Anatomy of a Fraudulent Transfer (Series: Bankruptcy Battle Royale)

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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
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it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic.
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MEET THE FACULTY
Moderator:
Mark Melickian – Sugar Felsenthal Grais & Helsinger
Panelists:
Gary W. Marsh – Dentons US LLP
Matthew Christensen – Angstman Johnson
Michael Schwarzmann – Independent CRO and Restructuring Advisor
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ABOUT THIS WEBINAR:
Anatomy of a Fraudulent Transfer
Chapter 5 of the Bankruptcy Code creates certain causes of action that arise only upon the
filing of a bankruptcy case. Specifically, these provisions enable the debtor or trustee to
take actions to bring assets back into the debtor’s estate. In additional to preference
lawsuits, debtors and trustees can pursue recovery of recovery of fraudulent transfers
under both the Bankruptcy Code and state law. This webinar discusses the standards for
bringing these causes of action, highlights the types of transactions most at risk for these
claims, and provides tips on defending against these claims as well as business tips on
reducing the risk of exposure to these claims.
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ABOUT THIS SERIES:
Bankruptcy Battle Royale
No matter how you are involved in a Chapter 11 bankruptcy proceeding, there is a real
chance you will wind up litigating some issue. Litigating in bankruptcy court, however, is
very different than litigating in any other federal or state court because the customs, rules
and players are all different. This webinar is designed for the litigator who does not
generally find herself in front of a bankruptcy judge As with all Financial Poise Webinars,
each episode in the series episode is delivered in Plain English, bringing you into engaging,
sometimes humorous conversations designed to entertain as they teach. And, as with all
Financial Poise Webinars, each episode in the series is designed to be viewed
independently of the other episodes, so that participants will enhance their knowledge of
this area whether they attend one, some, or all of the episodes.
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EPISODES IN THIS SERIES
2/26/19 Episode #1:
Cash Collateral and DIP Loan Contests
3/26/19 Episode #2:
Anatomy of a Preference
4/23/19 Episode #3:
Anatomy of a Fraudulent Transfer
5/21/19 Episode #4:
Contesting Confirmation
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

WHAT IS A FRAUDULENT TRANSFER?
The Bankruptcy Code presumes that the company that is now known as the Debtor was
insolvent the 90 days before it files for bankruptcy. It also presumes that the Debtor
knows during that period that its ship is sinking. Bankruptcy practitioners call that 90
days pre-bankruptcy period the “Preference Period” – a reference to one of the powers
available to a Debtor or Trustee in bankruptcy which is the power to avoid – or clawback
– preferential transfers.
A Debtor or Trustee has another significant clawback power, however, which is the
power to avoid so-called fraudulent transfers. The elements of a fraudulent transfer and
the path to clawing them back bear some semblance to those for preferences, but also
significant differences.
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WHAT IS A FRAUDULENT TRANSFER?
(cont’d)
Common types of transfers leading to fraudulent transfer litigation:
• 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
There are two types of fraudulent transfers – constructively fraudulent transfers,
and intentional fraudulent transfers.
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ELEMENTS OF A CONSTRUCTIVE
FRAUDULENT TRANSFER
• Transfer of property of the debtor
• Made within (a) 1 year prior to a bankruptcy filing (Sec 548) or 3-6 years
prior to a bankruptcy filing (state law)
• For less than reasonably equivalent value
• When the company was insolvent or was rendered insolvent by the transfer
Note: Intent to commit fraud or deceive creditors is not an element of
constructive fraud – the focus is on whether the debtor received reasonably
equivalent value.
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ELEMENTS OF AN ACTUAL FRAUDULENT
TRANSFER
• Transfer of property of the debtor
• Made within (a) 1 year prior to a bankruptcy filing (Sec 548) or 3-6 years
prior to a bankruptcy filing (state law)
• With the intent to defraud or otherwise avoid obligations to one or more
creditors
Note: Neither reasonably equivalent value nor insolvency are necessary
elements of an intentional fraudulent transfer. The focus is on the intent to
deceive and/or deprive creditors.
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APPLICABLE LAW – FEDERAL AND
STATE
• Bankruptcy Code Sec. 548
• State law (through Sec. 544(b))
o Uniform Fraudulent Transfer Act
o Uniform Fraudulent Conveyance Act
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APPLICABLE LAW – FEDERAL AND
STATE (cont’d)
• Bankruptcy Code Sec. 550
Recovery statute – from mediate and intermediate transferees
• Federal Debt Collections Practices Act (another source of recovery – used by the IRS, for
example)
o Note: Although it shares an acronym, not to be confused with the Fair Debt Collection
Practices Act.
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SIGNIFICANT DIFFERENCES BETWEEN
BANKRUPTCY CODE AND STATE LAW
FRAUDULENT TRANSFER LAW
• Statutes of Limitations (reachback period)
o Bankruptcy Code – 1 year prior to bankruptcy filing
o State law – 3 to 6 years (depending on the state)
• Issues with state law reach-back – existence of actual creditor at time of transfer
• Tolling – the statute of limitations may be tolled (a) by agreement or (b) in some circumstances, by facts
that suggest that the deadline for filing should be extended as a matter of law (for example, if the defendant
actively “concealed” transfers)
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TIME PERIOD TO COMMENCE AN
ACTION – BANKRUPTCY CASE
Bankruptcy Code § 546(a) provides that a complaint to avoid a fraudulent transfer may not
be commenced after the earlier of:
•The later of
➢ 2 years after the petition date (in voluntary cases); or
➢ 1 year after the appointment of a trustee, under certain circumstances; and
•The time the case is closed or dismissed
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STANDING
Standing: Who may bring an action to pursue an action to set aside a fraudulent transfer?
• Debtor/Trustee
• Official committee of unsecured creditors
• Post-confirmation trustee appointed in a chapter 11 liquidating plan
Disclosure: If fraudulent transfer claims are to be brought by a post-confirmation trustee appointed
in a chapter 11 plan, the disclosure statement filed with the chapter 11 plan (the document that
explains the chapter 11 plan to creditors who vote on the plan) should describe both the nature of
the claims and, if possible, the potential targets. Some courts have held that failure to disclose
these claims may result in the post-confirmation trustee being unable to pursue them for the
benefit of the bankruptcy estate.
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CONSTRUCTIVE FRAUD – WHAT IS
THIS?
The gravamen of a constructive fraud claim is that a transfer occurred for which the
debtor received less than “reasonably equivalent value” – and the debtor was either
already insolvent or the transfer made it insolvent.
• Lack of reasonably equivalent value – what does this mean?
o 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
(and subject of litigation) becomes whether the value was really adequate
compensation for the transferred property.
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CONSTRUCTIVELY FRAUDULENT
TRANSACTIONS
Common forms of transactions that are often attacked as constructively fraudulent in that the debtor
received less than equivalent value:
• Ponzi scheme transfers – where the “victims” are themselves deemed to have wrongfully received funds
• Leveraged buyouts – loading the company with debt and rendering it insolvent as a result of the buyout
• Intercompany guarantees (upstream, sidestream, downstream) – that render the guarantor insolvent
• Shareholder distributions – made to equity when the company is insolvent
• Insiders/Officers – e.g., CEO receives materially excessive compensation (or an exit package) at a time that
the company is insolvent
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DEFENSES TO FRAUDULENT
TRANSFER CLAIMS
1. Acting in Good Faith
Good faith is a defense to a fraudulent transfer claim under both the Bankruptcy Code (11 U.S.C. § 548(c))
and the Uniform Fraudulent Transfer Act (§ 8(a)).
A recipient acts in good faith if he accepts a payment without knowledge of facts su􀃞 cient to cause a
reasonable person to inquire into the debtor’s insolvency or fraud.
2. Futility Exception
This is another branch of the good faith defense. Under this defense, a recipient on inquiry notice (e.g.,
some duty to inquire) can still establish good faith if it can prove that a reasonable investigation would not
have uncovered the debtor’s misconduct (i.e., any inquiry would have proven futile).
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DEFENSES TO FRAUDULENT
TRANSFER CLAIMS (cont’d)
3. No Harm to Creditors
Harm to creditors is required even for intentional fraud. See e.g. In re Incare
LLC, Adv. No. 14-0248, 2018 Bankr. LEXIS 1339 (E.D. Pa. May 7, 2018) (no
recovery from intentional fraudster shown to have made the estate whole with
subsequent transfers).
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PONZI SCHEMES
Ponzi schemes have been a hot battleground for fraudulent transfer litigation for
two decades. Among the bankruptcy cases and related litigation giving rise to
fraudulent transfer litigation are the Petters case (Minnesota), the Madoff case
(New York), and Stanford case (Texas).
These cases have generated hundreds, even thousands, of litigations and claims
for recovery, and are too complex to summarize here. However, each case has
resulted in rulings that are lessons for debtors and defendants.
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RECENT LESSONS IN THE PONZI
SCHEME CASES
• The good faith exception of futility may not apply. This defense was rejected, for example, in
the Stanford case (see Janvey v. GMAG LLC, 2019 WL 141107 (5th Cir. Jan. 9, 2019)
• The general rule that an investor caught up in a Ponzi scheme fraudulent transfer action is
only liable for the return of profits may not always apply. In Janvey v. GMAG LLC, the 5th
Circuit concluded that the investor had to return not just its profits but its entire $79 million
in original investment. In this case, the investor failed to investigate notwithstanding red
flags, and the court concluded that the principal as well as profits must be returned even
though the investor demonstrated that an investigation might be futile.
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SHAREHOLDER DISTRIBUTIONS AND
FRAUDULENT TRANSFER LITIGATION
Shareholder distributions are a frequent target of fraudulent transfer litigation in bankruptcy
cases. An estate fiduciary is almost assured to at least investigate distributions made to investors
in the year prior to a bankruptcy filing. That investigation can snare both sophisticated investors
in privately held companies to “retail” (i.e., mom and pop) shareholders in a publicly traded
company.
Example: In the Tribune bankruptcy case, spawned by the bankruptcy that immediately
followed the leveraged buyout of the Tribune media conglomerate in 2007, the litigation trustee
appointed in the case has pursued claims against tens of thousands of ordinary “street” investors
who held Tribune stock and received cash in a stock buyback campaign following the LBO.
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FINANCIAL FORENSIC EXPERTS
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Financial forensic experts play a key role in fraudulent transfer litigation:
• Investigation and development of claims
• Expert reports
• Expert testimony

PRACTICAL CONSIDERATIONS
Practical considerations before a fiduciary engages in fraudulent transfer litigation:
• Cost – investigation, litigation, experts
• Time involved
• Strength of case
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ABOUT THE FACULTY
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MARK MELICKIAN – mmelickian@sfgh.com
Mark leads Sugar Felsenthal Grais & Helsinger LLP’s restructuring practice. Over the two-plus decades, he has worked
primarily on business transactional and litigation matters with a focus on chapter 11 commercial bankruptcy cases and
non-bankruptcy distressed situations. His practice includes both debtor- and creditor-side representations and
include financial institutions, indenture trustees, trade creditors, asset purchasers, investors, commercial real estate
interests, corporate officers, and other parties in interest in chapter 11 cases throughout the country. A significant focus
of his practice is the representation of committees and other estate fiduciaries in bankruptcy cases. He has counseled
dozens of official and unofficial bankruptcy committees, liquidating trustees, litigation trustees, and plan
administrators charged with pursuing and liquidating assets for the benefit of estate creditors. Mark is a Contributing
Editor to The Bankruptcy Strategist and has authored several articles for the American Bankruptcy Institute Journal.
He is a contributing author to the treatise Reorganizing Failing Businesses: A Comprehensive Review and Analysis of
Financial Restructuring and Business Reorganization, Third Edition (American Bar Association, 2018), and has
written for Wiley Bankruptcy Law Update, Ginsberg & Martin on Bankruptcy, Norton Bankruptcy Law Adviser, and
the Cornell University Legal Ethics Library, as well as dozens of professional conferences and seminars. For several
years, he wrote a monthly legal affairs column for Student Lawyer, an America Bar Association publication, for which
he received the Peter Lisagor Award for Exemplary Journalism from the Chicago chapter of the Society of Professional
Journalists. Mark is a graduate of Colorado State University and Northwestern University School of Law, and studied
creative writing for two years at the University of North Carolina-Greensboro.
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MATTHEW CHRISTENSEN – mtc@angstman.com
Matt Christensen joined Angstman Johnson in 2008 as an associate attorney. Now a member of the
firm, Matt has a civil litigation practice involving commercial law (finance and secured
transactions), bankruptcy, real property, and business matters. He also has a transactional practice
involving real estate, finance and business matters, including franchising. Matt frequently
represents bankruptcy trustees and other fiduciaries in recovering assets and administering estates.
Prior to joining the firm, Matt was a Junior Partner at a Meridian, Idaho, law firm and also
established a solo practice.
In addition to practicing law, Matt is an adjunct professor at the University of Idaho College of Law
where he teaches international trade/business, real estate transactions and law practice
management courses.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/matthew-
christensen/
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GARY MARSH– gary.marsh@dentons.com
Gary Marsh is co-chair of Dentons’ US Restructuring, Insolvency and Bankruptcy practice, and focuses on general
commercial litigation and bankruptcy, workouts and debtor/creditor law. He represents creditors and debtors in
Chapter 11 reorganization proceedings, out of court restructurings and debtor/creditor litigation. He also
represents court appointed receivers, examiners and trustees.
Mr. Marsh has extensive experience in representing creditors in and out of bankruptcy court in enforcing their
rights and remedies. He also analyzes and defends against preference and fraudulent conveyance actions,
represents buyers of assets out of bankruptcy and represents landlords and other parties who have leases or
contracts with debtors.
Georgia Trend selected him as one of Georgia’s “Legal Elite” and Atlanta Magazinenamed him one of Georgia’s
“Super Lawyers,” and a “Top 100 Super Lawyer” in 2007 and 2012. Mr. Marsh is a fellow in the American College
of Bankruptcy and has been included in The Best Lawyers in America and Chambers USA as one of America’s
Leading Business Lawyers in Bankruptcy law. And he was recognized in 2013 by the Georgia chapter of the
Turnaround Management Association for his outstanding turnaround work.
Mr. Marsh is Board Certified in Business Bankruptcy and Creditor’s Rights by the American Board of
Certification.
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MICHAEL SCHWARZMANN– michaelschwarzmann@yahoo.com
Michael Schwarzmann has over 20 years’ experience helping identify opportunities to create value for his
clients. I have extensive experience working with established companies when they encounter financial
difficulties by assisting them in developing solutions to address short term cash needs and longer term
profitability. My process includes helping to identify cost savings and value capture scenarios by analyzing
historical financial performance along with current operations and projecting optimizing strategies.
Utilizing weekly and monthly cash flow statements, budgets, and forecasts, I utilize a focused, data driven
approach to identifying opportunities to increase company profitability. Through a broad review of
financial, operational and strategic performance, I help guide companies to increased profitability. Working
across the organization, vertically and horizontally, uncovers additional solutions and generates greater
buy-in of the goals, objectives and action plan, all of which are critical to maximize the impact of proposed
changes. I utilize my legal knowledge to seamlessly work with counsel to identify and address legal issues in
a more cost effective manner.
I have guided the development and evaluation of business plans and formulated successful strategies to
preserve or improve asset values. I am a consensus builder. Industry experience includes: health care,
manufacturing, agricultural, construction, restaurants and franchising, energy and travel.
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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