![]() On direct appeal, the Third Circuit vacated the bankruptcy court’s dismissal.Īs the Third Circuit noted, some courts applying the collapsing doctrine have required proof of knowledge of the fraudulent scheme on the part of both the debtor and the transferee. The bankruptcy court dismissed the claims at the pleading stage, concluding that the Liquidation Trust was required to show that Preferred Bank had knowledge of the alleged fraudulent acts and that the complaint had failed to allege facts from which such knowledge could be inferred. The collapsing doctrine provides that a court may “collapse” several apparently innocuous transactions for purposes of fraudulent transfer analysis and consider the economic reality of the transactions together. The bankruptcy court analyzed the fraudulent transfer claims against Preferred Bank using the “collapsing” doctrine. incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition if the debtor voluntarily or involuntarily (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became. of an interest of the debtor in property, or any obligation. Section 548(a)(1) of the Bankruptcy Code provides that “he trustee may avoid any transfer. ![]() At bottom, the crux of the complaint was that the financing, coupled with the purposeful overcharging, constituted a fraudulent transfer by the debtor under section 548(a)(1), and that Preferred Bank had culpable knowledge of the underlying scheme to defraud. The Liquidation Trust further asserted that Preferred Bank was aware that Kolin priced its products above market, which would eventually make it impossible for the debtor to remain in business. The Liquidation Trust asserted that the debtor entered into financing with Preferred in order to “siphon” money to Kolin, Kolin overcharged Syntax for inventory, and that, as a result, the proceeds of Syntax’s sales of the inventory were insufficient to repay the debt to Preferred Bank. In its complaint, the Liquidation Trust alleged that several of Syntax’s officers and directors engaged in “a series of fraudulent activities” that led to the debtor’s insolvency and that such fraud was made possible through the involvement of Preferred Bank. The Syntax-Brillian Liquidation Trust initiated an adversary proceeding against Preferred Bank under section 548(a) of the Bankruptcy Code and the corresponding provisions of the Delaware Code, attempting to avoid and recover alleged fraudulent transfers in the form of payments made by the debtor to Perferred Bank pursuant to the loan agreements. The SB Liquidation Trust was established pursuant to the debtor’s liquidation plan, which transferred control over all of the debtor’s assets and causes of action to the Liquidation Trust. Subsequently, the debtor sought bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. ![]() As it happened, several of Syntax’s officers and directors were also officers and directors of Kolin. The loan agreement between Syntax and Preferred Bank was amended on a number of occasions. In SB Liquidation Trust, prepetition, debtor Syntax-Brillian Corporation and Preferred Bank entered into a loan agreement and credit agreement, the proceeds of which were used by Syntax to acquire inventory from Taiwan Kolin Company. ![]() ![]() 11, 2014) has provided more food for thought when it comes to the issue of a transferee’s knowledge, concluding that it is not necessary to plead the transferee’s knowledge of the fraudulent transfer to maintain a cause of action under section 548(a)(1) of the Bankruptcy Code. Now, the United States Court of Appeals for the Third Circuit in SB Liquidation Trust v. Recently, we examined the knowledge required to establish a transferee’s “good faith” defense under section 548(c) of the Bankruptcy Code. The extent of a transferee’s knowledge in the context of fraudulent transfer claims under the Bankruptcy Code has been a frequent topic of discussion on the Weil Bankruptcy Blog. ![]()
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