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District Court Affirms Bankruptcy Court ‘s Remand Order and Ruled Against Reopening the Record Due to Undue Burden on the Trustee and Considerations of Judicial Economy

March 30, 2017, DelawareBurtch v. Prudential Real Estate & Relocation Sevs. (In re AE Liquidation, Inc.,No. 16-252-LPS, 2017 U.S. Dist. LEXIS 47580 (D. Del. Mar. 30, 2017)

Debtor Eclipse Aviation Corporation, a manufacturer of private jets, engaged Defendant Prudential Real Estate &Relocation Services to provide relocation benefits to its employees under a relocation services agreement. The Debtor filed for bankruptcy, and the Trustee brought a complaint against Prudential asserting that certain transfers made by Eclipse to Prudential within the ninety days preceding the bankruptcy were preferential and avoidable under §547(b) of the Bankruptcy Code. Prudential asserted affirmative defenses under §547(c)(2) and §547(c)(4) of the Bankruptcy Code. The parties agreed that Prudential had a new value defense but disputed the amount. Crediting the full amount of Prudential’s new value defense, the Bankruptcy Court granted judgment for Trustee. Both parties appealed.

The Trustee argued that the Bankruptcy Court erred by including alleged invoices in its calculation of Prudential’s new value defense. The Court reasoned that even if the services outlined in the subject invoices were provided a week before the March 5, 2009, invoice date, as its witness testified, those services were still provided after the petition date, i.e. November 25, 2008, and post-petition transfers cannot qualify new value. Since the services rendered a week prior to March 5, 2009, occurred after the petition date, and the previous order did not distinguish between the services provided pre-petition and post-petition for the purpose of calculating Prudential’s new value defense, the District Court remanded the matter to the Bankruptcy Court to reexamine and determine the appropriate amount of Prudential’s new value defense. The Bankruptcy Court issued a remand order and determined that the amount of the new value defense should be reduced from $128,379.40 to $56,571.37 to reflect only services provided pre-petition. Prudential appealed the remand order.

Prudential argued that the remand order was entered in error. Prudential reasoned that the Bankruptcy Court’s decision to eliminate the subject invoices from Prudential’s new value defense was based on the incorrect premise that Prudential did not want to open the actual record and wanted to rely on the factual record established at trial, despite Prudential’s request to reopen the record. Had it been permitted to submit additional evidence, Prudential argued that its witness would have provided “more detailed testimony as to the alleged invoices to explain why they were, indeed, for services rendered pre-petition.” Conversely, the Trustee argued that the facts and circumstances of this case did not warrant reopening the record.

The Court found that once the Trustee made a prima facie showing that the alleged invoices constituted preferential transfers under §547(b), the burden shifted to Prudential to establish each element of its affirmative defense. To carry its burden of establishing new value, Prudential was required to prove the date on which it rendered the services to the Debtor, and invoice dates were not sufficient. The Court determined Prudential had a full and adequate opportunity to set forth this evidence during a two-day trial. However, Prudential failed to do so, and Prudential’s failure did not warrant reopening the record, four years after the trial, especially in light of the burden this would impose on the Trustee and considerations of judicial economy. The Court ruled that the Bankruptcy Court did not abuse its discretion in denying Prudential’s request to reopen the record. The Court affirmed the remand order.


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Madoff Trustee Moves for Direct Appeal to Second Circuit in a Clawback Fight Against RBS

March 28, 2017, New York – On March 15, 2017, the trustee Irving Picard for Bernie Madoff’s fraudulent investment scheme sought certification of a bankruptcy court’s final judgment for immediate appeal to the United States Court of Appeals for the Second Circuit under 28 U.S.C. § 158(d)(2)(A) and Federal Rule of Bankruptcy Procedure 8006(f). The call for a direct appeal stemmed from the bankruptcy court’s findings that the trustee cannot pursue clawbacks to recover Ponzi scheme proceeds transferred from foreign Madoff feeder funds to other foreign investment funds mostly owned by European banks. The bankruptcy court’s decision had resulted in the dismissal of the Picard’s complaint against RBS, formerly known as ABN Amro bank, wherein the trustee intended to recover about $22 million which were purportedly fraudulently transferred from a Madoff feeder fund to the bank. The Court had dismissed the trustee’s claims due to international comity and extraterritoriality grounds.

With this direct appeal, the Trustee now requests the Second Circuit to determine if he can claw back Ponzi scheme proceeds transferred from foreign Madoff feeder funds. The Trustee urged the Second Circuit to rule on whether and in what circumstances the Bankruptcy Code permits the recovery of property fraudulently transferred by the debtor when it has been subsequently transferred in transactions with allegedly extraterritorial components. RBS has requested the court to deny the trustee’s motion for direct appeal, alleging that the question needs to go to the district court. RBS argued that the trustee has failed to establish the legal grounds to justify bypassing the district court on the issue, especially as the dispute stems from a 2014 district court order on clawbacks from foreign banks.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, et al., case number 1:08-ap-01789, in the U.S. Bankruptcy Court for the Southern District of New York.


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SunEdison Lenders Respond to Fraudulent Transfer Allegations

March 24, 2017, New York – Last month, many financial investment groups including Blackrock Financial Management Inc. and Citigroup Financial Products Inc., urged a New York bankruptcy court to dismiss fraud and other allegations launched against them by the bankrupt energy company’s official unsecured creditors committee. These second-lien lenders had loaned the debtor companies about $725 million in new financing and exchanged $336 million of outstanding unsecured notes for $225 million worth of senior secured convertible notes in January 2016. They are now accused of participating in fraudulent transfers that provided the lenders the benefit of gaining secured collateral just before SunEdison filed for Chapter 11 in April 2016. The unsecured creditor’s committee asserted that the alleged transfers benefitted those lenders at the expense of unsecured creditors, which were left with a diminished likelihood of recouping from SunEdison when it went bankrupt.

The second-lien lenders urged the court to reject the committee’s claims as the loan transactions were proper and not subject to avoidance because SunEdison received reasonably equivalent value in exchange for the liens.

SunEdison, which develops renewable energy products around the world, had filed for Chapter 11 protection in April 2016. Kobre & Kim LLP is representing the unsecured creditors’ committee and the law firm of Skadden Arps Slate Meagher & Flom LLP is representing SunEdison. The adversary case is Official Committee of Unsecured Creditors v. Wells Fargo Bank NA et al., case number 1:16-ap-01228 and the bankruptcy case is In re SunEdison Inc. et al., case number 1:16-bk-10992, both in the U.S. Bankruptcy Court for the Southern District of New York.


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Whether a Complaint Adequately Identifies a Particular Transfer is Determined by Asking Whether a Defendant Could Respond to the Claims with Appropriate Affirmative Defenses

March 24, 2017 – Spradlin v. Pryor Cashman LLP (In re Licking River Mining, LLC), Nos. 14-10201, 16-1031, 2017 Bankr. LEXIS 805 (U.S. Bankr. E.D. Ky. Mar. 24, 2017)

Chapter 7 Trustee Phaedra Spradlin for Debtor U.S. Coal Corporation and its nine co-debtor subsidiaries brought a complaint against Defendant Pryor Cashman LLP for an avoidance of preference and fraudulent transfers under Sec. 547 and 548 of the Bankruptcy Code. The Defendant filed a motion to dismiss under Civil Rule 12(b)(6), alleging that the Trustee’s allegations failed to state a claim upon which relief could be granted as a matter of law, the claims were implausible as plead and the claims were not pleaded with requisite particularity. The Trustee filed an amended complaint in response to the Defendant’s motion to dismiss. The Trustee argued that the transfers made by the Debtor to the Defendant between July 2010 and May 2014 totaling $1,633,286.18 were fraudulent because the Defendant rendered no legal services to the Debtor’s subsidiaries and they received no benefit from the Defendant’s services, yet the Debtor used the subsidiaries’ funds to pay the Defendant’s legal fees.

The Court found that the Trustee’s Complaint failed to describe any specific transfers from the subsidiaries to the Debtor. It did not state which subsidiary made a transfer to the Debtor, the amount each subsidiary transferred, or the date of any transfer. Instead, the complaint simply alleged that all transfers occurred via “sweep accounts,” which was not sufficient enough to identify challenged transfers under Civil Rule 8. The Court further determined that whether a complaint adequately identifies a particular transfer is determined by asking whether the defendant could respond to the claims with appropriate affirmative defenses. The Court observed that in the case at bar, since the amended complaint did not identify any particular avoidable transfer from the subsidiaries to the Debtor, the Defendant could not assess its potential defenses concerning any specific transfer, including defenses available under § 550(b). The Court ruled that the blanket allegations, like unspecified subsidiaries, generally transferred funds to the Debtor, were insufficient to plead the facts necessary to state a claim for recovery against the Defendant as a subsequent transferee.

The Court further held that the Trustee’s amended complaint did not identify any specifically challenged transfer, did not contain any dates or amounts of the alleged fraudulent transfers and instead lumped all transfers from the Debtor to the Defendant via a total dollar amount. Since this information was strictly required in the context of claims of actual fraud to give the answering party notice of the misconduct that is being challenged, the Court held that the Trustee’s actual fraud claims fail to satisfy Civil Rule 9(b).

About the preference payments, the Court held that the Trustee could pursue the claim against the Defendant as the initial transferee of transfers from the Debtor. The Court found that the amended complaint did allege that the total of the transfers to be $135,000, that it was made within 90 days, made in connection with the promissory note and the Trustee did attach the payment schedule. The Court stated that with these allegations and the exhibit, the Defendant can assert its defenses and can also use discovery methods to discern whether additional facts exist to defend itself against this claim.


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Defendant Fails to Rebut the Presumption of Insolvency or Demonstrate that a Genuine Issue of Material Fact Exists as to the Debtor’s Solvency At the Time of the Transfer

March 17, 2017, New York Geltzer v. Fleck (In re ContinuityX, Inc.),Nos. 13-10458 (MKV), 15-01015 (MKV), 2017 Bankr. LEXIS 709 (U.S. Bankr. S.D.N.Y. Mar. 17, 2017)

The Trustee for Debtor ContinuityX Solutions, Inc. brought an adversary proceeding against Defendant Robert J. Fleck to avoid and recover certain transfers as preferences under sections 547 and 550 of the Bankruptcy Code. Before the transfers, the Defendant provided certain financial accounting related services to the Debtor and issued various invoices, which set forth the details of the services rendered and the amount of payment owed for such services. The Defendant also submitted expense
reports for reimbursement of his out-of-pocket expenses. The Defendant admitted that he received thealleged transfers from the Debtors on account of an antecedent debt and that the transfers were received within the 90 days preceding the petition date. However, the Defendant argued that summary judgment should be denied because the Debtors were solvent at the time the transfers were made.

Next, the Defendant argued that the Debtors made the alleged transfers to the Defendant on account of services, which the Defendant rendered to the Debtors as the Debtor’s employee.
Hence, it was a contemporaneous exchange for new value under Sec 547 (c) (1). The Court held for the Trustee. The Court found that the two documents, Form 10-K and the Form 10- Q, which were submitted by the Defendant did relate to the Debtor’s financial condition. However, these documents referred to the Debtor’s financial condition before the transfer period. Thus, the Court ruled that the evidence was insufficient to rebut the presumption of insolvency during or at the time of transfer or to raise a genuine issue of material fact on the Debtors’ solvency at the time of the transfer period.

Next, the Court found that the Defendant failed to offer any competent evidence to support his defense that he was an employee entitled to a finding of non-avoidability under §547(c)(1). The Trustee, however, acknowledged that the Defendant did provide new value amounting to $13,940 and accordingly offset in part the claim. The Court concluded that the Defendant failed to meet his burden of proof or even to demonstrate a material issue of fact on any available defense to the Trustee’s claim.

Accordingly, the Court granted judgment for the Trustee after offsetting the amount of his claim by the new value credit.


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Ninth Circuit – Courts May Entertain Hypothetical Preference Actions Within Section 547(b)(5)’s Hypothetical Chapter 7 Liquidation

March 7, 2017, California – Schoenmann v. Bank of the West (In re Tenderloin Health, FKA), 849 F.3d 1231 (9th Cir. 2017)

Defendant Bank of West extended loan to a Debtor Tenderloin Health, a walk-in clinic serving AIDS patients in San Francisco, three years prior to the Debtor’s Chapter 7 bankruptcy filing. The loans were secured by the Debtor’s personal property, including its deposit accounts with the Defendant. In late 2011, the Debtor winded up its affairs and sold its property. The Debtor used the proceeds of that sale to execute two transactions – it paid $190,595.50 to the Defendant to satisfy its outstanding loan obligations (debt) and transferred $526,402.05 in its deposit account with the Bank (deposit). Subsequently, the Debtor filed for bankruptcy. The Bank thus received two transfers simultaneously within 90 days of the Debtor’s bankruptcy — the $190,000 payment from a sale escrow and the $526,000 deposit.The Bank later voluntarily turned over the net balance (more than $500,000) in the its deposit account to the Trustee, never having set off anything. The Trustee sued the Defendant, alleging that the Debtor’s $190,000 payment to the Bank was preferential and subject to avoidance under §547(b)(5). The Bankruptcy Court determined that the Bank did not receive more than it would have in a hypothetical liquidation because it maintained a right of setoff that entitled it to full payment, and the Debtor’s deposit account held the requisite amount of funds on the petition date.

The Trustee appealed and argued that the Trustee would avoid the $526,402.05 deposit in a hypothetical liquidation, such that the deposit account would contain only $37,713.87 on the petition date, a sum far less than the $190,595.50 the Bank actually received, even allowing for its right of setoff. The District Court affirmed, and the Trustee timely appealed to the Ninth Circuit. The Bank alleged that it was impermissible to entertain a hypothetical preference action within a hypothetical liquidation and that the deposit made by the Debtor into its deposit account did not meet the definition of an avoidable preference.

The Ninth Circuit reversed the judgment and held that the courts may entertain hypothetical preference actions within a hypothetical Chapter 7 liquidation when such an inquiry is factually warranted, is supported by appropriate evidence, and the action would not contravene an independent statutory provision. The Court ruled that $526,402.05 deposit received by the bank would constitute an avoidable preference in the hypothetical liquidation at issue. The Court reasoned that the Bank gained a beneficial interest in the funds through the deposit and became indebted to the Debtor for $564,115.92, and correspondingly increased its right to exercise a setoff for the full amount of its loan. Thus, the Court held that the Trustee has sufficiently demonstrated that the Bank received more as a result of the debt payment that it would in hypothetical Chapter 7 liquidation. Reversing the District Court’s judgment for the bank, the Ninth Circuit remanded to the Bankruptcy Court for further proceedings.


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Second Circuit to Hear Madoff Investor’s Request to Reconsider $655M Settlement

March 10, 2017, New York — Last month, a group of Tremont investors who lost money through Bernard Madoff’s Ponzi scheme urged the Second Circuit that a $655 million class-action settlement against the hedge funds they invested with should be reallocated because it unfairly favored certain investors over others. These investors had invested in various funds managed by Tremont Groups Holdings, Inc., which in turn pumped money into the Madoff scheme. Since the Tremont investors allegedly received an inferior recovery from the settlement plan, they appealed, alleging that the settlement plan was flawed. However, the opposing counsel asserted that the plan treated all funds
participating in the Madoff trustee settlement on equal footing. The counsel further added that the settlement was agreed upon mediation and was approved by the federal court.

The case is In Re: Tremont Securities Law, the U.S. Court of Appeals for the Second Circuit.


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Cal Dive International Inc. Launches Its Clawback Campaign

March 2, 2017, Delaware – Cal Dive International Inc., the defunct undersea oil drilling services firm,
launched a campaign of avoidance actions last month, seeking to clawback more than $20 million in payments made before it filed for Chapter 11 protection. On March 2, 2017, Cal Dive’s counsel, The Rosner Law Group LLC initiated almost 136 avoidance actions in the Delaware Bankruptcy Court to recover so-called preference payments under §§547 and 550 of the Bankruptcy Code, made during the 90-day period before the debtor entered bankruptcy. In its complaint, subject to proof, Cal Dive Offshore Contractors, Inc., as debtor-in-possession also seeks to avoid and recover from a defendant or any other person or entity for whose benefit transfers were made under sections 548 and 550 of the Bankruptcy Code any transfers that may have been fraudulent conveyances. The Court has not scheduled pre-trial conferences so far in the debtor’s bankruptcy cases.Before the wind-down of the debtors’ operations, the debtors and their non-debtor foreign affiliates constituted a global marine contractor that provided highly specialized manned diving, pipe lay and pipe burial, platform installation and salvage, and well-intervention services to a diverse customer base in the offshore oil and gas industry. The debtor is continuing to operate as debtors in possession. The case is In re Cal Dive International, Inc., Case No. 15-10458 in United States Bankruptcy Court for the District of’Delaware.


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Former Madoff Employee Andrew Cohen to Give Up $1.1M He Received During the Madoff Ponzi Scheme

February 27, 2017, New York — A New York federal judge ruled that a former employee of Bernie Madoff will have to give up $1.1 million he withdrew from his investment account at Bernard L. Madoff Investment Securities LLC. The trustee Irving Picard sued Andrew H. Cohen, who worked at Madoff Investment Securities from 1991 through 2000 and was not part of the fraud, to recoup the amount by which Cohen’s withdrawals exceeded his investments. The Court held that the alleged amount that he thought were profits on investments was instead money from newer victims of the Ponzi scheme. Cohen was a BLMIS investor who was a “net winner” – he withdrew more from BLMIS than he invested. Cohen raised the “value” defense under §548(c) of the Bankruptcy Code, which, in brief, would allow him to retain payments received from BLMIS to the extent that he gave value to BLMIS in exchange for the payments. Cohen’s principal defense was that BLMIS owed antecedent debts that were satisfied by the payment of fictitious profits, and therefore, the fictitious profits were received for value. The Bankruptcy Court, after a trial, issued proposed findings of fact and conclusions of law, which the District Court reviewed de novo. The District Court ruled for the Trustee and granted the judgment of $1,143,461.00 against Cohen.

The case is Irving H. Picard, as Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff v. Andrew H. Cohen, case number 1:16-cv-05513, in the U.S District Court for the Southern District of New York


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Trustee Needs More Time to Object to General Unsecured Claims in the Trump Entertainment Resorts Inc. Clawback Suits

February 24, 2017, New York – The trustee in Trump Entertainment Resorts Inc.’s Chapter 11 case urged a Delaware bankruptcy court that he needs more time to decide whether to object to what’s left of the $1.9 billion in general unsecured claims asserted against the former casino operator in Atlantic City, New Jersey. The trustee Nathan A. Schultz requested the court for an additional 180 days to object to remaining general unsecured claims. The trustee stated that approximately 900 proofs of claim asserting more than $1.9 billion in general unsecured claims had been filed against the debtors and to date, the trustee has been able to expunge or otherwise resolve approximately 748 of such proofs of claims totaling almost $1.7 billion. The trustee further claimed that despite his best efforts, he has not yet completed the process and, therefore, may not be able to fully reconcile all general unsecured claims before the claims objection deadline. The trustee requested an extension of time until August 23, 2017. No objections were filed so far against the trustee’s motion for entry of an order extending the period to object to claims. The objection deadline was March 10, 2017.


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