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Jared C. Walters, Trustee v. Jeanne A. Gallegos, et al.

Summarizing by David Treacy

Meoli v. The Huntington National Bank

Madoff and Sixth Circuit have differing formulations about the ‘good faith’ defense for a recipient of a fraudulent transfer.

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Case Type:
Case Status:
Affirmed in part and Reversed in part
Nos. 15-2308/2362 (6th Circuit, Feb 08,2017) Published
In a lengthy opinion, Sixth Circuit affirmed a district court's determination that a bank was liable as a transferee of direct and indirect loan payments it received after its good faith defense ceased. The district court's determination was reversed as to the bank's liability for excess deposits held by the bank in it borrower's account and the bank's liability was capped at the amount of its loan to its borrower. The bank's liability for loan payments it received before its good faith ended is determined by its knowledge of the payments avoidability.
Procedural context:
Chapter 7 trustee sued bank for transfers bank received from three sources: direct loan payments, indirect loan payments, and excess deposits. Two companies were part of a ponzi scheme and the trustee sought to recover payments made to bank to reduce debt of bank's borrower. Bankruptcy court issued 5 opinions on various issues. Bankruptcy court found bank liable for $72 million although debt to bank did not exceed $16 million. Bankruptcy court issued report and recommendation to district court which adopted it without much discussion. Trustee appealed the determination that interest was calculated on the statutory rate and the time period involved and bank appealed on the liability for the excess deposits.
Bank borrower used a related company in a ponzi scheme where related company deposited funds in borrower's account which were used for illicit purposes and some debt payments. Bank became suspicious when large check bounced. Bank did not do anything for period of time but its security department eventually determined the principal was a fraudster. Bank security told FBI but not internal bank employees watching borrower. FBI raided businesses and principal committed suicide. Bank security's finding of fraudster's background without telling other bank employees destroyed bank's good faith defense. Trustee may be able to recover loan payments, direct and indirect, received by bank earlier in time if it can show on remand that bank had sufficient knowledge of the avoidability of the transfers. Bankruptcy court will have benefit of Sixth Circuit's clarification of prior precedent on knowledge required for recovery.
Moore, Rogers and Sentelle (D.C Circuit-sitting by designation)

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