I recently wrote for The Nonprofit Quarterly on a bankruptcy trustee’s ability to recover charitable contributions that were made with corrupt funds obtained through a Ponzi scheme. Recovery of these contributions to charitable and religious organizations is generally achieved through a legal action commonly referred to as a clawback suit under either federal or state fraudulent transfer laws. Many states differ from federal law with respect to the look-back period for undoing these contributions (i.e., statute of limitations). Federal law provides for a two-year statute of limitations, while many states allow for four or five years. 

At the heart of this issue are competing hardships and losses between innocent recipients of corrupt funds and innocent victims of a Ponzi scheme. In the end, there are no easy answers. Minnesota recently experienced such policy debates when it enacted a law to reduce the statute of limitations as applied to charitable and religious organizations under state law from six to two years. As discussed in my article:

The aftermath of Ponzi schemes can be particularly difficult to stomach when viewed through the lens of policy debates. Minnesota not only hit the headlines for enacting the new clawback law, but also for the contentious debate prior to its enactment due to the effect it may have on the $3.65 billion Ponzi scheme orchestrated by Minnesota businessman Tom Petters. Although the clawback suits in that case were filed prior to the bill’s enactment, the Minnesota statute provides that it will apply retroactively to clawback suits currently being decided—a provision that Doug Kelley, the bankruptcy trustee for the Petters estate, estimates will result in only half of the $445 million he was seeking to be recoverable.

There was strong support for the law from groups such as the Minnesota Council of Nonprofits, which explained, “Funds given for charitable purposes are done so with specific program goals in mind, and often tied to spending in a specific time period. Re-claiming those resources after the fact is unreasonable, and can put nonprofit organizations in a position of serious financial hardship.” The victory for nonprofits, however, comes at a considerable cost. As the U.S. attorney for Minnesota described during the sentencing phase in the Petters case, “Innocent people have been traumatized. Lives have been ruined. Life savings of hard-working, decent men and women have been lost. The victims of this defendant’s criminal conduct are numerous and include the elderly, the infirm, and even the disabled.”

[Endnotes omitted.]

NPQ is interested in hearing your thoughts on whether charities should be afforded greater protection from clawback suits in the comments section to this NPQ article, “Should Charities Be Protected from the Claws of Fraudulent Transfer Laws?”

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