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Judge Richard Posner – ‘evil zombies’ Ponzi corporations (1995)

July 9, 2012

NPR’s Nina Totenberg quotes Judge Richard Posner saying “I’ve become less conservative since the Republican Party started becoming goofy” in July 5th article “Federal Judge Richard Posner: The GOP Has Made Me Less Conservative

“Goofy” is actually a closely-related word to “zombie” in that both terms can be the effect of psychotropic chemicals or medication and as Judge Posner says: “deterioration in conservative thinking”. Also both have been used as gang member nicknames. But Judge Posner has a much stronger connection to ZombieLaw due to his 1995 opinion about “evil zombies” corporations in a Ponzi scheme:

STEVEN S. SCHOLES, as Receiver for Michael S. Douglas, D&S Trading Group, Ltd., Analytic Trading Systems, Inc., and Analytic Trading Service, Inc., Plaintiff-Appellee,
v.
CHARLES LEHMANN and LISA LEHMANN, JOSEPH E. PHILLIPS, AFRICAN ENTERPRISE, INC., et a

UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
Nos. 94-2039, 94-2136, 94-2718, 94-2947
56 F.3d 750
Decided May 18, 1995.

Judge Richard Posner Zombie

Judge Posner wrote the Opinion of the Court, explaining:

Michael Douglas masterminded a Ponzi scheme that has given rise to the interesting and important issues of fraudulent-conveyance law which these appeals require us to consider. Here is how the scheme operated (approximately–we shall simplify the facts for the sake of clarity). Douglas created three corporations and caused them in turn to create limited partnerships in which the corporations would be the general partners and would sell limited-partner interests to the investing public. The corporations represented to prospective investors that the limited partnerships would trade commodities and yield the limited partners a return of 10 to 20 percent per month on their investment. Although some trading of commodities was done, most of the money raised from the sale of the limited-partner interests was used simply to pay the promised return. These payments gave the scheme credibility, enabling Douglas to sell additional limited-partner interests. The scheme was launched in 1987 and by the time it crashed in 1989 Douglas’s corporations had raised $30 million from the sale of limited-partner interests. Douglas was prosecuted for fraud, pleaded guilty, and is serving a 12-year federal prison sentence.

The question of the case is about reclaiming monies distributed during the scheme. Judge Posner refers to the corporations as “Douglas’s robotic tools” and states:

The rule is that the maker of the fraudulent conveyance and all those in privity with him–which certainly includes the corporations–are bound by it. But the reason, of course, as the cases just cited make clear, is that the wrongdoer must not be allowed to profit from his wrong by recovering property that he had parted with in order to thwart his creditors. That reason falls out now that Douglas has been ousted from control of and beneficial interest in the corporations. The appointment of the receiver removed the wrongdoer from the scene. The corporations were no more Douglas’s evil zombies. Freed from his spell they became entitled to the return of the moneys–for the benefit not of Douglas but of innocent investors–that Douglas had made the corporations divert to unauthorized purposes. [citations omitted]

Continuing:

Put differently, the defense of in pari delicto loses its sting when the person who is in pari delicto is eliminated. Now that the corporations created and initially controlled by Douglas are controlled by a receiver whose only object is to maximize the value of the corporations for the benefit of their investors and any creditors, we cannot see an objection to the receiver’s bringing suit to recover corporate assets unlawfully dissipated by Douglas. [citations omitted]

The latin phrase of in pari delicto means “in equal fault” and here is used to mean that the zombie shell corporations were not at fault once the bad actor, Douglas, was removed from control; the remaining investors (as corporations) are the actual victims of the Ponzi scheme.

zombie steven scholes

The named plaintiff, Steven Scholes, partner at McDermott, Will & Emery, was “the receiver both for Douglas and for the corporations which would be suing him for that money.” Judge Posner noted in the opinion that “[i]f the money stopped with Douglas, a certain awkwardness might arise” but here didn’t need to consider that issue.

Judge Posner’s opinion in Scholes has been cited many times (like over 100) and dozens cite it for the “evil zombies” quote. It is one of the more important Zombie Law cases, (See Sutherland’s article) and the Scholes case was also cited in a recent decision (April 30, 2012) by Judge Rakoff regarding the notorious recent Ponzi scheme orchestrated by Bernard Madoff (See 56 Bankr. Ct. Dec. 113.)

zombie bernard madoff

Meanwhile, Judge Posner has only used the word “zombie” in one other opinion, American Amusement Machine Assoc. v. Kendrick, a 2001 opinion previously discussed in the ZombieLaw post about “undead” in Federal Courts. In American Amusement, Judge Posner refers to zombie movies and video games; declaring that even if “not distinguished literature … the world of kid’s popular culture … is not lightly to be suppressed.” The case also stands for the principle that “all literature is interactive.” See citation in Brown v. Entertainment Merchants, 131 S. Ct. 2729, a 2011 SCOTUS decision that video games are protected First Amendment speech.

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