FLORIDA: An Introduction to Litigation: General Commercial

I. COVID’S RIPPLE EFFECTS ON LITIGATION: MORE PONZI SCHEMES AND RECEIVERSHIPS

Communities in and outside of Florida are slowly returning to normal as COVID-19 vaccinations become widely available. But COVID-19's impact on the legal market may be long lasting.

A. Economy’s Downturn May Expose Ponzi Schemes and Other Frauds

Florida is a renowned target for Ponzi schemes and other frauds. It is a perfect ecosystem for breeding fraudsters and other con artists. Comparatively, Florida has a larger elderly population as well as pockets of immense wealth than virtually any other state, making its population especially susceptible to scammers. By way of example, Florida has several enclaves of considerable wealth, from Palm Beach to Miami Beach and Fisher Island, to name a few.

The United States experienced its first recession in a decade in 2020 due to the COVID-19 pandemic. In fact, many experts questioned whether the period of growth prior to the pandemic had an expiration date due to its sustained duration. The last downturn was the Great Recession that began in 2007. Recessions are generally the precursors to the collapse of Ponzi schemes. Both the Bernie Madoff and the Scott Rothstein Ponzi schemes were uncovered during the Great Recession. And both had ties to South Florida. Like other Ponzi schemes, they collapse when clients seek redemptions at an accelerated rate and the organizers are unable to locate new investors to pay off the old investors.

Media watchers and legal practitioners alike expect that the same will be true of this economic downturn. Harley Tropin, co-founder of Kozyak Tropin & Throckmorton, a South Florida litigation boutique that specializes in Ponzi-related class actions, says it is a question of when, not if, the next round of Ponzi schemes will unravel. “Recessions put pressure on finances and people seek to relieve that pressure with a quick fix,” said Tropin, who has recovered hundreds of millions of dollars for investors in U.S. Oil and Gas, Rothstein, Premium Sales and other South Florida Ponzi schemes.

Litigation is often the only vehicle that fraud victims have to recover substantial losses. Federal and state investigators seize assets for fraud victims, but by the time the Ponzi is uncovered, there is little money left over to make the hundreds or thousands of victims whole.

B. PPP Scams Are Developing Nationwide 

COVID-19 is anticipated to breed another new fad by con artists: PPP fraud. Congress adopted the Paycheck Protection Program (PPP) in the wake of the COVID-19 pandemic. Congress provided hundreds of billions of dollars in loans to small businesses as incentives to keep workers on payroll during the economic downturn. The loans have extremely low interest rates (1%) if not forgiven, deferred payments, a two-year maturity date, no requirements for collateral or personal guarantees, and no lender fees.

Unfortunately, but not surprisingly, cash-strapped businesses have become victims of PPP loan scams. Fraudsters pretend to be PPP lenders to unsuspecting businesses. Once the businesses provide the fake lenders their financial and other information, predators use personal information to access bank accounts or to steal money from credit cards.

Of course, certain PPP scams could be more complex. Fraudsters may pretend to be able to able to secure businesses loans, claiming to have an inside track or information. “There is no truer statement, if it is too good to be true, something’s wrong and proceed with caution,” said Javier Lopez, the managing partner for Kozyak Tropin & Throckmorton. Lopez is correct. In the first year of PPP loans, federal officials have filed more than 100 cases against more than 200 individuals for PPP fraud. According to a published report, at least $246 million has already been stolen by scam artists.

Lopez has already adjusted his practice to address the changes in the market due to COVID-19, working with dozens of companies on business interruption cases. He sees PPP fraud litigation as a natural outgrowth of his work as well as Kozyak Tropin & Throckmorton’s specialty in assisting victims of Ponzi and other frauds. Mr. Lopez also represents defendants in professional malpractice cases. He envisions that a number of clients will look to their accountants, lawyers, and other professionals for not protecting them during the upheaval created by the pandemic. “When times are good, people fight over money, when times are bad, people fight harder,” Lopez said.

C. Federal and State Receiverships Expected to Increase

The COVID-connected economic downturn is likely to cause an uptick in receiverships as well. Federal and Florida state courts often appoint receivers to defunct businesses or companies that were used as a fraudulent vehicle to marshal the assets for the victims or creditors, protect wasting assets, and often time file suit on behalf of the entities to recoup losses or other damages.

The Florida legislature adopted the Uniform Commercial Real Estate Receivership Act, which became effective July 2020. It was one of less than ten states to have done so since 2017. That Act addresses the pre-judgment and post-judgment circumstances in which courts can appoint a receiver in disputes arising over commercial real estate. The new Act has made it easier to obtain the appointment of a receiver in real estate cases. But Florida courts still maintain broad discretion in other disputes to appoint receivers.

Head of Kozyak Tropin & Throckmorton’s bankruptcy practice group Corali Lopez-Castro has been appointed the receiver in multiple Florida state court cases, including the sale of a Miami Beach hotel/condominium hybrid and a custodian in a case involving COVID-19 testing kits. She has seen a noticeable uptick in recent receiverships during the pandemic. “For many businesses, the pandemic has dealt a crushing blow to revenue and operations are not recovering. Although lenders showed some patience at the beginning of the pandemic, that patience is running out,” Lopez-Castro said.

Receivers often require a legal and financial background, as they assume the role as the financial head of distressed entities while also carrying on their court-appointed duties on behalf of investors, creditors, or other victims. Ms. Lopez-Castro also explains that oftentimes receivers require additional expertise of accountants or even private investigators to determine how assets were dissipated and may be recovered. Generally, receivers are sought when a borrower refuses to accept the reality that a business is not working and there is a lack of trust between lenders and borrowers. It is the receiver’s role to determine what is required to stabilize a business or even liquidate a business. Many times, the receiver will require the expertise of third parties (e.g. forensic accountants, auction company, brokers) to effectuate a result that benefits the receivership estate.

An important aspect of any receivership is communication with not only the court but also other stakeholders. At any time, receivers could be coordinating with federal investigators, secured creditors, unsecured creditors, suppliers, employees, accountants, tax firms, and lawyers representing investors or other plaintiffs. Lopez-Castro has negotiated and engineered numerous bankruptcy plans and other workouts from multiple stakeholders through her bankruptcy and receivership practice. “The stakeholders need to trust you but the receiver needs to gain that trust. If stakeholders don’t receive information, they begin to distrust the process. Good news and bad news needs to be communicated. I have never been told by a stakeholder, I wish you had not told me that,” Lopez-Castro said.