2011 Commercial Law Developments

IV. Fraudulent Transfers

  • Kudler v. Ingber , 9 Misc.3d 1223, 920 N.Y.S.2d 242, 2010 WL 4630273 (N.Y.Sup. 2010) – A judgment creditor challenged a husband's transfer of assets to his wife as a fraudulent conveyance under New York's fraudulent conveyance statute. The court concluded that while the creditor failed to show actual or constructive fraud, the conveyances were fraudulent. The transfers occurred after the creditor began legal proceedings against the husband and the wife failed to show that the conveyances were for fair consideration. Under NY law no showing of insolvency was required as long as the judgment was unpaid.
  • Parker v. Handy (In re Handy) , 624 F.3d 19 (1st Cir. 2010) – A creditor of a debtor's ex-husband commenced suit against the debtor to avoid a fraudulent transfer. The creditor did not obtain a judgment or an attachment before the debtor filed for bankruptcy relief. The court held that the creditor's constructive trust claim was only for a remedial device, not a cause of action. Thus, without a valid attachment on the fraudulently transferred property, the creditor could not pursue the claim after bankruptcy.
  • M & I Marshall & Ilsley Bank v. Guaranty Financial, MHC , 800 N.W.2d 476 (Wis. Ct. App. 2011) – A Federal law preempted a state-law fraudulent transfer claim of a lender with a security interest in stock of a corporation that was a wholly-owned subsidiary of a bank, arising from conversion of that stock into preferred stock of the bank pursuant to direction of Office of Thrift Supervision.
  • Perkins v. Haines , 661 F.3d 623 (11th Cir. 2011) – Payments to investors by a debtor who ran a Ponzi scheme are necessarily made with fraudulent intent. However, the investors are entitled to a good faith defense and, for that purpose, the investors gave value in exchange for the transfer by implicitly relinquishing their claims for restitution or fraud, even though the investment was structured as equity, not debt. Thus, the investors were protected to the extent that the payment returned their initial investment but were not protected to the extent that the payment represented fictitious profits from the scheme.
  • In re Adelphia Recovery Trust , 634 F.3d 678 (2d Cir. 2011) – Because rescission is not the only remedy for an avoided fraudulent transfer, bankruptcy court's approval of a transaction in which secured loans purchased prepetition by the debtor were settled and the collateral sold free and clear did not bar the debtor in possession – under the doctrines of ratification or res judicata – from bringing claim that the loan purchases were avoidable transfers for less than reasonably equivalent value.
  • In re TOUSA, Inc. , 444 B.R. 613 (S.D. Fla. 2011) – Lenders that shortly before bankruptcy received the proceeds of a new loan secured by subsidiaries' assets did not have fraudulent transfer liability for the funds received. The funds were not property of the subsidiaries and were not controlled by the subsidiaries, even though the subsidiaries were co-borrowers. Moreover, the subsidiaries received reasonably equivalent value in indirect benefits: the opportunity to avoid default and bankruptcy.
  • In re Doctors Hosp. of Hyde Park, Inc. , 2011 WL 6019336 (Bankr. N.D. Ill. 2011) – On remand after the decision in Paloian v. LaSalle Bank , 619 F.3d 688 (7th Cir. 2010), summary judgment denied on whether: (i) a subsidiary created as a bankruptcy-remote entity was truly a separate entity for fraudulent transfer purposes even though the corporate formalities were observed, given the apparent lack of separate operations; and (ii) sale of accounts was a true sale.
  • In re Creative Capital Leasing Group, LLC , 2011 WL 1042666 (Bankr. S.D. Cal. 2011) – Funds paid by LLC on credit cards issued to its sole member were avoidable transfers for less than reasonably equivalent value because even though the member deposited funds borrowed on the cards in the LLC's bank accounts, those deposits were capital contributions, not loans, and thus the LLC was never liable for the credit card debt.
  • In re Nieves , 648 F.3d 232 (4th Cir. 2011) – Although subsequent transferee for value of fraudulently transferred property did not have actual knowledge of facts that would lead a reasonable person to believe that the transfer was voidable, the transferee nevertheless did not act in good faith because numerous facts known to it would have led a reasonable person to inquire further as to the voidability of the transfer. Such facts included the debtor's confusion about the name of his own company, the fact that the certificate of good standing was a month old when the loan was made, and the fact that the transferee never conducted any title search to confirm ownership by the debtor's company and, if it had conducted such a search, would have discovered a transfer to the debtor's brother for no consideration shortly before the debtor's bankruptcy and a subsequent transfer by the debtor's brother for substantially less than market value.
  • In re Amerigraph, LLC , 456 B.R. 349 (Bankr. S.D. Ohio) – Although waiver of fraudulent transfer claims in cash collateral order would normally be binding on a trustee after conversion if the order states that its provisions will survive conversion, such a waiver is not binding if the parties in interest did not receive adequate notice of the proposed waiver in the motions that gave rise to the order.
  • Geltzer v. Mooney ( In re MacMenamin's Grill Ltd.) , 450 B.R. 414 (Bankr. S.D.N.Y. 2011) – After a failed LBO, the court rejected the argument that fraudulent transfer claims related to the LBO were precluded by the Bankruptcy Code § 546(e) safe harbor.

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