2012 Commercial Law Developments

IV. Fraudulent Transfers

  • In re Mirant Corp., 675 F.3d 530 (5th Cir. 2012) -- New York law, which by contract governed "the rights of the parties" to a guarantee agreement, applied to a claim that guarantee was an avoidable fraudulent transfer rather than the law of Georgia, the jurisdiction in which the guarantor was located.

  • In re TOUSA, Inc., 680 F.3d 1298 (11th Cir. 2012) -- Lenders that shortly before bankruptcy were paid off with the proceeds of a new loan secured by subsidiaries of the borrower received a fraudulent transfer because they were entities for whose benefit the liens were transferred.  Even if the opportunity to avoid default and bankruptcy constitutes "value" for this purpose, the value subsidiaries received was not, as the bankruptcy court found, reasonably equivalent to what they transferred.

  • Wachovia Securities, LLC v. Banco Panamericano, Inc., 674 F.3d 743 (7th Cir. 2012) -- A corporation's grant of a blanket lien to a lender controlled by the corporation's subsidiaries was an intentionally fraudulent transfer designed to shield the corporation from its financial obligations because:  (1) the debtor entered into the transaction shortly before or after incurring substantial debt to its stock broker; (2) the loan was between insiders; (3) the debtor retained possession or control of the property; (4) the transfer was of most of the debtor's assets; and (5) the debtor was insolvent or became insolvent shortly after the transfer.

  • In re Barton-Cotton, Inc., 2012 WL 2803742 (Bankr. D. Md. 2012) -- A trustee stated a claim for both intentional and constructive fraudulent transfers in connection with a leveraged buyout by which the debtor -- the target -- granted a security interest in its assets to secure a loan that it received but distributed upstream to its stockholders, who transferred their interests to the acquirer.  The trustee also stated fraudulent transfer claims for a subsequent cash out by which the debtor borrowed from a non-insider to repay the leveraged buyout lender, an insider.

  • In re Tronox Inc., 464 B.R. 606 (Bankr. S.D.N.Y. 2012) -- Liability for a fraudulent transfer -- even one avoided pursuant to Bankruptcy Code § 544 and state law designed to protect creditors -- is not limited to the amount of creditor claims, but may extend to the entire value of the property transferred, subject to the limitations and offsets provided for in the Bankruptcy Code.

  • Jefferson-Pilot Investments, Inc. v. Capital First Realty, Inc., 2012 WL 1952656 (N.D. Ill. 2012) -- Because a cash collateral order expired when the bankruptcy case was dismissed, a secured party had no claim against the entities to whom the debtor transferred the funds post-petition for unjust enrichment, aiding a breach of fiduciary duty, tortious interference with contract, or conversion.  The secured party also failed to plead with particularity a claim for an intentionally fraudulent transfer or explain how the transfers were to insiders within the meaning of state fraudulent transfer law.  However, the secured party did state a claim for a constructive fraudulent transfer.

  • U.S. Bank v. Verizon Communications Inc., 2012 WL 3100778 (N.D. Tex. 2012) -- Even if the debts assumed and notes issued by former subsidiary in a spin-off transaction were avoidable as fraudulently incurred obligations, they were not fraudulent transfers.  Thus while the obligations can be rendered unenforceable, no recovery is permitted under Bankruptcy Code § 550 even though the former parent transferred some of the newly issued notes to discharge its own obligations.

  • Bash v. Textron Financial Corp., 2012 WL 5472077 (N.D. Ohio 2012) -- The refinancing of secured loan pursuant to which the parties "amended" and "restated" the terms of their relationship and reduced the amount of credit available to the debtor — which operated a Ponzi scheme -- was not a novation and did not create a new security interest in the collateral.  Thus the security interest could not be avoided as a fraudulent transfer.  Even if the lender engaged in bad faith after the initial loan transaction, so that its claims could be subordinated, the bad faith would not invalidate is lien to cause the refinancing to be a new transfer.

  • In re Sentinel Management Group, Inc., Nos. 10-3787, 10-3990 & 11-1123 (7th Cir. 2012) -- A debtor granted a security interest in customer funds that the debtor was required to keep segregated.  Court rejected claims that (i) the violation of customer segregation rules was per se intent for an intentional fraudulent transfer claim, (ii) the secured party should be equitably subordinated and (iii) the secured party's contracts should be declared unenforceable because it facilitated the illegal pledge of customer segregated funds.

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