Category Archives: Avoidance Actions/Fraudulent Transfers

Fifth Circuit Finds that an Electricity Requirements Contract Is a “Forward Contract” Exempt from Bankruptcy Code’s Avoidance Powers

On August 2, 2012, the United States Court of Appeals for the Fifth Circuit held that a requirements contract for electricity is a forward contract for purposes of section 546(e) of the Bankruptcy Code and, therefore, settlement payments made under … Continue reading

Fifth Circuit Holds that Fixed Quantities are Not Required to Satisfy the “Forward Contracts” Safe Harbor Defense

On August 2, 2012, the United States Court of Appeals for the Fifth Circuit held that a requirements contract for the supply of electricity constituted a “forward contract” under the Bankruptcy Code and, therefore, was exempt from preference avoidance actions. The Fifth Circuit held that the contract in this case met the plain language definition of a “forward contract,” notwithstanding the fact that it lacked fixed quantity and delivery date terms. Lightfoot v. MXEnergy Elec., Inc. (In re MBS Mgmt. Servs., Inc.), 2012 WL 3125167 (5th Cir. Aug. 2, 2012). Continue reading

Second Circuit Affirms Arbitration Panel’s Finding That A Securities Clearing Firm May Be Liable As The “Initial Transferee” Of A Fraudulent Transfer

On July 3, 2012, the United States Court of Appeals for the Second Circuit refused to vacate an arbitration award against Goldman Sachs Execution & Clearing, P.C. The Court left intact the arbitration panel’s finding that the clearing firm was liable as the “initial transferee” of a fraudulent transfer by a customer engaged in a Ponzi scheme. The Second Circuit’s decision weakens the “mere conduit” defense that has traditionally shielded clearing firms from fraudulent transfer claims, and may increase the risk associated with accepting deposits from dishonest or insolvent customers. Goldman Sachs Execution & Clearing L.P. v. Official Unsecured Creditors’ Comm. of Bayou Group, LLC, No. 10-5049-cv, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012). Continue reading

Cadwalader Presents to LSTA on 11th Circuit TOUSA Decision

Cadwalader attorneys Peter Friedman, Doug Mintz and Josh Brant, joined by Morgan Stanley Executive Director Colin Adams, recently addressed the Loan Syndications and Trading Association and discussed their views on the 11th Circuit’s recent controversial TOUSA decision upholding a bankruptcy court’s decision finding that certain loans and liens constituted fraudulent transfers. Continue reading

What’s Yours is Mine, and What’s Mine is Mine? SDNY Expands the “Unfinished Business” Doctrine to Include Non-Contingency Client Matters In Possible Dewey Preview

The recent chapter 11 case of the storied New York law firm, Dewey & LeBoeuf LLP, will raise a host of issues attendant to the dissolution of a modern day “big law” firm partnership. Chief among these issues is likely to be whether the profits earned by former Dewey partners in completing Dewey’s open client matters belong to Dewey or the former Dewey partners. Continue reading

Akanthos: Eleventh Circuit Denies Noteholders’ Fraudulent Transfer Claims due to No-Action Clause in Indenture

On April 25, 2012, the U.S. Court of Appeals for the Eleventh Circuit overturned a decision by the U.S. District Court for the Northern District of Georgia permitting noteholders to proceed with a fraudulent transfer suit against the issuer of their notes, despite a clause in the indenture prohibiting such suits. The Eleventh Circuit held that the prohibition in the indenture, otherwise known as a “no-action clause”, should be strictly enforced, and that the noteholders were thus barred from bringing fraudulent transfer claims against the issuer and its officers and directors. Akanthos Capital Mgmt, LLC, et al. v. CompuCredit Holdings Corp., et al., Case No. 11-13227 (11th Cir. Apr. 25, 2012). The Eleventh Circuit’s decision comports with the majority of courts that have interpreted no-action clauses in this context and provides greater certainty in the marketplace regarding the litigation risks associated with bond issuance. Continue reading

Just When I Thought I Was Out . . . Eleventh Circuit Rules in TOUSA that Refinanced Lenders Can Be “Pulled Back In” and Held Liable if a Replacement Loan is a Fraudulent Transfer

On May 15, 2012, the Eleventh Circuit Court of Appeals upheld a ruling by the Bankruptcy Court for the Southern District of Florida, which required certain lenders to return $403 million in prepetition payments they had received from TOUSA, Inc. because the new loan TOUSA obtained to make those payments was a fraudulent transfer. The Eleventh Circuit’s decision raises serious questions regarding whether lenders whose loans are paid off in a refinancing may be forced to disgorge or return funds to a debtor if the refinancing loan is later found to be avoidable under the bankruptcy code. Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA, Inc.), Case No. 11-11071 (11th Cir. May 15, 2012). Continue reading

Eleventh Circuit Reinstates Controversial Bankruptcy Court Opinion in In re TOUSA

On May 15, 2012, the U.S. Court of Appeals for the Eleventh Circuit reinstated the controversial 2009 opinion from the U.S. Bankruptcy Court for the Southern District of Florida in In re Tousa Inc., which allowed the estate to avoid as fraudulent transfers approximately $420 million in loans extended to the bankrupt home builder as part of a July 2007 financing transaction. Continue reading

What’s In a Name? Fifth Circuit Rejects Formulaic “Legal Title” Standard of Ownership In Favor of “Control” Test

Asserting a fraudulent transfer claim is one of the most powerful tools a debtor in possession or trustee has under the Bankruptcy Code. Of course, a debtor can only seek to avoid a transfer of property in which it had an interest. On January 27, 2012, in a matter of first impression, the United States Court of Appeals for the Fifth Circuit considered whether a debtor had to establish that it had held legal title to a bank account in order for the debtor to demonstrate that it had transferred an “interest in property of its estate” for purposes of pursuing a fraudulent transfer claim. Rejecting a bright-line rule requiring formal legal title to property, the Fifth Circuit looked to state law in determining that a debtor could prove ownership of the bank account through control over that account. By virtue of its control over the account, the Fifth Circuit held that the debtor could bring a fraudulent transfer claim to seek return of that property (or equivalent damages). Guillermo De La Pena Stettner, et al. v. Steve Smith (In re IFS Financial Corp.), No. 10-20670 (5th Cir. Jan. 27, 2012). Continue reading

Mirant: Fifth Circuit Renders Pro-Creditor Rulings in Fraudulent Transfer Action

On March 20, 2012, in an adversary proceeding stemming from the Mirant bankruptcy, the U.S. Court of Appeals for the Fifth Circuit (i) affirmed the U.S. District Court for the Northern District of Texas’ ruling that Mirant’s recovery trust had standing to pursue a fraudulent transfer action even though Mirant’s unsecured creditors arguably received a full recovery under Mirant’s confirmed plan, and (ii) overturned the District Court’s determination that Georgia’s, rather than New York’s fraudulent transfer law, applied to the action. Because the District Court had dismissed the fraudulent transfer action based on Georgia law, which the Fifth Circuit now deemed inapplicable, the Fifth Circuit remanded the case for adjudication under New York law. MC Asset Recovery LLC v. Commerzbank A.G. et al., 2012 WL 919620 (5th Cir. (Tex.)). The Fifth Circuit’s rulings resurrected Mirant’s seven-year-old fraudulent transfer action, and are important, pro-creditor precedents that could impact numerous pending and future fraudulent transfer actions. Continue reading