Bash v. Textron Financial Corp., (In re Fair Finance Co.)

2016 WL 4437606 (6th Cir. 2016)
District Court erred in dismissing Trustee's Complaint to recover alleged fraudulent transfers and civil conspiracy charges. Case remanded for further proceedings.
Procedural context:
Trustee brought adversary proceeding against Textron to recover allegedly fraudulent transfers and for civil conspiracy. District Court withdrew the reference but left the preliminary matters in the Bankruptcy Court. Defendant filed a Motion to Dismiss under Rule 12(b)(6) alleging that the complaint failed to state a cause of action. Bankruptcy Court issued Report and Recommendations suggesting that the Motion be denied. On de novo review, District Court rejected R&R and dismissed all counts of the complaint. On further review, Sixth Circuit held that District Court erred in finding that complaint failed to state cause of action and reversed the District Court's dismissal of the Complaint.
Prior to 2002, Fair Finance had been family owned, highly profitable and unquestionably well operated business. In 2002, the owners of Fair Finance cold the company in an LBO. Shortly thereafter, Fair Finance and Textron entered into 2-year lending arrangement whereby Textron provided a line of credit secured by a lien on all of Fair Finance's assets. New owners then began operating Fair Finance as a ponzi scheme, using ever increasing private borrowings to cover interest and debt payments on other private borrowings as well as payments to Textron, while siphoning off large amounts of money for personal use. During the initial 2 year term, Textron's review of the operations of Fair Finance raise substantial concerns about the operations of the Company as well as the large amount of "insider loans" that appeared on Fair Finance's books. Nonetheless, in 2004, Textron and Fair Finance entered into an Amended and Restated Loan and Security Agreement (the ARL&SA"). In 2009, the ponzi scheme collapsed, the principals of Fair Finance were convicted of multiple securities law violations and Fair Finance placed into involuntary Chapter 7. The Chapter 7 Trustee sued Textron claiming that all payments made after execution of the 2004 ARL&SA were fraudulent and that Textron engaged in a civil conspiracy with the principals of Fair Finance to operate a ponzi scheme. Primary issue was whether the 2004 ARL&SA was a "mere extension" of the 2002 finance agreement or whether the 2004 ARL&SA was a novation and would be treated as new agreement. The Trustee contended that the 2004 ARL&SA was a novation and because Textron, by 2004, knew or reasonably should have known that Fair Finance was a ponzi scheme, execution of the ARL&SA was does with actual fraudulent intent. As such, the security interst granted in that Agreement would be invalid and any payments received by Textron would be actually and constructively fraudulent. Distrct Court found as a matter of law the the 2004 Agreement was a mere extension of the 2002 Agreement and because the 2002 Agreement (which was admittedly not fraudulent as to Textron) had a valid security agreement, any payments received by Textron were part of a valid security interest and could not be avoided. Circuit Court held that whether 2004 Agreement was novation was by definition a factual determination and the Trustee's complaint, assuming the truth of all well-pled facts, stated cause of action. District Court also dismissed civil conspiracy count, finding that any action would be subject to defens eo fin pari Delecto. Circuit Court reversed as in pari Delecto was affirmative defense and complaint did not have to contain factula ssertsions to either negate or avoid a potential affirmative defense. Circuit Court affirmed dismissal of action based on constructive fraudulent transfer as barred by the 4 year statute of limitations, but reversed on the actual fraud count as the statute of limitations for actual fraud runs from date on which the frauluent transfer was or reasonably could have been discovere. The Trustee brought the action with 4 years of appointment as Trustee. Matter remanded to Distrcit Court for futher proceedings.
Moore, Gibbons and Davis (Senior Circuit Judge from Fourth Circuit Court of Appeals)

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