Presenting a live 90-minute webinar with interactive Q&A Ponzi Scheme Clawback Litigation in Bankruptcy: Bringing or Defending Claims Navigating Inquiry Notice, Legitimate Profits, Statute of Limitations and More TUESDAY, MARCH 11, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Jesse S. Finlayson, Partner , Finlayson Williams Toffer Roosevelt & Lilly , Irvine, Calif. Anthony L. Paccione, Partner , Katten Muchin Rosenman LLP , New York Corey R. Weber , Partner , Ezra Brutzkus Gubner , Woodland Hills, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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HOW FAR DOES A TRUSTEE’s POWER GO? INTERESTING LEGAL AND POLICY ARGUMENTS SHAPING UP Who controls common law claims? How far does a Trustee’s powers extend? What transactions are protected from statutory safe harbors? 5
Threshold Questions What is a “Ponzi Scheme” and When did it Begin? Governing law — is it SIPC Protected? Type of Receiver to Be Appointed? 6
Today’s Topics Clawbacks – From the Trustee’s perspective and the Prima Facie case based on Fraudulent Conveyance Clawbacks – From a Transferee’s Perspective and the Good Faith/For Value Defense Specific Defenses –“Mere Conduit,” Section 546(e), and Standing 7
Corey R. Weber Ezra Brutzkus Gubner LLP 21650 Oxnard Street, Suite 500 Woodland Hills, CA 91367 Telephone: (818) 827-9000 cweber@ebg-law.com www.ebg-law.com
TRUSTEE’S CLAWBACK CLAIMS • Fraudulent Transfer Claims – Claims Under the Bankruptcy Code • 11 U.S.C. section 548 and 550 – Claims Under State Statutes • Section 544 and the UFTA (for California, Civil Code section 3439, et seq. ) • Preference Claims – 11 U.S.C. section 547 9
FRAUDULENT TRANSFER CLAIMS 10
Actual Intent Claims Under the Bankruptcy Code • “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 …” – 11 U.S.C. Section 548(a)(1). 11
Actual Intent Claims Under State Statutes (California) • “A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows: (1) With actual intent to hinder, delay, or defraud any creditor of the debtor.” – California Civil Code Section 3439.04(a). 12
Actual Intent Claims with a Guilty Plea • Guilty plea in criminal case for the Ponzi scheme principal can conclusively establish actual intent • “[w]e now hold that a debtor’s admission, through guilty pleas and a plea agreement admissible under the Federal Rules of Evidence, that he operated a Ponzi scheme with the actual intent to defraud his creditors conclusively establishes the debtor’s fraudulent intent under 11 U.S.C. section 548(a)(1)(A) and California Civil Code section 3439.04(a)(1), and precludes relitigation of that issue…” Johnson v. Neilson (In re Slatkin) , 525 F.3d 805, 814 (9 th Cir. 2008) 13
Actual Intent Claims with No Guilty Plea • Establish that a Ponzi scheme existed (the Ponzi scheme presumption) – If the Bankruptcy Court concludes that the Debtor operated as a Ponzi scheme, actual intent to hinder, delay or defraud creditors will be established as a matter of law • Donell v. Kowell , 533 F.3d 762, 770 (9 th Cir. 2008) • Barclay v. Mackenzie (In re AFI Holding, Inc.) , 525 F.3d 700, 704 (9 th Cir. 2008) 14
Constructive Fraud Claims Under the Bankruptcy Code • “…(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 a business or 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.” – 11 U.S.C Section 548(a)(1)(B). 15
Constructive Fraud Claims Under State Law (California) • “A Transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:… (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either: (A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction. (B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.” – California Civil Code Section 3439.04(a). See also alternate test under Section 3439.05. 16
Constructive Fraud vs. Actual Intent Claims • Constructive fraudulent transfer claims should have the same outcome as actual intent claims, but the burden of proof differs – Donell v. Kowell , 533 F.3d 762, 771 (9 th Cir. 2008) • In addition to differences re burden of proof, constructive fraud claims will likely require an expert witness (e.g., forensic accountant) • If there is no plea agreement or ability to demonstrate the debtor’s actual intent, the insolvency tests in constructive fraud claims provide an alternate way to avoid and recover transfers 17
Fraudulent Transfer Claims Under State vs. Federal Law • 2 year pre-bankruptcy petition reach-back under 11 U.S.C. section 548(a)(1) • There is normally a longer reach-back under state law – In California, the reach back period is up to 7 years (Cal. Civil Code section 3439, et seq.) • Trustee has 2 years to file a complaint post-bankruptcy (11 U.S.C. section 546(a)) 18
Reach-Back Period – In California, issue as to whether reach-back period is 7 years prior to: (1) the filing of the adversary proceeding; or (2) prior to the filing of the bankruptcy case. See, e.g.: • In re Acequia, Inc ., 34 F.3d 800, 807 (9 th Cir. 1994) • Slatkin I • In re Slatkin , 222 Fed.Appx. 545, 547 (9 th Cir. 2007)(“ Slatkin I ”) • In re Slatkin , 243 Fed.Appx. 255, 258 (9 th Cir. July 5, 2007)(“ Slatkin II ”) – Statute of limitations versus statute of repose – The issue is currently on appeal with the Bankruptcy Appellate Panel of the Ninth Circuit 19
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