Section 548(c) provides a defense to avoidance of a fraudulent transfer for a "good faith" transferee or obligee who gives "value" in exchange for a transfer or obligation:Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title [dealing with a trustee's power to avoid, respectively, transfers that are voidable under state law, statutory liens, and preferential transfers], a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.11 U.S.C. § 548(c).Section 548(d)(2)(A) states that "value" for the purposes of section 548 "means property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.""Good faith" is not defined by the Bankruptcy Code.

Thereafter, the court allowed the plaintiff to proceed with its fraudulent transfer claim against BMW, but reduced the amount at issue from approximately $32.5 million to $793,761.87 because the majority of the transfers at issue occurred outside the two-year fraudulent transfer period under 11 U.S.C. § 548. However, the court allowed the liquidating trust’s alternative unjust enrichment claim to proceed in the full amount of nearly $32.5 million.

The Bankruptcy Code allows a trustee to recover fraudulent transfers made by the debtor prior to bankruptcy. 11 U.S.C. § 548(a). An innocent recipient of a fraudulent transfer is not without a defense, however.

he debtor's board, its members approve a transfer based on fraudulent information provided by an officer, has the entity acted with fraudulent intent for purposes of avoidance?The U.S. Bankruptcy Court for the District of Delaware recently addressed this issue in In re Cyber Litigation Inc., 2023 WL 6938144 (Bankr. D. Del. Oct. 19, 2023). In granting summary judgment in favor of a trustee seeking to avoid payments made as part of a pre-bankruptcy tender offer as a fraudulent transfer, the court held that the intent of a fraudster-officer can be imputed to the board and, in turn, the debtor, where the fraudster manipulated the board through deceit. The court also considered, and rejected, application of the "earmarking" defense to avoidance.Avoidance of Fraudulent Transfers in BankruptcyAs noted, fraudulent transfers that can be avoided by a trustee or DIP include: (i) actual fraudulent transfers, which are transfers made with "actual intent to hinder, delay, or defraud" creditors (see 11 U.S.C. § 548(a)(1)(A)); and (ii) constructive fraudulent transfers, which are "transactions that may be free of actual fraud, but which are deemed to diminish unfairly a debtor's assets in derogation of creditors." Collier on Bankruptcy ("Collier") ¶ 548.05 (16th ed. 2023); 11 U.S.C. § 548(a)(1)(B).Due to the difficulty in proving actual fraud based on an avoidance defendant's subjective state of mind, some courts consider "badges of fraud" in assessing whether a transfer or obligation was made or incurred with intent to defraud, including, among other things, the adequacy of the consideration involved, the relationships between the parties, whether the transferor continued to use the property even after the transfer, and the transferor's financial condition at the time of and after the transfer. See, e.g., In re TransCare Corp., 81 F.4th 37 (2d Cir. 2023); see generally Collier at ¶ 548.04[1][b][i] (citing cases); see also Section 4(b) of the Uniform Fraudulent Transfer Act (the "UFTA") and its successor,

of paying a creditor of the debtor, hence "earmarking" them for that purpose, the transfer of the funds to the creditor may not be recoverable as preference. The doctrine rests on the idea that the funds are not within the control of the debtor, and because one debt effectively is exchanged for another, there is no diminution of the debtor's bankruptcy estate. See generally Collier on Bankruptcy ("Collier") ¶547.03[2][a] (16th ed. 2023).Fraudulent Transfers.Section 548(a)(1) of the Bankruptcy Code empowers a bankruptcy trustee to avoid pre-bankruptcy fraudulent transfers. It provides in part that:The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition ….11 U.S.C. §548(a)(1) (emphasis added). Fraudulent transfers that can be avoided include both: (i) actual fraudulent transfers, which are transfers made with "actual intent to hinder, delay, or defraud" creditors (see 11 U.S.C. § 548(a)(1)(A)); and (ii) constructive fraudulent transfers, which are "transactions that may be free of actual fraud, but which are deemed to diminish unfairly a debtor's assets in derogation of creditors." Collier at ¶ 548.05; see 11 U.S.C. § 548(a)(1)(B). Under section 548(A)(1)(B), a transfer is constructively fraudulent if the debtor received "less than a reasonably equivalent value in exchange for such transfer or obligation" and was, among other things, insolvent, undercapitalized, or unable to pay its debts as such debts matured. Id.Section 548(c) provides a defense to avoidance of a fraudulent transfer for a "good faith" transferee who gives value in exchange for the transfer involved.Fraudulent transfers may also be avoided by a trustee under section 544(b) of the Bankrupt

Section 548(c) provides a defense to avoidance of a fraudulent transfer for a "good faith" transferee or obligee who gives value in exchange for the transfer or obligation at issue:Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title [dealing with a trustee's power to avoid, respectively, transfers that are voidable under state law, statutory liens, and preferential transfers], a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.11 U.S.C. § 548(c).Section 550(a) of the Bankruptcy Code provides that, after avoidance of a transfer, the trustee may recover the property transferred or its value from the initial transferee (or the entity for whose benefit such transfer was made) or any "immediate or mediate transferee" of the initial transferee. However, pursuant to section 550(b), the trustee may not recover the property transferred or its value from an initial or subsequent ("immediate" or "mediate") transferee "that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided."

survive the man himself. BackgroundBernie Madoff died on April 14, 2021, while incarcerated in the Federal Medical Center in Butner, North Carolina, but he lives on in bankruptcy jurisprudence. The December 2008 disclosure that Bernard L. Madoff Investment Securities LLC (BLMIS) was a Ponzi scheme led to its liquidation under the Securities Investor Protection Act (SIPA). A SIPA liquidation is designed to collect “customer property” for ratable distribution among customers based on their “net equity” — investments minus withdrawals (i.e., loss of principal). SIPA largely incorporates the Bankruptcy Code and allows the SIPA trustee to recover property transferred by the debtor that would have been customer property if and to the extent that the transfer would have been voidable or void under the Bankruptcy Code.Irving H. Picard, who was appointed trustee in the SIPA proceeding, brought countless actions seeking to avoid and recover transfers that he alleged were “fraudulent” (a) under Bankruptcy Code section 548(a)(1)(B “constructive fraud” fraudulent transfers in which the debtor received less than a reasonably equivalent value in exchange for the transfer, and (b) under section 548(a)(1)(A) of the Bankruptcy Code, “actual fraud” fraudulent transfers in which the transfers were allegedly made with actual intent to hinder, delay, or defraud creditors. Transfers “avoided” under section 548 can be recovered under section 550(a) of the Bankruptcy Code. The trustee’s website reports recoveries of $14.604billion, and his pursuit of recipients of BLMIS funds is ongoing.Many of the trustee’s avoidance and recovery actions dealt with transactions involving foreign parties and encountered hurdles related to the issue of whether the US avoidance and recovery law applies extraterritorially in light of the presumption against extraterritoriality that “[a]bsent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.” If the presumption against ex

The worst-case scenario would be that the lender's unsecured claim (already valued at only pennies on the dollar) would decrease if the debtor/trustee proved by a preponderance of the evidence that the sale yielded less than fair market value. Aside from litigation surrounding its unsecured deficiency claim, the lender did not expect to defend its actions. It certainly did not realistically expect that a debtor-in-possession would name it in an adversary proceeding to unwind the foreclosure sale...until recently, that is.a. Fraudulent Transfers (11 U.S.C. § 548).For good reason, lenders have embraced the Supreme Court decision of BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). In BFP, a third party purchased the debtor-in-possession's property at a pre-petition foreclosure for $433,000.

Parties structuring certain financial transactions to comply with the Bankruptcy Code safe harbor provisions, including protections from the avoidance powers in Section 548 of the Bankruptcy Code, must be cognizant of recent case law prescribing the identity of counterparties within the ambit of the provisions. For example, the safe harbor protections extend to financial institutions, but the Supreme Court’s 2018 decision in Merit Management excluded financial institutions that were “mere conduits” in a transaction. Subsequently in Tribune II, the Court of Appeals for the Second Circuit held that a party who was a “customer” of a financial institution acting as the party’s “agent” may be a qualifying entity.In an opinion issued in connection with the Nine West 2014 leveraged buyout (“LBO”), a three-judge panel of the Second Circuit reiterated and refined Tribune II’s analysis of when a party who is a customer of a financial institution may qualify for Bankruptcy Code safe harbor protection.However, the majority, Circuit Judges Denny Chin (writing) and Joseph F. Bianco, also held that a transferee within the larger LBO transaction must be safe harbor-qualified to gain safe harb

ce of a debtor; (3) that the debtor transferred assets shortly before or after the creditor’s claim arose; and (4) that the debtor did so with actual intent to hinder, delay, or defraud any of the debtor’s creditors, then – and only then – the burden shifts to the defendant to show that the transferor had a legitimate purpose in making the transfer.”Id.With respect to constructive fraudulent transfers, under TUFTA, the Plaintiffs have the burden to show that the transfers were made by the Debtor without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they become due. Tex. Bus. & Comm. C. §24.005(a)(2).Under the Bankruptcy Code, 11 U.S.C. § 548(a)(1)(B), to prove constructive fraudulent intent, the Plaintiffs must show that the Debtor received less than a reasonably equivalent value in exchange for such transfer or obligation and one of the following:(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business11 U.S.C. § 548(a)(1)(B).Specifically, and importantly, the Plaintiffs bear the burden to establish the lack of reason