiper.com/derestructuring/2015/07/20/federal-court-of-justice-positive-knowledge-of-ponzi-scheme-implies-creditors-knowledge-of-wilful-discrimination/