## Facts

- Charles Ponzi solicited funds by issuing promissory notes promising $150 repayment for each $100 loaned, often offering early redemption to increase public confidence.
- Ponzi represented that profits came from trading international postal coupons, but he made no genuine investments and paid earlier lenders with money obtained from later lenders.
- Over roughly eight months, Ponzi received about $9.58 million and issued notes totaling about $14.37 million, making him insolvent throughout the scheme.
- Ponzi deposited lenders’ funds into bank accounts that were continuously depleted by repayments and replenished by new fraudulent borrowings; the accounts consisted entirely of victim funds.
- Within four months before the bankruptcy filing, several lenders (including Brown) demanded early payment and received repayment (sometimes including profit) under circumstances giving them reason to believe Ponzi was insolvent.
- The bankruptcy trustee filed consolidated equity actions to recover these repayments as voidable preferences under § 60b of the Bankruptcy Act; Brown also asserted that he was a minor during the transactions.

## Issues

1. Whether repayments to Ponzi’s lenders within four months of bankruptcy were rescissions returning the lenders’ own property, or voidable preferences under § 60b.
2. Whether lenders could avoid preference treatment by tracing their funds into Ponzi’s commingled bank accounts and claiming a resulting trust or equitable lien.
3. Whether a lender’s minority status exempts the lender from avoidance of a preference under § 60b.

## Decision

- The Supreme Court reversed the decrees dismissing the trustee’s suits.
- The Court held the repayments were transfers to creditors on account of antecedent debts and, given Ponzi’s insolvency and the lenders’ reason to believe it, constituted voidable preferences recoverable by the trustee.
- The Court rejected resulting-trust or lien theories because the commingled accounts were composed entirely of fraudulently obtained funds from many lenders, with earlier deposits exhausted and replaced by later deposits, defeating tracing.
- The Court held that a minor is not exempt from avoidance of an unlawful preference; Brown’s repayment was subject to recovery like the others.

## Legal Principles

- Payments to a creditor within the statutory preference period are avoidable under § 60b when made while the debtor is insolvent and the creditor has reasonable cause to believe insolvency, and the payment yields more than other creditors of the same class.
- A defrauded claimant may reclaim property in bankruptcy only if the claimant can identify and trace specific funds into a distinct, identifiable res; failing tracing, the claimant is a general creditor.
- When a debtor’s bank account consists entirely of commingled proceeds of similar frauds against many victims and is repeatedly depleted and replenished, individual victims generally cannot establish a resulting trust or equitable lien in the account to justify preferential repayments.
- The Bankruptcy Act’s preference rules apply regardless of the preferred creditor’s minority status.

## Conclusion

The Court required Ponzi’s recently repaid lenders to return the funds to the bankruptcy estate because the repayments were voidable preferences, not recoveries of identifiable property, and neither commingled-fund tracing theories nor a creditor’s minority status prevented avoidance under § 60b.


Cunningham v. Brown, 265 U.S. 1 (1924)