Ponzi Scheme Clawbacks Dealt a Blow by MN Supreme Court Ruling

The Minnesota Supreme Court recently issued an opinion overturning a legal presumption that permitted victims of financial fraud to forego evidentiary requirements under the Minnesota Uniform Fraudulent Transfer Act (MUFTA) in cases involving Ponzi schemes. As a result, the ruling calls into question the potential recovery of more than $1 billion in alleged false profits from those with relationships to Tom Petters, the mastermind of one of the largest financial frauds in U.S. history, second only to Bernie Madoff.

In 2010, Petters—a prominent Minnesota businessman and CEO of Petters Group Worldwide, a holding company with diverse assets that included Sun Country Airlines and Polaroid—was convicted on counts of fraud, conspiracy, and money laundering in connection with a $3.65 billion Ponzi scheme. Prior to Petters’s conviction, the U.S. Bankruptcy Court for the District of Minnesota appointed a bankruptcy trustee who proceeded to file more than 200 clawback suits against lenders and others in order recoup assets under MUFTA and other available claims.

Prior to the recent ruling, Minnesota courts applied a “Ponzi scheme presumption” to financial transfers between the perpetrator of the Ponzi scheme and beneficiaries of the fraud. As such, those transfers were deemed fraudulent on their face, without a trustee or receiver bearing the evidentiary burden of proving involvement by each individual beneficiary of a fraudulent transfer. Continue Reading

RadioShack, a Retail Legend Permanently Stuck in a Different Era, Files Chapter 11

This blogger fondly remembers the RadioShack cassette player/recorder her great-grandmother gave her in the late 1970s.  Cutting-edge technology at the time, the gadget allowed traveling musical entertainment and roving recording, a level of freedom that I have maintained through the years right down to my smartphone and Bluetooth headset.  So like many others, I greeted yesterday’s news of RadioShack’s widely anticipated Chapter 11 bankruptcy filing with no small amount of nostalgia.

As RadioShack’s own bankruptcy filing suggests, RadioShack arguably hasn’t achieved a memorable product launch since the mid-1980s. Simply put, it just isn’t the place to buy the newest thing anymore.  These troubles came to a head when the company made its after-hours filing in Delaware yesterday.

From a creditor/debtor lawyer’s perspective, the filing reminds us to keep a watchful eye on two pressing issues: the continued struggle by manufacturers and retailers to stay relevant in the new age of digital commerce, and the need to carefully negotiate and manage lending covenants.

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Caesars Begins $10B Fight In Earnest

A cross-jurisdictional fight has broken out between Caesars Entertainment Operating Company (“Caesars”) and three of its second lien noteholders. Following weeks of public disclosure regarding its intent to file a consensual chapter 11 case with the support of its senior secured creditors, Caesars was surprised on January 12 when Appaloosa Management LP, Tennenbaum Capital Partners, LLC, and Oaktree Capital Management, LP, through their respective investment vehicle special purpose entities holding second lien Caesars notes (the “Petitioning Creditors”), filed an involuntary chapter 11 petition against Caesars in Delaware bankruptcy court.

The Petitioning Creditors also filed emergency motions seeking the immediate appointment of an examiner, staying “any later-filed, parallel chapter 11 cases  that may be commenced by [Caesars]” and a determination of venue for which any such Caesars case should proceed. On January 14, Delaware bankruptcy Judge Kevin Gross denied the Petitioning Creditors requests regarding stay and venue determinations for any later-filed parallel proceedings, noting that both requests were premature unless and until Caesars filed a voluntary case.

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Wells Fargo Caught in the Crosshairs of the Automatic Stay

The Weidenbenners (aka the “Debtors”) had four accounts with Wells Fargo that held $6,923.54 when they filed for chapter 7 protection on March 7, 2014.  At the time they filed their petition, they claimed as exempt all of these funds.  Upon learning of the bankruptcy filing on March 12, 2014, Wells Fargo placed an administrative freeze on the funds in the accounts as of the filing date, which caused certain checks issued by the Debtors to bounce and the Debtors to incur a $25.00 penalty during the post-petition period.

On March 12, the same day as it placed the administrative freeze on the Debtors’ accounts, Wells Fargo sent a notice to the chapter 7 trustee in which Wells Fargo advised the trustee of the freeze and requested directions as to what should be done with the funds.  On March 17, the trustee directed Wells Fargo to release the entire amount of the funds to the Debtors.  On that same day, Wells Fargo released the funds to the Debtors.

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Challenging Insolvency through a Recharacterization Claim

An interesting decision from the Bankruptcy Court in the Eastern District of Tennessee shows how a defendant tried to defeat a preference claim by recharacterizing debt on the debtor’s balance sheet as a capital or equity contribution.  In Paris v. SSAB Enterprises, LLC (In re SIAG Aerisyn, LLC), the defendant tried to render the debtor balance sheet solvent by recharacterizing a significant portion (approximately $9.9 million) of the debtor’s debts as equity contributions.  By rendering the debtor solvent, the defendant could, in turn, defeat the preference claim. Continue Reading

Welcome to the Restructuring Debt Review

Welcome to the Restructuring Debt Review (the “RDR”).  The RDR blog is devoted to covering legal developments in the areas of troubled businesses, distressed debt and insolvency law.  Many of the posts will discuss recent developments under the federal Bankruptcy Code as it applies to local, regional, national and international situations.  We intend all of our posts to report on these developments from a client’s perspective, whether the client is a lender, borrower, business or individual; creditor or debt trader; or counterparty to an insolvent entity.  This area of the law punishes those who sit back and wait.  So, please, read on.

Valuing Assets in Chapter 11 – A Moving Target

A recent decision out of the First Circuit Court of Appeals illustrates the importance of the value of the collateral of creditors with fulcrum security, as that value relates to creditors’ rights to pendency interest.

In re SW Boston Hotel Venture, LLC, et al. involved a failed construction project by SW Boston Hotel Venture, LLC to develop a mixed-used property that would become the W Hotel and Residences in Boston’s theater district.  The senior secured lender (“Prudential”) provided up to $192.2 million in financing pursuant to a construction loan agreement.  As security for the loan, Prudential took a mortgage and first priority blanket security interest in SW Boston’s real and personal property.  Prudential also took a security interest in the real estate and property of certain affiliates of SW Boston, and received a $17.3 million letter of credit issued by Sovereign Bank.

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The Muddy Waters of Claim Classification

The chapter 11 case of In re Hyatt out of the Bankruptcy Court for the District of New Mexico illuminates a debtor’s use of claim classification to allocate creditors different recoveries under a liquidating plan.  While this debtor was ultimately successful in getting its Disclosure Statement approved by the Bankruptcy Court, this strategy ultimately hinges on the specific facts of the case and the jurisdiction in which the debtor finds itself.

In Hyatt, the debtor proposed a liquidating chapter 11 plan in which the plan separately classified and subordinated the punitive damages portion of a claim held by creditor Cornelius Dooley (the “Dooley Claim”) behind the general unsecured claims.  The plan also separately classified the unsecured claim of Farm Credit of New Mexico, ACA (the “Farm Credit Claim”) from the unsecured claims of other creditors.  The Farm Credit Claim was an unsecured claim based on the debtor’s guarantee of third-party debt.

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In re Alameda Investments, LLC: The Liquidating Trustee Has More Than an Economic Interest

The Ninth Circuit B.A.P. has affirmed in In re Alameda Investments, LLC that transfer restrictions in a limited liability company operating agreement to which the debtor was a party do not prohibit transfer of the debtor’s entire membership interest (including voting rights) to a liquidating trust established pursuant to the debtor’s chapter 11 plan.

In this case, the debtor was a member of a two-member limited liability company, West Lakeside, LLC (the “Joint Venture”).  Absent consent from a majority of other members, the Joint Venture’s operating agreement prohibited transfers of all components of a member’s interest, including voting rights.  The debtor’s plan established a liquidating trust to liquidate the debtor’s remaining assets, including its interest in the Joint Venture.  For well over a year, the Joint Venture permitted the liquidating trustee to participate in the management of the Joint Venture.  However, the non-debtor member of the Joint Venture eventually questioned whether the liquidating trust had full membership rights (including voting rights) to the Joint Venture or whether it had only an economic interest in the Joint Venture.

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The Intrusion of Section 506(b) in Foreclosure Proceedings

On June 23, 2014, the Fifth Circuit Court of Appeals weighed in on the applicability of section 506(b) to an oversecured creditor’s entitlement to payment for interest, fees and expenses in a case in which the secured creditor obtained relief from the automatic stay and executed a sale of its collateral under state law.  The case, Wells Fargo Bank, N.A. v. 804 Congress, LLC (In re 804 Congress, LLC), involved a single asset office building in Austin, Texas.  Wells Fargo Bank, N.A. (“Wells Fargo”) had financed the purchase of the building and held a real estate lien note (the “Note”) and a deed of trust that granted Wells Fargo a first-priority lien on the building.   Wells Fargo was owed $3,296,915, which included $87,000 in attorneys’ fees.

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