Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca6-15-03854/USCOURTS-ca6-15-03854-0/pdf.json

Parties Involved:
Brian A. Bash
Appellant
Textron Financial Corporation
Appellee

Document Text:

1 

RECOMMENDED FOR FULL-TEXT PUBLICATION 

Pursuant to Sixth Circuit I.O.P. 32.1(b) 

File Name: 16a0205p.06 

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT 

_________________ 

In re: FAIR FINANCE COMPANY, 

Debtor. 

__________________________________________ 

BRIAN A. BASH, Chapter 7 Trustee, 

Plaintiff-Appellant, 

v. 

TEXTRON FINANCIAL CORPORATION, 

Defendant-Appellee. 

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No. 15-3854 

Appeal from the United States District Court 

for the Northern District of Ohio at Akron. 

No. 5:12-cv-00987—Patricia A. Gaughan, District Judge. 

Argued: April 22, 2016 

Decided and Filed: August 23, 2016 

Before: MOORE, GIBBONS, and DAVIS,*

 Circuit Judges. 

_________________ 

COUNSEL 

ARGUED: Daniel R. Warren, BAKER & HOSTETLER LLP, Cleveland, Ohio, for Appellant. 

Mitchell A. Karlan, GIBSON, DUNN & CRUTCHER LLP, New York, New York, for Appellee. 

ON BRIEF: Daniel R. Warren, Thomas D. Warren, Joseph F. Hutchinson, Jr., Michael A. 

VanNiel, David F. Proaño, BAKER & HOSTETLER LLP, Cleveland, Ohio, for Appellant. 

Mitchell A. Karlan, GIBSON, DUNN & CRUTCHER LLP, New York, New York, James P. 

Schuck, Kenneth C. Johnson, Quintin F. Lindsmith, BRICKER & ECKLER LLP, Columbus, 

Ohio, for Appellee. 

 *

The Honorable Andre M. Davis, Senior Circuit Judge for the United States Court of Appeals for the 

Fourth Circuit, sitting by designation. 

>

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No. 15-3854 Bash v. Textron Financial Corp. Page 2 

_________________ 

OPINION 

_________________ 

 ANDRE M. DAVIS, Senior Circuit Judge. In this appeal from the dismissal of an 

adversary proceeding in bankruptcy, we are obliged to explore some uncharted territory of Ohio 

substantive and procedural jurisprudence. 

For more than six decades, members of the Fair family operated Fair Finance Company 

(the “Debtor”) as a profitable and respected financial services company in Northeast Ohio. In 

2002, Tim Durham and James Cochran purchased the Debtor in a leveraged buyout and 

transformed the Debtor’s factoring operation into a front for a Ponzi scheme, the proceeds of 

which went largely to fund Durham’s and Cochran’s extravagant lifestyles and various 

struggling business ventures. In 2009, the Ponzi scheme collapsed when Durham, Cochran, and 

Rick Snow, the Debtor’s Chief Financial Officer, were indicted for wire fraud, securities fraud, 

and conspiracy. The Debtor entered involuntary bankruptcy and Brian Bash, as Chapter 7 

Trustee (the “Trustee”), brought a number of adversary proceedings to recover on behalf of the 

Debtor’s estate and, by extension, the Ponzi scheme’s unwitting investors. In the adversary 

proceeding at issue in this appeal, the Trustee brought numerous claims against Appellee Textron 

Financial Corporation (“Textron”), whose alleged assistance in the concealment and perpetuation 

of the Ponzi scheme lies at the root of all the claims asserted. The district court granted 

Textron’s Rule 12(b)(6) motion to dismiss for failure to state a claim, and the Trustee timely 

appealed the dismissal as to all but one of his claims. 

As we explain within, we hold that, because the Trustee has set forth sufficient factual 

allegations to demonstrate the existence of an ambiguity in a 2004 financing and funding 

contract between the Debtor and Textron, we REVERSE the dismissal of the Trustee’s actual 

fraudulent transfer claim. We further hold that the Trustee was not required to plead facts in 

anticipation of Textron’s potential in pari delicto affirmative defense to survive a motion to 

dismiss; accordingly, we REVERSE the dismissal of the Trustee’s civil conspiracy claim. 

Finally, in light of the reinstatement of the Trustee’s actual fraudulent transfer and civil 

conspiracy claims, we also REVERSE the dismissal of the Trustee’s equitable subordination 

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and disallowance claims. We AFFIRM, however, the dismissal of the Trustee’s constructive 

fraudulent transfer claim as time barred. 

I. 

A.1

In 1934, Arthur Ray Fair founded the Debtor to finance the automobile sales of a familyowned car dealership. B.C. R. 8 (First Am. Compl. at 26:152).2

 Over the next six decades, 

members of the Fair family expanded the Debtor into a successful factoring company, 

purchasing accounts receivable at discounted rates and handling the billing and collection of 

client-owned customer accounts for a fee. Id. at 26:151–54. To support its purchase of accounts 

receivable, the Debtor sold investment certificates, or so-called V-Notes, to unsophisticated 

investors throughout Northeast Ohio. Id. at 26:155–58. The V-Notes routinely provided for sixmonth maturities and paid interest at a rate one-half of one percent higher than the rate payable 

on bank certificates of deposit. Id. at 26:158–27:160. The Debtor issued the V-Notes through 

private placements after filing offering circulars with the Ohio Division of Securities. Id. at 

27:161. As of 2001, the Debtor held title to approximately $54 million in accounts receivable, 

 1

We draw our factual recitations from the Trustee’s amended complaint and documents—attached as 

exhibits to the parties’ briefing on Textron’s motion to dismiss—referenced and quoted therein. “[A]s a general 

rule, matters outside the pleadings may not be considered in ruling on a 12(b)(6) motion to dismiss unless the 

motion is converted to one for summary judgment under Fed. R. Civ. P. 56.” Jackson v. City of Columbus, 194 F.3d 

737, 745 (6th Cir. 1999) (quoting Weiner v. Klais & Co., 108 F.3d 86, 88 (6th Cir. 1997)), abrogated on other 

grounds by Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002). However, “when a document is referred to in the 

pleadings and is integral to the claims, it may be considered without converting a motion to dismiss into one for 

summary judgment.” Commercial Money Ctr., Inc. v. Ill. Union Ins. Co., 508 F.3d 327, 335–36 (6th Cir. 2007). 

Because the attached documents were incorporated by reference and quoted extensively, they are central to the 

Trustee’s claims. Moreover, neither party contests the appropriateness of their consideration on review of Textron’s 

motion to dismiss. 

2

For purposes of this opinion, documents filed in the United States Bankruptcy Court for the Northern 

District of Ohio prior to the motion to withdraw the adversary proceeding’s reference to the bankruptcy court are 

cited using a “B.C.” designation for “bankruptcy court.” The adversary proceeding’s bankruptcy court docket is 

captioned Bash v. Textron Financial Corporation, et al., No. 12-05101-aih. Documents filed in the United States 

District Court for the Northern District of Ohio following the withdrawal of the adversary proceeding from the 

bankruptcy court are cited using a “D.C.” designation for “district court.” The adversary proceeding’s district court 

docket is captioned Bash v. Textron Financial Corporation, et al., No. 12-cv-00987-PAG. Only documents filed 

within the district court will have a Page ID. Finally, documents filed in the United States Bankruptcy Court for the 

Northern District of Ohio in the Debtor’s principal bankruptcy case are cited using a “B.P.” designation for 

“bankruptcy petition.” The Debtor’s principal bankruptcy docket is captioned In re Fair Finance Company, No. 10-

50494. 

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owed $39 million in V-Notes, had never missed a V-Note payment (interest or otherwise), and 

had most recently operated at a $3 million profit. Id. at 27:165–28:166. 

In January 2002, Donald Fair sold the Debtor to Fair Holdings, Inc. (“FHI”) in a 

leveraged buyout. Id. at 5:24. Durham and Cochran, two Indiana businessmen, founded FHI to 

serve as a holding company for the Debtor. Id. at 5:25, 6:32–33. They also formed a secondary 

holding company, DC Investments, LLC (“DCI”), which existed exclusively to own FHI. Id. at 

28:171–72. Durham and Cochran were DCI’s sole members. Id. at 28:170.

 To purchase and operate the Debtor, FHI entered into a Loan and Security Agreement 

(“2002 L&SA”) with Textron and United Bank (“United”) on January 7, 2002.3

 D.C. R. 20 

(Mot. to Dismiss First Am. Compl. (“Mot. to Dismiss”) Ex. A) (Page ID #874–915). Under the 

terms of the 2002 L&SA, Textron and United agreed to make a $22 million revolving line of 

credit4 available to FHI and the Debtor. Id. at 3–4 (Page ID #876–77). In exchange for 

extending the line of credit, Textron and United were entitled to interest and fees on amounts 

borrowed, with all such payments to be made through a lockbox arrangement. Under the 

arrangement, payments made on Debtor-owned accounts receivable would be made directly into 

a lockbox account and a designated lockbox agent would transfer appropriate funds to Textron 

and United as necessary. Id. at 4–5 (Page ID #877–78). To secure the loan, FHI pledged all of 

its present and future assets, i.e., its non-diluted interest in the Debtor. Id. at 6–8 (Page ID #879–

81).5

 Of particular relevance to the present action, the 2002 L&SA included the following 

provision regarding the scope of the security interest created thereunder: 

(c) It is Borrower’s express intention that this Agreement and the continuing 

security interest granted hereby, in addition to covering all present obligations of 

Borrower to Lenders and their respective Affiliates pursuant to the Obligations, 

shall extend to all future obligations of Borrower to Lenders intended as 

replacements or substitutions for said Obligations, whether or not such 

 3

Immediately following the consummation of the leveraged buyout, the parties amended the 2002 L&SA to 

add the Debtor as a Borrower. D.C. R. 20 (Mot. to Dismiss First Am. Compl. (“Mot. to Dismiss”) Ex. B) (Page ID 

#916–918) 

4

The 2002 L&SA provided that Textron and United’s pro rata share of the line of credit would be 

$12 million and $10 million, respectively. D.C. R. 20 (Mot. to Dismiss Ex. A, at 3–4) (Page ID #876–77). 

5

To facilitate the leveraged buyout, FHI also issued a $4.1 million seller’s note to Donald Fair secured by a 

second priority lien in FHI’s assets. B.C. R. 8 (First Am. Compl. at 29:181–82). 

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Obligations are reduced or entirely extinguished and thereafter increased or 

reincurred. 

Id. at 7 (Page ID #880). As discussed in this opinion, the continued efficacy of the security 

interest created by the 2002 L&SA is at the heart of the Trustee’s fraudulent transfer claims. 

 The 2002 L&SA also provided that FHI and the Debtor would furnish Textron and 

United with (1) monthly certified financial statements, (2) yearly audited financial statements, 

(3) yearly financial statements and tax returns for the loan’s guarantors (Durham and Cochran), 

and (4) any other relevant materials. Id. at 14–15 (Page ID #887–88). In addition, Textron and 

United enjoyed the right to audit FHI and the Debtor up to four times per year. Id. at 16 (Page 

ID #889). To perfect the security interest established under the 2002 L&SA, Textron and United 

filed a UCC Financing Statement with the Ohio Secretary of State on January 8, 2002. D.C. R. 

20 (Mot. to Dismiss Ex. C) (Page ID #919–21). 

After settlement of the leveraged buyout, Durham became the Debtor’s CEO and 

immediately began a campaign of selling additional V-Notes with substantially longer maturities 

and elevated interest rates. B.C. R. 8 (First Am. Compl. at 6:36–7:37). Durham then directed a 

significant portion of the new V-Note capital into a series of “insider loans” for his personal 

benefit, the benefit of other failing companies that he and Cochran owned or controlled, and the 

benefit of the officers and directors of those failing companies. Id. at 7:37–38. Generally, the 

insider loans followed a common path: Durham would cause the Debtor to lend money to FHI 

(the Debtor’s parent), and FHI would then lend a corresponding amount directly to an insider or 

to DCI (FHI’s parent), which would then lend the money to an insider. Id. at 7:39. 

By the end of 2002, the Debtor had made more than $30 million in insider loans. Id. at 

7:40. By the end of 2006, that number had grown to approximately $137 million, and by 

September 2009, the Debtor had made more than $228 million in insider loans. Id. at 7:40–8:41. 

While the insider loans were delineated as performing assets in the Debtor’s offering circulars, 

id. at 36:235–37:236, the loans were made on commercially unreasonable terms, “permitt[ing] 

financially distressed [i]nsiders to defer all payments for years at a time, to ‘secure’ the loans 

with inadequate collateral, without perfecting liens, and allow[ing] borrowers to exceed their 

credit limits without review,” id. at 34:217–18. Moreover, when an insider loan approached 

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default, Durham would cause the Debtor to modify the loan and prevent the Debtor from 

enforcing its rights and/or collecting amounts due. Id. at 34:218–35:226. Unsurprisingly, at no 

point did the Debtor receive any significant payments on any of the insider loans, id. at 9:46, and 

as of the filing of the Debtor’s bankruptcy petition, the outstanding balance on the insider loans 

totaled approximately $233 million, id. at 37:237. 

During Durham and Cochran’s ownership and control of the Debtor, the company did 

maintain its factoring operations. Id. at 8:44. However, because the Debtor’s accounts 

receivable assets remained fairly steady, the company’s factoring operation alone could not 

support its ever increasing issuance of V-Notes and insider loans. Id. at 8:44–9:48. 

Accordingly, by December 2003, the Debtor was operating as “a classic Ponzi scheme,” 

constantly requiring the issuance of new V-Notes to pay off existing V-Notes as they matured 

and to make the requisite monthly interest payments to all V-Note holders. Id. at 9:47–48. 

Importantly, the offering circulars issued by the Debtor to effectuate the sale of new V-Notes 

concealed the Debtor’s insolvency, “failed to fully and fairly disclose that the Debtor would use 

the proceeds of [the] V-Notes to make [i]nsider [l]oans,” and “grossly overvalued” the insider 

loans that were made. Id. at 36:233–35. The outstanding balance to V-Note holders totaled 

approximately $208 million as of the filing of the Debtor’s bankruptcy petition. Id. at 37:238. 

Textron’s March 29, 2002 audit of the Debtor and FHI, as well as subsequent internal 

communications, reveal that Textron knew, as early as spring 2002, that Durham had been 

causing the Debtor to make insider loans and that the Debtor had dramatically increased its VNote placements. D.C. R. 66 (Order Redacting Decl. of Michael VanNiel in Connection with 

Trustee’s Br. in Opp’n to Mots. of Textron Financial Corp. & Fortress Credit Corp. to Dismiss 

First Am. Compl. (“Redacted VanNiel Decl.”) Exs. 1–2) (Page ID #3523–28). Further, 

Textron’s August 2002 audit evidences the company’s early concern regarding the Debtor and 

FHI’s troubling business practices. D.C. R. 66 (Redacted VanNiel Decl. Ex. 4, at 3–4) (Page ID 

#3531–34). The official who reviewed the audit noted that the Debtor’s “[t]otal assets grew 

primarily due to an $11.8 [million] investment in other current receivables,” representing 

advances made to FHI, and that “[t]he cash was raised for the advances by issuing V-6 

certificates.” Id. at 3 (Page ID #3533). The official further noted that FHI had provided a series 

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of “loans to several affiliated entities” and included a recommendation that Textron examine the 

“financial health” of the insider loans going forward. Id. at 4 (Page ID #3534).

In a March 2003 internal Textron memorandum, a Textron official discussed the Debtor 

and FHI’s financial positions in-depth and, when evaluating the Debtor’s 2002 internal balance 

sheet, explained that the company had made a variety of loans to “companies substantially 

owned by Tim Durham and Jim Cochran” and had listed the loans as assets. D.C. R. 20 (Mot. to 

Dismiss Ex. F, at 7–8) (Page ID #956–57). The Textron official explained that the loans were 

entirely funded through the increasing issuance of V-Notes and that, should additional liquidity 

be needed in response to a rise in V-Note redemptions, Textron would expect the Debtor to 

liquidate its insider loans. Id. Despite the acknowledged risks associated with the Debtor’s 

practice of issuing insider loans, the Textron official noted his belief that Textron’s exposure was 

limited as a result of covenants contained in the 2002 L&SA, specifically the subordination of 

the V-Notes to Textron and United’s security interest and the Debtor’s ability to limit V-Note 

payments “in any calendar month to 10% of any calendar month’s net cash.” Id. at 3 (Page ID 

#952). Ultimately, the official expressed his belief that the overall relationship would continue 

to be a profitable one for Textron. Id. at 9 (Page ID #958). 

As months passed, however, Durham’s operation of the Debtor continued to be a point of 

concern for Textron. In an August 2003 letter to Durham, Textron’s Senior Vice President of 

Portfolio Management, Ralph Infante, explained that FHI and the Debtor were in default under 

the 2002 L&SA and that Textron would require updated financials, access to the companies’ 

certified public accountant, and access to the companies’ legal counsel to address Textron’s 

questions and concerns regarding the Debtor’s V-Note program. D.C. R. 20 (Mot. to Dismiss 

Ex. G) (Page ID #959–60). Under the terms of the 2002 L&SA, the Debtor and FHI had been 

required to provide Textron with their 2002 audited financial statements by April 30, 2003. D.C. 

R. 20 (Mot. to Dismiss Ex. A, at 14–15) (Page ID #887–88). Yet, as of August 2003, Textron 

had only received a draft report of the companies’ 2002 financials. D.C. R. 20 (Mot. to Dismiss 

Ex. G) (Page ID #959–60). Moreover, the draft audit it did receive showed a host of 

irregularities, including (1) the existence of “related party” transactions, a portion of which were 

nonperforming; (2) limited or non-existent security interests in the “related party” transactions; 

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and (3) line items that resulted in an overstating of each company’s net worth. D.C. R. 20 (Mot. 

to Dismiss Ex. H, at 7–8) (Page ID #967–68). 

As the 2002 L&SA’s January 6, 2004 maturity date approached, the parties began 

discussing whether a renewed agreement would be possible. D.C. R. 20 (Mot. to Dismiss Exs. 

H–I) (Page ID #961–70). On November 13, 2003, Textron’s Infante sent an email to Durham 

and Cochran to communicate the results of a credit committee meeting during which Infante 

pitched replacing the line of credit established under the 2002 L&SA with a new commitment 

funded solely by Textron. D.C. R. 20 (Mot. to Dismiss Ex. I) (Page ID #970). Infante explained 

that, while the credit committee had yet to make a final determination, the Debtor and FHI’s 

frequent insider loans and decision to use the Debtor’s V-Note program “as a piggy bank to 

finance” the insider loans was a serious point of concern. Id. Infante also noted that the credit 

committee members believed that it was “wrong” for the V-Note capital to be used for anything 

but “the growth and profitability of [the Debtor]” and that, “[i]n today’s world of SarbanesOxley, predatory lending and recent court rulings,” the credit committee members were 

concerned that their knowledge of where the V-Note proceeds were going “could come back to 

haunt” them. Id.

Ultimately, however, after (1) reviewing the Debtor’s V-Note circulars and determining 

that they complied with Ohio placement requirements, (2) receiving accountant assurances that 

the affiliated entities benefited by the insider loans had sufficient assets to secure the debts, 

(3) receiving Durham and Cochran’s promise to have insiders pay down a portion of the loans, 

and (4) introducing a covenant that limited the creation of future insider loans, Textron felt 

comfortable maintaining its relationship with the Debtor and FHI. D.C. R. 66 (Redacted 

VanNiel Decl. Ex. 9) (Page ID #3561–64). United found no comfort in these considerations, 

however, and, as early as July 16, 2003, had written Textron and urged it to either buy out 

United’s interest under the 2002 L&SA or exercise its rights under the 2002 L&SA by declaring 

the Debtor and FHI in default and accelerating the entire amount due under the promissory note. 

D.C. R. 66 (Redacted VanNiel Decl. Ex 6) (Page ID #3548). Textron chose the former option 

and worked with the Debtor and FHI to establish the terms under which Textron would move 

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forward without United, its “uncooperative” partner. D.C. R. 20 (Mot. to Dismiss Ex. H) (Page 

ID #962–69); D.C. R. 66 (Redacted VanNiel Decl. Ex. 9) (Page ID #3561–64). 

On January 6, 2004, the Debtor and FHI entered into a First Amended and Restated Loan 

and Security Agreement (“2004 ARL&SA”). D.C. R. 66 (Redacted VanNiel Decl. Ex. 10) (Page 

ID #3565–625). The 2004 ARL&SA’s opening recitals explained that (1) pursuant to the 2002 

L&SA, Textron and United had “committed to make loans to [the Debtor and FHI] in an 

aggregate amount not to exceed $22,000,000” and that the Debtor and FHI “granted a security 

interest to [Textron and United] in substantially all [their] business assets”; (2) under the 2002 

L&SA, the Debtor and FHI delivered to Textron “promissory notes, security agreements, 

mortgage deeds, guaranties and other loan documents” that, together with the 2002 L&SA, 

constituted the “Original Loan Documents”; (3) the Debtor, FHI, and Textron “desire[d] to 

amend and restate the Original Agreement in order to reduce the amount of the aggregate loans 

to $17,500,000 and to modify certain of the terms and conditions of the lending”;6

 and 

(4) “[c]ontemporaneously with the execution of this Agreement,” Textron agreed to purchase 

and United agreed to sell “and release all of its interest in the Original Loan Documents.” Id. at 

1 (Page ID #3565). As was the case with the 2002 L&SA, the 2004 ARL&SA incorporated a 

“Grant of Security Interest” provision, under which the Debtor and FHI “assign[ed] [Textron] a 

continuing security interest and lien upon” the Debtor and FHI’s assets and provided that: 

(c) It is Borrowers’ express intention that this Agreement and the continuing 

security interest granted hereby, in addition to covering all present obligations of 

Borrowers to Lender and its Affiliates pursuant to the Obligations, shall extend to 

all future obligations of the Borrowers to Lender intended as replacements or 

substitutions for the Obligations, whether or not the Obligations are reduced or 

entirely extinguished and thereafter increased and reincurred. 

Id. at 7–8 (Page ID #3571–72). 

The 2004 ARL&SA differed from the 2002 L&SA in several respects. The 2004 

ARL&SA provided for a new interest rate, a new fee schedule, and new events of default. Id. at 

5, 17–18 (Page ID #3569, 3581–82). New covenants were added, one of which required the 

 6

An internal Textron memorandum specifically explained that the Debtor would be able to operate under a 

decreased credit facility “due to [the Debtor’s] ongoing access to the unsecured subordinate debt market in the form 

of the V6 certificate.” D.C. R. 66 (Redacted VanNiel Decl. Ex. 7) (Page ID #3550). 

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Debtor and FHI to “reduce the total amount of related-party indebtedness . . . in accordance 

with” an attached payment schedule, while another required the Debtor and FHI to refrain from 

“mak[ing] any loan or advances to any Affiliate, Dealer or any other Person.” Id. at 11–14 (Page 

ID #3575–78). Several new conditions precedent were added, the most relevant of which 

required the Debtor and FHI to deliver to Textron 50% of the amount due to United under the 

Original Loan Documents or otherwise required to release United as well as “all accrued interest, 

fees, expenses, and other charges owing” under the Original Loan Documents. Id. at 14–15 

(Page ID #3578–79). Additionally, because the Debtor and FHI’s legal counsel had expressed 

concerns as to whether the insider loans were adequately disclosed in the V-Note offering 

circulars, the 2004 ARL&SA confirmed the parties’ decision to amend the offering circulars but 

to postpone the release of the updated offering circulars to avoid sending “an unsettling message 

to the market.” Id. at Schedule 25(p) (Page ID #3624); D.C. R. 66 (Redacted VanNiel Decl. Ex. 

19) (Page ID #3813–14). One of the 2004 ARL&SA’s final provisions provided that it was 

“intended by the Borrowers and Lender to be the final, complete, and exclusive expression of 

the agreement between them” and that the “Agreement supersedes all prior oral or written 

agreements related to the subject matter hereof.” D.C. R. 66 (Redacted VanNiel Decl. Ex. 10, at 

23) (Page ID #3587). 

In addition to executing the 2004 ARL&SA, the parties executed a new promissory note 

in the amount of $17,500,000. D.C. R. 66 (Redacted VanNiel Decl. Ex. 15) (Page ID #3733–

35). The January 6, 2004 promissory note provided as follows: “This Promissory Note and the 

advances contemplated hereunder are made pursuant to the terms and provisions of that certain 

First Amended and Restated Loan and Security Agreement . . . .” Id. Additionally, “[f]or the 

purpose of inducing [Textron] to lend money or extend credit to [the Debtor and FHI] by a 

revolving loan . . . in the Maximum Loan Amount of $17,500,000,” both Durham and Cochran 

executed new continuing unlimited personal guarantees. D.C. R. 66 (Redacted VanNiel Decl. 

Ex. 16) (Page ID #3736–51). Textron did not file a UCC financing statement upon the execution 

of the 2004 ARL&SA. On July 31, 2006, Textron did, however, file a UCC financing statement 

amendment, purporting to evidence the continuation of the security interest established on 

January 8, 2002, pursuant to the 2002 L&SA. D.C. R. 20 (Mot. to Dismiss Ex. D) (Page ID 

#922). 

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Despite the assurances of Durham and Cochran and the new covenants created in the 

2004 ARL&SA, a series of internal Textron modification requests evidence the lender’s 

knowledge and growing discontent concerning Durham and Cochran’s commitment to 

continuing their fraudulent scheme. D.C. R. 66 (Redacted VanNiel Decl. Ex. 12) (Page ID 

#3628–96). For example, a February 10, 2005 modification request indicates that the Debtor and 

FHI continued to miss deadlines for providing Textron with audited financials. Id. (Page ID 

#3629–30). As it turned out, the delay stemmed from the Debtor and FHI’s termination of their 

accounting firm in response to the firm’s determination that it could not issue the Debtor an 

unqualified audit opinion due to its many concerns regarding the Debtor’s insider loans and 

solvency.7 B.C. R. 8 (First Am. Compl. at 68:415–71:426). And while the Debtor and FHI’s 

new accounting firm issued an unqualified consolidated audit opinion for 2003 and 2004, the 

new firm later determined that the accounting analysis employed in the opinion was flawed, and 

it instructed Durham not to use the opinion in future offering circulars, an instruction Durham 

did not follow. Id. at 72:430–75:446. 

When the new accounting firm conducted a new audit that employed the appropriate FIN 

468 analysis, the audit showed that the Debtor and FHI had overvalued the insider loans since 

2002 and that the combined entities were insolvent by more than $21 million. D.C. R. 66 

(Redacted VanNiel Decl. Ex. 12) (Page ID #3666–68). After the firm provided the Debtor and 

FHI with its preliminary reports in the spring of 2006, the Debtor and FHI terminated the second 

accounting firm to avoid the release of an adverse audit opinion. B.C. R. 8 (First Am. Compl. at 

75:446–48, 78:460–79:470); D.C. R. 66 (Redacted VanNiel Decl. Ex. 24) (Page ID #3882–96). 

The Debtor and FHI then chose to release financial statements that were reviewed by a third 

accounting firm and certified by Durham, as opposed to releasing audited financial statements. 

Id. 

 7

The Debtor and FHI did not tell Textron that they had terminated their accounting firm but instead 

explained that the firm resigned to avoid a conflict of interest. D.C. R. 20 (Mot. to Dismiss Ex. M) (Page ID #986). 

8

FIN 46 is an anti-fraud interpretation developed by the Financial Accounting Standards Board that calls 

for a consolidated analysis of related entities to avoid inaccurate financial pictures. D.C. R. 20 (Mot. to Dismiss Ex. 

O) (Page ID #1006). 

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Textron continued to work with the Debtor and FHI through these issues, waiving various 

covenant violations and extending the loan on multiple occasions through the execution of ten 

distinct amendments to the 2004 ARL&SA. D.C. R. 66 (Redacted VanNiel Decl. Ex. 17) (Page 

ID #3752–3808). In exchange for the waivers and extensions, Textron received consideration in 

the form of significant non-refundable fees and assurances that Durham and Cochran were 

working to find an alternative lender that could refinance the loan and repay Textron in full. Id.; 

B.C. R. 8 (First Am. Compl. at 80:475–77). For example, upon the execution of the first waiver 

and amendment, Textron received a wavier fee of $30,000, D.C. R. 66 (Redacted VanNiel Decl. 

Ex. 12) (Page ID #3752–57), two $43,750 accommodation fees in exchange for the third and 

fourth amendments, id. (Page ID #3763–71), and a graduated series of fees totaling $135,000 in 

exchange for the execution of the seventh amendment to the 2004 ARL&SA, id. (Page ID 

#3783–88). 

On July 20, 2007, the Debtor and FHI finally secured alternative funding in the form of a 

$23 million asset sale transaction, and Textron received a total payment of $16,999,927.09, 

representing all the money owed under the 2004 ARL&SA. B.C. R. 8 (First Am. Compl. at 

82:493); D.C. R. 66 (Redacted VanNiel Decl. Ex. 18) (Page ID #3809–12). In turn, Textron 

agreed to release all liens securing the loan documents. D.C. R. 66 (Redacted VanNiel Decl. Ex. 

18) (Page ID #3809–12). The Trustee alleges, and Textron does not dispute that, from the 

execution of the 2004 ARL&SA to Textron’s payoff, the Debtor and FHI made more than $300 

million in payments to Textron. Appellant’s Opening Br. 14. 

Approximately two years after Textron’s relationship with the Debtor and FHI ended, the 

FBI raided the Debtor’s headquarters, seizing its documents and computers. B.C. R. 8 (First 

Am. Compl. at 19:111). On March 15, 2011, Durham, Cochran, and the Debtor’s Chief 

Financial Officer, Rick Snow, were indicted for wire fraud, securities fraud, and conspiracy. Id.

at 20:113. All three were convicted of various counts alleged in the indictment, and each is now 

serving a federal prison sentence. United States v. Durham, 766 F.3d 672 (7th Cir. 2014) 

(affirming Cochran’s twenty-five-year prison sentence and Snow’s ten-year prison sentence); 

United States v. Durham, 630 F. App’x 634 (7th Cir. 2016) (unpublished) (affirming Durham’s 

resentencing to a term of fifty years’ imprisonment). 

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B. 

 After the FBI raided the Debtor’s headquarters and the Ponzi scheme collapsed, certain 

V-Note holders filed a petition for involuntary bankruptcy against the Debtor. B.P. R. 1 

(Involuntary Bankr. Pet. (Chapter 7)). Following his appointment, the Trustee filed a number of 

adversary proceedings in the Bankruptcy Court for the Northern District of Ohio, including the 

present action against Textron, Fortress Credit Corporation, and Fair Facility I, LLC. B.C. R. 1 

(Compl.); B.C. R. 8 (First Am. Compl.). As to Textron, the only relevant defendant on appeal, 

the Trustee brought aiding and abetting claims, a conspiracy claim, claims to avoid and recover 

actual and constructive fraudulent transfers under 11 U.S.C. § 544(a) and (b)(1), O.R.C. 

§ 1336.04(A)(1) and (A)(2), O.R.C. § 1336.05(A), O.R.C. § 2307.61, 11 U.S.C. § 550(a), and 11 

U.S.C. § 551, and equitable subordination and disallowance claims. B.C. R. 8 (First Am. Compl. 

at 112–16, 124–26, 128, 130, 132, 135–37). 

In March 2012, both Textron and the Trustee moved to have the adversary proceeding’s 

reference to the bankruptcy court withdrawn pursuant to 28 U.S.C. § 157(d) so that the case 

could proceed in the United States District Court for the Northern District of Ohio. D.C. R. 1 

(Def.’s Mot. to Withdraw Reference to the U.S. Bankr. Ct. for the Northern Dist. of Ohio) (Page 

ID #1–23); D.C. R. 2 (Trustee’s Mot. for Entry of Order Withdrawing Reference of Adv. 

Proceedings) (Page ID #137–56). The district court granted the motions on April 20, 2012. D.C. 

R. 19 (Order Apr. 19, 2012) (Page ID #824). That same day, Textron moved in the district court 

to dismiss the Trustee’s claims for lack of standing, failure to state a claim, and failure to timely 

file the claims within the applicable statutes of limitations. D.C. R. 20 (Mot. to Dismiss) (Page 

ID #825–1025). The district court referred the adversary proceeding to the bankruptcy court for 

pretrial supervision and the filing of a report and recommendation on all dispositive motions. 

D.C. R. 29 (Order Apr. 30, 2012) (Page ID #1605). 

On July 31, 2012, the bankruptcy court issued a report and recommendation addressing 

Textron’s motion to dismiss. D.C. R. 60 (R.&R. to Deny Def.’s Mot. to Dismiss) (Page ID 

#3458–65). The bankruptcy court recommended denying Textron’s motion to dismiss in full, 

concluding that the Trustee had sufficiently pled each claim and that resolution of the claims on a 

motion to dismiss was inappropriate as Textron’s arguments in favor of dismissal required the 

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resolution of factual disputes. Id. at 3–8 (Page ID #3459–65). Textron objected to the report and 

recommendation, D.C. R. 75 (Obj. of Def. to R.&R. on Mot. to Dismiss Am. Compl.) (Page ID 

#5412–50), and on November 9, 2012, the district court rejected the report and recommendation 

and granted Textron’s motion to dismiss, D.C. R. 122 (Mem. Op. & Order Nov. 9, 2012) (Page 

ID #7210–58). 

 As to the Trustee’s fraudulent transfer claims, the district court concluded as a matter of 

law that the 2004 ARL&SA was not a novation of the 2002 L&SA and, as a result, the security 

interest conveyed pursuant to the 2002 L&SA continued in full force. Id. at 24–28 (Page ID 

#7233–37). Further, because Textron had maintained a valid security interest in the Debtor’s 

assets since 2002, neither the 2004 ARL&SA nor the payments made thereunder could qualify as 

“transfers” for purposes of a fraudulent transfer claim. Id. The district court also determined 

that any post-execution bad faith on the part of Textron did not render the 2002 security interest 

invalid for purposes of the Trustee’s fraudulent transfer claims. Id. 

Next, the district court addressed the Trustee’s aiding and abetting claim and determined 

that dismissal was appropriate in light of a recent decision by the Ohio Supreme Court, in which 

the court explained that Ohio does not recognize a cause of action for tortious acts undertaken. 

Id. at 28–29 (Page ID #7237–38). Turning to the Trustee’s civil conspiracy claim, the district 

court concluded that the allegations of the amended complaint established that the in pari delicto

bar to tort recovery was applicable. Id. at 30–35 (Page ID #7239–44). Specifically, the district 

court explained that Durham and Cochran so dominated the Debtor that their conduct would be 

imputed to the Debtor and that, even if the Ohio Supreme Court would recognize an innocent 

insider exception to foreclose such imputation in certain circumstances, the Trustee had failed to 

allege the existence of any innocent insider. Id. After imputing Durham and Cochran’s 

wrongful conduct to the Debtor, the district court found that the Debtor was, at a minimum, as 

culpable as Textron in perpetuating the Ponzi scheme, and it dismissed the Trustee’s civil 

conspiracy claim under the in pari delicto affirmative defense. Id. Lastly, the district court 

concluded that the Trustee’s equitable subordination and disallowance claims should also be 

dismissed. Id. at 35–36 (Page ID #7244–45). The bankruptcy court had recommended denying 

the dismissal of those claims because Textron had not yet filed a proof of claim in the Debtor’s 

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bankruptcy proceeding. Id. Although Textron did not object to that recommendation, the district 

court sua sponte dismissed those claims because it had already dismissed the Trustee’s 

underlying substantive claims. Id. 

The November 9, 2012 memorandum opinion and order dismissing the Trustee’s claims 

against Textron was merged into the district court’s July 24, 2015 final judgment, and, on August 

3, 2015, the Trustee filed a timely notice of appeal. D.C. R. 261 (Not. of Appeal) (Page ID 

#57085–87). 

II. 

 The Trustee argues that the district court improperly dismissed his fraudulent transfer, 

civil conspiracy, and equitable subordination and disallowance claims. We examine each claim 

in turn and review de novo whether the district court properly granted Textron’s motion to 

dismiss. Mertik v. Blalock, 983 F.2d 1353, 1356 (6th Cir. 1993). “A claim survives such a 

motion if its ‘[f]actual allegations [are] enough to raise a right to relief above the speculative 

level on the assumption that all of the complaint’s allegations are true.’” Jones v. City of 

Cincinnati, 521 F.3d 555, 559 (6th Cir. 2008) (alteration in original) (quoting Bell Atl. Corp. v. 

Twombly, 550 U.S. 544, 555 (2007)). 

A. 

1. 

We turn first to the Trustee’s fraudulent transfer claims. The Trustee asserts that, 

pursuant to the Ohio Uniform Fraudulent Transfer Act (“UFTA”), Ohio Rev. Code § 1336.01 et 

seq.,9

 the Debtor can avoid the obligations incurred and payments made under the 2004 

ARL&SA because the security interest conveyed by the Debtor to secure the 2004 ARL&SA and 

all the payments made in accordance with the Debtor’s obligations under that agreement qualify 

as either actual or constructive fraudulent transfers. Because, as discussed below, the Trustee’s 

constructive fraudulent transfer claim is barred by the applicable statute of limitations, we limit 

our discussion here to the Trustee’s actual fraudulent transfer claim. 

 9

The Trustee brings the fraudulent transfer claims under 11 U.S.C. § 544, which permits a bankruptcy 

trustee to seek avoidance of fraudulent transfers under applicable state laws. 

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Section 1336.04(A)(1) of the Ohio UFTA provides that “[a] transfer made or an 

obligation incurred by a debtor is fraudulent” and avoidable as to a creditor, “if the debtor made 

the transfer or incurred the obligation . . . [w]ith [the] actual intent to hinder, delay, or defraud 

any creditor of the debtor.” The Ohio UFTA broadly defines “transfer” as “every direct or 

indirect, absolute or conditional, and voluntary or involuntary method of disposing of or parting 

with an asset or an interest in an asset, and includes payment of money, release, lease, and 

creation of a lien or other encumbrance.” § 1336.01(L). And it defines “lien” to include “a 

security interest created by agreement.” § 1336.01(H). Importantly, however, the Ohio UFTA 

explicitly carves out all “[p]roperty to the extent it is encumbered by a valid lien” from the 

statute’s definition of a transferable asset. § 1336.01(B)(1).10 When read in concert, these 

provisions provide that, to state a claim for relief under the Ohio UFTA, the Trustee must allege 

facts plausibly suggesting that the 2004 ARL&SA, including its conveyance of a security interest 

in all of the Debtor’s property, and the payments made pursuant to the 2004 ARL&SA, 

constitute transfers under the Ohio UFTA. That is, he must show that the assets or interests in 

assets conveyed by the Debtor pursuant to the 2004 ARL&SA were not already encumbered by a 

valid lien. 

The district court dismissed the Trustee’s actual fraudulent transfer claim, concluding that 

the Trustee had failed to make such a showing. Specifically, the district court determined that, 

because the 2004 ARL&SA was merely a refinancing of the 2002 L&SA, the security interest 

established pursuant to the 2002 L&SA remained in full force and encumbered any assets or 

interests in assets conveyed with regard to the 2004 ARL&SA. Bash v. Textron Fin. Corp., 

483 B.R. 630, 646 (N.D. Ohio 2012). The district court thus concluded that the Trustee had 

failed to allege the existence of an avoidable transfer for purposes of the Ohio UFTA. Id. 

On appeal, the Trustee argues that three independent grounds exist for nullifying or 

invalidating the lien, or security interest, established under the 2002 L&SA, thereby rendering 

the 2004 ARL&SA, including its grant of a security interest, and the payments made thereunder 

 10Property encumbered by a valid lien does not constitute a transferable asset because, from the time a 

valid lien is perfected, the property is no longer considered part of the debtor’s estate. Comer v. Calim, 716 N.E.2d 

245, 249 (Ohio Ct. App. 1998). 

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avoidable transfers.11 First, the Trustee contends that the 2004 ARL&SA was a novation of the 

2002 L&SA and that, when the 2002 L&SA was extinguished, so too was the security interest 

granted thereunder. Next, the Trustee argues that, if this Court turns first to the contractual 

obligations incurred pursuant to the 2004 ARL&SA and finds them avoidable as incurred for the 

purpose of defrauding the Debtor’s creditors, then the 2002 lien securing those contractual 

obligations becomes a legal nullity. Finally, the Trustee asserts that this Court may use its 

equitable powers to subordinate the 2002 security interest in light of Textron’s post-perfection 

bad faith and that such subordination would effectively render Textron’s lien invalid for 

purposes of the Ohio UFTA. 

Because we conclude that the Trustee has demonstrated that the district court erred in 

determining as a matter of law that the parties did not intend the 2004 ARL&SA as a novation of 

the 2002 L&SA, we reverse the judgment of the district court on the Trustee’s first theory and 

remand for further proceedings without examining the merits of the Trustee’s other two 

arguments. We note, however, that our silence as to the two alternative theories for invalidating 

the 2002 security interest should in no way be taken as a comment in favor of or against the 

viability of such arguments going forward; specifically, our vacatur of the judgment means that 

the district court may, in its discretion and in light of this opinion, revisit those issues upon 

remand. 

2. 

The Trustee argues that, under Ohio law, the 2004 ARL&SA constituted a novation of 

the 2002 L&SA. Thus, the Trustee contends that, upon execution of the 2004 ARL&SA, the 

2002 L&SA along with its underlying security interest was extinguished. As a result, the Trustee 

asserts that the Debtor’s assets were not encumbered by a preexisting valid lien and that he may 

therefore seek avoidance of the 2004 ARL&SA, including the security interest granted 

thereunder, and all payments made pursuant to that obligation as fraudulent transfers. The 

 11At no point does the Trustee assert that the 2002 L&SA, its grant of a security interest, or any of the 

payments made to Textron pursuant to the 2002 L&SA constitute avoidable transfers under the Ohio UFTA, likely 

recognizing that Textron seemingly acted in good faith when it initially entered into business with Durham and 

Cochran—an affirmative defense allowing a recipient of a fraudulent transfer to nonetheless avoid liability. See

Ohio Rev. Code §1336.08(A) (“A transfer or obligation is not fraudulent . . . against a person who took in good faith 

and for a reasonably equivalent value . . . .”). 

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district court disagreed with the Trustee’s argument and, instead, determined that the 

2004 ARL&SA constituted a mere refinancing of the 2002 L&SA that did not impact the 

ongoing validity of the 2002 security interest. At the motion to dismiss stage and on the record 

before us, however, we must agree with the Trustee that the allegations are sufficient to state a 

claim and that genuine factual disputes surround the issue of the effect of the 2004 ARL&SA on 

the continuing validity of the security interest conveyed under the 2002 L&SA. 

“A contract of novation is created where a previous valid obligation is extinguished by a 

new valid contract, accomplished by substitution of parties or of the undertaking, with the 

consent of all the parties, and based on valid consideration.” McGlothin v. Huffman, 640 N.E.2d 

598, 601 (Ohio Ct. App. 1994). The Ohio Court of Appeals has explained that “[i]ntent, 

knowledge and consent are the essential elements in determining whether a purported novation 

has been accepted.” Nat’l City Bank v. Reat Corp., 580 N.E.2d 1147, 1149 (Ohio Ct. App. 1989) 

(alteration in original) (quoting Bolling v. Clevepak Corp., 484 N.E.2d 1367, 1379 (Ohio Ct. 

App. 1984)). “A party’s knowledge of and consent to the terms of a novation need not be 

express, but may be implied from circumstances or conduct.” Id. “[T]he evidence of such 

knowledge and consent,” however, “must be clear and definite, since a novation is never 

presumed.” Bolling, 484 N.E.2d at 1379. These basic principles have routinely been applied in 

cases involving contracts delineating financial rights and obligations. See, e.g., Noland v. 

Wilmington Sav. Bank (In re D & K Aviation, Inc.), 349 B.R. 169, 175–77 (Bankr. S.D. Ohio 

2006) (noting that, where a new note has been executed between existing parties, Ohio law 

provides for a presumption in favor of finding a new loan transaction to be “a renewal of the 

original debt that retains the same security” as opposed to a novation; a party may overcome this 

presumption by demonstrating that the parties intended for the “new loan transaction [to] 

discharge[] [the] prior debt and its corresponding security”); Holland v. Assocs. Fin. (In re 

Holland), 16 B.R. 83, 87 (Bnkr. N.D. Ohio 1981) (“It is well settled in Ohio that renewals of 

notes, or changes in the form of the evidence of a precedent debt, do not create a new debt, or 

operate as a discharge or satisfaction of the old debt, unless it is expressly agreed between the 

parties.”). 

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Here, the district court concluded as a matter of law that the parties clearly intended the 

2004 ARL&SA to be a mere refinancing of the 2002 L&SA and not a novation. In so 

concluding, the district court emphasized that (1) the 2004 ARL&SA provided for a security 

interest in the same collateral that was encumbered under the 2002 L&SA; (2) the 

2004 ARL&SA actually reduced the aggregate line of credit available to the Debtor; (3) the 

language of the 2002 L&SA12 provided for Textron’s security interest to extend to cover “future 

obligations of Borrower to Lenders intended as replacements or substitutions for said 

Obligations, whether or not such Obligations are reduced or entirely extinguished and thereafter 

increased”; and (4) one of the 2004 ARL&SA’s recitals set forth the parties’ “desire to amend 

and restate the Original Agreement.” Bash, 483 B.R. at 647–48. These facts, to varying degrees, 

do support the district court’s conclusion that the parties did not clearly intend the 

2004 ARL&SA to be a novation of the 2002 L&SA. Importantly, however, there remains 

extensive evidence that went unexamined by the district court, evidence that supports the 

Trustee’s contention that the parties clearly and overwhelmingly manifested their intent for the 

2004 ARL&SA to constitute a novation of the 2002 L&SA, making it inappropriate to determine 

the parties’ intent at the motion to dismiss stage. See Crane Hollow, Inc. v. Marathon Ashland 

Pipe Line, LLC, 740 N.E.2d 328, 340 (Ohio Ct. App. 2000) (noting that, “if [a] contract is 

ambiguous, ascertaining the parties’ intent constitutes a question of fact”). 

Turning first to the text of the 2004 ARL&SA, several provisions evidence the parties’ 

intent for the 2004 ARL&SA to wholly replace and extinguish the 2002 L&SA as the operative 

agreement between the parties. For example, Paragraph 39 expressly sets forth the parties’ 

desire to have the 2004 ARL&SA “supersede[] any and all prior oral or written agreements 

relating to the subject matter thereof.” D.C. R. 66 (Redacted VanNiel Decl. Ex. 10, at 23) (Page 

ID #3587). In the same vein, Paragraph 35 explains that the 2004 ARL&SA “constitutes the 

entire agreement of Borrowers and Lender relative to the subject matter hereof.” Id. at 21 (Page 

ID #3585). Further, in Paragraph 11, the Debtor and FHI agreed to “grant, pledge, convey and 

 12The Trustee contends that the district court inappropriately relied on evidence outside the 2004 ARL&SA 

when examining the parties’ intent. Graham v. Drydock Coal Co., 667 N.E.2d 949, 952 (Ohio 1996) (“The intent of 

the parties is presumed to reside in the language they chose to use in their agreement.”). Because the 2004 

ARL&SA is ambiguous as to the parties’ intent, however, an exploration of relevant extrinsic evidence is permitted. 

Shifrin v. Forest City Enters. Inc., 597 N.E.2d 499, 501 (Ohio 1992). 

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assign” a new security interest in and lien upon their property to Textron “to secure the prompt 

and full payment and complete performance of all obligations of Borrowers to Lender under [the 

2004 ARL&SA].” Id. at 6–8 (Page ID #3570–72). Lastly, in the conclusion to the 

2004 ARL&SA’s recitals, the parties explicitly confirmed that the 2004 ARL&SA was the 

product of “valuable consideration, the receipt and sufficiency of which are hereby 

acknowledged.” Id. at 1 (Page ID #3565). Read together, these provisions support a finding that 

the parties demonstrated their intent to “extinguish[] their obligations under the prior agreement” 

and be bound anew under the terms of the 2004 ARL&SA. See 216 Jamaica Ave., LLC v. S & R 

Playhouse Realty Co., 540 F.3d 433, 439 (6th Cir. 2008) (applying Ohio law). 

We find additional evidence of the parties’ intent to have the 2004 ARL&SA operate as a 

novation of the 2002 L&SA in the circumstances surrounding the execution of the 2004 

ARL&SA. First, the parties entered into the 2004 ARL&SA on the date the 2002 L&SA 

matured. Second, the parties replaced the 2002 promissory note and personal guarantees with a 

new promissory note and new personal guarantees. Third, the 2004 ARL&SA imposed 

significant new terms on both parties, including (1) new interest rate and fee terms; (2) an 

increased financial commitment on the part of Textron; (3) a requirement that the Debtor and 

FHI deliver to Textron 50% of the amount required to obtain United’s release from the 2002 

L&SA as well as “all accrued interest, fees, expenses and other charges owing by Borrowers 

under the Original Agreement”; and (4) the removal of United as a lender. D.C. R. 66 (Redacted 

VanNiel Decl. Ex. 10, at 14–15) (Page ID #3578–79). It is true that any one of these facts, in 

isolation, might fail to constitute a clear manifestation of the parties’ intent to have the 

2004 ARL&SA serve as a novation of the 2002 L&SA. However, when examined together, in 

conjunction with the relevant provisions of the 2004 ARL&SA, and in the light most favorable to 

the Trustee as the nonmoving party, these facts demonstrate, at the very least, the existence of an 

ambiguity as to whether the parties clearly intended the 2004 ARL&SA to extinguish the 

2002 L&SA. Potti v. Duramed Pharm, Inc., 938 F.2d 641, 647 (6th Cir. 1991) (explaining that, 

“[u]nder Ohio law, [while] interpretation of written contract terms is a matter of law for initial 

determination by the court,” “when the relevant contract language is ambiguous . . . the job of 

interpretation is turned over to the fact finder”). To be sure, the ambiguity in this case is not so 

much over the discrete meaning of a contract term or the elements of a bargained-for 

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performance. Rather, it derives from the unique role an ostensible novation plays in setting the 

framework for performance. Under the circumstances here, a “new agreement” does not 

necessarily require the creation of a new security interest, but neither does a “new agreement” 

foreclose a finding of an intent on the part of the contracting parties that prior dealings have 

come to an end and that a new lien be created. 

In that light, it bears mention that the principal, if not singular, case that the district court 

relied upon, Official Committee of Unsecured Creditors of Tousa, Inc. v. Citicorp North 

America, Inc. (In re TOUSA, Inc.), No. 09-60589, 2011 WL 1627129 (S.D. Fla. Mar. 4, 2011), is 

distinguishable from the case here. In In re TOUSA, Inc., the district court concluded that the 

execution of a Second Amended and Restated Revolving Credit Agreement did not constitute a 

new obligation for the purposes of a fraudulent conveyance claim because a preexisting security 

agreement remained in effect. Id. at *7–8. In determining that the initial security agreement still 

bound the plaintiff, the district court relied heavily on the Second Amended and Restated 

Revolving Credit Agreement’s explicit statement that “it was the ‘intent of the parties . . . that the 

security interests and [l]iens granted in the [c]ollateral under and pursuant to the [o]riginal 

[s]ecurity [a]greement shall continue in full force and effect.’” Id. at *1, *7 (alterations in 

original). No such language exists in the 2004 ARL&SA at issue in this case and that renders 

decision of the issue as a matter of law especially challenging. We think that challenge cannot 

be met here. 

Accordingly, because the Trustee has established the existence of an ambiguity as to 

whether the parties clearly intended the 2004 ARL&SA to extinguish the 2002 L&SA and the 

security interest it created, we conclude that the district court erred when it determined as a 

matter of law that the 2004 ARL&SA was not a novation of the 2002 L&SA and that the security 

interest created pursuant to the 2002 L&SA remained in full force. The Trustee sufficiently 

showed, for purposes of withstanding Textron’s motion to dismiss, that the Debtor’s assets were 

no longer encumbered by a preexisting valid lien when the parties executed the 2004 ARL&SA 

and the Debtor granted Textron a new security interest in its assets. 

Moreover, we hold that the Trustee has sufficiently stated a plausible claim for relief 

under the Ohio UFTA. The Trustee pled facts that, taken as true, demonstrate that the 2004 

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ARL&SA, the security interest the Debtor granted pursuant to the 2004 ARL&SA, and all 

payments made by the Debtor in accordance with its obligations under the 2004 ARL&SA 

amount to fraudulent transfers under the Ohio UFTA because each transaction was undertaken in 

an effort to perpetuate a Ponzi scheme that inevitably collapsed and left hundreds of 

unsophisticated Ohio investors holding the bag. See, e.g., Rieser v. Hayslip (In re Canyon Sys. 

Corp.), 343 B.R. 615, 636–37 (Bankr. S.D. Ohio 2006) (compiling cases in which transfers made 

in the course of a Ponzi scheme were determined to have been made with the actual intent to 

hinder, delay, or defraud creditors as a matter of law).13

3. 

As an alternative basis for affirming the dismissal of the fraudulent transfer claims, 

Textron argues that the claims are barred by the applicable statutes of limitations. For purposes 

of an actual fraudulent transfer claim, the Ohio UFTA provides that: 

[a] claim for relief with respect to a transfer or an obligation that is fraudulent 

. . . is extinguished unless [the] action is brought . . . within four years after the 

transfer was made or the obligation was incurred or, if later, within one year after 

the transfer or obligation was or reasonably could have been discovered by the 

claimant. 

Ohio Rev. Code § 1336.09(A). In the case of a constructive fraudulent transfer claim, the Ohio 

UFTA provides that the claim must be brought “within four years after the transfer was made or 

the obligation was incurred.” § 1336.09(B). 

Here, the Trustee is seeking to avoid the obligations incurred under the 2004 ARL&SA 

and all transfers of assets made in connection with the 2004 ARL&SA, including the grant of the 

2004 security interest. The parties executed the 2004 ARL&SA on January 6, 2004; the 

Debtor’s bankruptcy petition was not filed until February 8, 2010. Accordingly, because the 

Trustee brought the constructive fraudulent transfer claim well outside the applicable four-year 

 13And while Textron argues that the novation analysis is ultimately irrelevant because the 2004 ARL&SA 

was the subject of its own valid lien, Textron cannot use the creation of a lien that the Trustee has plausibly alleged 

is itself avoidable as a fraudulent transfer as a shield from application of the Ohio UFTA. Cf. § 1336.01(L) (broadly 

defining “transfer” as “every direct or indirect, absolute or conditional, and voluntary or involuntary method of 

disposing of or parting with an asset or an interest in an asset, . . . includ[ing] payment of money, release, lease, and 

creation of a lien or other encumbrance” (emphasis added)). 

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statute of limitations, we agree with Textron and conclude that the Trustee’s constructive 

fraudulent transfer claim is time barred. As for the Trustee’s actual fraudulent transfer claim, the 

parties agree that it must fall within the ambit of the latter portion of § 1336.09(A), the 

provision’s discovery rule, in order to be timely. The parties disagree, however, as to whether, 

for purposes of § 1336.09(A), discovery occurs when the transfer is discoverable or when the 

transfer’s fraudulent nature is discoverable. 

When resolving an issue of state law, “we look to the final decisions of that state’s 

highest court, and if there is no decision directly on point, then we must make an Erie guess to 

determine how that court, if presented with the issue, would resolve it.” Conlin v. Mortg. Elec. 

Registration Sys., Inc., 714 F.3d 355, 358–59 (6th Cir. 2013). “Intermediate state appellate 

courts’ decisions are also viewed as persuasive unless it is shown that the state’s highest court 

would decide the issue differently.” Savedoff v. Access Grp., Inc., 524 F.3d 754, 762 (6th Cir. 

2008). In this instance, neither the Ohio Supreme Court nor Ohio’s Court of Appeals has 

directly addressed the issue before us. Accordingly, we must “consider all relevant data, 

including jurisprudence from other jurisdictions,” Combs v. Int’l Ins. Co., 354 F.3d 568, 577 (6th 

Cir. 2004) (internal citations and quotation marks omitted), and we must “make [the] best 

prediction, even in the absence of direct state court precedent, of what the [Ohio] Supreme Court 

would do if it were confronted with this question,” Managed Health Care Assocs., Inc. v. 

Kethan, 209 F.3d 923, 927 (6th Cir. 2000) (first alteration in original) (quoting Welsh v. United 

States, 844 F.2d 1239, 1245 (6th Cir. 1988)). 

The only cases to have directly addressed the issue of accrual of a claim under the 

discovery rule of § 1336.09(A) of the Ohio UFTA have arisen in the federal district courts sitting 

in Ohio, and those decisions, in addition to reaching varied conclusions, offer little in the way of 

guidance. See Bradley v. Miller, 96 F. Supp. 3d 753 (S.D. Ohio 2015); Fitness Quest Inc. v. 

Monti, No. 5:06CV2691, 2012 WL 3587491 (N.D. Ohio Aug. 20, 2012); Treinish v. Spitaleri (In 

re Spitaleri), No. 05-94988, 2006 WL 4458357 (Bankr. N.D. Ohio May 9, 2006). For example, 

in 2006, the Bankruptcy Court for the Northern District of Ohio concluded that the Ohio UFTA 

did not provide a savings clause, as was the case with Ohio’s repealed fraudulent conveyance 

statute, but instead provided a “constructive discovery” clause that hinged on discovery of the 

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transfer and not on discovery of the fraud. In re Spitaleri, 2006 WL 4458357, at *2. In making 

this distinction, however, the court did not cite any Ohio cases that had previously required a 

plaintiff to demonstrate that she discovered the existence of the transfer within one year of filing 

her complaint, as opposed to requiring that she establish when she discovered the transfer’s 

fraudulent nature. Id. 

While a district court in another case relied on In re Spitaleri to conclude that “the statute 

of limitations on Ohio fraudulent transfer claims begins to run on the date that a creditor could 

have discovered the transfer, and not when the alleged fraud was discovered,” the court sought to 

bolster this holding by citing two unpublished opinions of the Ohio Court of Appeals. Fitness 

Quest, Inc., 2012 WL 3587491, at *5 (citing Davis v. McDowell, No. H-06-001, 2006 WL 

2242875 (Ohio Ct. App. June 30, 2006); Cunningham v. Cunningham, No. 01CA007938, 2002 

WL 1263964 (Ohio Ct. App. May 29, 2002)). Those state court decisions, however, prove fairly 

unsupportive upon close inspection. In each instance, the state court employed a limited 

constructive discovery analysis, at no point directly considering whether discovery of a transfer 

without knowledge of its fraudulent nature would be sufficient, presumably because, in each 

case, it appears that the creditor actually became aware of the transfer and the transfer’s 

fraudulent nature simultaneously. Davis, 2006 WL 2242875, at *1 (discovering that appellant 

transferred home months after claimant obtained a state court judgment against appellant); 

Cunningham, 2002 WL 1263964, at *2 (discovering, during the course of divorce proceedings, 

that appellant “gifted” home to his brother the same day appellant filed for divorce). 

More recently, a district court for the Southern District of Ohio charted a contrary course 

altogether. See Bradley, 96 F. Supp. 3d at 770. The court in Bradley relied on Ohio’s general 

discovery-rule principles to conclude that the Ohio UFTA’s discovery rule would only begin to 

run once the plaintiff had “knowledge of such facts as would lead a fair and prudent man, using 

ordinary care and thoughtfulness, to make further inquiry.” Id. (quoting Hambleton v. R. G. 

Barry Corp., 465 N.E.2d 1298, 1300–01 (Ohio 1984)). Accordingly, because the plaintiff 

“‘possessed knowledge sufficient to lead a reasonably prudent person to make inquiry and had 

such inquiry been made with reasonable care and diligence, it would have led to the discovery of 

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the alleged’ fraudulent transfer,” the district court dismissed the plaintiff’s fraudulent transfer 

claim as time barred. Id. (quoting Hambleton, 465 N.E.2d at 1301). 

Ultimately, while direct guidance is limited or altogether absent, in light of Ohio’s 

broader statute of limitations and discovery rule case law, jurisprudence from other courts, and 

the purpose of the Ohio UFTA, we hold that, if the Ohio Supreme Court were presented with this 

issue, it would conclude that the discovery rule starts to run, and a claim accrues, for purposes of 

§ 1336.09(A) when the plaintiff reasonably could have discovered the transfer’s fraudulent 

nature. 

Ohio courts have yet to specifically offer direction as to the proper trigger for the Ohio 

UFTA’s discovery rule. They have, however, routinely applied the discovery rule in response to 

statutory provisions and common law principles of equity to toll applicable statutes of limitations 

until an injured party “discovers or, in the exercise of reasonable care, should have discovered” 

her injury. Invr’s REIT One v. Jacobs, 546 N.E.2d 206, 209–11 (Ohio 1989) (concluding that 

the discovery rule provided for under Ohio Rev. Code § 2305.09(D) resulted in the tolling of the 

statute of limitations in fraud, conversion, and breach of trust cases until the plaintiff discovered 

or reasonably could have discovered the injury that forms the basis of her suit); see Zimmie v. 

Calfee, Halter & Griswold, 538 N.E.2d 398, 401 (Ohio 1989) (explaining that, under the 

discovery rule, a cause of action accrues and the statute of limitations begins to run on a legal 

malpractice claim “when there is a cognizable event whereby the client discovers or should have 

discovered that his injury was related to his attorney’s act or non-act and the client is put on 

notice of a need to pursue his possible remedies against the attorney”); O’Stricker v. Jim Walter 

Corp., 447 N.E.2d 727, 730–31 (Ohio 1983) (determining that, even before the Ohio legislature 

amended Ohio Rev. Code § 2305.10 to expressly provide for a discovery rule for asbestosrelated exposure claims, equitable principles required a tolling of the statute of limitations until 

the plaintiff “discovered his cancer and the causal relationship to asbestos exposure”). 

Throughout each application of the discovery rule, the crux of the inquiry was not at what 

point in time the defendant engaged in the allegedly wrongful conduct but at what point in time 

the plaintiff possessed or should have possessed, upon the exercise of reasonable diligence, 

“actual knowledge not just that [she] has been injured but also that the injury was caused by the 

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conduct of the defendant.” Flagstar Bank, F.S.B. v. Airline Union’s Mortg. Co., 947 N.E.2d 

672, 676 (Ohio 2011). Were we to adopt the interpretation offered by Textron in this case, that 

the Ohio UFTA’s discovery rule begins to run when a plaintiff discovers, or upon the exercise of 

reasonable diligence, could have discovered the mere existence of the transfer, we would be 

adopting an application of the discovery rule that is in tension with Ohio’s broader statute of 

limitations and discovery rule jurisprudence—jurisprudence that the Commissioners were aware 

of when adopting the UFTA. See SASCO 1997 NI, LLC v. Zudkewich, 767 A.2d 469, 475 (N.J. 

2001) (explaining that the National Conference of Commissioners on Uniform State Laws, 

which approved the UFTA in 1984, “drafted the tolling provision [of the UFTA] to mirror the 

common-law discovery rule which, they noted, was generally applicable to fraud actions” (citing 

National Conference of Commissioners on Uniform State Laws, Proceedings in Committee of 

the Whole on the Uniform Fraudulent Transfer Act 117 (July 29, 1984))). Rather, Ohio 

precedent weighs in favor of our conclusion that § 1336.09(A)’s one-year discovery period 

begins to run when a plaintiff discovers or, upon the exercise of reasonable diligence, could have 

discovered the transfer and its fraudulent nature. This is because, absent requiring the actual or 

constructive discovery of a transfer’s fraudulent nature, application of the discovery rule would 

continue to “lead to the unconscionable result that the injured party’s right to recovery c[ould] be 

barred by the statute of limitations before he is even aware of its existence.” O’Stricker, 

447 N.E.2d at 730 (internal citation and quotation marks omitted). 

In addition to aligning with Ohio’s broader statute of limitations and discovery rule 

jurisprudence, reading § 1336.09(A)’s one-year discovery period as beginning to run when the 

plaintiff discovers or, upon the exercise of reasonable diligence, could have discovered the 

transfer’s fraudulent nature is supported by the decisions of other state courts to have addressed 

this aspect of their states’ UFTA. While not every jurisdiction to have taken up the discovery 

rule has so concluded, see Nat’l Auto Serv. Ctrs., Inc. v. F/R 550, LLC, No. 2D14-3632, 2016 

WL 1238265, at *5 (Fla. Dist. Ct. App. Mar. 30, 2016) (determining that the plain language of 

§ 726.110(1) of Florida’s UFTA mandates that the one-year discovery period begins to run 

“from the date the transfer was discovered or could reasonably have been discovered”), we find 

persuasive the numerous state court decisions that have concluded that a coherent reading of the 

UFTA’s full statute of limitations provision, the overall purpose of the UFTA, and general 

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discovery rule principles support a determination that discovery for purposes of a fraudulent 

transfer claim requires both knowledge of the transfer and knowledge of the transfer’s fraudulent 

nature. See, e.g., Schmidt v. HSC, Inc., 319 P.3d 416, 426 (Haw. 2014) (en banc) (explaining 

that, because “[t]he term ‘transfer’ in HRS § 651C-9(1) clearly refers to the ‘fraudulent transfer’ 

identified in the preceding” portion of the statute of limitations provision and because “the 

obvious purpose of the UFTA is to prevent fraud and to provide a remedy to those who are 

victims of fraudulent transfers,” the discovery rule allowed a plaintiff “to file an action within 

one year of the discovery of the ‘fraudulent nature’ of a transfer”); Workforce Sols. v. Urban 

Servs. of Am., Inc., 977 N.E.2d 267, 278–79 (Ill. App. Ct. 2012) (relying on general Illinois 

discovery rule principles to conclude that the discovery rule of Illinois’s UFTA “postpon[es] the 

start of the limitations period until the injured party knows or should know it has been injured 

and knows or should know that the injury was wrongly caused”); Freitag v. McGhie, 947 P.2d 

1186, 1189 (Wash. 1997) (en banc) (concluding that “[c]ommon sense and the statutory purpose 

of the UFTA necessitate a finding that the statute begins to run with the discovery of the 

fraudulent nature of the conveyance”); see also Duran v. Henderson, 71 S.W.3d 833, 839 (Tex. 

Ct. App. 2002) (noting that, under the UFTA’s discovery rule, a cause of action accrues when the 

claimant discovers the fraud or would have discovered the fraud upon the exercise of reasonable 

diligence); Moore v. Browning, 50 P. 3d 852, 859 (Ariz. Ct. App. 2002) (same). 

Finally, we note that, in deeming discovery to occur at the point when a transfer’s 

fraudulent nature is discovered or reasonably could be discovered, we are mindful of the broader 

purpose of the Ohio UFTA. The Ohio UFTA’s overall purpose is to discourage fraud and 

provide aggrieved creditors with a means to recover assets wrongfully placed beyond their reach. 

Accordingly, to require a claimant to bring suit within one year of discovering a transfer, without 

having discovered facts that would put the claimant on notice as to the transfer’s fraudulent 

nature, would be to interpret § 1336.09(A) in a manner that is directly at odds with the animating 

purpose of the UFTA. Because, “[i]f the statute were to begin to run when the transfer was 

made, without regard as to whether the claimant discovered or could have discovered the 

fraudulent nature of the transfer, those successful at concealing a fraudulent transfer would be 

rewarded” and those injured would have their claims lapse before even becoming aware of the 

damage, as pointedly illustrated by the facts in this case. Freitag, 947 P.2d at 1190. 

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In sum, mindful of Ohio’s broader statute of limitations and discovery rule jurisprudence, 

the interpretations of the discovery rule in other jurisdictions, and the overall purpose of the Ohio 

UFTA, we conclude that the Ohio Supreme Court, if faced with this issue, would determine that 

§ 1336.09(A)’s discovery rule begins to run at the point when a plaintiff discovers or, in the 

exercise of reasonable care, could have discovered the transfer and its fraudulent nature. 

Applying that rule here, the execution of the 2004 ARL&SA was first reasonably discoverable as 

of August 2004, when the Debtor’s offering circulars filed with the Ohio Division of Securities 

made note of the $17,500,000 line of credit created under the 2004 ARL&SA. However, the 

second amended complaint contains extensive factual allegations to support the Trustee’s 

contention that the injured investors did not and could not have reasonably discovered the 

fraudulent nature of the 2004 ARL&SA and the lien created thereunder until November 24, 

2009, when the FBI raided the Debtor’s offices and Durham and Cochran’s operation of the 

Debtor as a Ponzi scheme was revealed—a date delayed by Durham and Cochran’s purposefully 

inadequate disclosures and improper accounting practices, both of which were undertaken with 

Textron’s acquiescence. Accordingly, because the Debtor’s investors filed the Chapter 7 

bankruptcy petition against the Debtor on February 8, 2010, we conclude that the Trustee’s 

actual fraudulent transfer claim was timely under § 1336.09(A)’s discovery rule. 

B. 

Having determined that the Trustee’s actual fraudulent transfer claim survives Textron’s 

motion to dismiss, we next address the Trustee’s civil conspiracy claim. Textron argues that 

three independent grounds exist for affirming the district court’s dismissal of the Trustee’s civil 

conspiracy claim: lack of standing, the affirmative defense of in pari delicto, and limitations. 

We address (and reject) each argument in turn. 

1. 

 “As a creature of statute, the trustee in bankruptcy has only those powers conferred upon 

him by the Bankruptcy [Code].” Stevenson v. J.C. Bradford & Co. (In re Cannon), 277 F.3d 

838, 853 (6th Cir. 2002) (alteration in original) (quoting Cissell v. Am. Home Assurance Co., 

521 F.2d 790, 792 (6th Cir. 1975)). Pursuant to 11 U.S.C. § 541(a)(1), a “trustee stands in the 

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shoes of the debtor and has standing to bring any action that the bankrupt could have brought had 

he not filed a petition for bankruptcy.” In re Cannon, 277 F.3d 853. Conversely, “[i]f a cause of 

action belongs solely to the estate’s creditors, . . . then the trustee has no standing to pursue the 

claim.” Id. Whether a cause of action belongs to the debtor estate or to its creditors is a question 

of state law. Id. 

 Textron urges this Court to adopt the Second Circuit’s reasoning in Shearson Lehman 

Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991), which concluded that, “when a 

bankrupt corporation has joined with a third party in defrauding its creditors, the trustee cannot 

recover against the third party for the damage to the creditors.” Id. at 118. The court elaborated 

however, that whether a trustee has standing to recover for “damage to the corporation, apart 

from that done to the third-party creditor noteholders” was a separate question. Id. at 118–19. 

To answer the latter question, the Second Circuit considered whether the corporation had 

possessed, before it entered bankruptcy, any claims under which the third party “could have been 

held liable” and ultimately concluded that, because the corporation’s sole stockholder and 

decision maker participated in the fraud alongside the third party, any damage endured fell 

exclusively on the creditors, not the corporation. Id. at 119. 

 As other circuits have recognized, the Second Circuit’s decision in Wagoner appears to 

conflate the affirmative in pari delicto defense14 with the issue of standing. See, e.g., Moratzka 

v. Morris (In re Senior Cottages of Am., LLC), 482 F.3d 997, 1003 (8th Cir. 2007) (collecting 

cases in which “other circuits have declined to conflate the constitutional standing doctrine with 

the in pari delicto defense”); Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards, 

437 F.3d 1145, 1149–50 (11th Cir. 2006) (explaining that, while a debtor’s wrongdoing was 

material to the ultimate success of a trustee’s claim against an alleged accomplice in the debtor’s 

Ponzi scheme, the debtor’s wrongdoing did not bear on the trustee’s standing “because ‘[a]n 

analysis of standing does not include an analysis of equitable defenses, such as in pari delicto’” 

(alteration in original) (quoting Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 

 14The in pari delicto defense stems from “the equitable principle that ‘[n]o Court will lend its aid to a man 

who founds his cause of action upon an immoral or illegal act.’” Terlecky v. Hurd (In re Dublin Sec., Inc.), 133 F.3d 

377, 380 (6th Cir. 1997) (alteration in original) (quoting Jones v. Hyatt Legal Servs. (In re Dow), 132 B.R. 853, 860 

(Bankr. S.D. Ohio 1991)). The defense and its application to the Trustee’s civil conspiracy claim will be analyzed in 

depth in the following section. 

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267 F.3d 340, 346 (3d Cir. 2001))); R.F. Lafferty, 267 F.3d at 346 (“In general, [s]tanding 

consists of both a case and controversy requirement stemming from Article III, Section 2 of the 

Constitution, and a subconstitutional prudential element. An analysis of standing does not 

include an analysis of equitable defenses, such as in pari delicto.” (alteration in original) 

(internal citations and quotation marks omitted)). We think the reasoning of these cases is 

sound, and we therefore decline to inject an equitable defense into Article III of the 

Constitution’s “case or controversy” requirement. Rather, our task here is to determine whether 

(1) the plaintiff has alleged that the debtor “suffered some actual or threatened injury due” to the 

alleged illegal conduct of the defendant; (2) the injury is “fairly traceable to the challenged 

action”; and (3) there is a “substantial likelihood that the relief requested will redress or prevent 

[the plaintiff]’s injury.” In re Cannon, 277 F.3d at 852 (alteration in original) (quoting Grendell 

v. Ohio Sup. Ct., 252 F.3d 828, 832 (6th Cir. 2001)). 

The Trustee’s amended complaint explicitly alleges an injury to the Debtor. Specifically, 

the Trustee asserts that Textron, in exchange for hundreds of thousands of dollars in interest and 

fees, not only turned a blind eye to Durham and Cochran’s fraudulent behavior, but actually 

assisted the two Indiana businessmen in looting the Debtor and transforming its once profitable 

factoring operation into a front for a Ponzi scheme. Accordingly, because the relief requested 

would redress the Debtor’s alleged injury and because the alleged injury is separate from any 

injury suffered by the Debtor’s investors, we conclude that the Trustee has standing to pursue the 

civil conspiracy claim. 

2. 

 While in pari delicto principles do not deprive the Trustee of standing to bring a civil 

conspiracy claim against Textron, the affirmative defense is by no means immaterial at this 

juncture. As Textron asserted and the district court concluded, the Trustee’s civil conspiracy 

claim is likely barred by the common law in pari delicto defense, which “derives from the Latin, 

in pari delicto potior est conditio defendentis,” meaning “[i]n a case of equal or mutual fault . . . 

the position of the [defending] party . . . is the better one.” Bateman Eichler, Hill Richards, Inc. 

v. Berner, 472 U.S. 299, 306 (1985) (alterations in original) (quoting Black’s Law Dictionary 

711 (5th ed. 1979)). This equitable defense is used to bar a plaintiff’s recovery when the 

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plaintiff “bears at least substantially equal responsibility for the underlying illegality” upon 

which the claim is based, Pinter v. Dahl, 486 U.S. 622, 635–36 (1988), in light of “the policy 

that ‘no Court will lend its aid to a man who founds his cause of action upon an immoral or 

illegal act,’” Downie-Gombach v. Laurie, 41 N.E.3d 858, 865 (Ohio Ct. App. 2015) (quoting In 

re Dow, 132 B.R. 853, 860 (Bankr. S.D. Ohio 1991)). The in pari delicto defense has repeatedly 

been used to bar the actions of “bankruptcy trustee[s] against third parties who participated in or 

facilitated wrongful conduct of the debtor[s].” Mosier v. Callister, Nebeker & McCullough, 

546 F.3d 1271, 1276 (10th Cir. 2008) (collecting cases). 

Here, the Trustee acknowledges of course that he stands in the shoes of the Debtor and 

that the in pari delicto defense may be raised against a bankruptcy trustee to the same extent it 

could have been raised against a debtor prior to the filing of bankruptcy. Appellant’s Opening 

Br. 42. The Trustee, however, argues that the district court’s dismissal of his civil conspiracy 

claim pursuant to the in pari delicto defense was inappropriate because Durham and Cochran’s 

fraudulent conduct should not have been imputed to the Debtor. Id. at 43. 

A principal is generally charged with the knowledge of and conduct undertaken by its 

agent operating within the scope of his employment. First Nat’l Bank of New Bremen v. Burns, 

103 N.E. 93, 94 (Ohio 1913). Such knowledge and conduct, however, will not be imputed to a 

principal if its agent “is engaged in committing an independent fraudulent act on his own 

account, and the facts to be imputed relate to this fraudulent act.” Am. Export & Inland Coal 

Corp. v. Matthew Addy Co., 147 N.E. 89, 92 (Ohio 1925); Restatement (Third) of Agency § 5.04 

(2006) (“[N]otice of a fact that an agent knows or has reason to know is not imputed to the 

principal if the agent acts adversely to the principal in a transaction or matter, intending to act 

solely for the agent’s own purposes or those of another person.”). This principle is known as the 

adverse interest exception. First Nat’l Bank of New Bremen, 103 N.E. at 94. 

The adverse interest exception is not absolute, however. Pursuant to the sole actor 

doctrine, if the agents responsible for the adverse conduct are the officers or directors of the 

principal and those officers or directors “so dominated and controlled the [principal] that the 

[principal] had no separate mind, will, or existence of its own,” then the officers and directors are 

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deemed the “alter egos” of the principal and “any malfeasance on their parts is directly 

attributable to the [principal].” In re Dublin Sec., 133 F.3d at 380. 

In determining that Durham and Cochran so dominated the Debtor as to trigger the sole 

actor doctrine, the district court emphasized that, in the amended complaint, the Trustee alleged 

that Durham and Cochran immediately began operating the Debtor as a fraudulent scheme and 

controlled all aspects of the Debtor’s operations. Bash, 483 B.R. at 651–52. On appeal, the 

Trustee does not take issue with the district court’s conclusion that Durham and Cochran 

dominated the Debtor. Appellant’s Opening Br. 43. Rather, the Trustee reiterates that, “even if 

the ‘sole actor’ doctrine might otherwise apply here, it is subject to the ‘innocent insider’ 

exception, which exists if the company had at least one innocent decision-maker who could have 

stopped the wrongdoing if he or she had known of it.” Id. 

“The innocent insider exception is a corollary to the sole actor rule. . . . The touchstone 

of the innocent insider exception is control. If an innocent person inside the corporation had the 

power to stop the fraud, the agent and the company are not mere alter egos, so the sole actor rule 

cannot apply.” Unencumbered Assets, Tr. v. Great Am. Ins. Co., 817 F. Supp. 2d 1014, 1036 

(S.D. Ohio 2011) (quoting McHale v. Citibank, N.A. (In re 1031 Tax Grp., LLC), 420 B.R. 178, 

202 (Bankr. S.D.N.Y. 2009)); see Gold v. Deloitte & Touche LLP (In re NM Holdings Co.), 

411 B.R. 542, 549 (E.D. Mich. 2009) (explaining that “the presence of innocent decision makers 

is an indication that the sole actor rule should not apply because the wrongdoer was not really a 

sole actor”); Cohen v. Morgan Schiff & Co. (In re Friedman’s Inc.), 394 B.R. 623, 632–34 (S.D. 

Ga. 2008) (emphasizing “that the sole actor rule does not apply if innocent decision-makers 

could have stopped the fraudulent activity”); Midwest Mem’l Grp. LLC v. Citigroup Global 

Mkts. Inc., No. 322338, 2015 WL 5519398, at *11 (Mich. Ct. App. Sept. 17, 2015) (unpublished) 

(“For the existence of an innocent decision-maker to preclude application of the sole actor rule, 

there must exist[] at least one innocent decision maker who, if he had been alerted to the fraud, 

could have stopped it.” (alteration in original) (internal citation and quotation marks omitted)); 

Glenbrook Capital Ltd. P’ship v. Dodds (In re Amerco Derivative Litig.), 252 P.3d 681, 696 

(Nev. 2011) (concluding that the presence of innocent insiders is relevant in assessing whether a 

sole actor exists sufficient to overcome the adverse interest exception); O’Halloran v. 

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PricewaterhouseCoopers LLP, 969 So.2d 1039, 1045 (Fla. Dist. Ct. App. 2007) (noting that “the 

presence of any innocent decision-maker in the management of a corporation can provide the 

basis for invoking the adverse interest exception, preventing the imputation of wrongdoing and 

defeating the use of the in pari delicto defense against the corporation”).

In ruling on the motion to dismiss, the district court correctly noted that no Ohio court 

has adopted or otherwise directly addressed whether the existence of an innocent decision maker 

or insider would preclude the application of the sole actor doctrine. Bash, 483 B.R. at 652. 

However, the district court went on to conclude that, regardless of whether Ohio would embrace 

an innocent insider exception to the sole actor doctrine, “the [amended] complaint is completely 

devoid of any allegations regarding innocent insiders or any control they may have exerted over 

the [D]ebtor.” Id. Thus, the district court concluded that the innocent insider exception was 

inapplicable, the adverse interest exception to imputation was negated by the sole actor doctrine, 

and, upon imputing Durham and Cochran’s wrongful conduct to the Debtor, the Trustee’s civil 

conspiracy claim was barred by the in pari delicto defense. 

In reaching these conclusions, however, the district court failed to give heed to a basic 

principle of federal civil procedure: a plaintiff is not required to plead facts necessary to defeat 

an affirmative defense. See Frank v. Dana Corp., 646 F.3d 954, 963 (6th Cir. 2011) (concluding 

that, because good faith was an affirmative defense to a claim under § 20(a) of the Securities and 

Exchange Act of 1934, the district court erred in requiring the plaintiff to plead that the 

defendants did not act in good faith). As the Supreme Court has explained, 

A complaint is subject to dismissal for failure to state a claim if the allegations, 

taken as true, show the plaintiff is not entitled to relief. If the allegations, for 

example, show that relief is barred by the applicable statute of limitations, the 

complaint is subject to dismissal for failure to state a claim; that does not make 

the statute of limitations any less an affirmative defense. Whether a particular 

ground for opposing a claim may be the basis for dismissal for failure to state a 

claim depends on whether the allegations in the complaint suffice to establish that 

ground, not on the nature of the ground in the abstract. 

Jones v. Bock, 549 U.S. 199, 215–16 (2007) (holding “that failure to exhaust is an affirmative 

defense under the PLRA, and that inmates are not required to specially plead or demonstrate 

exhaustion in their complaints”). Accordingly, we conclude that the district court erred when it 

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dismissed the Trustee’s civil conspiracy claim based in part on its determination that the Trustee 

had failed to plead facts demonstrating the existence of an innocent insider, which the district 

court assumed, for purposes of its decision, would potentially defeat Textron’s affirmative in 

pari delicto defense. 

 Although the district court expressed no opinion as to whether the Ohio Supreme Court 

would adopt the innocent insider exception to the sole actor doctrine, this litigation’s prolonged 

procedural history necessitates that we venture an “Erie guess” in the name of judicial efficiency, 

and we conclude that the Ohio Supreme Court would adopt the innocent insider exception to the 

sole actor doctrine. Ohio has long followed the sole actor doctrine. See First Nat’l Bank of New 

Bremen, 103 N.E. at 96. Although no Ohio court appears to have decided whether to apply the 

innocent insider exception to that doctrine, see Unencumbered Assets, Tr., 817 F. Supp. 2d at 

1036, the innocent insider exception is a corollary that flows ineluctably from the agency 

principles that underlie the sole actor doctrine. 

The United States District Court for the Southern District of New York has described 

why this is the case. The adverse interest exception to the in pari delicto doctrine applies “the 

fiction of imputation” by asking “whether the knowledge of the agent that is to be imputed to the 

principal was gained within, or outside of, the scope of agency.” In re CHI Holding Co., 

311 B.R. 350, 373 (S.D.N.Y. 2004), aff’d in part and rev’d in part, 529 F.3d 432 (2d Cir. 2008). 

“Even when an agent is defrauding his principal, unless the agent has totally abandoned the 

interests of the principal and is acting entirely in his own, or another person’s, interest, that agent 

is acting within the scope of his agency.” Id. The sole actor doctrine is based on the recognition 

that, when a particular agent or set of agents “are one and the same” as the principal, “it would 

be nonsensical to refrain from imputing the agent’s acts of fraud to the corporation, despite the 

agent’s total abandonment of the corporation’s interests, because the agent is identical to the 

corporation.” Id. (internal quotation marks omitted). But, “when the innocent insiders possessed 

authority to stop the fraud, the ‘sole actor rule’ does not apply, because the culpable agents who 

had totally abandoned the interests of the principal, and were thus acting outside the scope of 

their agency, were not identical to the principal.” Id. In other words, a set of agents cannot be 

said to be the sole actor who is one and the same as the principal when others exist within the 

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principal who had sufficient authority to stop the fraud had they known of it. Accordingly, we 

hold that the Ohio Supreme Court, if given the chance, would apply the innocent insider 

exception to the sole actor doctrine. 

3. 

 Finally, we turn to Textron’s contention that the Trustee’s civil conspiracy claim is time 

barred. Under Ohio law, “the applicable statute of limitations for filing a civil conspiracy 

[claim] is the relevant limitations statute for the underlying cause of action.” Davis v. Clark Cty. 

Bd. of Comm’rs, 994 N.E.2d 905, 909 (Ohio Ct. App. 2013). Here, the Trustee alleges that 

Textron conspired with Durham to defraud the Debtor. Accordingly, for the claim to be timely, 

it must have been filed within four years of the date that the Debtor first discovered or should 

have discovered the fraud. Inv’rs REIT One, 546 N.E.2d at 209–10. Recognizing that Durham 

and Cochran perpetrated the fraud in the Debtor’s name, the Trustee does not assert that the 

Debtor was unaware of the fraud. Appellant’s Reply Br. 29. Rather, the Trustee argues that the 

doctrine of “adverse domination” applies to equitably toll the four-year statute of limitations 

because the directors and officers are unlikely to initiate actions or investigations into fraudulent 

conduct when such actions or investigations would reveal their own wrongdoing. Id. 

The Ohio Supreme Court has yet to expressly address the adverse domination doctrine in 

any context, and in December 2015, the court declined to answer a certified question from this 

court as to whether Ohio would “apply the doctrine of adverse domination to toll the statute of 

limitations provided by Ohio Rev. Code § 2305.09 for a claim of breach of fiduciary duty 

brought against a director or officer of an Ohio corporation.” Antioch Co. Litig. Tr. v. Morgan, 

633 F. App’x 296, 302 (6th Cir. 2015); Antioch Co. Litig. Tr. v. Morgan, 45 N.E.3d 242 (Ohio 

2016). As a result, on March 24, 2016, the Sixth Circuit ventured in a nonprecedential decision 

an “Erie guess” as to whether the Ohio Supreme Court would adopt the adverse domination 

doctrine to toll or extend the statute of limitations for a breach of fiduciary duty claim and 

answered the question in the negative. Antioch Co. Litig. Tr. v. Morgan, -- F. App’x --, No. 14-

3790, 2016 WL 1161233, at *1–3 (6th Cir. Mar. 24, 2016) (unpublished). In so doing, the Court 

emphasized two points. First, the Court noted that “[t]he Ohio Court of Appeals has twice 

rejected adverse domination as generally lacking support in Ohio’s statutes and judicial 

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decisions.”15 Id. at *2. Next, the Court underscored that “other courts considering the question 

of adverse domination have focused on whether state law would apply a discovery rule to the 

relevant claim for purposes of the statute of limitations” and explained that, because Ohio’s 

legislature only provided a limited discovery rule for those § 2305.09 actions grounded in fraud 

and conversion, “the Ohio Supreme Court has declined to expand application of the discovery 

rule” to other torts arising under § 2305.09, including claims for breach of fiduciary duty. Id. at 

*3. 

Antioch Co. Litigation Trust is an unpublished decision lacking precedential authority. 

Mfrs.’ Indus. Relations Ass’n v. E. Akron Casting Co., 58 F.3d 204, 208 (6th Cir. 1995); United 

States v. Williams, 15 F.3d 1356, 1363 n.6 (6th Cir. 1994). So while we find benefit in 

thoughtfully considering the Court’s analysis, we are not bound by the decision. We do note, 

however, that while we conclude that the Ohio Supreme Court, if presented with this issue, 

would apply the doctrine of adverse domination to toll the statute of limitations provided by 

Ohio Rev. Code § 2305.09 for a claim of fraud, our decision is in line with the thrust of this 

Court’s analysis in Antioch Co. Litigation Trust. 

As the Court in Antioch Co. Litigation Trust explained, when considering whether state 

law would embrace the adverse domination doctrine to toll or extend a cause of action’s statute 

of limitations, other courts “have focused on whether state law would apply a discovery rule to 

the relevant claim for purposes of the statute of limitations.” Id. at *2. Courts routinely look to a 

state’s application of the discovery rule when considering the doctrine of adverse domination 

because “adverse domination shares the same theoretical underpinnings as the discovery rule.” 

Id. at *2 (quoting Wilson v. Paine, 288 S.W.3d 284, 287 (Ky. 2009)). The discovery rule 

operates in many jurisdictions to toll the statute of limitations for certain tort claims until the 

plaintiff discovers or, upon the exercise of reasonable diligence, could discover that she has been 

injured by the wrongful conduct of another. See, e.g., Alexander v. Sanford, 325 P.3d 341, 353–

54 (Wash. Ct. App. 2014); Wilson, 288 S.W.3d at 286–87; Resolution Tr. Corp. v. Grant, 901 

 15As noted by the dissent in Antioch Co. Litigation Trust, however, these two opinions, written sixty years 

apart, come from one of Ohio’s twelve intermediate appellate courts and provide little in the way of analysis or 

precedential support. Id. at *5 (Moore, J., dissenting). Moreover, neither case addressed the application of the 

adverse domination doctrine to claims of fraud. Accordingly, they are of limited value in assessing the issue before 

us.

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P.2d 807, 813–14 (Ok. 1995); Clark v. Milam, 452 S.E.2d 714, 718 (W.Va. 1994). And most 

courts have “uniformly embraced adverse domination” as a natural extension of a state’s 

discovery rule, Wilson, 288 S.W.3d at 288, tolling a cause of action’s statute of limitations 

because, when controlled by culpable directors, a corporate plaintiff will be unable to 

“independently acquire the knowledge and resources necessary to bring suit,” id. at 288 (quoting 

Hecht v. Resolution Trust Corp., 635 A.2d 394, 504 (Md. 1994)). See Alexander, 325 P.3d at 

354; FDIC v. Smith, 980 P.2d 141, 145–46 (Or. 1999); Grant, 901 P.2d at 813–14; Clark, 452 

S.E.2d at 718. 

Here, the Ohio legislature has expressly set forth a limited discovery rule for purposes of 

§ 2305.09, providing that, if an action under § 2305.09 “is for trespassing under ground or injury 

to mines, or for the wrongful taking of personal property, the causes thereof shall not accrue until 

the wrongdoer is discovered; nor, if it is for fraud, until the fraud is discovered.” § 2305.09. In 

light of this mandate, the Ohio Supreme Court has explained that, in fraud cases, “the date of 

discovery [will] toll the running of the governing statute of limitations until the plaintiff 

discovers or, in the exercise of reasonable care, should have discovered the complained-of 

injury.” Inv’rs REIT One, 546 N.E.2d at 210. Accordingly, because the Ohio legislature 

expressly provided for a discovery rule in actions sounding in fraud and because the adverse 

domination doctrine is “merely a corollary of . . . [the] discovery rule,” Wilson, 288 S.W.3d at 

288, giving credence to the basic principle that knowledge of a cause of action is meaningless 

unless it is coupled with an ability to act, we conclude that the Ohio Supreme Court, if presented 

with this issue, would apply the doctrine of adverse domination to toll the statute of limitations 

provided by Ohio Rev. Code § 2305.09 for a claim of fraud. 

Thus, because the four-year statute of limitations was tolled pursuant to the adverse 

domination doctrine until the FBI raided the Debtor and the Debtor, for the first time, possessed 

knowledge of Durham, Cochran, and Textron’s alleged wrongdoing and the ability to act on that 

knowledge, we conclude that the Trustee’s civil conspiracy claim is timely. 

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C. 

 A brief word is in order as to the district court’s dismissal of the Trustee’s equitable 

subordination and disallowance claims. The district court exclusively rested its sua sponte

dismissal of the Trustee’s equitable subordination and disallowance claims on its dismissal of the 

Trustee’s underlying substantive claims. Accordingly, because we reverse the district court in 

part and remand for further proceedings on the Trustee’s actual fraudulent transfer and civil 

conspiracy claims, we also reverse the district court’s dismissal of the Trustee’s equitable 

subordination and disallowance claims. 

III. 

For the reasons set forth above, we REVERSE the district court’s dismissal of the 

Trustee’s actual fraudulent transfer, civil conspiracy, and equitable subordination and 

disallowance claims, and we AFFIRM the district court’s dismissal of the Trustee’s constructive 

fraudulent transfer claim. 

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