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2015 Commercial Law Developments, Prepared by the Business Law Section Commercial Transactions Committee for the 2015 Business Law Section Annual Report
IV. Fraudulent Transfers

  • Korea Trade Ins. Corp. v. Neema Clothing, Ltd., 2015 U.S. Dist. LEXIS 9975 (S.D.N.Y. 2015) – A seller of goods filed a lawsuit alleging that a buyer did not make payment to the seller for the goods purchased by the buyer. The buyer’s CEO and majority shareholder then transferred nearly $2 million from the buyer’s corporate accounts to his personal accounts. The seller subsequently brought an action for fraudulent conveyance. At issue in this case was whether the CEO’s transfer was made without fair consideration, an element of a fraudulent conveyance claim. The court rejected summary judgment relief because the CEO claimed that the transfers were made as repayment of a secured loan, explaining that a transfer to an insider is not inherently a fraudulent transfer if that insider is a secured party.

  • Trustco Bank v. Mathews, 2015 Del. CH. LEXIS 18 (Del. Ch. 2015) – The place of harm caused by a fraudulent transfer determines the law applicable to a fraudulent transfer.

  • Kentucky Petroleum Operating Ltd. v. Golden, 2015 WL 927358 (E.D. Ky. 2015) – The recipient of an arbitration award was entitled to avoid the mortgage and security interest granted by the arbitration defendants to related parties after the arbitrator closed the hearing but before the arbitration award. The timing of the grant of the security interest was a classic badge of fraud and the debtors submitted no evidence of good faith. Moreover, the corporate veil among the debtors and the secured party would be pierced because all were under common ownership and control, none observed corporate formalities, and continued recognition of their supposedly separate corporate forms would sanction injustice.

  • Sourcing Management, Inc. v. Simclar, Inc., 2015 WL 4587974 (N.D. Tex. 2015) – A judgment creditor stated a cause of action that the transfer of all of the debtor’s assets, allegedly valued at $44 million, at a collusive private disposition under Article 9 with respect to a $9 million secured obligation, was both an actually fraudulent and constructively fraudulent transfer. Because the complaint alleged that the property disposed of was worth substantially more than the secured obligation, it was not excluded from the definition of ‘assets’ under the UFTA. The creditor also stated a claim against the buyer for successor liability as a mere continuation of the debtor by alleging that the buyer entered into a collusive agreement to avoid the debtor’s debts, that the buyer informed the debtor’s customers that it was merely operating under a ‘new legal name,’ that the buyer retained many of the same employees, continued operations in the same location, and used the same telephone numbers, and that the debtor’s shareholders became members of the buyer.

  • Villaverde v. IP Acquisition VIII, LLC, 39 N.E.3d 144 (Ill. Ct. App. 2015) – A secured party’s foreclosure sale, at which it acquired the debtor’s only asset – intellectual property – through a credit bid could not be an avoidable fraudulent transfer because the intellectual property was fully encumbered, and thus not an ‘asset’ under the Uniform Fraudulent Transfer Act. The secured party did not acquire successor liability under the theory that the foreclosure sale was an improper attempt to escape liability for the debtor’s obligations because the only evidence of the collateral’s current value was that it was worth substantially less than the secured obligation. The secured party was not a mere continuation of the debtor because there was no continuity of ownership, although the owner of the debtor did become an employee of the secured party.

  • Klein v. King & King & Jones, _ F3d _ (10th Cir 2014) – Law firm not subsequent transferee for fraudulent transfer purposes when received funds directly from transferor.

  • Janvey v. The Golf Channel, 780 F.3d 641 (5th Cir 2015) – Seller of advertising space to operator of Ponzi scheme received a fraudulent transfer because no value for creditors of transferor.

  • Hogan Lovells LLP v. Howrey LLP, _ F.Supp.3d _ (ND Calif. 2015) – Dissolved law firm does not have property interest in pending matters and cannot bring Jewel claim against firms where former partners are working.

  • MC Asset Recovery v. Commerzbank AG, _ F.Supp.3d _ ( 2015) - Creditors acceptance of guarantee not a fraudulent transfer. Acceptance of guarantee following inadequate due diligence on borrower not absence of good faith.

  • In re Brooke Corp., 2015 WL 7568202 (Bankr. D. Kan. 2015) – Parent corporation guarantied debt of its insolvent subsidiary. Downstream guaranty could be a constructively fraudulent transfer unless the creditor demonstrated the value of the indirect benefit received by the parent in exchange for the guarantee.

  • *Sentinel Management Group, Inc. 8, 2016 Wl 98601 (7th Cir. January 8, 2016) – In defense of “actual intent” fraudulent transfer action, transferee may assert “good faith” defense under Bankruptcy Code section 548(c). To use that defense transferee must make diligent investigation when it becomes aware of suspicious facts relating to the legitimacy of a loan transaction. The transferee must be on “inquiry notice”, which required it to investigate the collateral the borrower was using to secure the loan where the transferee had “awareness of suspicious facts that would have led a reasonable firm, acting diligently, to investigate further and by doing so discover wrongdoing ... and … an investigation would have revealed that the bank could not in good faith accept assets of [transferor’s] customers as security for the bank’s loans to Sentinel.” These facts also did not justify equitable subordination, unless they amounted to “fraud.” That standard would require that the bank believed there was a high probability of fraud and acted deliberately to avoid confirming its suspicion. The secured party’s suspicion of potential wrongdoing without any follow up might be negligent, but that is not an adequate basis for imposing equitable subordination.

V. Secured Party and Borrower Liability | Table of Contents