Defense of Fraudulent Transfer Actions

Fraudulent Transfers

Section 548(a)(1) of the Bankruptcy Code authorizes a trustee or Debtor in Possesion (“DIP”) to avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, within the two years preceding a bankruptcy filing if: (1) the transfer was made or the obligation was incurred with actual fraudulent intent by the Debtor, under §548(a)(1)(A) – i.e., the transfer was made, or the obligation was incurred, “with actual intent to hinder, delay, or defraud” any creditor; or (2) the transfers or obligation amounts to constructive fraud under §548(a) (1)(B) – i.e., the debtor received “less than a reasonably equivalent value in exchange for such transfer or obligation” and was insolvent, undercapitalized, unable to pay its debts as such debts matured, etc.

In relevant part, the statute provides:

Section 548 – Fraudulent transfers and obligations

1. 1. The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily-
      1. made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
      2. 1. received less than a reasonably equivalent value in exchange for such transfer or obligation; and
         2. 1. was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
            2. was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
            3. intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
            4. made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

Thus, the trustee or DIP has the ability to avoid two different kinds of transfers: (1) transfers made with actual fraud (under §548(a)(1)(A)), or (2) transfers that involve constructive fraud (§548(a) (1)(B)). The distinction between actual and constructive fraud is very important.
Constructive fraudulent transfer claims are frequently, though not always, attached as an add-on or alternative claim in actions seeking to avoid and recover preferential transfers. In those cases, the trustee or DIP may be filing the claim as something of an either/or proposition, piling on claims to try to increase the dollar amount they can clawback. In most instances, such fraudulent transfer claims are no more “fair” than the preference claim itself. But, in some of those cases, the Fraudulent Transfer count may take a back seat to the preference count, based on the defenses discussed below.

Defenses

Among the more common defenses that may be available are that you provided reasonably equivalent value for a transfer that is now alleged to be constructively fraudulent or in good faith provided value to the debtor in exchange for the transfer. There may be other defenses available to you by showing that the Transfer does not fit the statutory predicates. For example, solvency of the debtor or that the transfer was not actually an interest of the debtor in property,

Ponzi Schemes

There are differing laws across the country regarding transfers purportedly in furtherance of a Ponzi scheme. Some Courts have taken expansive views on the scope of certain presumptions to be made in Ponzi scheme cases, to support avoidance of those transfers. Like anything else, those cases do not tell the whole story. The facts of every case need be examined to determine the extent and manner that avoidance actions can be defended in the Delaware Bankruptcy Court.

Case Study: Woodbridge Group of Companies

Notably, the Trustee appointed in the bankruptcy of the Woodbridge Group of Companies took the position that (virtually?) all payments made by the Woodbridge Group of Companies were made with “actual fraudulent intent” because the “Bankruptcy Court has already determined that the Debtors operated as a Ponzi scheme.”

To this end, the Liquidating Trustee filed suit claiming intentional fraudulent transfers in addition to alleging preference claims. The Liquidating Trustee also made countless other demands seeking repayment of allegedly intentional fraudulent transfers. Avoidance actions were filed against various investors, for receiving return of their investments and/or interest, against brokers, employees, and others for receiving wages, commissions or other compensation related to such investments.

We welcome the opportunity to discuss your case with you. If you received a demand for payment and are considering accepting it in order to avoid litigation, contact us first so that we can help you evaluate whether you really should pay that settlement. We also are willing to discuss alternate billing arrangements with you, including reverse contingency fee arrangements. Call us at (302) 655-5303 or contact us today at info@tobialaw.com.