| April 2011 issue: Your Name Here! The Bankruptcy Section is looking for volunteers to write a Case Analysis for an upcoming edition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions -- especially those interpreting BAPCPA's amendments to the Code. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive here. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. CLLA 205 N. Michigan, Suite 2212, Phone: 312-240-1400 Newsletter design by: |
April 2011 Bankruptcy Section Newsletter Section NewsCLLA Staff The bankruptcy section will sponsor up to 6 hours of continuing legal education at this year's Chicago/Spring Meeting, which takes place April 14-17, 2011 at the Westin on Michigan Avenue. The education includes:
CLLA's Bankruptcy Section Announces Programming For Its NCBJ Events In Tampa, Florida This Fall!2011 Annual Breakfast Featuring the presentation of the Lawrence P. King Award for Excellence in Bankruptcy and a keynote presentation from Greg Gumbel. Greg Gumbel's standout work in the busy world of sports broadcasting has made his face, his name and his voice as familiar as any in the industry. Across almost 40 years in the business, Gumbel has become one of the most outstanding and best known announcers in sports television. When Gumbel's not doing play-by-play or hosting on-air for CBS, he enjoys speaking to groups all around the country sharing his motivational thoughts, ideas and experiences from the world of sports. The Honorable Frank W. Koger Memorial Education Program: Current Developments in Hot & Emerging Areas of Bankruptcy Emerging And Complex Issues In Chapter 11: Part One
Emerging And Complex Issues In Chapter 11: Part Two
Recent Developments in Bankruptcy Ethics
Sua Sponte Peter Califano, Bankruptcy Section Chair Financial news continues to help fill the "news window" these days, often with states' pension plans being targeted as the significant problem at the state level. According to Eli Lehrer of the Heartland Institute, they are not. According to Mr. Lehrer, pension contributions represent approximately 2.9% of state expenditures, just about what they were 15 years ago. It was also noted that once state employees are "vested" in their pension plans they are typically constitutionally protected. And only about 8 of the 87 major state level pension systems have liabilities in excess of 30% when compared to promised benefits. Therefore, instead of hand wringing over current pension liabilities, legislators and budget reformers would be best to focus on high wages, excessive vacation benefits and "Cadillac" employee health care plans. This holds true in states with large budget gaps such as California, New York, Florida, Texas and Wisconsin. This is probably good advice as each state tries to get its financial house in order. In other news, our Section members Stephen Sather and Barbara Barron of Barron Newburger & Sinsley, PLLC of Austin, Texas, filed an amicus curiae on behalf of the Commercial League of America in support of rehearing en banc of the Court's decision in Reed v. City of Arlington, Case No. 08-11098, United States Court of Appeals for the Fifth Circuit. On February 22, 2011, the Court granted the petition for rehearing in this important case that purports to limit a Chapter 7 Trustee's ability to pursue omitted assets from the bankruptcy estate. We will report further developments from the rehearing. Also, please join us in Chicago for the Annual Chicago Spring Meeting and National Convention that will take place on April 14-17, 2011 at the Westin Michigan Avenue Hotel. The Bankruptcy Section will have four very informative educational panels, hold Section committee meetings and offer many networking opportunities with bankruptcy judges, trustees, attorneys and other professionals from around the country. Especially noteworthy is the ever popular "Hot and Emerging Issues in Bankruptcy Law" presented by Ronald Peterson of Jenner Block from Chicago that will take place on Saturday morning. We hope to see you at the Conference. Case Law AnalysisPete Gannott Bankruptcy Court Provides New Views on the "Good Faith" Defense to a Fraudulent Conveyance Action A Bankruptcy Court in Michigan recently adopted a new standard and analysis for determining whether a lender acted in "good faith" in accepting a fraudulent conveyance. In re Teleservice Group Inc., Meoili v. The Huntington National Bank, A.P. No. 07-80037 (Bankr. W.D. Mich. March 17, 2011). In a 127-page decision, Judge Jeffrey R. Hughes of the Bankruptcy Court for the Western District of Michigan determined that a financial institution must return to the bankruptcy estate sums paid to it after it suspected its customer was engaged in a Ponzi scheme. The court concluded that the inquiry of whether the lender acted in "good faith" must be based solely upon the subjective intent of the lender. This differs from opinions from many other courts, which apply an objective standard. In addition, the court concluded that proof that the lender lacked good faith may be established using the same "badges of fraud" that have historically been used to establish a debtor's actual intent to defraud. The Factual Background Judge's Hughes' opinion characterized the events as "a tragic play" orchestrated by the CEO and Chairman of CyberCo Holdings, Inc., Barton Watson. Id. 7. The $100 million Ponzi scheme involved Watson seeking advances from banks, leasing companies and similar institutions under the pretext that CyberCo would buy computer equipment. Watson represented to his financiers that a company called Teleservices was CyberCo's preferred vendor for buying computer server equipment. The financiers issued checks to Teleservices, which was actually one of CyberCo's front companies, and which then sent the money to CyberCo to pay high salaries to Watson and other CyberCo executives. Id. 13. CyberCo deposited the sums from Teleservices in a Huntington National Bank account. Huntington also provided cash management services by which CyberCo paid down its $13 million line of credit. Toward the end of CyberCo's existence, Teleservices bypassed CyberCo and transferred the payments directly to Huntington. The bank grew suspicious of CyberCo's operations and began a formal investigation, but discovery of the fraud was stymied by Watson. Watson falsely told Huntington that Teleservices was the newly formed arm for CyberCo that collected the company's receivables. Watson also provided Huntington with a false Social Security number, so a criminal background check turned up no red flags. Despite this misinformation, Huntington's then-regional security officer, Larry Rodriguez, discovered Watson was a felon convicted of fraud. Rodriguez did not report this to Huntington officials. Without this critical information, Huntington continued accepting payments on CyberCo's outstanding debt for another six months. The Court's Opinion The Teleservices Chapter 7 bankruptcy trustee brought an adversary proceeding against Huntington under Section 548 of the Bankruptcy Code and Michigan's version of the Uniform Fraudulent Transfers Act for sums paid to Huntington. Id. at 4. After a lengthy trial, Judge Hughes rendered a comprehensive decision covering many aspects of the case and fraudulent conveyance law. The court concluded the payments to Huntington by CyberCo and Teleservices were fraudulent conveyances. It also decided the bank gave value in exchange for the indirect transfers, but not the direct conveyances. Id. at 32-33, 41. The Teleservices decision then turned to the more difficult issue of Huntington's "good faith" defenses under §548(c) and §550(b). Judge Hughes reviewed the development of fraudulent conveyance jurisprudence prior to the enactment of the Bankruptcy Code. He discussed at length the "good faith" defenses that may be raised to claims seeking recovery of actual and constructive conveyances, post-petition transfers and preferences. The decision also examined the growing body of law holding that a transferee's "good faith" is to be based on an objective standard of whether he was aware of "red flags" that would place a reasonable person on inquiry of debtor's fraudulent purpose. Id. 44-46, citing, e.g., In re Bayou Group, LLC, 439 B.R. 284 (S.D.N.Y. 2010). But the court concluded the "objective approach is not well grounded in the law" and, instead, decided that "good faith" requires proof of "the recipient's own honesty and integrity." Id., 65. The opinion further concluded that proof that the transferee lacked good faith may be established using the same "badges of fraud" that have historically been employed to establish a debtor's actual intent to defraud. Id., 75. Additionally, a recipient who is "willfully blind" to information suggesting fraud will lack good faith if he does not investigate further. Id. 77. Applying these principles, Huntington's conduct was tested by "its own honesty and integrity – i.e., good faith – as it became aware of more and more indicators of Teleservices' fraud upon its creditors." Id. 78. The court determined that Huntington, for at least the six months prior to the collapse of the scheme, did not act in good faith when it turned a "blind eye" to Rodriguez's evidence that Watson was a convicted felon. Id. 121. If information of Watson's fraudulent past had been provided to his supervisors, "Huntington would have undoubtedly concluded that absolutely nothing at CyberCo could be accepted at face value, including the increasingly suspicious story of who Teleservices was and why it was transferring huge amounts of money to CyberCo," Judge Hughes wrote. Id. 26. This lapse in judgment prevented Huntington from establishing its "good faith." Id. 97. The court also concluded that Huntington turned a "blind eye" to six- and seven-figure round-dollar transfers into CyberCo's depository account received directly from Teleservices. Id. 104. Due to Huntington's inability to prove its good faith, it was obligated to return all of the transferred sums, even those exchanged for reasonably equivalent value. Finally, the court held that Huntington's exposure under Section 550 could be as much as four times what it lent CyberCo because CyberCo also maintained deposit accounts at Huntington. Id., 125, n. 260. Thus, Huntington could expect a judgment of $73 Million, although it had only lent CyberCo only $16.5 Million. Further Implications Judge Hughes' thoughtful and scholarly decision in CyberCo challenges the current trend – expressed even in recent cases – of using an objective standard to assess the "good faith" of a transferee of fraudulently conveyed property. It will be interesting to see whether other bankruptcy judges are persuaded by its reasoning in the future. Moreover, some lenders may be justifiably concerned that their "Section 550 exposure could be as much as four times what it lent simply because [debtor] also maintained deposit accounts" at the institution. Id., 125, n. 260. Due to the potential for such a large recovery, bankruptcy trustees may more aggressively attempt to claw back sums paid to banks and other lending institutions with the expectation that these transferees discovered badges of fraud in connection with servicing the loans and, therefore, cannot establish the "good faith" defense to a fraudulent conveyance claim. Legislative Update: Senate Judiciary Approves Bankruptcy Court Foreclosure Mediation Sharon Edmondson, Washington Legislative Team Member On March 31, the Senate Judiciary Committee approved, by a roll call vote of 10-8, legislation which would clarify the authority of bankruptcy courts to offer foreclosure mediation programs. The "Limiting Investor and Homeowner Loss in Foreclosure Act of 2010" (S 222) was introduced by Senator Sheldon Whitehouse (D R.I.). The legislation will authorize bankruptcy courts to establish a loss mitigation program for the negotiation of alternatives to avoid foreclosure between an individual debtor and the holder of the claim secured by a security interest. The Senate committee passed by voice vote a motion by Sen. Whitehouse to table an amendment brought by Sen. Coburn (R OK) that would have terminated the Home Affordable Modification Program (HAMP) and required return of the money to Treasury. Another amendment offered by Sen. Coburn would have added the same eligibility requirements to the ones under HAMP; failed by voice vote. In a prepared statement, Ranking Member Grassley (R Iowa) voiced concerns about S 222 saying that it could damage the economy, housing market, and availability of credit. |