► In This Issue:

• Fifth Circuit Embraces Minority Rule, Narrows Meaning of “Value” under § 548(c)
• For Good-Faith Defense to Shield a Transferee from a Fraudulent Transfer Avoidance Claim, Transferor Must Receive Reasonably Equivalent Value
• Minnesota Supreme Court Rejects Presumption that Ponzi Schemes Are Insolvent as a Matter of Law
• Commercial Fraud Committee Member Spotlight—Richard Lauter

Fifth Circuit Embraces Minority Rule, Narrows Meaning of “Value” under § 548(c)

Daniel M. Anderson Ice Miller LLP Columbus, Ohio

Victoria E. Powers Ice Miller LLP Columbus, Ohio

Section 548(c) of the Bankruptcy Code provides a defense to a party found to have received a fraudulent transfer: If the transfer is received for value and in good faith, the transferee may retain the property to the extent value was given in exchange.

Although seemingly straightforward, § 548(c) presents a number of questions, including: What happens when a transferee gives value to the debtor that is less than what the transferee received? Is the transferee entitled to a complete defense, so that it retains everything it received so long as it gave “reasonably equivalent” value? Or is the transferee’s defense limited, so that it remains liable for the excess of what it received over the value that it gave to the debtor? The majority view among bankruptcy courts has been that giving reasonably equivalent value provides a complete defense. However, in Williams v. Fed. Dep. Ins. Corp. (In re Positive Health Management), the Fifth Circuit embraced the minority view and held that the defense is limited to the value given to the debtor.

In Williams, the debtor had offices in a building owned by an affiliate that shared common ownership with the debtor. First National Bank held the mortgage on the property. The debtor made payments totaling $367,681.35 to First National. The payments were listed on the debtor’s tax returns as rent, even though it had no direct obligation to the bank. When the payments stopped, First National foreclosed and the debtor filed for chapter 7. The trustee brought a claim to avoid the payments as fraudulent transfers.  Read More

For Good-Faith Defense to Shield a Transferee from a Fraudulent Transfer Avoidance Claim, Transferor Must Receive Reasonably Equivalent Value

Matthew R. Barrett Horwood Marcus & Berk Chtd. Chicago

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. The fees were determined to have been fraudulent transfers because the firm, although paid by the transferor, did not perform legal services on behalf of the transferor, but rather for third parties. Because no “reasonably equivalent value” was received by the transferor, the payments to the defendant law firms were deemed fraudulent transfers.  Read More

Minnesota Supreme Court Rejects Presumption that Ponzi Schemes Are Insolvent as a Matter of Law

Johnathan Cyrluk Carpenter Lipps & Leland LLP Chicago

Steven C. Moeller Carpenter Lipps & Leland LLP Chicago

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). In such cases, several courts have held that once the plaintiff proves the existence of a Ponzi scheme, then it is presumed that the transfers were made with the actual intent to hinder, delay or defraud the transferor’s creditors. The so-called Ponzi scheme presumption is a powerful tool for a plaintiff seeking to recover payments made to winning investors.

On Feb. 18, 2015, however, the Minnesota Supreme Court in the case Finn v. Alliance Bank rejected the Ponzi scheme presumption, holding that creditors seeking to “claw back” payments to the winners of a Ponzi scheme must prove that the transfers at issue were fraudulent in the same manner as any other plaintiff.

Underlying Facts in Finn
Finn arose from the collapse of First United Funding, LLC, a loan originator that sold participation interests in loans that it originated. Beginning in 2002, however, First United began to oversell participation interests (i.e., interests that were larger than the underlying loan) and to sell interests for which no loans existed. Even after 2002, however, not all of the interests First United sold were fraudulent; it continued to sell both legitimate and fraudulent interests. However, the company commingled funds that it received from legitimate interests and fraudulent interests, and used those funds to pay both holders of legitimate and fraudulent loans.  Read More

Commercial Fraud Committee Member Spotlight—Richard Lauter

Richard Lauter Freeborn & Peters LLP Chicago

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. We sat down with Rich and asked him some questions regarding his involvement in ABI and the Commercial Fraud Committee in general. The following is an excerpt of our discussion.

Commercial Fraud Committee (Committee): How did you first get involved in ABI?

Richard Lauter (Rich): I attended ABI’s Central States Bankruptcy Workshop and met the Advisory Board chair. I then volunteered to raise sponsorship money for the conference and was appointed Sponsorship co-chair.  Read More