The Ponzi Perpetrator’s Art Dealer? The Endless Scope of Clawback Claims

Sheila Gowan, the trustee of Dreier, LLP ("DLLP"), has filed a fraudulent transfer action against Marc Dreier's personal art advisor, Heidi Lee, and her business, Heidi Lee Art Advisory. Gowan asserts that Marc Dreier caused DLLP to make a series of transfers to Lee totaling $1,940,915.00 for Mark Dreier's personal obligations and that DLLP received no consideration for these transfers. The Trustee asserts that Dreier retained Lee to advise him on his art purchases for his personal collection and that DLLP was not a party to any agreement with Lee.

The Trustee's complaint asserts a claim for avoidance and recovery of the payment as constructive fraudulent transfers under 11 U.S.C. § 548(a)(1)(b) and § 550 on the theory that DLLP did not receive any value from Lee's services in exchange for the money DLLP paid to Lee. The complaint also objects to Lee's proof of claim under § 502(d), which requires the court to disallow a claim filed by a party from whom property is recoverable under §§548 or 550.

It will be interesting to see what defenses Lee asserts to this claim. Undoubtedly, the Trustee will have little difficulty in proving her case-in-chief. Presumably, the Trustee has the DLLP checks payable to and negotiated by Lee, so the Trustee's case will be complete when she establishes either: (1) that DLLP was insolvent at the time of the transfers; (2) that the transfers left DLLP with unreasonably small capital; or (3) that DLLP intended to incur or believed that it would incur debts beyond its ability to pay as such debts matured.

Lee may assert a good faith value defense under § 548(c), but even that will be challenging for her. While she may have acted in good faith and without knowledge or notice of Dreier's fraud, that is not enough. The defense will only help her to the extent that her services provided value to DLLP, and that may be tough for her to prove since the services rendered by Lee were allegedly for the benefit of Dreier individually and not for DLLP.

This case highlights the difference between preferences and fraudulent transfers from the perspective of the transferee. The Trustee does not allege that Lee did anything wrong or out of the ordinary course of Lee's business.. Unfortunately for Lee, however, there is no ordinary course defense for fraudulent transfer claims as there is in a preference action. See 11 U.S.C. § 547(c)(2).

A fraudulent transfer claim has a different objective than a preference claim, where the ordinary course of business makes a difference. The purpose of the ordinary course exception in preference actions is "to leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or [its] creditors during the debtor's slide into bankruptcy." Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.) 78 F.30 (2d Cir. 1996).

In constructive fraudulent transfer actions such as the Trustee's claims against Lee, however, the purpose and perspective is different. Fraudulent transfer law considers liability from the perspective of the financial condition of the debtor to ensure that the debtor hasn't given away its property with no return value being provided in exchange. Whether the transaction is ordinary or unusual, therefore, not an issue.

Lee may be out of luck in this case, even though all she did was accept payment for the services she provided. In the fraudulent transfer context, however, defendants are stuck with the option of demonstrating both good faith and value, and if the money came from an entity different from the entity that received the value, the value element of the defense cannot likely be established.

A complete discussion of fraudulent transfer claims, preference claims, and the defenses to them may be found in The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis 2012) by Kathy Bazoian Phelps and Hon. Steven Rhodes.  The Ponzi Book is available for purchase at www.lexisnexis.com/ponzibook, and more information about the book can be found at www.theponzibook.com.

Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes

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