IV. Fraudulent Transfers and Voidable Transactions

– Vendorpass, Inc. v. Texo Solutions, L.L.C., 2017 WL 444303 (N.J.Super. Ct. 2017) – A secured party that received payment from the debtor after the debtor had received funds from a related entity had no liability to a creditor of the related entity. There was no basis for a claim of constructive trust because the secured party was not unjustly enriched by the repayment of a debt. Even if the transfer of funds to the debtor was a constructive or intentionally fraudulent transfer, the secured party was a good faith subsequent transferee that gave value, and hence had a valid defense. Moreover, the secured party took free as a transferee of money.

– United States Small Business Administration v. Bensal, _ F.3d _ (9th Cir. 2017) – The Federal Debt Collection Procedures Act has a fraudulent transfer provision. That provision authorizes the federal government to void a “fraudulent transfer” by a debtor owing a debt to the United States. The Act preempts a state law that allows a debtor to disclaim an inheritance and thereby place the property to be inherited beyond the reach of the government.

– Nautilus, Inc. v. Yang, _ Cal.App.4th _ (2017) – The Uniform Fraudulent Transfer Act (the predecessor to the Uniform Voidable Transactions Act) allows a transferee to avoid liability if it can establish that it acted in good faith. The court held that the good faith defense is not available if the transferee had fraudulent intent, colluded with a person who was engaged in the fraudulent conveyance, actively participated in the fraudulent conveyance, or had actual knowledge of facts showing its knowledge of the transferor’s fraudulent intent. The court emphasized that the transferee was not subject to inquiry notice of facts that would have given it knowledge of the fraudulent intent. The court also held that the transferee has the burden of proof in establishing its good faith.

– McDonald v. Nixon Energy Solutions, 2017 WL 1836937 (D.S.C. 2017) – The supplier of a generator to a biogas facility had no fraudulent conveyance claim against the owner’s secured party for receiving payment of a federal grant to the owner, even though the secured party perfected its security interest after the supplier filed a notice of its mechanic’s lien and the secured party never complied with the Federal Assignment of Claims Act. The secured party did have a security interest in the owner’s general intangibles, which included the right to payment of the federal grant, and there was no evidence that the owner was insolvent when the security interest was transferred. The supplier also had no claim for tortious interference with contract against the secured party because the secured party was justified in receiving the payment.

–   Janice M. Hinrichsen, Inc. v. Messersmith Ventures, L.L.C., 895 N.W.2d 683 (Neb. 2017) – The trial court did not err in concluding that the transaction by which an insurance agency with a $98,000 judgment against it sold for $250 to an entity newly formed by the agency’s owner the agency’s customer list was a fraudulent transfer for less than reasonably equivalent value. However, the trial court did err in awarding judgment for only $250. Although the plaintiff did not prove the value of the customer list, the proper remedy for a fraudulent transfer is to avoid the transfer, so the plaintiff should have been permitted to levy on the asset transferred or its proceeds.*

– Georgia Commercial Stores, Inc. v. Forsman, 803 S.E.2d 805 (Ga. Ct. App. 2017) – An unsecured creditor of an insolvent LLC stated claims for breach of fiduciary duty and intentionally fraudulent transfer against the LLC’s president for causing the LLC to repay a $239,000 debt to the president. Just as the officers and directors of an insolvent corporation owe a fiduciary duty to the corporation’s creditors, so too do the managing members of an insolvent LLC. Although the LLC’s assets were fully encumbered and the payment was made with the secured creditor’s approval, those facts alone did not demonstrate that the unsecured creditor was uninjured by the transfer; the claim of a creditor that diligently pursues collection are not reduced or defeated by the hypothetical claims of other creditors who have slept on their rights.

– Duncan v. Asset Recovery Specialists, Inc., 2017 WL 2870520 (W.D. Wis. 2017), appeal filed, (7th Cir. Aug. 8, 2017) – Although the debtor did not have a claim under the Fair Debt Collection Practices Act against either the secured party or the repossession agent based on her mistaken belief that the repossession agent sought to charge her $100 to return property within the repossessed car, the debtor might have a conversion claim.

– Impala Platinum Holdings Limited v. A-1 Specialized Services and Supplies, Inc., 2017 WL 2840352 (E.D. Pa. 2017) – Pursuant to the Uniform Contribution Among Tortfeasors Act, the defendant who the jury determined was 59% responsible for the $16 million verdict in a fraudulent transfer action was not entitled to any reduction for the amount paid by the defendants who settled during the trial because the settlement agreement provided that any judgment against other tortfeasors would be reduced by the pro rata share of liability the jury apportioned to the settling defendants. Thus, the defendant remained liable for 59% of $16 million, even though that amount plus the settlement amount exceeded $20 million.

– Stoltenberg v. Sheppard, Mullin, Richter, & Hampton, LLP, 2017 WL 2644646 (Cal. Ct. App. 2017) – A law firm that acquired a security interest in a client’s artwork and cooperative apartments to secure the payment of the firm’s fees did not thereby receive a fraudulent transfer. Although the security interest attached after an $8.5 million judgment was entered against its client, it initially appeared that the client had sufficient assets to pay the firm’s fees and at least a portion of the judgment and the judgment creditor’s counsel had agreed that the client could use the art to pay attorney fees. The transfer was not constructively fraudulent because even if the collateral was worth substantially more than the amount of the fees, the firm’s lien was limited to the amount of the fees.*

– Wells Fargo Equipment Finance, Inc. v. Bacjet, LLC, 221 So. 3d 671 (Fla. Ct. App. 2017) – A secured party located in Oklahoma and that did not lend to Florida residents was nevertheless subject to personal jurisdiction in Florida with respect to a judgment creditor’s fraudulent transfer action against the secured party with respect to the transaction by which the secured party acquired a security interest in the judgment debtor’s accounts, stock certificates, and Florida homestead.

– Mizrahi v. Checkolite International, Inc., 2017 WL 111919 (D.N.J. 2017) – An unsecured creditor of a corporation stated a cause of action for violation of the New Jersey Uniform Fraudulent Transfer Act against the corporation’s secured lender and the buyer of the corporation’s assets at a disposition by the secured lender. The unsecured creditor alleged that the buyer, which employed the debtor’s principal owner, and the secured lender conspired to prevent payment to the unsecured creditor.

– Meoli v. Huntington National Bank, 848 F.3d 716 (6th Cir. 2017) – Because a bank’s investigator discovered the fraudulent past of the operator of a Ponzi scheme, whose company was a depositor and borrower of the bank, but failed to share that discovery with the bank’s manager who oversaw the company’s account, the bank failed to demonstrate that it acted in good faith with respect to loan payments it received after that date. With respect to earlier indirect transfers, the bank did not necessarily have knowledge of the voidability of those transfers merely because it had acquired inquiry notice of the fraud; it depends on what a reasonable investigation would have disclosed. Moreover, the bank was not a “transferee” with respect to deposits received into the depositor’s account from a related entity that participated in the scheme because the bank has no dominion or control over ordinary deposits that the customer could withdraw, even though the bank had a security interest in the deposits.

– In re Cornerstone Homes, Inc., 567 B.R. 37 (Bankr. S.D.N.Y. 2017) – The debtor’s bankruptcy trustee stated a cause of action for actual and constructive fraudulent transfers against the banks for making loans that enabled the debtor to operate a Ponzi scheme. The complaint adequately pled fraudulent intent of the transferor by alleging that the loans were used to create the illusion of profitability, to pay off individual investor loans, to solicit individuals to make unsecured investments, and to perpetuate the alleged Ponzi scheme. The complaint adequately pled fraudulent intent of the banks by alleging that, at the time the loans were made, the banks knew or should have known that the debtor was insolvent based on the debtor’s audited financial statements and tax returns, which the banks had. The trustee also adequately pled claims for constructive fraud by alleging that the banks lacked good faith for the same reasons.

-In re International Management Associates, LLC, 563 B.R. 393 (Bankr. N.D. Ga. 2017) – Although all transfers in furtherance of a Ponzi scheme are presumed to have been made with fraudulent intent, to be “in furtherance of” the scheme and subject to the presumption, a transfer must be one that directly and materially induces future investors. Therefore, the debtor’s transfer of funds to a brokerage to open an account was not in furtherance of the debtor’s Ponzi scheme. The transfer was for contemporaneous and equivalent value to a third party who was neither an investor nor participant in the scheme. Even if the presumption did apply, the brokerage acted in good faith. While an insider might be subject to an objective standard of good faith – and therefore properly be charged with knowledge of the facts that an inquiry in response to red flags would have disclosed – an unaffiliated third party in an arm’s-length transaction is subject only to a subjective standard of good faith, and lacks good faith only if it has actual knowledge of the insolvency of the debtor or the existence of a Ponzi scheme.

The fact that the account was opened in the name of the debtor entity and funded with the entity’s assets, rather than in the name of the entity’s owner does not suggest bad faith, even if that somehow violated regulatory requirements or the brokerage’s internal policies. The fact that two of the debtor’s checks to the brokerage were dishonored and funds were then sent by wire might indicate financial difficulties, inadequate capital or liquidity, or insolvency, but does not give rise to an inference of dishonesty of lack of integrity. Finally, the fact that the debtor traded on margins, incurred substantial losses, and the brokerage did not investigate further, as industry standards might require, would be relevant only if good faith were an objective test; it does not suggest that the brokerage lacked honesty or remained willfully ignorant of facts that would give rise to a belief that the debtor was operating a Ponzi scheme.

– In re Comprehensive Power, Inc., 2017 WL 6327192 (Bankr. D. Mass. 2017) – The trustee stated a claim that the secured party’s purchase of the debtor’s assets at a public disposition was intentionally fraudulent by alleging that the secured party engaged in a “loan to own” strategy and because it assumed effective control of the debtor prior to the sale, its intent could be imputed to the debtor. The trustee also stated a claim that the transfer was constructively fraudulent by claiming that the value of the assets was substantially greater than the amount the secured party’s credit bid, which was the only bid.

– Ehrlich v. Commercial Factors of Atlanta, 567 B.R. 684 (N.D.N.Y. 2017) – The allegations of the debtor’s bankruptcy trustee that the debtor provided false invoices to its factor to obtain new loans, and used those funds to pay down the debt to the factor, did not state a claim against the factor for avoidance of a fraudulent transfer. The factor had a perfected security interest in all of the debtor’s assets, and thus the transfers could not have harmed other creditors.

– In re Caribbean Fuels America, Inc., 688 F. App’x 890 (11th Cir. 2017) – In ascertaining the value of what the debtor received in exchange for an allegedly constructively fraudulent transfer, the objective value of the property is what matters, not whether the debtor benefitted from it. Accordingly, because the trustee did not challenge the objective value of the leasehold that the debtor received in return for the rent paid for a house used as a residence and office by the debtor’s principals, the payments were not avoidable.

– Development Specialists, Inc. v. Kaplan, 574 B.R. 1 (D. Me. 2017), appeal filed, (1st Cir. May 17, 2017) – The bankruptcy court did not err in concluding that reasonably equivalent value was received by corporations that signed promissory notes and granted a security interest in their assets to secure a loan used to pay the corporations’ shareholders for their stock, which was transferred to the corporations’ new parent. The shareholder gave reasonably equivalent value and although the bankruptcy court failed to focus on what each of the corporations received, the court did find synergy and indirect benefits in the transaction.

– In re Fah Liquidating Corp., 572 B.R. 117 (Bankr. D. Del. 2017) – The debtor’s prepetition transfers of $31.5 million to a German company could not be avoided as constructive fraudulent transfers under § 548(a)(1)(B) because, even though the transfers originated in the United States from a Delaware corporation, they were made pursuant to contracts that included milestones to be achieved at production facilities in Germany, required disputes to be resolved in Munich, chose German law to govern, and required payment in Euros, and thus the transfers were made extraterritorially.

– In re East Coast Foods, Inc., 2017 WL 3701211 (Bankr. C.D. Cal. 2017) – The recipient of an avoidable fraudulent transfer has no claim for the consideration provided if the recipient did not act in good faith.

– In re Trinity 83 Development, LLC, 574 B.R. 136 (Bankr. N.D. Ill. 2017) – The re-recording thirteen months before the petition of a mortgage for which a satisfaction had erroneously been recorded did not result in a new “transfer” that could be avoided under § 548.

– PGA West Residential Association, Inc. v. Hulven International, Inc., _ Cal.App.4th _ (2017) – An individual sought to shield his real property from the claims of his creditors by creating a sham corporation and then giving the sham corporation a sham note and sham deed of trust. The plan was for the sham entity to foreclose on the real property. A creditor of the individual brought an action to invalidate the deed of trust. In a reversal of roles, the creditor argued that a “transfer” — and therefore a fraudulent transfer”) had not taken place because everything was a sham and the “transferee” argued that a fraudulent transfer had taken place. The reason for this reversal is that the applicable statute of repose had lapsed and with it the substantive claim had been “extinguished.” Although the complaint did not allege a fraudulent transfer in those words, the court ruled that the “gravamen” of the claim was a fraudulent transfer and ruled for the “transferee.”

– Slone v. Commissioner of Internal Revenue, _ F.3d _ (9th Cir. 2018) – Shareholder of transferor received a fraudulent transfer in a tax avoidance transaction.

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2017-2018 Commercial Law Developments

I. PERSONAL PROPERTY SECURED TRANSACTIONS 
II. REAL PROPERTY SECURED TRANSACTIONS
III. GUARANTIES
IV. FRAUDULENT TRANSFERS AND VOIDABLE TRANSACTIONS
V. CREDITOR AND BORROWER LIABILITY
VI. U.C.C. – SALES AND PERSONAL PROPERTY LEASING
VII. NOTES AND ELECTRONIC FUNDS TRANSFERS
VIII. LETTERS OF CREDIT, INVESTMENT SECURITIES, AND DOCUMENTS OF TITLE
IX. CONTRACTS
X. OTHER LAWS AFFECTING COMMERCIAL TRANSACTIONS