► In This Issue:

• Suspicious Minds: Lender’s Failure to Investigate and Search for “Possible Dirt” Leads to
  Fraudulent Transfer Liability, but Not Equitable Subordination
• Husky International Electronics Inc. v. Daniel Lee Ritz, Jr.: Whether “Actual Fraud”
  Under 11 U.S.C. § 523(a)(2)(A) Requires a False Representation
• The Unfortunate Expansion of the Ponzi Scheme Presumption

Suspicious Minds: Lender’s Failure to Investigate and Search for “Possible Dirt” Leads to Fraudulent Transfer Liability, but Not Equitable Subordination

Jeffrey Rhodes Blank Rome LLP Washington, D.C.

In a decision that deserves the close attention of secured lenders, the U.S. Court of Appeals for the Seventh Circuit held that a bank’s awareness of suspicious facts about the collateral pledged to secure its loan required bank officials to perform a diligent investigation of possible fraud or other wrongdoing by its borrower. The failure to conduct such an investigation scuttled the bank’s good-faith defense under § 548(c) of the Bankruptcy Code and ultimately left the bank’s claim unsecured after the borrower’s transfer of funds, from segregated to lienable accounts, was avoided as an intentional fraudulent transfer. The court went on to hold, however, that the bank’s conduct did not rise to the level of culpability necessary for the equitable subordination of its now-unsecured claim.
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Husky International Electronics Inc. v. Daniel Lee Ritz, Jr.: Whether “Actual Fraud” Under 11 U.S.C. § 523(a)(2)(A) Requires a False Representation

Bianca Rucker Wright, Lindsey & Jennings, LLP Rogers, Ark.

On Nov. 6, 2015, the U.S. Supreme Court granted certiorari in Husky International Electronics Inc. v. Daniel Lee Ritz, Jr. and heard oral arguments in the case on March 1, 2016. The issue pending before the Supreme Court concerns whether “actual fraud” under 11 U.S.C. § 523(a)(2)(A) requires a finding that a false representation was made by the debtor to the objecting creditor.

The original dispute arose out of unpaid debt owed by Chrysalis Manufacturing Corporation (CMC) to Husky Electronics (Husky). From 2003-07, CMC bought electrical components from Husky, and in doing so incurred a debt of approximately $164,000 that it did not pay. Husky tried to recover the money from one of CMC’s owners, Daniel Lee Ritz, Jr. (Ritz), by filing a federal lawsuit in 2009. While the suit was pending, Ritz filed a chapter 7 bankruptcy petition.
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The Unfortunate Expansion of the Ponzi Scheme Presumption

Stephen C. Stapleton Cowles & Thompson PC Dallas

You operate a law firm in Texas. You are hired by a Utah business trust to represent a friend of the trust’s founder, who is facing criminal charges in New Hampshire. You represent the friend, and for your legal services you are paid $90,000 by the trust. More than four years later, you learn that the Commodity Future Trading Commission (CFTC) has brought an action in Utah against the trust, claiming that the trust is a Ponzi scheme. The CFTC has sought and won the appointment of a receiver to marshal the assets of the trust, among which are payments previously made in furtherance of the Ponzi scheme. You are thereafter sued in Utah by the receiver for the trust, who claims, under Utah’s Uniform Fraudulent Transfer Act, that you have to pay the $90,000 back. Obviously, you disagree.
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