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.
Recent cases suggest that broadcasters who advertise a debtor’s fraudulent business may face exposure to § 548 claims, as was addressed in Part 1 of this article. In Part 2, we address the second element of a broadcaster’s defense: the exchange of reasonably equivalent value in exchange for payments received by the broadcaster.
It is well settled that state law statutes of limitations do not affect a trustee’s ability to bring fraudulent transfer actions, so long as the limitations period has not expired before the petition date. Assuming that the limitations period has not expired, the limitations period essentially freezes, and the bankruptcy trustee has two years of “breathing room” to investigate and bring fraudulent transfer claims.
In December 2014, attorneys and financial advisors serving both unsecured creditors’ committees and trustees watched as the Second Circuit expanded the “safe-harbor” provision available to defendants in certain clawback litigations. The safe-harbor provision was designed by Congress to protect certain securities and other transactions including “settlement payments” from avoidance actions. In 11 U.S.C. 546(e), the Bankruptcy Code sets forth that a trustee may not avoid a transfer that was a settlement payment to (or for the benefit of) a broker or financial institution, or for a payment made in connection with a securities contract.
In a case of first impression, the U.S. Bankruptcy Court for the Northern District of Illinois recently held that loan payments related to a two-tiered securitization structure are protected from avoidance by 11 U.S.C. § 546(e). Specifically, in Krol v. Key Bank National Association (In re MCK Millennium Centre Parking LLC), the court held that the debtor’s payments on a nondebtor affiliate’s loan, which had been transferred into a trust as part of a commercial mortgage-backed securitization, were made “in connection with a securities contract” under § 546(e) and, therefore, were not avoidable as preferential or constructively fraudulent transfers.
Two recent cases suggest that broadcasters who advertise a debtor’s fraudulent business may be vulnerable to § 548 claims. If the broadcaster received notice of the debtor’s fraudulent business practices, it may lack good faith. Yet a recent decision from the Fifth Circuit suggests that even if good faith exists, advertising that grew the debtor’s fraud does not provide reasonably equivalent value. In this first of two articles, good faith is addressed.
In this edition of the Commercial Fraud Committee Newsletter, we introduce a new feature: an interview with a Commercial Fraud Committee member. Our inaugural interviewee is Richard Lauter, Commercial Fraud Committee Chair. Rich is a partner at Freeborn & Peters LLP in Chicago, where he leads his firm’s Bankruptcy and Restructuring Group.
Over the past several years, creditors, bankruptcy trustees and receivers have used § 548 of the Bankruptcy Code and the Uniform Fraudulent Transfer Act (UFTA) to “claw back” amounts paid to winning investors in a Ponzi scheme (i.e., payments made to investors greater than their investment).
A series of recent Tenth Circuit decisions illustrate the potential pitfalls defendants face in relying on the good faith and subsequent transferee defenses in fraudulent transfer avoidance claims. In both cases, law firms were required to return fees they had undisputedly earned.
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