Source: http://rolandjones.com/claw-back-report/
Timestamp: 2017-11-22 22:12:10
Document Index: 80635360

Matched Legal Cases: ['§ 547', '§ 547', '§ 502', '§ 546', '§547', '§550', '§ 547', '§547', '§547', '§ 548', '§ 547', '§ 548', '§ 544', '§ 3439', '§ 547', '§ 548', '§ 547', '§ 547', '§ 548']

Your monthly dispatch from the preference wars by Roland Gary Jones Esq., “The Preference Guy”.
Trustees initiated more than 600 adversary proceedings nationwide in the last two months – March and April 2016. Most notable —
161 clawback lawsuits initiated in the bankruptcy cases of Sports Authority Holdings, Inc
109 preference actions were commenced in CWC Liquidation Inc. bankruptcy.
53 clawback lawsuits filed in the bankruptcy cases of TelexFree, LLC
Rulings for March and April —
A Bankruptcy Court held that Section 547(b) is a “no fault” provision; a creditor’s knowledge, intent and state of mind are irrelevant in determining whether a transfer is avoidable under section 547(b).
The United States District Court for the District of Delaware held that only those services which are provided prior to the petition date should be included while calculating the new value defense. Pursuant to an order from the District Court remanding the case to the Bankruptcy Court, Judge Walrath revised a calculation of new value and reduced the Defendant’s new value defense.
A Bankruptcy Court held in favor of the Defendant because the Trustee’s complaint was devoid of particularized facts with respect to the nature and amount of each antecedent debt, the dates on which the transfers were made, and the identities of the transferors and the transferees. The Court stated that a trustee must identify preferential transfers with particularity to survive a motion to dismiss.
Fax: 212-202-4416 www.rolandjones.com rgj@rolandjones.com
Setback for Madoff Victims as the Bankruptcy Court Knocks Down Defendant’s Value Argument to Retain Fictitious Profits.
Preference Action Initiated in Plaza Healthcare Centre LLC Bankruptcy
Clawback Lawsuits on Cards for Sports Authority Holdings, Inc
Intraday Overdrafts by Banks Do Not Give Rise to Antecedent Debt
Neither Intent Nor Motive of the Parties is Relevant Under § 547(b)
Mere Fact That a Defendant is in Default Does Not Entitle the Plaintiff to a Default Judgment
Texas Supreme Court: Arm’s-Length Transaction in Ordinary Course is Reasonably Equivalent Irrespective of a Ponzi Scheme
Inadequate Facts to Satisfy Insolvency Requirement Resulted Judgment in Favor of Defendant
Trustee Established Presumption of Fraud under Section 548(a)(1)(A) to Recover the Alleged Transfer as Fraudulent.
Recent Preference and Fraudulent Conveyance News
April 1, 2016, Massachusetts – On April 13, 2014, Debtors Telexfree, LLC and its affiliates filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the District of Nevada. Subsequently, the cases were transferred to the District of Massachusetts. Subsequently, on June 6, 2014, Stephen B. Darr was appointed as a Chapter 7 Trustee.
April 1, 2016, New York – Automatic adjustments to certain dollar amounts in the Bankruptcy Code and Official Bankruptcy Forms will now apply to cases filed on or after April 1, 2016. In the Bankruptcy Reform Act of 1994, Congress provided for the automatic adjustment of the dollar amounts at three-year intervals on the basis of the change in the Consumer Price Index.
The revised dollar amounts will affect, among other matters: the eligibility of a debtor to file under chapters 12 and 13 of the Bankruptcy Code; certain maximum values of property that a debtor may claim as exempt; the maximum amount of certain claims entitled to priority; the duration of a chapter 13 plan; where the trustee may commence certain proceedings to recover a money judgment or property; preference thresholds in non-consumer cases (11 U.S.C. 547(c) (9)). Although the changes aren’t substantial, it is always a good idea to keep them in mind when assessing cases to be filed after April 1st, 2016.
April 26, 2016, Delaware – Last week, Alfred T. Giuliano, Chapter 7 Trustee for the jointly administered estates of Debtors LTC Holdings, Inc. et al, initiated about 53 adversary proceedings in the U.S. Bankruptcy Court for the District of Delaware to avoid and recover transfers pursuant to 11 U.S.C. §§ 547 and 550, and disallowance of claims pursuant to 11 U.S.C. §§ 502(d) and 502(j). LTC Corp. Government Services Inc., doing business as Lakeshore TolTest, along with LTC Holdings and several other Lakeshore entities had filed for bankruptcy two years ago on May 2, 2014
The Debtors were general construction contractors which, prior to the petition date, entered into numerous contracts and task orders with various agencies of the United States, municipal government agencies, commercial clients, oil and gas clients, and the United States Department of Defense, to provide certain goods and services including, construction services, environmental services and energy services.
The largest case in the group is filed against RK Mechanical, Inc. for claim amount of $1,461,865.46. The Debtors’ bankruptcy cases are filed in the U.S. Bankruptcy Court for the District of Delaware, case no. 14-11111. Fox Rothschild LLP is representing the Debtors and Honorable Judge Christopher S. Sontchi is overseeing the Debtors’ bankruptcy cases
April 28, 2016, New York – U.S. Bankruptcy Judge Stuart Bernstein in New York said earlier last week that Andrew H. Cohen, a former trader in Madoff’s market-making business, should return $1.14 million he withdrew from his personal account in Madoff’s bogus investment advisory unit. As per the proposed findings of fact and conclusions of law signed by Judge Bernstein, Cohen deposited a total of $2,921,539 and withdrew a total of $4,065,000. Of the withdrawals, a total of $1,143,461 was withdrawn by Cohen in excess of the principal, representing fictitious profits, and all of these withdrawals took place within the two-year period prior to the filing date.
Cohen argued against returning the money on the grounds that he received the cash for value on a debt Madoff owed. Cohen also argued that he is entitled to recover as direct and consequential damages the amount of $773,869.00 he paid in taxes on account of fictitious profits and $45,760.95 in legal fees and expenses he incurred defending claims brought against him as a result of Madoff’s fraud. However, Judge Bernstein rejected these arguments in post-trial findings on April 25, wherein the judge recommended that the District court enter a judgment in the Trustee’s favor. Judge Bernstein stated that “even if the defendants had claims against BLMIS under state or federal law, the transfers from BLMIS exceeding the return of defendants’ principal were not made ‘for value’.
The Court found that Cohen was a good faith transferee (he did not willfully blind himself to Madoff’s fraud) and his liability was limited to the fictitious profits he received within two years of the filing date. Accordingly, the Bankruptcy Court respectfully recommended that the District Court adopt the proposed findings of fact and conclusions of law, and enter a judgment in favor of the Trustee and against the defendant in the sum of $1,143,461. This conclusion may prove a setback for many Madoff investors, who were hoping to retain millions in fake profit from the Madoff’s Ponzi scheme.
The case is Securities Investor Protection Corp. v Andrew H. Cohen, 08-01789, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).
March 3, 2016, California – On March 4, 2014 and March 5, 2014, Plaza Healthcare Center LLC, along with other eighteen jointly administered affiliated entities commenced their bankruptcy cases by filing voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The Debtors were primarily engaged in the business of owning and operating skilled nursing facilities in southern California. Collectively, the Debtors owned and operated 18 skilled nursing facilities and one assisted living facility.
Thirteen clawback actions have been initiated so far in the month of March to avoid and recover preferential transfers worth $5 million in the Debtors bankruptcy cases. The largest case in the group is Interface Rehab, Inc. for claim amount of $ 3.5 million.
The Debtors’ bankruptcy cases are filed in the U.S. Bankruptcy Court for the Central District of California. The case no, is 8:14-bk-11335-CB. Levene, Neale, Bender, Yoo & Brill LLP is representing the Debtors and Honorable Judge Catherine E. Bauer is overseeing the Debtors’ bankruptcy cases
Oregon, March 10, 2016 – The U.S. Securities and Exchange Commission has recently sued an Oregon company and its top executives on accusations that they allegedly operated a $350 million Ponzi scheme. In its complaint, filed on March 10, 2016 in the U.S. District Court for the District of Oregon, the SEC said that Aequitas group allegedly operated a scheme to defraud and misuse client assets in connection with investments offered through the Aequitas group of companies, founded by Robert J. Jesenik and based in Lake Oswego, Oregon.
The SEC’s complaint alleged that CEO Robert Jesenik and Executive Vice President Brian Oliver Jesenik raised funds primarily by issuing promissory notes through Aequitas Commercial Finance, LLC (ACF), an entity wholly owned by Aequitas Holdings, LLC. The ACF notes were typically offered on one to four year terms with interest rates generally between 5 and 15 percent. According to its financial records, ACF appeared to have been profitable from 2011 to 2013. However, in May 2014, Corinthian Colleges, a for-profit education provider, whose receivables made up 75% of the receivables owned by ACF, defaulted on its obligations to ACF, intensifying the significant cash flow shortages of ACF and its parent, Aequitas Holdings. By July 2014, Jesenik and Oliver knew that redemptions and interest payments to prior investors were being paid primarily from new investor money in a Ponzi-like manner, and that very little investor money was being used to purchase trade receivables.
The lawsuit allegedly seeks civil penalties against the executives and the relinquishment of illegal gains. The SEC named three top executives as defendants, Jesenik, Oliver, and former Chief Financial Officer and Chief Operating Officer, N. Scott Gillis, alleging that they used the vast majority of investor funds to repay prior investors and to pay the operating expenses of the Aequitas enterprise.
The case is filed in the Portland Division of the U.S. District Court for the District of Oregon and assigned to Honorable Judge Paul Papak. The case no. is 3:16-cv-00438-PK.
March 14, 2016, New York – On March 14, 2016, Judge Stuart Bernstein of the U.S. Bankruptcy Court dealt a severe blow to the efforts of Trustee Irving Picard to clawback over $220 million in transfers from Bernard L. Madoff Investment Securities (BLMIS) to investment vehicles that profited from Bernie Madoff’s Ponzi scheme.
Judge Bernstein dismissed most of the claims brought by the Trustee against Legacy Capital Ltd, a British Virgin Islands-based investment vehicle and Khronos LLC, a provider of accounting and other services to Legacy. The Trustee’s complaint sought to avoid and recover approximately $213 million in initial transfers made to Legacy and approximately $6.6 million in subsequent transfers made to Khronos.
The Trustee alleged eight counts under federal and New York State law. Counts one and two alleged actual and constructive fraud and sought to recover from Legacy transfers made within two years of the Madoff bankruptcy pursuant to Section 548 of the Bankruptcy Code. Counts three to six sought to recover from Legacy transfers made within six years of the Madoff bankruptcy for alleged actual and constructive fraudulent transfer under New York Law. Count seven sought to recover from Legacy transfers as undiscovered fraudulent transfers under New York law regardless of when they occurred. Count eight sought to recover from Khronos subsequent transfers from Legacy under Section 550 of the Bankruptcy code.
Legacy moved to dismiss the complaint alleging that the Trustee’s claims were barred by the safe harbor of Bankruptcy Code § 546(e). Khronos moved to dismiss count eight, arguing that the Trustee had failed to plead actual knowledge. The Court granted Khronos’ motion to dismiss the Trustee’s complaint in its entirety, and also granted Legacy’s motion to dismiss except to part of the first count of the Trustee’s complaint, which sought to recover fictitious profits transferred to Legacy within two years of the BLMIS bankruptcy filing date.
The case is In re: Bernard L. Madoff Investment Securities, Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC v. Legacy Capital Ltd., No 08-99000, Adv. Proc. No. 08-01789; Adv. P. No. 10-05286.
Recent Preference and Fraudulent Conveyance Opinions
Chapter 7 Tr. v. Moran Towing Corp. (In re AES Thames, LLC), Nos. 11-10334 (KJC), 13-50395 (KJC), 2016 Bankr. LEXIS 706 (U.S. Bankr. D. Del. Mar. 3, 2016)
March 3, 2016, Delaware – The Chapter 7 Trustee filed an adversary complaint against Defendant Moran Towing Corporation to avoid and recover two transfers as preference payments pursuant to Bankruptcy Code §547(b) and §550. Moran did not dispute that the transfers met the requirements of § 547(b), but argued that the transfers were not avoidable under Bankruptcy Code §547 (c) (2) because the Debtor paid the transfers in the ordinary course of its business with Moran. The parties disagreed on how the payments should be analyzed.
The Trustee argued that during the historical period, the Debtor paid Moran on average 2.45 days after the due date, while during the preference period the Debtor paid Moran on average 15.63 days after the due date. The Trustee also pointed out that during the historical period; only 4 of 164 invoices (or 2.44%) were paid 10 days or later after the due date. Therefore, the preference period transfers did not conform to more than 97% of the payments during the historical period. Moran argued that during the historical period, payments ranged between 28 (i.e., 28 days before the due date) to 35 days after the due date. Therefore, the range of payments during the preference period (10-19 days) fell within the historical period range.
The Court found that the Trustee’s reliance on the average payment statistics was countered by Moran’s reliance on the range of payment statistics. The Court concluded that the amount of the alleged transfers fell within the range of the amount of payments made during the historical period. The alleged transfers continued the Debtor’s practice of paying a number of invoices together for all cargo shipped in the previous month. The alleged transfers, like all payments during the historical period, were made by wire transfer. The parties stipulated that Moran did not take any unusual action to collect on the preference period invoices, and there was no evidence that Moran did anything to gain an advantage over other creditors during the preference period. The Court ruled in favor of Moran and concluded that the business relationship between Moran and the Debtor fell within the type of relationship the ordinary course of business defense was intended to protect.
AFA Inv. Inc. v. Dale T. Smith & Sons Meat Packing Co. (In re AFA Inv. Inc.), Nos. 12-11127 Jointly Administered, 14-50134(MFW), 2016 Bankr. LEXIS 741 (U.S. Bankr. D. Del. Mar. 9, 2016)
March 9, 2016, Delaware – The Debtors AFA Investment Inc., et al. was one of the largest ground beef processing operations in the U.S. Defendant Dale T. Smith & Sons Meat Packing Company provided beef processing and packing services to the Debtors. During the preference period, the Defendant received twenty-five transfers totaling $2 million from the Debtors. The Debtors filed a complaint to avoid and recover the transfers as preferences. The Debtors argued that there were no disputed issues of material fact as to the prima facie elements of the preference action and they were entitled to judgment as a matter of law on all of the Defendant’s asserted defenses. The Defendant argued that the Debtors did not establish that the Defendant received more than it would otherwise have obtained in a hypothetical chapter 7 liquidation. In addition, the Defendant asserted that the ordinary course of business defense applies to the alleged transfers.
The Court agreed with the Debtor that the Defendant was an unsecured creditor, and unsecured creditors were slated to receive less than a 100% distribution under the Debtors’ confirmed chapter 11 plan. The Court found that the declaration of David Beckham, the Debtors’ former chief restructuring officer, who estimated zero recovery for general unsecured creditors and a reduced recovery for section 503(b) (9) claimants, was sufficient to establish that the Defendant would receive less than a 100% recovery in a hypothetical chapter 7 liquidation, even if a portion of its claims are afforded section 503(b)(9) status. The Court concluded that the Debtors made a prime facie showing that the transfers were preferential.
On its ordinary course argument, the Defendant asserted that late payment from the Debtors was an ordinary occurrence throughout the parties’ historical dealings. The Debtors responded that the difference in payment timing between the historical period and the preference period demonstrated that the transfers were not ordinary under the subjective test. The Court concluded that, even if the Debtors’ payments to the Defendant were late historically, the weighted average of the invoice-to payment period nearly doubled from 22.43 days during the parties’ historical relationship to 43.95 days during the preference period. This was sufficiently significant to defeat the ordinariness of the transfers. The Defendant also failed to demonstrate that the transfers were consistent with ordinary business terms in its industry. The Court ruled in favor of the Debtor.
Chatz v. Stepaniants (In re Fatoorehchi), Nos. 13 B 46203, 14 A 679, 2016 Bankr. LEXIS 761 (U.S. Bankr. N.D. Ill. Mar. 9, 2016)
Sarachek v. Luana Sav. Bank (In re Agriprocessors, Inc.), No. 15-CV-1015-LRR, 2016 U.S. Dist. LEXIS 33012 (N.D. Iowa Mar. 15, 2016)
March 15, 2016, Northern District of Iowa – Debtor Agriprocessors, Inc. owned and operated a kosher meatpacking and food processing facility in Postville, Iowa. The Chapter 7 Trustee Joseph E. Sarachek filed an adversary action against Defendant Luana Savings Bank in the U.S. Bankruptcy Court for Northern District of Iowa to avoid the payments made by the Debtor to the Bank as preferential transfers and improper setoff. The Bank denied that it was the recipient of any preference payments and raised various affirmative defenses. The Bankruptcy Court ruled that the Trustee was entitled to recover $1,556,782.89 of preferential transfers that the Debtor made to the Bank during the ninety-day preference period. The Trustee appealed and the Bank cross-appealed.
On appeal, there were two central issues to determining whether and in what amount the relevant wire transfers constituted transfers on antecedent debt – (i) whether the Bankruptcy Court erred in holding that only true overdrafts, rather than both intraday and true overdrafts, constitute antecedent debt under the Bankruptcy Code (ii) whether the Bankruptcy Court erred in finding that the Bank was not a “mere conduit” for Debtor’s funds.
On the first issue, the District Court stated that routine advances (intraday overdrafts) against uncollected deposits do not create antecedent debt under the Bankruptcy Code. The Court reasoned that the banks routinely make uncollected funds available to the depositor, not as a loan, but in recognition of a bank’s anticipated debt to the depositor. Although, it was true, a debt will arise if deposited checks are dishonored, but until dishonor, a bank that advances funds in the expectation that deposits will routinely be collected acts as a conduit for the depositor’s financial transactions, not as a creditor. Thus, the Court determined that intraday overdrafts do not constitute antecedent debt and hence not recoverable by the Trustee as preferences. The Court further determined that only true overdrafts – those overdrafts that were allowed to stand past the midnight deadline – constituted “debt” under preference law, and thus only true overdrafts were avoidable. The Court stated that unlike transfers for intraday overdrafts, true overdraft transfers were not made specifically to cover provisional debits on Debtor’s account, nor did they arrive with a specific directive as to their use.
In the case at bar, the Bank did not merely pass the funds along to a third party or held them for some special purpose at the behest of Debtor. Instead, it received and applied the funds to pay down the negative balance in the Debtor’s account. Thus, the funds did not flow through the Bank as a financial intermediary; the funds stopped with the Bank as repayment on the overdrawn account. At this point, the funds became the Bank’s and it had legal dominion over them. Thus, the alleged transfers for true overdrafts constituted transfers on antecedent debt and hence avoidable as preferences.
The Bank next argued that it was acting as a mere conduit for Debtor’s funds pursuant to the check clearing process and therefore, received no transfers on account of an antecedent debt. The Court stated that if a party is a mere conduit in an avoidable transfer, it is not considered an initial transferee under the Bankruptcy Code and, therefore, is not liable for the avoidable transfer and to be an initial transferee, a party must have dominion and control over the transferred funds. However, in the instant case, the Court concluded that since the Bank failed to demonstrate that it was a mere conduit under either dominion or control test, the Bank was not acting as a mere conduit when it received transfers on account of true overdrafts in the Debtor’s account.
The Court found that the Bankruptcy Court did not err in denying the Bank’s affirmative defenses; the Bank was not acting as a mere conduit. The District Court affirmed the Bankruptcy Court’s order in whole.
The Court found that the Trustee met all the requirements of Sec. 547 (b). The Defendants contended that even if the Trustee has met his burden under §547(b), he cannot avoid the alleged transfers because Ratiba had no knowledge of the existence of the bank account or the transfers. The Court found that there was no question that the bank account was maintained in Ratiba’s name and listed the address of the real estate, her home address. As such, she was the account owner and even if the Defendants Ratiba did not know that the bank account existed or that the Debtor had transferred $705,000 to the bank account in satisfaction of its indebtedness to her, that did not bar the Trustee from avoiding the transfers as preferences because Section 547(b) is a “no fault” provision; a creditor’s knowledge, intent and state of mind are irrelevant in determining whether a transfer is avoidable under section 547(b). The Court ordered that the transfers from the Debtor to the bank account totaling $705,000 be avoided pursuant to section 547(b) of the Bankruptcy Code,
Fort v. Branch Banking & Tr. Co. (In re JAT, Inc.), Nos. 13-07552-HB, 15-80205-HB, 2016 Bankr. LEXIS 841 (U.S. Bankr. D.S.C. Mar. 16, 2016)
The Trustee brought the adversary proceeding to avoid and recover the transfer of $71,137.30 from Debtor JAT, Inc. to Defendant Branch Banking & Tr. Co (BB&T) that was allegedly property of the estate transferred during the two years preceding the petition date. The Trustee sought the recovery of alleged payments as fraudulent transfers pursuant to 11 U.S.C. § 548 as they were allegedly made by JAT with actual intent to hinder, delay, or defraud existing and future creditors or as preferences under § 547 on account of an antecedent debt of JAT. BB&T failed to timely file an answer to the Trustee’s complaint and, as a result, the Trustee filed an affidavit of default. A clerk’s entry of default was entered the same day. The Trustee filed the request for entry of judgment in the amount of $71,137.30 for voided transfers pursuant to § 548(a)(1).
Burtch v. Prudential Real Estate & Relocation Servs. (In re AE Liquidation, Inc.), Nos. 08-13031 (MFW), 10-55543 (MFW), 2016 Bankr. LEXIS 980 (U.S. Bankr. D. Del. Mar. 29, 2016)
Delaware, March 29, 2016 -The matter was remanded from the District Court on the appeal of the Bankruptcy Court’s decision dated July 17, 2013. In that opinion, Judge Walrath had ruled that (i) $781,702.61 of pre-petition transfers to Defendant Prudential Real Estate & Relocation Servs. were preferential; (ii) Prudential had a new value defense totaling $128,379.40; and (iii) the Trustee was not entitled to prejudgment interest
After both parties appealed, the District Court ruled that post-petition new value was not protected and that the Trustee was entitled to pre-judgment interest. The District Court held that the only services provided prior to the petition date should be included in the new value defense and directed the Bankruptcy Court on remand to reconsider the amount of Prudential’s new value defense. The Court also directed the Bankruptcy Court to explain explicitly why prejudgment interest was denied.
The Trustee argued that of the $128,379.40 in new value, $71,808.83 of the invoices related to post-petition services and, therefore, not eligible for new value credit. Prudential responded that the post-petition invoices were prepared solely to support its proof of claim and did not reflect the actual date the underlying services were performed. The Court agreed with the Trustee and concluded that Prudential’s new value defense should be reduced to $56,571.37 ($128,379.40 less $71,808.03) to reflect only services provided pre-petition. Thus, the Trustee was entitled to judgment in the amount of $781,702.61 less the new value of $56,571.37, for a total of $725,131.24.
On the prejudgment interest argument, the Court agreed with the Trustee as prejudgment interest is routinely granted in avoidance actions. The Court relied upon Hechinger Investment v. Universal Forest Products (In re Hechinger), 489 F.3d 568, 570-71 (3d Cir. 2007) and held that there was no reason to deny prejudgment interest. The Court stated that though the award of prejudgment interest is within the Court’s discretion, the discretion “must be exercised according to law, which means that prejudgment interest should be awarded unless there is a sound reason not to do so.”
Accordingly, Judge Walrath revised a calculation of new value pursuant to an order from the District Court remanding the case and reduced Prudential’s new value defense to $56,571.37 and entered judgment in favor of the Trustee for $725,131.24. ($56,571.37 minus $781,702.61, for a total of $725,131.24) Prejudgment interest in amount of $5,186.97 was also awarded the Trustee.
Weil v. United States (In re Tag Entm’t Corp.), Nos. 1:09-bk-26982-VK, 1:10-ap-01342-VK, 2016 Bankr. LEXIS 982 (U.S. Bankr. C.D. Cal. Mar. 29, 2016)
The Trustee for Debtor TAG Entertainment Corp. brought the adversary proceeding, alleging that a $5,989,999 restitution payment received by the United States from Debtor’s founder, Steven Kent Austin, constituted a fraudulent transfer. The Trustee alleged that the restitution money paid to the United States was traceable to the Debtor and may be recovered as a fraudulent transfer under 11 U.S.C. § 544(b) and California’s Uniform Fraudulent Transfer Act. The Trustee also alleged that the Debtor was involved in a Ponzi scheme along with the Debtor’s founder, Austin. The United States asserted that the Trustee failed to show transfers originated from Debtor. The United States also raised the statute of limitations set forth in Cal. Civ. Code § 3439.09 as its defense
The Court found that the Trustee failed to establish that Debtor was involved in a Ponzi scheme and could not rely on the existence of a Ponzi scheme to prove that the transfers were made with intent to hinder, delay or defraud creditors of debtor. The Court held that although an existence of a Ponzi scheme is sufficient to establish intent to defraud, the Trustee was unable to do so in the case at bar. The Court further concluded that the Trustee also failed to demonstrate that any of the transfers flowed from Debtor to the United States. Even if any of Debtor’s assets were transferred to or for the benefit of the Debtor, the Trustee still could not meet her burden of proving that any transfers were made with intent to hinder, delay or defraud creditors of Debtor. On statute of limitation argument, the Court concluded that since the United States did not include the defense of statute of limitations in the pretrial order, and because the Trustee objected to the United States raising the issue for the first time at trial, the United States may not assert the defense at this time.
The judgment was entered in favor of the United States.
Texas Supreme Court: Arm’s Length Transactions Made in Ordinary Course is Reasonably Equivalent Irrespective of a Ponzi Scheme
Janvey v. Golf Channel, Inc., No. 15-0489, 2016 Tex. LEXIS 241 (Apr. 1, 2016)
April 1, 2016, Texas – R. Allen Stanford perpetrated a multi-billion dollar Ponzi scheme through Debtor Stanford International Bank Limited (Stanford), which sold fraudulent high yield certificates of deposit to innocent investors. Defendant Golf Channel entered into a two-year agreement with Stanford to provide media-advertising services. In exchange for its services, Golf Channel received $5.9 million. Three years after the services contract expired, the Court-appointed a Receiver, who sued Golf Channel to recover all the money Stanford paid under the media-advertising agreement, alleging the payments were made with intent to defraud Stanford’s creditors. Golf Channel argued the transfer was not voidable because it took Stanford’s contract payments in good faith and in exchange for reasonably equivalent value. The Receiver alleged that Golf Channel’s affirmative defense failed as a matter of law because advertising services that further a Ponzi scheme and produce no tangible estate asset have zero value.
The District Court agreed that fraudulent intent was conclusively established because Stanford operated a Ponzi scheme, but still granted summary judgment for the Defendant on its affirmative defense. Citing TUFTA’s definition of reasonably equivalent value, the Court opined that, if Golf Channel’s services provided any value, the exchange of value was reasonably equivalent even when a Ponzi scheme was involved because the transaction was at arm’s length, in good faith, at fair market value, and in the ordinary course of business.
On appeal, the Fifth Circuit initially reversed and rendered judgment in the Receiver’s favor. The Court declared that that the Defendant’s services provided zero value to the creditors as Stanford operated a Ponzi scheme and the expenditures for Golf Channel’s media services further depleted the assets an insolvent Debtor without conferring any reciprocal benefit for its creditors. Thus, the alleged payments were voidable.
On rehearing, the panel vacated its opinion and opined that considering TUFTA’s definitions of value and reasonably equivalent value as applied to the circumstances of the case at bar, the reasonably equivalent value requirement in section 24.009(a) of TUFTA was satisfied when the transferee fully performed an arm’s-length transaction in the ordinary course of its business at market rates. The Court concluded that the Defendant’s services were sold at fair market value in an arm’s-length transaction; had an objective value and utility from a reasonable creditor’s perspective at the time of the transaction; were carried out in the ordinary course of business and a later discovery that the Debtor was operating a Ponzi scheme did not render the exchange valueless. Hence, the alleged transfers were not voidable.
In re Empire Land, Nos. 6:08-bk-14592-MH, 6:10-ap-01329-MH, 2016 Bankr. LEXIS 1087 (U.S. Bankr. C.D. Cal. Apr. 4, 2016)
Next, although the Defendant alleged that certain transfers were reimbursements for business expenses incurred by the Debtor in the ordinary course of business, the Court found that the Defendant did not submit any evidence that such transfers were made in the ordinary course of business, and hence failed to meet its burden. The Court denied the Defendant’s Motion and concluded that the Trustee presented sufficient evidence to pursue the alleged transfers under both a preference and constructive fraud theory. .
In re Vazquez, Nos. 12-09895 (ESL), 14-00298 (ESL), 2016 Bankr. LEXIS 1136 (U.S. Bankr. D.P.R. Apr. 6, 2016)
The Chapter 7 Trustee for the Debtors Luis A. Vazquez, Madeline E. Otero Feliciano, brought a lawsuit against the Defendant Cooperativade Ahorro de Credito de Arecibo (COOPACA) to avoid COOPACA’s lien on an automobile purchased by Luis A. Vazquez. The facts were: On August, 18, 2012, Luis and COOPACA executed an installment contract for the purchase of a 2013 motor vehicle. On November 29, 2012, COOPACA filed the documents required to perfect the lien over the motor vehicle. On December 17, 2012, the Debtors filed for bankruptcy relief. On February 22, 2013, lien on vehicle was registered.
The Trustee argued that since, the lien was perfected nineteen days before the bankruptcy petition date; it was voidable as a preferential transfer pursuant to Sec. 547. COOPACA contended that the recording of a security interest over a vehicle was not a transfer and that Luis was solvent when the installment contract was signed and when the lien was recorded. In addition, COOPACA contended that its actions to perfect the lien complied with the applicable Puerto Rico law and regulations making the transaction valid and non-voidable under Sec. 546.
The Court found that the Trustee has met all five elements required under Sec. 547 (b) to avoid the alleged transfers as preference: As to the first element, COOPACA admitted that it was a creditor, but argued that the recording of a lien over a motor-vehicle was not a transfer. The Court stated that the term transfer is defined in Section 101(54) as and includes creation of lien within the definition of transfer. The term transfer encompasses an exchange of anything of value, thus, both the payment of money and the creation of a lien were transfers. COOPACA did not dispute the second element: existence of an antecedent debt and the evidence submitted showed that the debt was incurred on August 18, 2012, before the alleged preferential transfer was made. With regard to the third element of insolvency, the Court found that in the absence of evidence to meet or rebut the presumption, the trustee was entitled to rely upon the presumption of insolvency in his favor. The Defendant did not contest the fourth element as the alleged transfer was made on November 29, 2012, nineteen days before the bankruptcy petition, thus within the 90-day preference period. With respect to the fifth element, the Court found that it was met because without the transfer COOPACA would be treated as an unsecured creditor who would have to share distribution with the Debtors other unsecured creditors.
The Court also ruled that despite the fact that COOPACA’s security interest was perfected under state law, the trustee could still avoid the transfer of the security interest because COOPACA failed to meet the 30 day perfection requirement under Section 547(c)(3).Accordingly, the Court concluded that all the elements of Section 547(b) were met and that COOPACA’s lien may be avoided as a preferential transfer.
Mazel v. Varela (In re Kelly), Nos. 15-10164-j7, 15-1049 J, 2016 Bankr. LEXIS 1679 (U.S. Bankr. D.N.M. Apr. 14, 2016)
Edward A. Mazel, Chapter 7 Trustee of the bankruptcy estate of Debtor Darla Kelly sought summary judgment on his claims to recover certain transfers of property as preferential transfers under 11 U.S.C. § 547; as constructively fraudulent transfers and as actual fraudulent transfers under 11 U.S.C. § 548. Defendant Clare Varela, was the cousin of the Debtor. Pre-petition, the Debtor transferred Dodge Truck, a Navajo Lane Property, and a Vacant Land (Properties) to the Defendant. Previously, the Debtor had borrowed money from the Defendant for several years, and agreement was made to take the Properties in payment of debts owed to the Defendant.
The Court found that although the Defendant, who was the Debtor’s cousin, was an insider for purposes of 11 U.S.C. § 547(b)(4)(B), the Trustee failed to establish that the transfer of the Dodge Truck was made at a time that the Debtor was insolvent. The Debtor transferred the Dodge Truck to the Defendant on August 8, 2014, less than a year, but more than 90 days before the date of the filing of the petition on January 28, 2015. The Court said that the Trustee cannot, therefore, rely on the presumption of insolvency under 11 U.S.C. § 547(f) to establish the insolvency element with respect to this transfer. The Court stated that insolvency on the date of preference is the critical issue, and insolvency on any other date is insufficient standing alone to prove this essential element of a preference. The Court held in favor of the Defendant and ruled that the facts are insufficient to satisfy the insolvency requirement with respect to the Debtor’s transfer of the Dodge Truck.
The Trustee next argued that the rest of two Properties were avoidable as they enabled the Defendant to receive more than she otherwise would have received in a Chapter 7 liquidation had the transfers not occurred. The Court found that there was neither an evidence of the value of the Navajo Lane Property and the Vacant Lot, nor for the amount of the Defendant’s unsecured claim. Thus, without these amounts, it was difficult for the Court to conclude that the transfer of these two Properties to the Defendant enabled the Defendant to receive more than she otherwise would have been entitled to receive had the transfer not occurred and the bankruptcy estate.
The Trustee was not entitled to summary judgment on fraudulent transfer claim under 11 U.S.C.S. § 548 either because, without knowing the value of the property transferred, the Court was unable to determine whether the Debtor received reasonably equivalent value. Also, the circumstantial evidence to establish the Debtor’s actual intent to hinder, delay, or defraud was not so overwhelming as to conclusively establish, by summary judgment, the requisite actual intent necessary to recover the transfers. Thus, the Court declined to grant summary judgment on the Trustee’s claims to recover the transfers based on actual fraud also.
Snapshot of Clawback Cases Filed
Groups of Adversary Proceedings filed by the Debtors
Largest Case in the group
Claim Amount of the Largest Case
D & L Energy, Inc. 27 Kay Woods McJunkin Red Man Corporation 342615.67 41380 Northern District of Ohio
Telexfree, LLC 43 Melvin S. Hoffman ISG Telecomm Consultants, LLC 747973.55 41742 District of Massachusetts
LTC Holdings, Inc. 53 Christopher S. Sontchi RK Mechanical, Inc. 1461865.46 41761 District of Delaware
CEP Reorganization, Inc. 33 Charles Novack Data2Logistics, LLC 411491.08 41760 Northern District of California
Energy & Exploration Partners, Inc. 34 Russell F. Nelms Nabors Drilling Technologies USA, Inc. 3020730 42345 Northern District of Texas
Life Partners Holdings, Inc. 24 Russell F. Nelms Worth Financial Group Inc $ 872,585.08 42024 Northern District of Texas
CWC Liquidation Inc. 109 Brendan Linehan Shannon Gary Hong Kong Limited $ 1,520,577.45 41740 District of Delaware
Simplexity, LLC 44 Kevin Gross Reliance Communications, LLC $ 3,038,145.00 41714 District of Delaware
Sports Authority Holdings, Inc. 161 Mary F. Walrath yet to be determined yet to be determined 42431 District of Delaware
Calumet Photographic, Inc. 29 Deborah L. Thorne Canon U.S.A., Inc. $ 2,970,981.75 41710 Northern District of Illinois
Thornton & Co., Inc. 5 Ann M. Nevins International Precision Components Corporation $ 692,349.02 42226 District of Connecticut
Plaza Healthcare Center LLC 23 Catherine E. Bauer Interface Rehab, Inc. $ 3,758,155.87 41702 Central District of California
Corona Care Convalescent Corporation 23 Robert N. Kwan Renato Ferrer $ 900,402.25 41477 Central District of California
Washington, March 5, 2016 – Jones & Associates successfully defended its client, a service provider in the medical industry (the defendant). The lawsuit was initiated by Mark Calvert, the liquidation trustee of the Debtor Natural Molecular Testing Corporation (NMTC) against the defendant in the U.S. Bankruptcy Court for the District of Washington. The Trustee agreed to voluntarily dismiss the complaint for less than 5% of the claim amount without waiver of claims as Jones & Associates successfully proved that the alleged transfers were not fraudulent pursuant to Sec. 548 of the Bankruptcy Code.
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