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Home / Case News / A Defendant May Be Entitled to Sec. 548 Defense When He Acts in Good faith and Without Knowledge of Debtors’ Ponzi Activities

A Defendant May Be Entitled to Sec. 548 Defense When He Acts in Good faith and Without Knowledge of Debtors’ Ponzi Activities

October 17, 2018, Idaho – Debtor DBSI and its related entities were engaged in three main spheres of business and was purportedly engaged in a massive Ponzi scheme. It ran its business and entities as a unified enterprise under common ownership and control with a small group of insiders that control to raise cash, commingle it, and then distribute it as needs presented.

The alleged Ponzi scheme centered on three investment units sold by DBSI as either securities through security markets or as interests in real estate through real estate markets – promissory notes, both secured and unsecured, bonds and TICs or tenant in common units.

The transaction at issue was the purchase of certain Idaho real estate from Defendant Marty Goldsmith. The Defendant Marty Goldsmith purchased the Tanana Valley property in October 2005 from a family trust for $19.2 million. In April 2006, Goldsmith contracted to sell the property to a Swenson-controlled company called Kastera LLC for an initial contract price of $35.8 million. At the time, Tanana Valley was raw land with a 13,000 square foot luxury home located on approximately five acres. After obtaining certain development entitlements from the City of Meridian, Goldsmith sold the property to a DBSI subsidiary known as DBSI Tanana Valley LLC. That entity took an assignment of Kastera’s contract and purchased the property for $28.8 million in a transaction that closed in February 2007. That transaction was funded with $28.4 million raised from investors by two note and fund entities, DBSI 2006 Land Opportunity Fund and DBSI 2006 Secured Notes Corp. Kastera paid $400,000 of the purchase price.

The Trustee brought a suit to recover the Debtors’ transfers of the purchase price on various actual and constructive fraud theories arising out of the DBSI Ponzi scheme. The Trustee asserted that the Defendant received around $28.8 million in exchange for selling approximately 180 acres of real property located in Ada County, Idaho that was worth substantially less.

Applying the Ponzi scheme presumption, the court concluded that the transfers at issue were done with actual intent to defraud creditors and thus, under 11 U.S.C.S. §§ 548(a)(1)(A) and 544(b) (incorporating Idaho fraudulent transfer law), they were avoidable as actually fraudulent transfers. However, the Court added that since the Defendant acted in good faith and without knowledge of the Ponzi activities, thus, he was entitled to the defenses in 11 U.S.C.S. §§ 548(c) and 550(b)(1) to the extent he provided appropriate value.

The court accordingly concluded that the transfers were avoidable, but that defendant was entitled to the defenses provided under 11 U.S.C.S. §§ 548(c) and 550(b)(1) to the extent he provided appropriate value.

Zazzali v. Goldsmith (In re DBSI Inc.), Nos. 08-12687-CSS, 12-06056-TLM, 2018 Bankr. LEXIS 3217 (Bankr. D. Idaho Oct. 17, 2018)