The U.S. Court of Appeals for the Seventh Circuit recently held that a lender that is on inquiry notice that its security interest in the collateral had been fraudulently conveyed may lose its secured status.

However, the Court also held that the lender's negligence here did not amount to "purposeful avoidance of the truth" sufficient to justify application of the doctrine of equitable subordination, which allows a bankruptcy court to reduce the priority of a claim in bankruptcy.

Yesterday’s post discussed the recent appellate ruling in Sentinel’s bankruptcy, Grede v. Bank of New York Mellon Corp.

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.

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.

Section 105(a) of the Bankruptcy Code provides that a bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a).  In the Caesars bankruptcy, the Seventh Circuit explored the breadth of a court’s rights to take action under this section.  The Seventh Circuit held that section 105(a) permits the Bankruptcy Court to issue an injunction with respect to litigation pending against the debtors’ non-debtor parent.

Two days before Christmas, the Seventh Circuit Court of Appeals issued a ruling that is likely to have a dramatic impact in the highly-contested Caesars Entertainment bankruptcy case.  The decision may also give a green light to other debtors seeking to enjoin lawsuits brought against non-debtor affiliates.

The Court of Appeals for the Seventh Circuit recently issued a decision which may give a trump card to fraudulent transfer defendants seeking to use the “good faith” defense under the Bankruptcy Code’s recovery provision. This defense, set forth in section 550(b)(1), provides that a trustee may not recover a voidable transfer from “a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidablity of the transfer avoided[.]” (emphasis added).

Insiders who loot their corporate entities often dispose of the cash proceeds in transactions with third parties. A recent Seventh Circuit opinion, In re Equipment Acquisition Resources, Inc., 14-2174 (7th Cir. October 13, 2015) (the “EAR Opinion”)addresses a common risk faced by a third party who receives cash from the defrauding insider.

In issuing its decision in Jubber v. SMC Electrical Products, Inc. (In re C.W. Mining Company), 2015 WL 4717709 (10^th Cir. 2015), the Tenth Circuit joined the Sixth, Seventh and Ninth Circuits in holding that a first-time transaction between the debtor and a creditor may qualify for the ordinary course defense of § 547(c).¹  In C.W.

A “bankruptcy court has discretion to award the [bankruptcy] trustee the actual [fraudulently transferred] property or its pre-transfer value,” held the U.S. Court of Appeals for the Seventh Circuit on Oct. 23, 2015. Hebenstreit v. Kaur, 2015 WL 6445461, at *2 (7th Cir. Oct. 23, 2015).