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From Across the Pond – Dissipation of Assets May be Tort Under English Law: Marex Financial Limited v. Garcia [2017] EWHC918

Editor’s Note from The Bankruptcy Cave:  Our good colleagues Robert Dougans and Tatyana Talyanskaya from BC’s London office published this earlier in the summer, and we could not wait to add it to your autumn reading list.  The lesson here is powerful – England, the birthplace of the common law, comes through again to right an injustice where traditional legal principles might otherwise fall short.  Many of you readers have often dealt with defendants playing a shell game with their assets.  The Marex decision provides a powerful response – an independent tort against the individuals who perpetrated the asset stripping, instead of a pursuing a daisy-chain of subsidiaries and affiliates, all bereft of assets.  We at The Bankruptcy Cave applaud this decision – for every right, there shall be a remedy! 

There is a joke that freezing injunctions are

No Trustee Left Behind – Another Bankruptcy Court Requires Colleges to Return Tuition to the Bankruptcy Estate

b09036864402bfedc690a2f80d6de804Another bankruptcy trustee catches another hapless college unaware.  In Roach v. Skidmore College (In re Dunston), Bankr. S.D. Ga. (Jan 31, 2017), a trustee appears to win the next battle of “bankruptcy estates v. child’s college,” ruling that an insolvent parent who paid the college tuition of an adult child made a fraudulent transfer to the college.  Thus, the unsuspecting college will likely have to return the tuition to the parent’s bankruptcy estate.

The theory is simple (albeit unsettling to some).  Under Section 548 of the Bankruptcy Code (and applicable state law, as a back-up), if any debtor makes a transfer to a third party while insolvent, and does not receive reasonably equivalent value in return, the debtor’s bankruptcy trustee may reclaim such transfer for

Defending A Preference Action – Can You Setoff Post-Petition Amounts Owed by the Debtor Against Your Preference Liability?

September 21, 2016

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All bankruptcy lawyers (and most long-suffering trade creditors) know that creditors who receive payments from a debtor within the “preference period” – 90 days before a voluntary bankruptcy case was filed, or 1 year if the creditor is an “insider” of the debtor – are at risk of lawsuit to return those payments to the bankruptcy estate. Pre-petition claims the creditor hold are no automatic defense.  However, the Bankruptcy Court for the District of Delaware recently ruled, as a matter of first impression in that Court, that an allowed post-petition claim of the creditor can be used to set off the creditor’s preference liability. See Official Comm. of Unsecured Creditors of Quantum Foods, LLC v. Tyson Foods, Inc. (In re Quantum Foods, LLC), 2016 WL 4011727 (Bankr. D. Del. Jul. 25, 2016).  Here is a copy of the case.

The background of the case is simple. The

Over Four Hundred Years of Law on Fraudulent Transfers, Flushed Down the Drain

August 15, 2016

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In 1571, Parliament enacted a law, sometimes known as the Statute of 13 Elizabeth, creating one of the greatest means of creditor protection – the proscription of fraudulent transfers.  As Professors Baird and Jackson stated, the law prevents an “Elizabethan deadbeat [from selling] his sheep to his brother for a pittance.”[1]  The law has progressed, covering not just intentional acts to hinder, delay, or defraud creditors, but also “constructively fraudulent transfers” in which a third party who is not in on any con nonetheless gets something from an insolvent debtor for less than reasonably equivalent value.

These are simple, straightforward principles, with which no bankruptcy professional (or really, anyone) could quibble.  You got stuff and you didn’t pay for it, so you need to give it back.  There are some exceptions.  Voiding transfers in the securities industry, for instance, could up-end financial markets.  So Congress added Sections 548(d)(2)(B)

Golf Channel Finds the Fairway in Fraudulent Transfer Litigation – Good News for Vendors in Ponzi Scheme Cases

In some good news for commercial vendors, the Supreme Court of Texas recently ruled that payments for ordinary services provided to an insolvent customer are not recoverable as fraudulent transfers, even if the customer turns out to be a “Ponzi scheme” instead of a legitimate business.

In Janvey v. Golf Channel, Inc.,[1] the Court considered whether, under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), a vendor should be required to return payments it received in good faith for services rendered simply because its customer turned out to be a Ponzi scheme and not a lawful business.[2]  Ultimately, the Court determined that the objective market value of services provided in the ordinary course of business serves as a defense to a fraudulent transfer claim, despite the illegitimate nature of the Ponzi scheme. In reaching that conclusion, the Court rejected the contention that the

Preference Defendants, Rejoice! Services Billed in a Lump Sum Can Be Allocated Per Diem, for Your New Value Defense

May 4, 2016

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Preference actions are, for the most part, insanity. We won’t go on a tirade here. But recently, a ruling brings common sense to the “new value” defense.

Specifically, all bankruptcy lawyers know that any “new value” must come after the allegedly preferential transfer. This can be problematic for service providers, especially services provided daily, or over time. The debtor may, for instance, pay a prior invoice on April 10, and then file for bankruptcy on April 20, or 30, before the service provider generates an invoice for all of April’s services. A crafty trustee may thus argue that there is no evidence of new value provided after April 10, and hence no new value defense.

The recent case of Levin v. Verizon Business Global, LLC (In re OneStar Long Distance, Inc.), 3:15-cv-00049 (S.D. Ind. March 28, 2016) is a perfect example of this. The defendant provided telecommunications services to the

7th Circuit Disrupts Commercial Certainty in Lease Terminations; Landlords, We Hate That You Have to Read this Blog Post

There are many tenants that are, shall we say, “problem children.” They pay late, open late, breach, junk up your strip or building, threaten, the works. Sometimes, the landlord finds it easier just to reach a lease termination agreement with such a tenant, with the parties walking away with a mutual release. If the lease is below market, or the landlord is really motivated to move this tenant along, the landlord even provides some “keys money” to terminate the lease.

This normal practice may now be turned on its head. In a recent opinion, the Seventh Circuit ruled that a pre-bankruptcy lease termination was a “transfer” under the Bankruptcy Code. Because it was a “transfer,” if the tenant did not receive “reasonably equivalent value” for the value of the lease (such as where the tenant alleges it was a below market lease, which could have been assigned in bankruptcy for

10th Circuit Holds That First Time Transactions Fall Within 11 U.S.C. 547(c)(2), Ordinary Course of Business Defense

In a decision that surprised many, the United Stated Circuit Court of Appeals for the Tenth Circuit (the “10th Circuit Court of Appeals”) affirmed decisions finding that a payment made on account of a first time transaction between a debtor and creditor can qualify for the ordinary course of business defense under 11 U.S.C. § 547(c)(2).

C.W. Mining Company (the “Debtor”) entered into an equipment agreement with a new contractor, SMC Electric Products, Inc. (“SMC”), in an attempt to increase the Debtor’s coal production. This agreement was reached several months before the filing of an involuntary bankruptcy petition. Within 90 days of the involuntary bankruptcy filing, the Debtor made the first payment under the agreement in the amount of $200,000 to SMC via wire transfer. The Trustee filed an adversary proceeding seeking to avoid and recover the $2000,000 payment under 11 U.S.C. §§ 547(b) and 550, as an alleged preferential

Earth to Creditors: Triangular Payment Arrangements May Constitute “Reasonably Equivalent Value”

Satellite Orbiting Earth.

The Eleventh Circuit Court of Appeals recently clarified the meaning of “reasonably equivalent value” in a complex fraudulent transfer case.  Its decision in In re PSN USA, Inc., Case No. 14-15352 (11th Cir. Sept. 4, 2015), provides particular insight on fraudulent transfers in the context of parent-subsidiary and other triangular payment arrangements.  The Eleventh Circuit held that even though the debtor, a cable television channel, was not a party to the underlying satellite services contract at issue, payments made from the debtor to the satellite services company pursuant to its parent company’s contracts constituted “reasonably equivalent value” and could not be avoided as constructive fraudulent transfers.

PSN USA, Inc. (the “Debtor”) operated the PSN Channel, a cable television station that broadcasted live and recorded sporting events throughout Latin America.  Pan

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