In a decision that deserves the close attention of secured lenders, the U.S. Court of Appeals for the Seventh Circuit held that a bank’s awareness of suspicious facts about the collateral pledged to secure its loan required bank officials to perform a diligent investigation of possible fraud or other wrongdoing by its borrower.
The legal saga of the Wyly brothers continues.
Born in rural Louisiana during the Great Depression, Samuel Wyly and his older brother Charles, Jr., built a fortune from a computer company and later from steakhouses and Michael’s, an arts-and-crafts retail chain. In 2010, however, the U.S. Securities and Exchange Commission (SEC) brought a civil enforcement action against the Wylys, alleging that they participated in an elaborate international securities fraud scheme.
In a Jan. 8, 2016, opinion, the U.S. Court of Appeals for the Seventh Circuit reminded secured lenders of their due diligence obligations when choosing to extend credit. In Grede v. Bank of New York Mellon Corp. and Bank of New York (Grede), a panel of the Seventh Circuit held that Bank of New York and its successor, Bank of New York Mellon Corporation, (collectively, the bank) were on inquiry notice of their obligation to investigate the provenance of the collateral used by Sentinel Management Group, Inc. to secure several hundred million dollars in loans made to Sentinel.
In Sikirica v. Wettach, the Third Circuit held that a party seeking to avoid a fraudulent transfer under Pennsylvania’s Uniform Fraudulent Transfer Act (PUFTA) bears the burden of persuasion on all elements, including the insolvency of the debtor and the lack of reasonably equivalent value in exchange.
A Ponzi scheme is a fraudulent arrangement where an entity makes payments to investors from monies obtained from later investors, not from profits of any underlying business venture. The scheme is a variation of robbing Peter to pay Paul. Charles Ponzi is regarded as the mastermind of the first such scheme.
Fraudulent transfer plaintiffs be reminded: the heightened pleading standard in Rule 9(b) continues to create difficulty surviving a motion to dismiss actual fraudulent transfer claims. In In re Lyondell Chem. Co, in the context of fraudulent transfer litigation following a leveraged buyout, the United States Bankruptcy Court for the Southern District of New York reaffirmed that the Rule 9(b)
Chasing fraudsters is never easy. They always appear to be one step ahead and creditors, in addition to having to prove the fraudulent transaction, have to also find the money or assets and be able to recover them.
In a recent decision, the United States Court of Appeals for the Seventh Circuit provided further clarification regarding the defenses available to “mediate or immediate transferees” who receive an otherwise avoidable transfer.
The Commercial Fraud Committee has had a very busy and prolific year, producing one book, two webinars, three newsletters, multiple case law eblasts, and the launching of a committee wide conference call program.
“Let there be an end, a privacy, an obscure nook for me. I want to be forgotten even by God.” This Browning verse would serve as an apt credo for many fraudsters looking to exit the game. The problem is that today, the exit always seems to include an “obscure nook” — and a few million dollars of other people’s money.
Reid Collins & Tsai LLP
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Gray Reed & McGraw LLP