Creditors of corporations, including victims of Ponzi schemes, often look to the remedies of the appointment of a federal court receiver or an involuntary bankruptcy petition and appointed trustee. The ability of the court appointed fiduciary to pursue third party avoidance actions to recover fraudulent transfers, under state or federal law, may be an important consideration in determining whether to pursue these remedies.
Clearly, a bankruptcy trustee has the power to pursue federal and state law causes of action to recover fraudulent transfers under federal law. 11 U.S.C. § 548 provides that transfers made within two (2) years of the petition, which were actually or constructively fraudulent, may be avoided for the benefit of the creditors.
Moreover, the trustee, on behalf of the bankruptcy estate, can pursue the state law fraudulent transfer actions that a creditor could pursue. 11 U.S.C. § 544 provides that the trustee has the rights and powers, including avoidance powers, of a creditor that extends credit to the debtor as of the date of the petition and, at such time with respect to such credit, obtains an unsatisfied execution. Generally, courts allow pursuit of claims by the trustee, under the Uniform Fraudulent Transfers Act, with a four (4) year statute of limitations.
A federal equity receiver may also pursue such fraudulent transfer actions. The receiver can pursue claims of the entity in receivership, but not claims of the creditors of that entity. The Fifth Circuit, in Janvey v. Democratic Senatorial Campaign Committee, Inc. (DSCCII), 712 F.3d 185, 190 (5th Cir. 2013), held “a federal equity receiver has standing to assert only the claims of the entities in receivership.” The Fifth Circuit relied on the Seventh Circuit’s opinion in Scholes v. Lehman, 56 F.3d 750 (7th Cir. 1995).
In Janvey, the Fifth Circuit made short work of the argument that the court appointed receiver was saddled with the knowledge of the fraud of the corporation’s principals and tossed the in pari delicto defense. Relying on Scholes, the Fifth Circuit held that the receiver had standing to recover transfers made without reasonably equivalent value to the corporation. In finding standing, and in dealing with the objection that the receiver was pursuing claims of the investor creditors, the Fifth Circuit noted that the receiver was pursuing the recoveries for the damages to the corporation for the loss of the funds through the fraudulent transfers. The Fifth Circuit also found that the avoidance actions were timely, having been asserted within one (1) year of discovery of the fraudulent transfer. The Fifth Circuit rejected the argument that the fact of the subject transfers were a matter of public record more than a year before the avoidance action “. . . a fraudulent-conveyance claim does not accrue until the claimant knew or reasonably could have known both of the transfer and that it was fraudulent in nature.”