Bankruptcy Litigation News & Updates

In ruling a motion to dismiss, the Third Circuit Court of Appeals considered whether the purchaser of the Debtors’ shares post-confirmation was bound by releases contained in the plan of reorganization (the “Plan”).  A copy of the opinion is available here.

The Plan included “broad releases of liability,” that protected the Debtor and its

In a suit by the trustee of the liquidation trust of Green Field Energy Services, a defunct oil services business, against the debtor’s former CEO and others, the U.S. Bankruptcy Court for the District of Delaware found that the trustee can recover almost $17 million.  See Halperin v. Moreno, et al. (In re Green Field

In entertainment and bankruptcy news, the chapter 7 trustee for the bankruptcy filed by former celebrity couple Duane Daniel Martin and Tisha Martin Campbell (the “Debtors”), brought suit against Roxe, LLC (“Roxe”) and others claiming that Roxe was formed by Martin and his brother (also a defendant to this suit) to conceal Martin’s ownership of

Michael Temin writes:

Fiber optical network cableWhen deciding a motion to dismiss a complaint pursuant to Federal R. Bankr. 7008, which incorporates Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and construe all inferences from those allegations in favor of a plaintiff.  It was, therefore, unusual when a Michigan bankruptcy court dismissed

Michael Temin writes:

Litigation DamagesOne of the commonly asserted defenses to preference avoidance actions is the “new value” defense set forth in 11 U.S.C. § 547(c)(4).  One issue considered by courts is whether the “new value” must remain unpaid.  In a recent opinion, the Eleventh Circuit joined the Fourth, Fifth, Eighth and Ninth Circuits in holding

Yesterday, the Bankruptcy Panel of the Ninth Circuit Court of Appeals issued yet another decision related to standing and rights to appeal bankruptcy court orders.  In Bray v. U.S. Bank National Association, (In re Bray), the Ninth Circuit BAP considered a chapter 7 individual debtor’s appeal from an order reopening his involuntary chapter 7

Bruce J. Borrus writes:

Bernie Madoff in New York, Tom Petters in Minneapolis, Allen Stanford in Houston, and Darren Berg in Seattle lead a rogues’ gallery of infamous Ponzi schemers.  All are now serving time in prison.  But the civil litigation arising from their Ponzi schemes and the Ponzi schemes of other less notorious fraudsters is not over.  Ponzi schemes have spawned thousands of fraudulent transfer cases.  Anglo-American fraudulent transfer law has a long history dating back four centuries to the Statute of 13 Elizabeth, enacted in 1571, and to the first reported fraudulent transfer case, Twyne’s Case, decided in 1601.  But fraudulent transfer law is far from settled.  In recent years, especially in fraudulent transfer cases arising out of Ponzi schemes, the law developed rapidly in a direction favoring the plaintiffs.  However, in 2015 and 2016, the direction began to turn.

Ponzi Scheme Word CloudIn an effort to obtain funds for the victims of the Ponzi schemes, bankruptcy trustees and receivers have commenced fraudulent transfer cases to recover payments made by the Ponzi schemer.  Many of the defendants had no knowledge of the Ponzi scheme.  The defendants had innocently loaned money or provided goods and services.  These defendants did nothing wrong.  Nevertheless, most of the defendants lost—at least in federal courts.

The federal courts frequently apply Ponzi scheme presumptions that set high barriers for defendants.  In 2015 and 2016, however, opinions issued by the highest courts of Minnesota and Texas rejected the Ponzi scheme presumptions.  Before discussing these recent state court decisions, it is best to put the decisions into context—first by discussing Ponzi schemes and then by describing the federal courts’ Ponzi scheme presumptions.

There is no precise definition of a Ponzi scheme.  The Ninth Circuit describes a Ponzi scheme as:

. . . a financial fraud that induces investment by promising extremely high, risk-free returns, usually in a short time period, from an allegedly legitimate business venture.  The fraud consists of funneling proceeds from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating the illusion that a legitimate profit-making business opportunity exists and inducing further investment.

Donell v. Kowell, 533 F.3d 762, 767 n.2 (9th Cir. 2008).

The Fifth Circuit describes a Ponzi scheme as:

. . . a pyramid scheme where earlier investors are paid from the investments of more recent investors, rather than from any underlying business concern, until the scheme ceases to attract new investors and the pyramid collapses.

Janvey v. Democratic Senatorial Campaign Comm., 712 F.3d 185, 188 n.1 (5th Cir. 2013).

In fraudulent transfer cases in which the transferor has been running a Ponzi scheme, many courts apply what have become known as Ponzi scheme presumptions.  All of the reported decisions that have applied the Ponzi scheme presumptions are from federal courts.  The cases typically originate as suits brought by bankruptcy trustees or receivers in cases in which the Ponzi schemer or one of his or her companies is the debtor.  The bankruptcy trustee seeks a judgment in the amount that the Ponzi schemer paid to the defendant.  Even though many fraudulent transfer cases are brought pursuant to a state’s version of the Uniform Fraudulent Transfer Act (“UFTA”), the federal courts that apply the Ponzi scheme presumptions cite as authority other federal cases.  No state supreme court has yet applied the Ponzi scheme presumptions.
Continue Reading For the Defense: State Courts Reject the Ponzi Scheme Presumptions in Fraudulent Transfer Actions

In a recent opinion, the Fifth Circuit affirmed a district court ruling that found that a debtor was judicially estopped from claiming a stay violation by a mortgagee, who foreclosed on the debtor’s property, due to the debtor’s failure to disclose the affected property or his putative claims in his bankruptcy.

The Fifth Circuit explained

When a trademark licensor files for bankruptcy, can the licensees of their trademarks continue using those marks, or does the licensor have the right to prohibit their continued use? On Fox’s Above the Fold blog covering advertising law, partner Elizabeth Patton recently wrote a post discussing this open question, which sits at the heart of