overview of fraudulent transfer litigation

OVERVIEW OF FRAUDULENT TRANSFER

LITIGATION

Part of the Commercial Bankruptcy Litigation 2015 Series

Premier Date: August 4, 2015

OVERVIEW OF FRAUDULENT TRANSFER LITIGATION

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MEET THE FACULTY

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PANELISTSAram Ordubegian Arent Fox LLPTeresa Pilatowicz Garman Turner Gordon LLP


MODERATORMichael Brandess,

Sugar Felsenthal Grais & Hammer LLP

Practical and entertaining education for business owners and executives, Accredited Investors, and their

legal and financial advisors.

For more information, visit www.financialpoisewebinars.com

DISCLAIMER:

THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT

MAY BE BEST FOR YOUR INDIVIDUAL NEEDS

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http://www.financialpoise.com/

CLLA is the leader in providing expertise, insight and results to and for attorneys, credit grantors and their

partners in the credit and business communities. For more information, visit www.clla.org.

DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE

BEST FOR YOUR INDIVIDUAL NEEDS

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ABOUT THIS EPISODE

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Fraudulent transfer lawsuits can be brought under state law or under the Bankruptcy Code. They can be based on facts as simple as giving your brother a large gift or as complicated as those that arise in the context of a leveraged buyout. Attend this webinar to learn the nuts and bolts of fraudulent transfer litigation.

EPISODES IN THIS SERIES

EPISODE #1 How to Defeat a Single Asset Real Estate Case5/5/15

EPISODE #2 Professional Responsibility in Bankruptcy Cases 6/2/15

EPISODE #3 Valuation Fights in Bankruptcy 7/7/15

EPISODE #4 Overview of Fraudulent Transfer Litigation 8/4/15

EPISODE #5 Fighting About Involuntary Bankruptcy Petitions 9/8/15

EPISODE #6 Cash Collateral and DIP Loans 10/6/15

EPISODE #7 Anatomy of Preference Litigation 11/3/15

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(Dates below are premier dates; all webinars also available on demand)

WHAT IS FRAUDULENT TRANSFER LITIGATION?

In bankruptcy, fraudulent transfer is similar to preference litigation. Both are considered avoidance actions. Both are becoming increasingly common as lawyers and trustees dig deeper for money to pay creditors. Examples of situations that result in fraudulent transfer litigation include:

•A company paying bonuses to executives and directors prior to filing bankruptcy•One division of an insolvent company paying an invoice that was billed to another division•Being paid in a Ponzi scheme prior to the filing of bankruptcy


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ACTUAL FRAUD

Actual fraud is committed when 1) a transfer is made within one year before the date of the filing of a bankruptcy petition and 2) is made with the intent to hinder or defraud a creditor. Actual fraud requires proof of intent from the person challenging the transfer. Of course, a debtor intending to defraud his creditors will not be overt about his intentions to do so. Therefore, courts have set forth circumstances, the existence of which indicate the intent to defraud. Some examples of these circumstances are actual or threatened litigation against the debtor, a retention of possession or control of the property, transfer of substantially all the debtor’s assets, transfer to a newly created corporation, and a special relationship with the person to whom the property is transferred. These are only factors to be considered in determining whether a person intended to defraud a creditor, and whether they do in fact prove the debtor’s fraudulent intent is to be determined on a case by case basis.


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CONSTRUCTIVE FRAUD

Constructive fraud also requires two conditions: 1) in exchange for the transfer, the debtor received less than “reasonably equivalent value”, and; 2) the debtor is unable to pay debts either at the time the transfer was made or as a result of the transfer itself. In this case, intent need not be proven rather the focus of the inquiry rests on whether the debtor received reasonably equivalent value. Of course, reasonably equivalent value can be in the eye of the beholder. When there is nothing of value exchanged for the transfer of the debtor’s property, the answer is an easy one. Not infrequently, however, something of value is given and the question becomes whether the value was really adequate compensation for the property.


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11 U.S. Code § 548(a) – FRAULENT TRANSFERS AND OBLIGATIONS(A) (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— (A) 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

(B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii) (I) 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;

(II) 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;

(III) 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

(IV) 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.


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(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which— (A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or

(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.


11 U.S. Code § 548(a) – FRAULENT TRANSFERS AND OBLIGATIONS, continued…

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11 U.S. Code § 548(b) & (c)- FRAUDULENT TRANSFERS AND OBLIGATIONS

(b) The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.

(c) Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.


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11 U.S. Code § 548(d)- FRAUDULENT TRANSFERS AND OBLIGATIONS

(d) (1) For the purposes of this section, a transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee, but if such transfer is not so perfected before the commencement of the case, such transfer is made immediately before the date of the filing of the petition.

(2) In this section— (A) “value” means property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor;

(B) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency that receives a margin payment, as defined in section 101, 741, or 761 of this title, or settlement payment, as defined in section 101 or 741 of this title, takes for value to the extent of such payment;

(C) a repo participant or financial participant that receives a margin payment, as defined in section 741 or 761 of this title, or settlement payment, as defined in section 741 of this title, in connection with a repurchase agreement, takes for value to the extent of such payment;

(D) a swap participant or financial participant that receives a transfer in connection with a swap agreement takes for value to the extent of such transfer; and


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(E) a master netting agreement participant that receives a transfer in connection with a master netting agreement or any individual contract covered thereby takes for value to the extent of such transfer, except that, with respect to a transfer under any individual contract covered thereby, to the extent that such master netting agreement participant otherwise did not take (or is otherwise not deemed to have taken) such transfer for value.

(3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution— (A) is made by a natural person; and

(B) consists of— (i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of 1986); or

(ii) cash.

(4) In this section, the term “qualified religious or charitable entity or organization” means— (A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or

(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.


11 U.S. Code § 548(d)- FRAUDULENT TRANSFERS AND OBLIGATIONS

continued…

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11 U.S. Code § 548(e)- FRAUDULENT TRANSFERS AND OBLIGATIONS

(e) (1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if— (A) such transfer was made to a self-settled trust or similar device;

(B) such transfer was by the debtor;

(C) the debtor is a beneficiary of such trust or similar device; and

(D) the debtor made such transfer 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, indebted.

(2) For the purposes of this subsection, a transfer includes a transfer made in anticipation of any money judgment, settlement, civil penalty, equitable order, or criminal fine incurred by, or which the debtor believed would be incurred by— (A) any violation of the securities laws (as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c (a)(47))), any State securities laws, or any regulation or order issued under Federal securities laws or State securities laws; or

(B) fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of any security registered under section 12 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l and 78o (d)) or under section 6 of the Securities Act of 1933 (15 U.S.C. 77f).


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11 U.S. Code § 544 – TRUSTEE AS LIEN CREDITOR AND AS SUCCESSOR TO CERTAIN

CREDITORS AND PURCHASERS(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by— (1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

(b) (1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502 (e) of this title.

(2) Paragraph (1) shall not apply to a transfer of a charitable contribution (as that term is defined in section 548 (d)(3)) that is not covered under section 548 (a)(1)(B), by reason of section 548 (a)(2). Any claim by any person to recover a transferred contribution described in the preceding sentence under Federal or State law in a Federal or State court shall be preempted by the commencement of the case.


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MORE ABOUT THE FACULTYOVERVIEW OF FRAUDULENT TRANSFER LITIGATION

MICHAEL A BRANDESS

Michael A. Brandess has a wealth of experience representing both secured and unsecured creditors in complex restructurings and liquidations across the country, in industries ranging from real estate, construction, retail, financial services, telecommunications and restaurant franchises. Michael represents secured lenders both before and during insolvency proceedings, protecting his clients’ collateral from diminution of value, so they may realize a higher return. Michael also has represented asset purchasers in complex bankruptcy sales, creditors’ committees in difficult reorganizations and liquidating trustees and plan administrators during the wind-down of multi-million dollar bankruptcy estates.

Michael is a member of the firm's Bankruptcy, Reorganization and Creditor's Rights and Business Transactions practice groups. Michael has represented his clients in complex bankruptcy matters before the U.S. Bankruptcy Courts for the Southern District of New York, the District of Delaware, the Southern District of Florida, the District of Arizona, the Central District of California, the Southern District of Texas and the Northern District of Illinois.Additionally, Michael has authored several articles on bankruptcy claims trading, including, "Claims Trading: The Wild West of Chapter 11's," which was featured on the cover of the July/August 2010 American Bankruptcy Institute Law Journal. He recently moderated a series of webinars for Financial Poise focused on Business Transition and Exit Planning.

Michael received his juris doctorate from the University of Illinois College of Law magna cum laude, where he received the CALI Excellence for the Future Award in several courses, including Negations; Pre-trial Litigation; and Counseling and Fact Investigations. In addition, he was awarded Best Brief in the University of Illinois Bankruptcy Moot Court Competition. Michael received his B.A. in English from the University of Michigan.

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MORE ABOUT THE FACULTY

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ARAM ORDUBEGIAN

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Aram is a Partner in the Bankruptcy and Financial Restructuring Group at Arent Fox LLP, having joined the firm in July 2009. Prior to joining Arent Fox LLP, he was a partner at the “bankruptcy boutique” law firm of Weinstein, Weiss & Ordubegian, LLP of Los Angeles, California where he practiced since 2000. From 1996 to 2000, Mr. Ordubegian was an associate at the firm of Shapiro & Miles LLP (now Miles & Bauer LLP) of Costa Mesa, California, where he represented primarily secured creditors in bankruptcy cases.

Aram has broad-based reorganization and bankruptcy litigation and appellate experience in a wide area of insolvency matters, from various perspectives, including: representation of businesses and high net-worth individuals facing financial distress, purchasers of assets, individual and corporate creditors, creditors' committees, trustees, and parties to out of court work-out transactions with debtors, before, during and after bankruptcies. Mr. Ordubegian has advised businesses in connection with debt restructuring, securitization, trust formation, acquisitions, divestitures and wind-downs in connection with financially distressed assets, and has advised corporations, limited liability companies and partnerships on creditors' rights, governance and control issues.

MORE ABOUT THE FACULTYTERESA PILATOWICZ

Ms. Pilatowicz is of counsel with the newly-formed law firm of Garman Turner Gordon LLP. She is a member of the firm’s Business Restructuring & Bankruptcy Department. Her practice is concentrated in the areas of corporate restructuring and insolvency including representation of trustees, debtors, and creditors in all aspects of Chapter 11 cases, including adversary proceedings. Prior to joining the firm she was senior counsel at the law firm of Gordon Silver. In 2013, Ms. Pilatowicz was selected as one of 40 young bankruptcy attorneys nationwide to participate to participate in the prestigious National Conference of Bankruptcy Judges Next Generation Program. The Next Generation Program is designed to host up-and-coming bankruptcy practitioners. Currently, Ms. Pilatowicz is located in Phoenix, Arizona, but maintains an active practices in both Arizona and Nevada.


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IMPORTANT NOTE:THE MATERIAL IN THIS PRESENTATION IS FOR

GENERAL EDUCATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL,

INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

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