Douglas A. Kelley v. Gus Boosalis

United States Court of Appeals
For the Eighth Circuit
___________________________

No. 19-1079
___________________________

Douglas A. Kelley, in his capacity as PCI Liquidating Trustee
for the PCI Liquidating Trust

Appellee

v.

Gus Boosalis

Appellant

___________________________

No. 19-2376
No. 19-2382
No. 19-2452
___________________________

Douglas A. Kelley, in his Capacity as PCI Liquidating Trustee
for the PCI Liquidating Trust

Appellee

v.

Chris M. Kanios and Steve Papadimos

Appellants
____________
 Appeals from United States District Court
for the District of Minnesota
____________

Submitted: February 11, 2020
Filed: September 11, 2020
____________

Before LOKEN, BENTON, and KELLY, Circuit Judges.
____________

LOKEN, Circuit Judge.

This litigation arose from the financial losses caused by a $3.5 billion Ponzi
scheme1 perpetrated by Thomas Petters from 1994 to 2008 through his company,
Petters Company, Inc. (“PCI”). The unfortunate saga has been documented in
numerous cases throughout this circuit. See generally Ritchie Capital Mgmt., LLC
v. Stoebner, 779 F.3d 857, 859-60 (8th Cir. 2015); United States v. Petters, 663 F.3d
375, 379-80 (8th Cir. 2011), cert. denied, 566 U.S. 990 (2012); Ritchie Special Credit
Investments, Ltd. v. U.S. Tr., 620 F.3d 847, 849-52 (8th Cir. 2010); In re Petters Co.,
494 B.R. 413, 417-20 (Bankr. D. Minn. 2013). We will limit this opinion to facts
necessary to resolve these appeals.

PCI “purported to run a ‘diverting’ business that purchased electronics in bulk
and resold them at high profits to major retailers.” Ritchie Capital Mgmt., 779 F.3d
at 859. Petters and his associates persuaded individual investors to make secured
loans to finance specific purchases of electronics for resale. In reality, PCI engaged

1
“Ponzi schemes are fraudulent business ventures in which investors’ ‘returns’
are generated by capital from new investors rather than the success of the underlying
venture. This results in a snowball effect as the creator of the Ponzi scheme must
then recruit even more investors to perpetuate the fraud.” In re Armstrong, 291 F.3d
517, 520 n.3 (8th Cir. 2002).

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in almost no purchase and sale transactions. Instead, it diverted the loan proceeds and
used the proceeds of new loans to repay interest due on outstanding loans -- one of
the largest Ponzi schemes ever created. See id. When the scheme collapsed, Petters
was convicted of multiple federal offenses and currently serves a fifty year prison
sentence. PCI filed for bankruptcy. Douglas A. Kelley is the liquidating trustee for
the PCI Liquidating Trust (“the Trustee”) in a consolidated Chapter 11 bankruptcy.
He has filed more than two hundred cases seeking to recover (“claw back”) PCI’s
interest payments to early PCI lenders for the benefit of later lenders who lost their
entire loans to the Ponzi scheme. See In re Petters Co., 494 B.R. at 417-18.

These appeals involve the Trustee’s separate claw back claims against lenders
Gus Boosalis, a former floor trader on the Pacific Exchange, and government attorney
Steve Papadimos and his wife, physician Chris Kanios, who live in a Toledo, Ohio
suburb (collectively “Defendants”). The Trustee asserted claims under 11 U.S.C.
§ 544(b)(1), which permits a trustee to “avoid any transfer of an interest of the debtor
. . . that is voidable under applicable law by a creditor holding an unsecured claim.”
Here, the “applicable law” is the Minnesota Uniform Fraudulent Transfers Act
(“MUFTA”). Minn. Stat. §§ 513.41 et seq.2 The principal balances of Defendants’
loans were repaid when PCI shifted its borrowing to large institutional lenders some
time before it filed for bankruptcy. The Trustee asserted claw back claims under
MUFTA seeking only to recover payments of interest to Defendants on their loans to
PCI.

Between 1995 and 2001, Boosalis was paid over $3.5 million in interest on
loans to PCI. After lengthy discovery and a one week jury trial, the jury found that
all interest payments were fraudulent transfers under MUFTA, and that Boosalis

2
The Minnesota Legislature amended MUFTA in 2015, without affecting the
provisions at issue, renaming it the “Uniform Voidable Transactions Act.” See 2015
Minn. Sess. Law Serv. Ch. 17 (S.F. 1816) (West). Like the parties, we will refer to
the statute as “MUFTA” to preserve a consistent record.

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failed to prove an affirmative defense. Based on this verdict, the district court
awarded approximately $3.5 million in damages and $2.9 million in prejudgment
interest. Between July 1997 and March 2006, Papadimos loaned PCI $3,297,300.00
in many separate transactions. PCI paid $3,126,524.37 in interest on annual rates
ranging from 12 to 48 percent. Kanios loaned PCI $690,000.00 in over twenty
promissory note transactions. She was paid $572,500.22 interest at rates ranging
from 12 to 39.66 percent. Following trial of the Trustee’s claims against Boosalis,
the district court granted the Trustee’s motion for summary judgment against
Papadimos and Kanios, concluding the record conclusively established that each of
PCI’s interest payments constituted “actual fraud” under MUFTA and these
Defendants failed to establish the statutory affirmative defense to actual fraud. The
court awarded the Trustee actual damages and prejudgment interest totaling
$5,852,168.36 against Papadimos and $1,071,594.93 against Kanios.

All three Defendants appeal, raising numerous issues, many but not all of
which overlap. Without consolidating the appeals, we heard oral arguments on the
same day and now resolve the appeals in a combined opinion. On the major
overlapping issue, we conclude the district court erred in applying the Supreme Court
of Minnesota’s controlling MUFTA decision in Finn v. Alliance Bank, 860 N.W.2d
638 (Minn. 2015), and the Minnesota law of void contracts. This requires reversing
summary judgment against Papadimos and Kanios. In the Boosalis case, we likewise
reverse and remand because the district erred in instructing the jury on the MUFTA
elements of “good faith” and “reasonably equivalent value.” In both cases, we
conclude the district court erred in concluding that Minnesota rather than federal law
governed the award of prejudgment interest. We reject Defendants’ other arguments.

I. Background

A. Boosalis. Boosalis first learned of Petters in 1995 when a friend said he was
lending to Petters and suggested Boosalis do the same. At a meeting in San

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Francisco, Petters claimed to be in the business of “diverting merchandise” --
purchasing discounted merchandise and selling it to large retailers like Sam’s Club
or Costco – and outlined his plan to build several retail stores. Thinking the business
would be even more successful than Costco, Boosalis, after consulting his attorney,
agreed to lend PCI approximately $50,000. PCI repaid that loan and a second loan
in full. Boosalis continued lending on a regular basis, memorializing each loan in a
promissory note and, in most transactions, a security agreement pledging as collateral
the goods PCI would buy with the loan proceeds.3 To maintain Petters’s transaction
facade, PCI’s Vice President of Operations, Deanna Coleman, attached fake purchase
orders and invoices to many promissory notes. Petters also built several stores around
the Twin Cities area that Boosalis occasionally visited. But PCI primarily used the
proceeds of new loans to repay interest and principal to earlier lenders.

As the lending continued, Boosalis “rolled” the principal of his outstanding
notes when PCI repaid interest every 90 days, counting outstanding unpaid principal
toward the principal of a new note. By the end of 1998, unpaid principal on loans to
Boosalis totaled $2.1 million, with PCI paying over $460,000 in interest. The amount
fluctuated but, at one point, Boosalis had as much as $3.1 million outstanding.
Boosalis encouraged business associates, family members, and the “Boosalis Family
Limited Partnership” to lend to PCI, becoming the point of contact for what PCI
called the “California Group.” When PCI needed money, its employees would call
Boosalis, and he would connect them to a lender. In 2001, millions of dollars of PCI

3
The Trustee repeatedly describes Boosalis as an “investor” who made “false
profits.” But that term is not accurate. An investment typically is an infusion of
capital for the receipt of equity whereas Petters made use of loan-based financing to
support his scheme. See Greenpond S., LLC v. Gen. Elec. Capital Corp., 886 N.W.2d
649, 651 n.2 (Minn. App. 2016); In re Petters Co., 495 B.R. 887, 892 & n.1 (Bankr.
D. Minn. 2013). As Minnesota law governs, we will follow the lead of Greenpond
and “use the term ‘lender’ to identify a person or entity that provided debt capital to
Petters, ‘loan’ as identifying the extension of that capital, and ‘creditors’ when
referencing all of Petters’ lender-victims.”

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checks to Boosalis and his family bounced. Boosalis contacted Petters, who promptly
paid the debt, and Boosalis loaned PCI another $500,000. Before that note was due,
Petters said he had secured better financing and offered a new interest rate of 18
percent. Boosalis quit lending. By October 2001, PCI repaid him in full.

B. Papadimos and Kanios. Papadimos learned of the opportunity to make
short-term loans to PCI’s diverting business in 1997. He met with Petters at PCI
headquarters in Minnesota and visited a warehouse filled with goods purchased by
PCI for resale. Papadimos received assurances of PCI’s legitimacy from its insurers,
other references, and Minnesota government agencies. Thomas Hay, an attorney and
adviser to Petters, told Papadimos that PCI’s long-term plan was to progress from
loans from individual investors to large credit facilities provided by institutional
investors. Papadimos began making loans and, at his recommendation, Kanios began
making loans to PCI through her 401(k) plan. Nearly every promissory note included
a security agreement granting the lender a security interest in the goods to be
purchased. Papadimos and Kanios stopped making loans in 2005 because PCI
wished to transact only with institutional investors. PCI repaid their outstanding
principal balances in full.

C. The Litigation. In September 2008, Deanna Coleman walked into the U.S.
Attorney’s office in Minneapolis and precipitated Petters’s prosecution, the downfall
of his $3.5 billion operation, PCI’s bankruptcy, and this claw back litigation.
Following eight years of Trustee-led case management, discovery, and motion
practice before the bankruptcy court, the Boosalis case was transferred to the District
of Minnesota in 2018, and the district court held the first trial in the Trustee claw
back actions in Kelley v. Boosalis, D. Minn. No. 18-cv-00868.

Coleman was the Trustee’s lead witness at the Boosalis trial. Coleman
explained she solicited lenders for the scheme and fabricated purchase orders to make
the loans appear legitimate. She would “always call the investor up and tell them it

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was for some kind of deal,” claiming PCI would use the loan to purchase “some kind
of merchandise.” Promissory notes accurately stated the terms of the loans, but the
high interest rates, set by Petters, were not “tied to any economic reality.” Coleman
recalled Boosalis never requested any documents or conducted any investigation,
even after PCI bounced “quite a few” checks, worth “[h]undreds of thousands” of
dollars, in 2001. She specifically recalled offering Papadimos fraudulent transactions
when PCI needed money “to do a certain deal.” Besides purchase orders, Coleman
falsified bank statements, wire transfers, and insurance policies.

The Trustee retained Theodore Martens as an expert forensic accountant to
analyze PCI’s finances. At the Boosalis trial, Martens testified PCI was insolvent
from late 1996 to 2008; its liabilities always exceeded its assets. Martens’s forensic
analysis of each loan concluded that “the funds received from/sent to the
Defendant[s] were part of the rolling churn of the Petters Ponzi scheme,” not
legitimate transactions. Boosalis funded payments to other lenders, while other
lenders funded payments to Boosalis. Thus, opined Martens, Boosalis was
“Ponzied.” Martens found no evidence that funds associated with Defendants’ loans
flowed to Petters companies that conducted legitimate businesses. His revised
analysis, described as “conservative,” showed that PCI paid Boosalis a total of
$3,307,090 in interest on principal loan balances totaling $5,340,000. In total, the
parties called eight witnesses and introduced over 175 exhibits.

II. The MUFTA Issue

In both cases, the Trustee seeks to avoid under “applicable law,” MUFTA, the
transfer of interest PCI paid to Defendants on outstanding promissory notes. 11
U.S.C. § 544(b)(1). MUFTA provides that a transfer made by a debtor is voidable if
the transfer is tainted by actual fraud, defined as “actual intent to hinder, delay, or
defraud any creditor of the debtor,” or by constructive fraud, defined as a financially
distressed debtor not “receiving a reasonably equivalent value in exchange for the

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transfer or obligation.” Minn. Stat. § 513.44(a); see Citizens State Bank Norwood
Young Am. v. Brown, 849 N.W.2d 55, 60 & n.5 (Minn. 2014).4 We focus this
opinion on whether the interest payments constituted “actual fraud.” Given our
resolution of the actual fraud issues, we need not consider the Trustee’s alternative
claims of constructive fraud, though they will likely be relevant on remand.

A. Actual Fraud. The jury found that each PCI interest payment to Boosalis
was made with intent “to hinder, delay, or defraud” PCI creditors. The district court
adopted this as a conclusion of law in granting summary judgment against Papadimos
and Kanios. “Because the intent to defraud creditors is rarely susceptible of direct
proof,” courts applying MUFTA and the uniform fraudulent transfer laws in other
States often rely on circumstantial evidence -- known as “badges of fraud” -- to
determine whether the debtor had the requisite fraudulent intent. Citizens State, 849
N.W.2d at 60; see Minn. Stat. § 513.44(b)(3), (9); Ritchie Capital Mgmt., 779 F.3d
at 863. The trial and other sworn testimony of Coleman and Martens provided
substantial evidence of PCI’s overall fraudulent intent in conducting a twelve-year
Ponzi scheme in which PCI used new loan proceeds to repay early lenders, rather than
to finance legitimate transactions. Papadimos and Kanios argue the direct evidence
was too generalized to support summary judgment and the circumstantial evidence
was insufficient. They posit that a reasonable jury might decide that their loans and
loan proceeds were tied to Petters entities that conducted legitimate business. But
given the summary judgment record, this is “speculation and conjecture . . .
insufficient to defeat summary judgment.” Bloom v. Metro Heart Grp. of St. Louis,
Inc., 440 F.3d 1025, 1028 (8th Cir. 2006).

4
Whether there are unsecured PCI creditors with allowable claims on whose
behalf the Trustee can seek avoidance is disputed by Boosalis, but not by Papadimos
and Kanios. We reject Boosalis’s contention in Part III, infra.

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 Given the overwhelming evidence of PCI’s overall intent to operate a
fraudulent Ponzi scheme, we will not disturb the jury’s finding and the district court’s
conclusion regarding PCI’s actual intent to hinder, delay, or defraud its creditors.
However, the Trustee’s evidence in both cases emphasized a “Ponzi churn” theory of
fraudulent transfers that in our view was contrary to Minnesota law. MUFTA
requires that each fraudulent transfer claim “be determined in light of the facts and
circumstances of each case” on a “transfer-by-transfer” basis. Finn, 860 N.W.2d at
647. Therefore, we leave the actual fraud issue open for reconsideration and new
evidence on remand.

B. The Affirmative Defense to Actual Fraud: MUFTA provides an
affirmative defense to a claim of actual fraud under Minn. Stat. § 513.44(a)(1): “A
transfer or obligation is not voidable under [§ 513.44(a)(1)] against a person that took
in good faith and for a reasonably equivalent value.” § 513.48. All Defendants
asserted this affirmative defense. The Trustee stipulated that Papadimos and Kanios
took in good faith. The jury found that Boosalis did not; he challenges the district
court’s jury instruction on that issue. All Defendants challenge the district court’s
interpretation of “reasonably equivalent value” under MUFTA. This critical issue
also affects whether a transfer is avoidable under the constructive fraud provisions
of § 513.44(a)(2). Therefore, we will first consider the reasonably equivalent value
component of the actual fraud affirmative defense under Minnesota law.

1. Reasonably Equivalent value -- Papadimos and Kanios. In Finn, the
Supreme Court of Minnesota rejected a broad “Ponzi-scheme presumption” adopted
by many courts that have considered claw back actions under the fraudulent transfer
provision in the federal Bankruptcy Code, 11 U.S.C. § 548, and § 544(b) claw back
actions based on the Uniform Federal Transfer Acts adopted in other States.5 The

5
Claims under 11 U.S.C. § 548 are subject to a one-year statute of limitations,
which is doubtless why the Trustee chose to proceed under § 544(b) in these cases.

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Court refused to conclude as a matter of law “that a debtor operating a Ponzi scheme
cannot receive reasonably equivalent value for the ‘interest’ or ‘profits’ it pays to
investors.” 860 N.W.2d at 649. Finn held, instead, that whether an individual
transfer was made for reasonably equivalent value “depends on the facts and
circumstances of each case.” Id. at 650.

In the Boosalis trial, the district court instructed the jury that “[v]alue may be
reasonably equivalent where the payment made to the investor satisfies a valid
antecedent debt,” but “[a]ny payment above the amount of the principal investment
is not in satisfaction of a valid antecedent debt if it was made in furtherance of a
fraud, enabled by a fraud, or paid on a dishonestly-incurred debt.” Kelley v. Boosalis,
No. 0:18-cv-00868, 2018 WL 6322631, at *2 (D. Minn. Dec. 3, 2018). In granting
summary judgment against Papadimos and Kanios, the district court explained the
premises underlying this instruction.

First, the district court concluded that, though the Supreme Court of Minnesota
rejected the use of the Ponzi-scheme presumption adopted by many federal courts,
Finn did not discard the “equity-driven bankruptcy law” on which the presumption
was based. The equity-based decisions conclude that an investor who profits from
a Ponzi scheme, even if an unwitting accomplice to fraud against other lenders or
investors, does not have a contractual right to keep interest payments made as a direct
result of that illegal scheme. See, e.g., Scholes v. Lehmann, 56 F.3d 750, 757 (7th
Cir. 1995). This principle was not categorically rejected by the Court in Finn, the
district court concluded. Rather, Finn held only that “any legally enforceable right
to payment against the debtor is sufficient to qualify as an antecedent debt under
MUFTA.” 860 N.W.3d at 651 (emphasis added). Second, the court noted Minnesota
cases stating that a contract that aims to deceive third parties is void as against public
policy. In a Ponzi scheme, payment of interest using other investors’ money plainly

See In re Carrozzella & Richardson, 286 B.R. 480, 483 n.3 (Bankr. D. Conn. 2003).

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aims to deceive those other investors. Therefore, the contract is not legally
enforceable under Minnesota law because it furthered the on-going fraud. Because
Defendants “failed to adduce evidence showing that any one of their interest
payments was not made in furtherance of a fraud, enabled by a fraud, or paid on
dishonestly-incurred debt,” no antecedent debt was satisfied by the interest payments,
and Defendants did not provide reasonably equivalent value for the interest payments
they received.6

(a) We agree with Defendants that the district court’s analysis misinterpreted
the unanimous decision of the Supreme Court of Minnesota in Finn.7 In Finn, the
receiver of a Ponzi-scheme operator’s bankruptcy estate sought to claw back interest
earned by a bank from a “participation interest” in a loan made by the Ponzi-scheme
operator. See 860 N.W.2d at 642-43. The Court entered summary judgment in favor
of the defendant transferee because it had provided reasonably equivalent value for
the interest payments it received, namely, “satisfaction of the debt owed . . . under the
participation agreement between the parties.” Id. at 655. Consistent with Minn. Stat.
§ 513.43(a), the Court held that “the satisfaction of an antecedent debt can constitute
reasonably equivalent value” and “any legally enforceable right to payment against
the debtor is sufficient to qualify as an antecedent debt under MUFTA.” 860 N.W.2d
at 650, 651.

6
This analysis avoided a critical holding in Finn: “[A]ny enforceable right to
payment against the debtor is sufficient to qualify as an antecedent debt under
MUFTA. . . . Without a legally enforceable contractual claim, any payment made to
an investor beyond its principal investment is not for antecedent debt, and therefore
cannot be in exchange for reasonably equivalent value.” Finn, 860 N.W.2d at 651.
Thus, Finn confirmed that, in defending a fraudulent transfer claim under MUFTA,
a bona fide debt investor is in a stronger position than a bona fide equity investor.
7
The Trustee successfully urged the district court not to certify this question to
the Minnesota Supreme Court.

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 The district court’s global approach to the issues of antecedent debt and
reasonably equivalent value is contrary to the clear directive in Finn that each
fraudulent transfer claim “be determined in light of the facts and circumstances of
each case” on a “transfer-by-transfer” basis. 860 N.W.2d at 647. The transfers at
issue were payments of interest owed to Defendants on loans reflected by promissory
notes and security agreements. Concluding that each loan was void ab initio because
PCI was engaged in a Ponzi scheme, and therefore each periodic interest payment was
not for an antecedent debt, simply repackages the Ponzi-scheme presumption that
Finn refused to adopt as Minnesota law. Cf. Stoebner v. Opportunity Fin., LLC, 909
F.3d 219, 226 (8th Cir. 2018). Finn expressly rejected the basis for equity-based
decisions the district court followed that were not governed by Minnesota law:

[E]quality among a debtor’s creditors, even if they are victims of a Ponzi
scheme, is not the purpose of MUFTA. Rather, its purpose is to prevent
debtors from putting property which is available for the payment of their debts
beyond the reach of their creditors. . . . [P]ayment of an honest debt is not
fraudulent under the general statutes against fraudulent conveyances, although
it operates as a preference. . . . Mere preferences are different from fraudulent
transfers because the basic object of fraudulent conveyance law is to see that
the debtor uses his limited assets to satisfy some of his creditors; it normally
does not try to choose among them. Boston Trading Grp., Inc. v. Burnazos,
835 F.2d 1504, 1509 (1st Cir. 1987) (Breyer, J.).

Id. at 652-53 (emphasis in original; cleaned up).

Consistent with other equity-based decisions, the district court concluded that
each PCI loan transaction was void as against public policy because it furthered the
Ponzi scheme, and each preferential interest payment was a fraudulent transfer under
MUFTA because it was paid with money stolen from other investors. See Janvey v.
Brown, 767 F.3d 430, 441-42 (5th Cir. 2014) (certificate of deposit lending contracts
with Ponzi-scheme operator “void” because recovery of promised returns in excess
of investor’s undertaking furthers debtor’s fraudulent scheme at the expense of other

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investors, applying Tex. UFTA); Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008)
(“[W]inners in the Ponzi scheme, even if innocent of any fraud themselves, should
not be permitted to enjoy an advantage over later investors sucked into the Ponzi
scheme who were not so lucky,” applying Cal. UFTA, quotation omitted). This
analysis sweeps as broadly as the Ponzi-scheme presumption Finn rejected. See 860
N.W.2d at 651-53.

(b) We agree with the district court that Finn limited its antecedent debt
analysis to “legally enforceable” contracts and “honest debt,” leaving open the
question whether recovery of “profits” by early investors in a Ponzi scheme may be
so entangled in the debtor’s fraud as to be void ab initio under Minnesota law, in
which case there is no antecedent debt that was satisfied by the debtor’s payments at
issue. However, we conclude that the Supreme Court of Minnesota would rule, if
faced with this precise issue, that the promissory notes at issue in this case were not
void ab initio under Minnesota law. See EMC Ins. Cos. v. Entergy Ark., Inc., 924
F.3d 483, 485 (8th Cir. 2019) (standard of review).

In Finn, the Court noted that courts applying the Ponzi-scheme presumption
“effectively deem a contract between the operator of a Ponzi scheme and an investor
to be unenforceable as a matter of public policy.” Id. at 651. The Court rejected that
categorical approach and, having “set aside” the presumption, granted summary
judgment in favor of transferee Alliance Bank because it received interest payments
at a “commercially reasonable rate of return” on a loan that was “real and not
oversold.” Therefore, satisfaction of debtor’s antecedent debt was reasonably
equivalent value under MUFTA. Id. at 655-56.

Under Minnesota law, a contract is void against public policy only if “it is
injurious to the interests of the public or contravenes some established interest of
society,” or if “illegality has so tainted the contract that enforcing the contract would
be against public policy.” Isles Wellness, Inc. v. Progressive N. Ins. Co., 725 N.W.2d

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90, 93 (Minn. 2006) (cleaned up). This is an extraordinary measure that “should be
only exercised in cases free from doubt.” Id. Whether a contract is void as against
public policy is an issue of law. Id. at 92.

In concluding that every loan transaction between PCI and Defendants was
legally unenforceable, the district court relied on the principle “that a contract is void
which has for its object the practice of deception or fraud upon a third party.” Torpey
v. Murray, 101 N.W. 609, 610 (Minn. 1904); accord Geo. Benz & Sons v. Hassie, 293
N.W. 133, 136 (Minn. 1940); Horbach v. Coyle, 2 F.2d 702, 706 (8th Cir. 1924).
However, in these cases, both parties entered into the contract at issue with the
purpose of deceiving a third party. For example, in Torpey, where the plaintiff agreed
with the defendant to manipulate a third party into purchasing an asset from the
plaintiff in exchange for an illegal kickback, the plaintiff’s contractual claim to
recover the kickback was rejected on this ground. 101 N.W. at 610. Here, there is
no evidence that Papadimos and Kanios, whose good faith the Trustee has conceded,
worked with PCI to deceive other lenders or investors. Neither the Trustee nor the
district court cited a Minnesota case that invalidated a contract based on one party’s
unilateral acts of deception. In the case cited by the Trustee at oral argument, State
v. Tauer, the Court held that a contract between rival newspapers to rig a county
bidding process was void against public policy because it unlawfully destroyed
economic competition. 227 N.W. 499, 500 (Minn. 1929).

The Trustee asserted and the district court concluded that the promissory notes
are void because they enabled an on-going fraud, an illegal purpose. But they cite no
Minnesota case invalidating an otherwise valid contract on this ground, and there are
many cases to the contrary. In Johnstown Land Co. v. Brainerd Brewing Co., for
example, the Supreme Court of Minnesota held that “mere knowledge by the lender
of [the borrower’s unlawful] purpose will not bar his recovery of the amount loaned.”
172 N.W. 211, 212 (Minn. 1919). In Anheuser-Busch Brewing Ass’n v. Mason, the
Court refused to void a purchase contract for beer because the beer would be

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consumed by patrons of a brothel, noting that a contract “is not void simply because
there is something immoral or illegal in its surroundings or connections.” 46 N.W.
558, 558-59 (Minn. 1890). Similarly, in Hart Pubs. v. Kaplan, the Court held that a
contract for the sale of tickets for an illegal lottery was not void; “bare knowledge of
the purpose for which the tickets could be used was not enough to raise a valid
defense of illegality.” 37 N.W.2d 814, 818-19 (Minn. 1949).

The promissory notes held by Defendants fit comfortably within this group of
decisions. Defendants supplied PCI financing, not knowing PCI would used the loan
proceeds to further a fraudulent Ponzi scheme rather than to purchase merchandise
in which Defendants were promised a security interest. Defendants received interest
payments to which they were contractually entitled. The fact that the interest was
paid out of PCI’s Ponzi churn was immaterial to the validity of the promissory notes.
Though the district court “decline[d] to imply a strict mens rea requirement” from
prior cases, that decision was squarely contrary to well established Minnesota law:

Even if it be granted that the record might warrant the drawing of an
inference that [the transferor] was actuated by an actual fraudulent intent, we
find nothing which would permit such an intent to be found in the grantee. To
be entitled to have a deed upon fair consideration adjudged void as to a
creditor of the insolvent grantor it is necessary to prove actual intent to
defraud on the part of both grantor and grantee.

Watson v. Goldstein 219 N.W. 550, 551 (Minn. 1928); see Skinner v. Overend, 252
N.W. 418, 419 (Minn. 1934); Petersdorf v. Malz, 162 N.W. 474, 477 (Minn. 1917).

The district court thus erred as a matter of law in declaring the promissory
notes void and incapable of creating legally enforceable antecedent debts that would
provide reasonably equivalent value for the interest payments Defendants received.
Since the grant of summary judgment rejecting the actual fraud affirmative defense
of Papadimos and Kanios turned on this determination, summary judgment must be

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reversed. On their face, the secured promissory notes held by Defendants were valid
and enforceable contracts -- “honest debts,” as described in governing Supreme Court
of Minnesota opinions -- in which case interest payments Defendants received
satisfied PCI’s antecedent debts. Whether those payments were nonetheless not
received “for a reasonably equivalent value” under MUFTA must now be determined
by the district court on remand.

2. Reasonably Equivalent value -- Boosalis. On appeal, Boosalis challenges
Jury Instruction 18, which defined “reasonably equivalent value” for the jury:

Value may be reasonably equivalent where the payment made to the
investor satisfies a valid antecedent debt. Any payment above the
amount of the principal investment is not in satisfaction of a valid
antecedent debt if it was made in furtherance of a fraud, enabled by a
fraud, or paid on a dishonestly-incurred debt. If you find that an
interest payment made by Petters Company, Inc. to Mr. Boosalis was
made in furtherance of a fraud, enabled by a fraud, or paid on
dishonestly incurred debt, then that payment does not satisfy a valid
antecedent debt, and is not for reasonably equivalent value.

We have explained why the italicized portion of this instruction did not fairly and
adequately instruct the jury as to the substantive law under MUFTA. That error does
not resolve Boosalis’s appeal, however, because the jury also found that he did not
act in good faith, the other component of the actual fraud affirmative defense. We
turn next to that issue.

3. Good Faith -- Boosalis. On appeal, Boosalis challenges Jury Instruction 17,
which addressed the good faith element of his affirmative defense to actual fraud
avoidance:

To determine whether Mr. Boosalis received a particular payment from
Petters Company, Inc. in good faith, you must determine (1) whether

-16-
 Mr. Boosalis was on inquiry notice of Petters Company, Inc.’s
insolvency or fraud; and, if so, (2) whether Mr. Boosalis conducted a
diligent investigation.

Mr. Boosalis was on inquiry notice if he had sufficient facts, or
sufficient red flags existed, to cause a reasonable person to question
whether Petters Company, Inc. was insolvent or paying money to Mr.
Boosalis for a fraudulent purpose. Sufficient facts or red flags may
include delinquent payments, reversed checks, relatively high interest
rates on loans, and a lack of formal paperwork surrounding business
transactions. The presence of such signs must place a reasonable person
on inquiry notice and require him or her to diligently investigate.

If you find Mr. Boosalis was not on inquiry notice at the time he
received a particular payment from Petters Company, Inc., then Mr.
Boosalis has established the element of good faith with respect to that
particular payment. If you find Mr. Boosalis was on inquiry notice at
the time he received a particular payment from Petters Company, Inc.,
you must determine whether Mr. Boosalis conducted a diligent
investigation as to the facts or red flags that placed him on inquiry
notice and whether his investigation was reasonable under the
circumstances. If you find Mr. Boosalis did not conduct a diligent
investigation that was reasonable under the circumstances, then Mr.
Boosalis has failed to establish the element of good faith. If you find
that Mr. Boosalis did conduct a diligent investigation that was
reasonable under the circumstances, then Mr. Boosalis has established
the element of good faith.

(Emphasis added.)

(a) The Trustee argues Boosalis waived this objection before the district court.
We disagree. At the instructions conference, counsel objected:

-17-
 COUNSEL: Your Honor, I didn’t have any issues up until Instruction
Number 16.8 If we could go to that on page 12.

THE COURT: 16. Good faith, yep.

COUNSEL: Yes, Your Honor. If you go to the second paragraph, we
would ask that the language starting with “sufficient facts or red flags
may include delinquent payments, reversed checks, relatively high
interest rates on loans, and lack of formal paperwork surrounding
business transactions.” I would ask that that language be stricken.

THE COURT: And why is that?

COUNSEL: I think it’s prejudicial here, Your Honor. I mean, there
could be a list, you know, a thousand items long. The problem I have
with this is it includes basically, you know, all of the issues that are
present here in this case. And I think it’s kind of an all or nothing where
if we’re going to list these red flags, you know, it can’t just be these few.
So, you know, I would just prefer that we take that language out
completely.

THE COURT: Okay. Do you think it’s an incorrect statement?

COUNSEL: Your Honor, I don’t -- I’m not going to argue that it’s an
incorrect statement. Again, I think it’s context. I think if you’re going
to put a list in, this list is highly prejudicial because it basically lays out
a few elements and all the elements are what are argument in this case.
If we’re going to do a list, I would prefer that we have an exhaustive list.
What that would look like I don’t know, but it would certainly be more
than just this. And in light of that and I think the confusion it would
cause, I would just like this language stricken. That’s my request.

8
The instructions were renumerated after the charge conference, such that Jury
Instruction 16 became Jury Instruction 17.

-18-
Counsel renewed that objection prior to closing arguments and the court’s final
instructions to the jury. Even correct statements of the law can mislead the jury if
they unduly emphasize a matter favorable to a party’s case. See Rosebud Sioux Tribe
v. A & P Steel, Inc., 733 F.2d 509, 518-19 (8th Cir.), cert. denied, 469 U.S. 1072
(1984). That was the objection made, and counsel explained it sufficiently to
preserve the error for appellate review. See Fed. R. Civ. P. 51; Bauer v. Curators of
Univ. of Missouri, 680 F.3d 1043, 1044-45 (8th Cir. 2012); Brown v. Sandals Resorts
Int’l, 284 F.3d 949, 953 n.6 (8th Cir. 2002).

(b) While a district court has broad discretion in formulating jury instructions,
it “must be careful if it intends to tie in principles of law to the facts.” Vanskike v.
ACF Indus., Inc., 665 F.2d 188, 202 (8th Cir. 1981), cert. denied, 455 U.S. 1000
(1982). “An instruction is argumentative if it does not include all the elements of the
doctrine, or singles out the testimony of one witness while disregarding other relevant
evidence, or unduly highlights certain features of a case.” Id. at 201-02 (citations
omitted); see Caviness v. Nucor-Yamato Steel Co., 105 F.3d 1216, 1221-22 (8th Cir.
1997). Such instructions “effectively require[] unjustified commentary on the
evidence” and are “virtually verdict-directing in their character,” in contrast to more
preferable, “neutral instruction[s] directing the jury to consider such factors.” Cent.
Microfilm Serv. Corp. v. Basic/Four Corp., 688 F.2d 1206, 1219 (8th Cir. 1982), cert.
denied, 459 U.S. 1204 (1983); compare Mems v. City of St. Paul, Dep’t of Fire &
Safety Servs., 327 F.3d 771, 782-83 (8th Cir. 2003) (approving an instruction listing
“hypothetical examples” of a non-hostile work environment), cert. denied, 540 U.S.
1106 (2004); Nat’l Auto. Trading Corp. of China v. Pioneer Trading Co., 46 F.3d
842, 843-44 (8th Cir. 1995) (approving an instruction listing facts that “tend to
establish” abuse of corporate privilege).

Jury Instruction 17 was that type of error. It singled out facts most favorable
to the Trustee. Worse yet, it stated that, if the jury found the presence of such signs,
it “must” find that Boosalis was on inquiry notice, in effect, a directed verdict on a

-19-
critical element of the good faith issue. Good faith is not defined in MUFTA. See
Minn. Stat. § 513.41. The term has no recognized meaning under the Uniform
Fraudulent Transfers Act. See For Your Ease Only, Inc. v. Calgon Carbon Corp., 560
F.3d 717, 721 (7th Cir. 2009); UFTA § 8 cmt. (1) (Unif. L. Comm’n 1984); cf.
Kansas City Power & Light Co. v. Ford Motor Credit Co., 995 F.2d 1422, 1430 (8th
Cir. 1993) (“What good faith means depends on the situation in which the term is
used.”). By singling out “signs” favorable to the Trustee and then instructing that
those facts are “sufficient,” the instruction confused facts that support a finding with
facts that require it in every case.

(c) Not every erroneous instruction results in a new trial. We reverse only if
the error affected the substantial rights of the parties. See Fed. R. Civ. P. 61. There
is no prejudice if the evidence was “overwhelming.” Vanskike, 665 F.2d at 203.
Here, the impact of the error in Instruction 17 must be considered in combination with
the error in Instruction 18 on the issue of reasonably equivalent value, and with the
way in which the Trustee relied on the combined errors in his final argument.

As we explained in Part II.B., the district court erred in instructing the jury in
Instruction 18 that any payment of interest on PCI’s promissory notes “is not in
satisfaction of a valid antecedent debt if it was made in furtherance of a fraud,
enabled by a fraud, or paid on a dishonestly-incurred debt.” Relying on this
instruction, the Trustee declared in closing argument:

PCI was a Ponzi scheme. . . . The nature of a Ponzi scheme is that
PCI defrauds new investors to pay old investors, right? It’s the churn.
And Gus Boosalis was in the churn. He was defrauded. His money was
taken and used to pay old investors, and then later he was paid with
money that was stolen from new investors.

* * * * *

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 These promissory notes were a tool of fraud. They aren’t legitimate
contracts . . . . These notes were meaningless.

* * * * *

So let’s think about what that means. The truth is for four years
. . . Gus Boosalis invested millions of dollars without a guaranty [from
Petters] and without doing any diligence. That’s not good faith. The
guaranty didn’t matter. The money did.

* * * * *

You see . . . red flags going up, between January 3rd, 2001, and April
16th, 2001, all those [PCI payments] are bad checks. $3,383,500 in bad
checks to the Boosalis family, and Gus Boosalis does nothing except ask
that the checks be made good.

And then what does he do next? He invests another half million
dollars. That’s not good faith.

* * * * *

You’ve heard the evidence . . . . $3.5 million. That didn’t come from
compensation. That didn’t come from commissions. That came from the
Ponzi scheme. . . . That’s money that was stolen from other investors.
It was used to pay Gus Boosalis. That’s . . . what we’re asking that you
award in a verdict today.

The effect of these instructions and this closing argument is that the jury was
invited to find that years of interest payments were actual fraudulent transfers based
on a Ponzi presumption that is contrary to MUFTA as construed in Finn. The inquiry
notice issue as argued was that Boosalis should have inquired before making loans
reflected by promissory notes that were facially valid under Minnesota law. But the
alleged fraudulent transfers were payments of interest due on those notes. Left
unaddressed by the Trustee’s argument and the district court’s instructions is whether

-21-
the holder of a promissory note has an inquiry duty under MUFTA, before accepting
interest payments on a presumptively valid antecedent debt that will reduce the
debtor’s total liabilities, and if so, what reasonable inquiry is required.

Under Minnesota law as construed in Finn, MUFTA, including its actual fraud
affirmative defense, requires proof on a transaction-by-transaction basis. Unlike the
preferential transfer provisions of the Bankruptcy Code, MUFTA “does not prohibit
a debtor from making a preferential transfer in favor of one bona fide creditor over
another, so long as the transfer is not fraudulent.” 860 N.W.2d at 647, 653. Enabled
by the district court’s instructions, the Trustee argued for a verdict contrary to these
principles. The distinction was cogently explained by Judge (now Justice) Breyer,
construing Massachusetts fraudulent conveyance law in Boston Trading, a case cited
favorably in Finn, 860 N.W. 2d at 653:

Suppose that [PCI] obtain[s] C’s money through dishonest means
(larceny, fraud, etc.) and use[s] it to pay a debt that [PCI] owe[s
Boosalis], a transferee who knows of, but did not participate in [PCI’s]
dishonesty. Does [Minn. Stat. § 513.44(a)(1)] permit C to recover its
money from [Boosalis]? We think . . . not.

[W]e have found no modern case . . . that has found a fraudulent
conveyance in such circumstances. That is not surprising, for the fraud
or dishonesty in this example concerns, not [PCI’s] transfer to
[Boosalis], but the manner in which the original debt to C arose.
Fraudulent conveyance law is basically concerned with transfers that
“hinder, delay or defraud” creditors; it is not ordinarily concerned with
how such debts were created.

835 F.2d at 1510 (emphasis in original); accord In re Sharp Int’l Corp. 403 F.3d 43,
56 (2d Cir. 2005) (“The fraud alleged . . . relates to the manner in which Sharp
obtained new funding from the Noteholders, not Sharp’s subsequent payment of part

-22-
of the proceeds to State Street. . . . [which] was at most a preference between creditors
and did not ‘hinder, delay, or defraud either present or future creditors.’”).

In these circumstances, the district court’s instruction errors “affected
[Boosalis’s] substantial right” to a fair trial of his affirmative defense. It may well be
that Boosalis did not take some or all of the interest payments he received over a
multi-year period “in good faith and for a reasonably equivalent value.” Minn. Stat.
§ 513.48(a). But that must be determined at a new trial.

III. The Predicate Creditor Issue.

The Bankruptcy Code authorizes the Trustee to avoid a transfer of the debtor
“that is voidable” by a creditor identified in 11 U.S.C. § 544(b)(1), commonly
referred to as a “predicate creditor.” We have interpreted this provision to require the
Trustee to “(1) identify an existing creditor; (2) with an allowable claim; (3) who
under non-bankruptcy law could avoid the transfer, at least in part.” In re DLC, Ltd.,
295 B.R. 593, 601-02 (B.A.P. 8th Cir. 2003), aff’d sub nom. Stalnaker v. DLC, Ltd.,
376 F.3d 819 (8th Cir. 2004). These requirements “have been discussed at length by
various courts.” In re Goodspeed, 535 B.R. 302, 306 & n.9 (Bankr. D. Minn. 2015)
(collecting cases).

In 2001, PCI began transitioning from individual lenders to large institutions.
In 2008, PCI borrowed $60 million from Interlachen Harriet Investments, Limited
(“Interlachen”), a Twin Cities hedge fund. On appeal, Boosalis argues the district
court erred in ruling as a matter of law that Interlachen was a “predicate creditor.”
Boosalis does not deny that Interlachen is an existing creditor with a claim under
MUFTA that could avoid the transfers at issue. But he argues that Interlachen is not,
at least as a matter of law, an unsecured creditor with an allowable fraudulent transfer
claim based on actual fraud, because the claim would be barred by MUFTA’s statute

-23-
of limitations -- within six years of “the discovery . . . of the facts constituting the
fraud.” Minn. Stat. § 541.05, subd. 1(6); Finn, 860 N.W.2d at 658.

For a claw back claim under 11 U.S.C. § 544(b)(1), the Trustee must prove
“that his predicate creditor did not know of or discover the fraud . . . at any time until
within the six years before the date on which the bankruptcy petition was filed.” In
re Petters Co., 495 B.R. at 9004. The district court concluded that Interlachen could
not have had knowledge of the Ponzi scheme fraud more than six years before that
date because Interlachen was not formed until 2008. Reviewing this issue de novo,
we agree. Anderson v. Indep. Sch. Dist., 357 F.3d 806, 809 (8th Cir. 2004) (standard
of review).

Boosalis argues that an Interlachen executive, Lance Breiland, may have
noticed “red flags” more than six years before the bankruptcy filing in 2008.9 Under
Minnesota law, a corporation can be charged for statute of limitations purposes with
constructive knowledge of material facts that its officers or agents acquire. See Day
Masonry v. Indep. Sch. Dist. 347, 781 N.W.2d 321, 334 (Minn. 2010); Travelers
Indem. Co. v. Bloomington Steel & Supply Co., 718 N.W.2d 888, 895-96 (Minn.
2006). In some circumstances, knowledge an agent acquired before the agency
relationship will “be deemed notice to his principal, and will bind him.” PHL
Variable Ins. Co. v. 2008 Christa Joseph Irrevocable Tr., 970 F. Supp. 2d 932, 944
(D. Minn. 2013), aff’d, 782 F.3d 976 (8th Cir. 2015), quoting Lebanon Sav. Bank v.
Hallenbeck, 13 N.W. 145, 147 (Minn. 1882); see 3 Fletcher, Fletcher Cyclopedia of
the Law of Private Corporations § 799 (rev. ed. 2018). But Boosalis has cited no
authority providing that a principal may be charged, for statute of limitations

9
The district court observed that Breiland’s cross-designated deposition
testimony concerned his work with Interlachen after 2002, within the six-year
limitations period.

-24-
purposes, with knowledge an agent acquired at a time when neither the agency
relationship nor the principal itself existed. We decline to adopt such a rule.

Alternatively, Boosalis argues that deciding this issue as a matter of law
deprived him of the opportunity to cross examine Interlachen representatives on
whether they noticed “red flags,” and whether the Trustee acted inconsistently in
treating Interlachen’s claim as valid while seeking to claw back interest PCI paid to
him. But the predicate creditor issue turns on whether Interlachen discovered PCI’s
Ponzi scheme fraud more than six years before the bankruptcy filing. As Boosalis did
not identify disputed facts regarding that issue, the district court properly ruled on the
issue as a matter of law.

IV. Personal Liability of Kanios.

Kanios argues that she is not personally liable to the Trustee for any fraudulent
transfers because PCI paid all interest to her 401(k) plan and therefore she was not
the “transferee” or “the entity for whose benefit such transfer was made.” 11 U.S.C.
§ 550(a). As she was not the beneficiary of the transfer, the transfer was not
quantifiable and was not accessible to her. See Bonded Fin. Servs., Inc. v. Eur. Am.
Bank, 838 F.2d 890, 893-96 (7th Cir. 1988). The district court properly rejected this
argument, which Kanios did not raise until the summary judgment motion
proceedings. On appeal, Kanios further argues for the first time that the Trustee
could recover from her only through a claim against the plan governed by the
Employee Retirement Income Security Act of 1974 (“ERISA”), and the Trustee lacks
standing under ERISA.

A. In rejecting this contention, the district court recognized that it is plainly
contradicted by the facts. As the sole beneficiary of the plan, Kanios received PCI
interest payments the instant the plan received them. The payments were quantified
in the lawsuit. The proceeds were fully accessible to Kanios at any time, albeit

-25-
subject to a ten percent tax penalty if withdrawn before she reached early retirement
age. See 26 U.S.C. § 72(t)(1), (2)(A)(i). That a prudent 401(k) plan beneficiary
would not incur an early withdrawal penalty did not make the money inaccessible at
the time of the fraudulent transfer. See Haury v. Comm’r, 751 F.3d 867, 868-69 (8th
Cir. 2014). That the plan may invest the proceeds before withdrawal did not mean
the initial deposit was not quantifiable. The interest payments increased the funds
available for investing in her plan account by $572,500.22. Therefore, Kanios was
the transferee of those payments from whom the creditor may recover under MUFTA.
See Minn. Stat. § 513.48(b)(1)(i).

B. We normally would not consider Kanios’s ERISA argument because it is
raised for the first time on appeal. In any event, it is without merit. Whether the
Trustee has standing to bring an action under ERISA’s remedial provisions because
the Trustee is not a plan participant, beneficiary, fiduciary, or the Secretary of Labor
is irrelevant. See 29 U.S.C. § 1132(a). The Trustee does not need standing to sue the
401(k) plan because the Trustee is not seeking a remedy under ERISA’s
“comprehensive civil enforcement scheme.” Aetna Health, Inc. v. Davila, 542 U.S.
200, 208 (2004) (quotation omitted). The Trustee seeks to claw back assets received
by the plan, asserting a claim under the federal Bankruptcy Code. Kanios cites no
case in which ERISA remedies preempted a federal cause of action. See In re Target
Corp. Sec. Litig., 275 F. Supp. 3d 1063, 1067 (D. Minn. 2017) (considering claims
brought by plaintiffs under both ERISA and federal securities law).

V. The Prejudgment Interest Issue

Finally, Defendants challenge the district court’s award of prejudgment
interest. In both cases, the court concluded that Minnesota rather than federal law
governed the award and therefore it was required to apply a 10 percent per annum
rate from the “commencement of this action,” namely, from September 23, 2010, the
date the Summons was issued, to the present. See Minn. Stat. § 549.09, subd. 1(b),

-26-
(c)(2). This resulted in awards increasing the total judgment against Boosalis by over
80 percent and the total judgment against Papadimos and Kanios by 47 percent.
Whether Minnesota law governs is an issue of law reviewed de novo. Though we are
reversing both final judgments and remanding for further proceedings, we will
address the issue because it may be relevant on remand. We will not address
Defendants’ alternative argument that, even if Minnesota law governs the award of
prejudgment interest, the district court abused its discretion by awarding prejudgment
interest under the circumstances in these cases.

In general, prejudgment interest presents “a question of federal law where the
cause of action arises from a federal statute,” Mansker v. TMG Life Ins. Co., 54 F.3d
1322, 1330 (8th Cir. 1995), while “[i]n a diversity case, the question of prejudgment
interest is a substantive one, controlled by state law,” Emmenegger v. Bull Moose
Tube Co., 324 F.3d 616, 624 (8th Cir. 2003). Whether the Trustee’s avoidance action
under 11 U.S.C. § 544(b)(1) is a state or federal cause of action for purposes of
prejudgment interest is a question we have not previously addressed that has divided
other courts. See Harris Winsberg and Karen Visser, A Survey on Prejudgment
Interest Awards in Preference and Fraudulent Conveyance Avoidance Actions, 24
Norton J. Bankr. L. & Prac. n.45 (2015) (comparing cases).

“In fraudulent transfer actions, there is a distinction between avoiding the
transaction and actually recovering the property or the value thereof.” In re Int’l
Admin. Servs., Inc., 408 F.3d 689, 703 (11th Cir. 2005). The Trustee’s authority to
recover money judgments against Defendants is conferred by 11 U.S.C. § 550.
Section 550(a) lists seven avoidance provisions in the Code, including § 544, and
provides that “the trustee may recover, for the benefit of the estate, the property
transferred or, of if the court so orders, the value of such property.” See, e.g., In re
H & S Transp. Co., 939 F.2d 355, 358 (6th Cir. 1991). Because “Section 544(b)(1)
says nothing about recovery . . . . [t]he recovery of fraudulent transfers is authorized
by federal law -- Section 550(a)(1).” In re DBSI, Inc., 869 F.3d 1004, 1015 (9th Cir.

-27-
2017). Therefore, § 550 provides the entire basis for the Trustee to recover once the
transfer has been avoided through one of the provisions listed in § 550(a), such as
§ 544(b)(1). See In re DLC, Ltd., 295 B.R. at 602.

In concluding the Trustee’s action is governed by state law, the district court
relied principally on In re Keefe, 401 B.R. 520 (B.A.P. 1st Cir. 2009). Keefe held
that while § 550 “identifies the entities from whom recovery may be made,”
Massachusetts fraudulent transfer law provided “the substantive basis for the
judgment.” 401 B.R. at 527. “Therefore, as state law is the substantive basis for the
fraudulent transfer judgment, the bankruptcy court should have looked to state law
to determine the applicable rate of prejudgment interest.” Id.; accord In re Agric.
Rsch. & Tech. Grp., 916 F.2d 528, 541 (9th Cir. 1990) (“Hawaii law regarding
prejudgment interest is applicable via 11 U.S.C. § 544(b).”).

We conclude the decision in Keefe reflects a misunderstanding of how § 544
and § 550 interact because the court ignored the Bankruptcy Code’s separation of
avoidance and recovery. “This demarcation . . . is underscored by § 550(f), which
places a separate statute of limitations on recovery actions.” Int’l Admin., 408 F.3d
at 703; see H.R. Rep. No. 595, 95th Cong. 1st Sess. 375 (1977) (“Section 550 . . .
enunciates the separation between the concepts of avoiding a transfer and recovering
from the transferee.”); In re Acequia, Inc., 34 F.3d 800, 809 (9th Cir. 1994). MUFTA
provided the substantive basis for Defendants’ fraudulent transfer liability but not the
right to a recovery to which the Trustee was therefore entitled. As the source of
recovery, § 550 was the source for the award of prejudgment interest:

The right to recover prejudgment interest on a fraudulent conveyance
arises from that language in [11 U.S.C.] § 550(a) which allows a trustee
to recover “the value” of the transferred property. To obtain such value,
the plaintiffs need some accommodation for the time value of money.
Prejudgment interest fulfills this purpose.

-28-
In re CNB Intern., Inc., 440 B.R. 31, 46 (W.D.N.Y 2010) (quotation omitted). For
this reason, the district court erred in awarding prejudgment interest under Minnesota
rather than federal law.

By holding that state law applies to the award of prejudgment interest through
11 U.S.C. § 544(b), the district court also endorsed what we see as an expansion of
the Erie10 doctrine. Application of state law turns on diversity or supplemental
jurisdiction. Emmenegger, 324 F.3d at 624 & n.9. “The award of prejudgment
interest in a diversity action is determined by referring to the law of the state in which
the cause of action arose.” Kisco Co. v. Verson Allsteel Press Co., 738 F.2d 290, 296
(8th Cir. 1984) (emphasis added). Here, it is undisputed that the district court’s
jurisdiction was based on a federal question, not on diversity or supplemental
jurisdiction, leaving no basis for applying state law other than § 544(b). Proceedings
to avoid fraudulent conveyances under § 544 are “core proceedings arising under title
11” that the district court may delegate to a bankruptcy court judge for final
disposition. 28 U.S.C. § 157(b)(1), (b)(2)(H). As the Ninth Circuit has bluntly
stated, § 544(b)(1) “permits a trustee to pursue a federal cause of action in bankruptcy
court.” DBSI, 869 F.3d at 1015; see In re Weinberg, 153 B.R. 286, 290-91 (Bankr.
D.S.D. 1993). “[A] case arises under federal law when federal law creates the cause
of action asserted.” Gunn v. Minton, 568 U.S. 251, 257 (2013).

That the Trustee’s claim under § 544 is a federal cause of action compels the
application of federal law to an award of prejudgment interest. In Monessen Sw. Ry.
v. Morgan, for example, the Supreme Court concluded that Pennsylvania courts erred
in treating the availability of prejudgment interest in Federal Employers’ Liability Act
actions as a matter of state rather than federal law:

10
Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).

-29-
 The proper measure of damages under the FELA is inseparably
connected with the right of action, and therefore is an issue of substance
that must be settled according to general principles of law as
administered in the Federal courts. . . . The question of what constitutes
‘the proper measure of damages’ under the FELA necessarily includes
the question whether prejudgment interest may be awarded to a
prevailing FELA plaintiff.

486 U.S. 330, 335 (1988) (quotation omitted). That logic applies here. Since the
recovery of fraudulently transferred property and the attachment of prejudgment
interest are “inseparably connected with the [federal] right of action” created by the
Bankruptcy Code, prejudgment interest is governed by federal standards in
determining the proper measure of damages.

VI. Conclusion

For the foregoing reasons, the judgments of the district court are reversed and
the cases are remanded for further proceedings not inconsistent with this opinion.
The Trustee’s motion to remand to clarify that Kanios is personally liable is denied
as moot.

KELLY, Circuit Judge, concurring in part, dissenting in part.

I respectfully dissent from Section II of the court’s opinion. I am not persuaded
that the district court’s rulings and jury instructions are at odds with Finn v. Alliance
Bank, 860 N.W.2d 638 (Minn. 2015).

A.

In Finn, the Minnesota Supreme Court rejected the so-called “Ponzi-scheme
presumption,” which “allows a creditor to bypass the proof requirements of a

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fraudulent-transfer claim by showing that the debtor operated a Ponzi scheme and
transferred assets in furtherance of that scheme.” Id. at 646 (cleaned up). The court
reasoned that the “asset-by-asset and transfer-by-transfer nature” of the inquiry
required under MUFTA demands that creditors must establish the elements of
fraudulent transfer “with respect to each transfer,” instead of relying on a presumption
rooted in “the form or structure of the entity making the transfer.” Id. at 647.

I do not agree that the district court in effect applied the Ponzi-scheme
presumption rejected by Finn. Instead, the district court diligently examined the
“overwhelming” direct evidence of PCI’s fraudulent intent and grappled with the
difficult question of whether each of the specific interest payments that lenders
received was “for a reasonably equivalent value.” Ante at 9; see Minn. Stat. §
513.48(a).

In making this inquiry, the district court relied on testimony from Coleman,
who drafted the notes, security agreements, and purchase orders underpinning the
challenged transfers. Kelley v. Kanios, 383 F. Supp. 3d 852, 871 (D. Minn. 2019).
She testified that “every purchase order that an investor received or invested in was
fake.” Id. (cleaned up). Because “every” purchase order PCI sent investors was
“fake,” Coleman testified, investors “never invested in a real transaction.” Id. at 861.
The district court also cited testimony from Martens, whose forensic accounting team
“scoured” PCI’s records to “analyze[ ] each transfer at issue.” Id. at 863, 871. He
explained that none of the lenders’ loans or interest payments were rooted in the
purchase or sale of real merchandise. Id. at 863. At summary judgment, neither
Kanios nor Papadimos came forward with evidence to the contrary.

As for the jury instructions in Boosalis, nothing in their language departs from
the transfer-specific inquiry required under MUFTA. See Finn, 860 N.W.2d at 647.
Consistent with Finn, the challenged instructions referred to “individual transfers,
rather than a pattern of transactions.” Id; see ante at 16–17 (reciting jury instructions

-31-
referring to transfers in the singular form, for example, “a particular payment from
[PCI],” “a payment,” and “an interest payment.”). Ultimately, the jury found that
“each PCI interest payment to Boosalis was made with intent to hinder, delay, or
defraud PCI creditors.” Ante at 8 (emphasis added) (cleaned up). Nothing in the
district court’s opinions or jury instructions leads me to believe it applied an
impermissible presumption or otherwise departed from Minnesota Supreme Court
precedent.

B.

More broadly, I do not believe Finn forecloses the conclusion that the interest
payments in these cases were not made in exchange for reasonably equivalent value.
As the court’s opinion acknowledges, Finn did not address whether interest payments
made in the thick of a Ponzi churn are void under Minnesota law. Ante at 13; see In
re Petters Co., Inc., 550 B.R. 457, 481 (Bankr. D. Minn. 2016). Rather, because
reasonably equivalent value must be assessed under the “facts and circumstances of
each case,” Finn, 860 N.W.2d at 650, Finn decided only that disbursements paid to
investors who purchased loan-participation interests, some of which were made “in
consequence of investment into legitimate, real business transactions,” were in
exchange for satisfaction of an antecedent debt. In re Petters Co., Inc., 550 B.R. at
463; see Finn, 860 N.W.2d at 655–56.

The facts and circumstances of Kanios and Boosalis are substantially different
from those of Finn. Here, the challenged transfers were “part of a serial churn of
funds propelled sequentially by fraud in the inducement on non-existent underlying
investments.” Id. at 467. Contrary to what lenders were led to believe, none of their
loans were actually used to purchase overstocked merchandise. See Kanios, 383 F.
Supp. 3d at 861, 863. Instead, they were used to pay earlier investors in the scheme.
Id. at 863. The Minnesota Supreme Court’s concerns about painting transfers with
too broad a brush are simply not salient here.

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 In Finn, the Minnesota Supreme Court held that “any legally enforceable right
to payment against the debtor is sufficient to qualify as an antecedent debt under
MUFTA.” 860 N.W.2d at 651 (citing Kummet v. Thielen, 298 N.W. 245, 247 (Minn.
1941)). “[S]atisfaction of an antecedent debt,” in turn, “can constitute reasonably
equivalent value.” Id. at 650 (citing Minn. Stat. § 513.43(a)). But the court was
silent on whether it would consider interest payments made pursuant to fictitious
loans, with funds fraudulently obtained from other lenders, to be “legally
enforceable” and therefore not subject to claw back. There is reason to believe,
however, the Minnesota Supreme Court would say they are not.

I find it instructive that Finn emphasized MUFTA was designed to “prevent
debtors from placing property that is otherwise available for the payment of their
debts out of the reach of their creditors.” Id. 644 (quoting Citizens State Bank
Norwood Young Am. v. Brown, 849 N.W.2d 55, 60 (Minn. 2014)). This focus on
MUFTA’s purpose leads me to believe the Minnesota Supreme Court would oppose
a rule allowing Ponzi-scheme debtors to deplete the assets available to creditors.
Indeed, Finn expressly acknowledged that “[i]n many Ponzi schemes, it is true that
there is no legitimate source of earnings and the payment of profits confers no benefit
on the Ponzi scheme but merely depletes the scheme’s resources faster.” Id. at 652
(cleaned up) (quoting Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995) (holding
that investors may retain profits they unwittingly made from a Ponzi scheme only if
the debtor’s payment of those profits, which necessarily reduced the net assets of the
estate, “was offset by an equivalent benefit to the estate”)).

The Minnesota Court of Appeals has described the position articulated in both
Scholes and Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008), as “consistent with the
UFTA drafters’ explanation that value is to be determined in light of the purpose of
the Act to protect a debtor’s estate from being depleted to the prejudice of the
debtor’s unsecured creditors” and that “consideration having no utility from a
creditor’s viewpoint does not satisfy the statutory definition of value.” Finn v. All.

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Bank, 838 N.W.2d 585, 602 (Minn. Ct. App. 2013) (affirmed as modified by Finn,
860 N.W.2d 638) (cleaned up). Nothing in the Minnesota Supreme Court’s opinion
indicates it would disagree with this assessment. Based on my reading of the
Minnesota Supreme Court’s decision in Finn, I think the court would examine each
individual transfer at issue to decide whether it conferred “value” on the Ponzi
scheme operator.

Pre-MUFTA cases addressing whether contracts that relate only peripherally
to fraudulent or illegal activity are legally enforceable are not to the contrary. See
ante at 14–15 (citing, among other cases, Anheuser-Busch Brewing Ass’n v. Mason,
46 N.W. 558, 558–59 (Minn. 1890); Johnstown Land Co. v. Brainerd Brewing Co.,
172 N.W. 211, 212 (Minn. 1919); Watson v. Goldstein, 219 N.W. 550, 551 (Minn.
1928)). Unlike the early Minnesota cases, the illegal activity in the cases now before
us was not merely adjacent to the agreements at issue. It was the motivating purpose
behind them.

In my view, the district court properly applied Finn to the unique “facts and
circumstances” of these cases. 860 N.W.2d at 647, 650. Further, I do not consider
the district court’s conclusion that the interest payments at issue were not in exchange
for reasonably equivalent value to be inconsistent with Finn. The Minnesota
Supreme Court left open the possibility that such interest payments, when made in
connection with a Ponzi scheme unsupported by any legitimate business transaction,
using money siphoned from earlier lenders, are void under Minnesota law.
Respectfully, I dissent as to Section II but otherwise concur in the court’s opinion.
______________________________

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