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Trustee Failed to Establish that Transfers were Made With Intent to Hinder, Delay or Defraud Creditors of Debtor

Weil v. United States (In re Tag Entm’t Corp.), Nos. 1:09-bk-26982-VK, 1:10-ap-01342-VK, 2016 Bankr. LEXIS 982 (U.S. Bankr. C.D. Cal. Mar. 29, 2016)

The Trustee for Debtor TAG Entertainment Corp. brought the adversary proceeding, alleging that a $5,989,999 restitution payment received by the United States from Debtor’s founder, Steven Kent Austin, constituted a fraudulent transfer. The Trustee alleged that the restitution money paid to the United States was traceable to the Debtor and may be recovered as a fraudulent transfer under 11 U.S.C. § 544(b) and California’s Uniform Fraudulent Transfer Act. The Trustee also alleged that the Debtor was involved in a Ponzi scheme along with the Debtor’s founder, Austin. The United States asserted that the Trustee failed to show transfers originated from Debtor. The United States also raised the statute of limitations set forth in Cal. Civ. Code § 3439.09 as its defense
The Court found that the Trustee failed to establish that Debtor was involved in a Ponzi scheme and could not rely on the existence of a Ponzi scheme to prove that the transfers were made with intent to hinder, delay or defraud creditors of debtor. The Court held that although an existence of a Ponzi scheme is sufficient to establish intent to defraud, the Trustee was unable to do so in the case at bar. The Court further concluded that the Trustee also failed to demonstrate that any of the transfers flowed from Debtor to the United States. Even if any of Debtor’s assets were transferred to or for the benefit of the Debtor, the Trustee still could not meet her burden of proving that any transfers were made with intent to hinder, delay or defraud creditors of Debtor. On statute of limitation argument, the Court concluded that since the United States did not include the defense of statute of limitations in the pretrial order, and because the Trustee objected to the United States raising the issue for the first time at trial, the United States may not assert the defense at this time.

The judgment was entered in favor of the United States.


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