In the latest ruling in the long-running dispute in Sentinel Management’s bankruptcy case, the Seventh Circuit recently held that a bank employee’s suspicions about the source of the bank’s collateral should have put the bank on inquiry notice, thus precluding the bank from asserting a “good faith” defense to a fraudulent transfer claim that a liquidating trustee brought against the bank.
Lenders and secured creditors often require that debtor-customers direct all receivable collections into a lockbox, hoping to wrangle any available proceeds to apply to their debtors’ outstanding debt. In requiring a debtor or its customer to remit payments to a lockbox, however, creditors may be overlooking a potential source of significant liability. A creditor using a lockbox may unwittingly expose itself to greater risk and liability than just a debtor’s default if it receives funds that were collected as sales tax on a debtor’s goods or services.
Last week, the United States Court of Appeals for the Sixth Circuit issued a decision in the case of Cyber Solutions International LLC v. Pro Marketing Sales, Inc. Although the decision blazes no new legal territory, the facts of the case and rulings offer important lessons for both lenders and licensees.
The Seventh Circuit Court of Appeals recently held that a lender is obligated to conduct a diligent investigation when it becomes aware of suspicious facts relating to the legitimacy of a loan transaction. In Sentinel Management Group, Inc., 2016 WL 98601 (7th Cir. January 8, 2016), the Seventh Circuit found that a bank officer’s puzzlement was enough to place the bank on inquiry notice, which required the bank to investigate the collateral the borrower was using to secure the loan.
In SGK Ventures, LLC, the Bankruptcy Court for the Northern District of Illinois ordered that the secured claims of two entities controlled by insiders of the debtor be equitably subordinated to the claims of unsecured creditors.
Students have taken on more than $1 trillion in debt to pay for the relentlessly rising costs of higher education. With that much debt outstanding, it’s no surprise that there are increasing numbers of borrowers defaulting on student loan debt, and seeking to discharge that debt by filing for bankruptcy protection. But, as a Wisconsin man recently learned, discharging student loan debt in bankruptcy is no easy feat.
When can a bank be at risk of unknowingly receiving a fraudulent transfer? How much information does a bank need to have before it is on “inquiry notice”? A recent decision from the Seventh Circuit Court of Appeals highlights the risks that a bank takes when it ignores red flags and fails to investigate.
In re Sentinel Management Group – The Decision
A “bank [making a secured rescue loan] had information that should have created the requisite suspicion … to conduct a diligent search for possible dirt” — i.e., whether the debtor had the right to pledge $312 million of customer securities, held the U.S. Court of Appeals for the Seventh Circuit on Jan. 8, 2016.In re Sentinel Management Group, Inc., 2016 WL 98601, at *2 (7th Cir. Jan. 8, 2016) [“Sentinel V”]. The Seventh Circuit reversed the district court, voided the defendant bank’s lien as a fraudulent transfer, and rejected the bank’s good faith defense.
In Venture Bank v. Lapides, 800 F.3d 442 (8th Cir. 2015), the Eighth Circuit found that a bank could not recover from its borrower and, in fact, had violated the post-discharge injunction by relying on change in terms agreements which were ineffective to reaffirm a debt discharged in the borrower’s Chapter 7 bankruptcy.
Precipitous commodity price declines that began in mid-2014 continued to disrupt the oil and gas industry in 2015, outlasting the expectations of many analysts. By the end of 2015, prices for both Brent and WTI crude were fluctuating in the mid to upper $30s per barrel, down from highs of over $100 a barrel in mid-2014.