Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Friday, June 29, 2012

The Ponzi Perpetrator’s Art Dealer? The Endless Scope of Clawback Claims

Posted by Kathy Bazoian Phelps

Sheila Gowan, the trustee of Dreier, LLP (“DLLP”), has filed a fraudulent transfer action against Marc Dreier’s personal art advisor. Gowan asserts that Marc Dreier caused DLLP to make a series of transfers to the defendant totaling $1,940,915.00 for Mark Dreier’s personal obligations and that DLLP received no consideration for these transfers. The Trustee asserts that Dreier retained the defendant to advise him on his art purchases for his personal collection and that DLLP was not a party to any agreement with the defendant.

The Trustee’s complaint asserts a claim for avoidance and recovery of the payment as constructive fraudulent transfers under 11 U.S.C. § 548(a)(1)(b) and § 550 on the theory that DLLP did not receive any value from the defendant’s services in exchange for the money DLLP paid to the defendant. The complaint also objects to the defendant's proof of claim under § 502(d), which requires the court to disallow a claim filed by a party from whom property is recoverable under §§548 or 550.

It will be interesting to see what defenses the defendant asserts to this claim. Undoubtedly, the Trustee will have little difficulty in proving her case-in-chief. Presumably, the Trustee has the DLLP checks payable to and negotiated by the defendant, so the Trustee’s case will be complete when she establishes either: (1) that DLLP was insolvent at the time of the transfers; (2) that the transfers left DLLP with unreasonably small capital; or (3) that DLLP intended to incur or believed that it would incur debts beyond its ability to pay as such debts matured.

The defendant may assert a good faith value defense under § 548(c), but even that will be challenging for her. While she may have acted in good faith and without knowledge or notice of Dreier’s fraud, that is not enough. The defense will only help her to the extent that her services provided value to DLLP, and that may be tough for her to prove since the services rendered by the defendant were allegedly for the benefit of Dreier individually and not for DLLP.

This case highlights the difference between preferences and fraudulent transfers from the perspective of the transferee. The Trustee does not allege that the defendant did anything wrong or out of the ordinary course of the defendant's business. Unfortunately for the defendant, however, there is no ordinary course defense for fraudulent transfer claims as there is in a preference action. See 11 U.S.C. § 547(c)(2).

A fraudulent transfer claim has a different objective than a preference claim, where the ordinary course of business makes a difference. The purpose of the ordinary course exception in preference actions is “to leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or [its] creditors during the debtor's slide into bankruptcy.” Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.) 78 F.30 (2d Cir. 1996).

In constructive fraudulent transfer actions such as the Trustee’s claims against the defendant, however, the purpose and perspective is different. Fraudulent transfer law considers liability from the perspective of the financial condition of the debtor to ensure that the debtor hasn’t given away its property with no return value being provided in exchange. Whether the transaction is ordinary or unusual, therefore, not an issue.

The defendant may be out of luck in this case, even though all she did was accept payment for the services she provided. In the fraudulent transfer context, however, defendants are stuck with the option of demonstrating both good faith and value, and if the money came from an entity different from the entity that received the value, the value element of the defense cannot likely be established.

Gowan’s suit was filed in the United States Bankruptcy Court for the Southern District of New York. (Adversary Proceeding No. 12-01717)

A complete discussion of fraudulent transfer claims, preference claims, and the defenses to them may be found in The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis 2012).

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