Bash v. Textron Financial Corp., 2015 U.S. Dist. LEXIS 5190

Background

Fair Finance (debtor) sold customer receivables to wholly owned subsidiary Fair SPE, which obtained a $50 million secured revolving loan from Fortress; Fortress took a security interest in the receivables and was repaid from collections.
Fair Finance principals Durham and Cochran diverted funds, ran up related‑party loan receivables, issued V‑Notes to investors, and were later convicted for fraud; the Trustee alleges Fair Finance operated as a Ponzi scheme.
After insolvency and involuntary bankruptcy, the Chapter 7 Trustee sued Fortress (and others) asserting avoidance and recovery claims under §§ 544, 547, 548, 549, 550, and state law — alleging actual and constructive fraudulent transfers and other relief.
The parties cross‑moved for summary judgment; the bankruptcy court recommended denying most relief and the district court reviews the R&R de novo.
Key disputed legal issues included (1) whether the receivables/transfers were property of the estate (veil‑piercing / true‑sale), (2) whether Fortress was a subsequent transferee, (3) whether Fair Finance was a Ponzi scheme so intent is presumed, and (4) whether Fortress took in good faith and for value (§ 548(c)).

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether transfers were property of the estate / whether to pierce Fair SPE’s veil	Trustee: Fair SPE was alter‑ego/used to further fraud; transfers are avoidable estate property	Fortress: Fair SPE was a properly maintained bankruptcy‑remote SPE and transfers were true sales	Genuine issue of fact exists on veil‑piercing and whether receivables were estate property; summary judgment denied
Subsequent‑transferee liability (can Trustee recover from Fortress without first avoiding transfer to Fair SPE)	Trustee: Section 550 allows recovery from subsequent transferee without prior successful avoidance of intermediate transfer	Fortress: Trustee must first avoid transfer to Fair SPE before recovering from subsequent transferee	Court adopts majority rule (Int’l Adm. Servs.) — Trustee need not first obtain avoidance, but complaint did not plead avoidance of the sale to Fair SPE, so Trustee cannot pursue Fortress as subsequent transferee of the receivables here
Actual fraudulent intent — Ponzi‑scheme presumption	Trustee: Fair Finance operated as a Ponzi scheme; intent to defraud is established as a matter of law	Fortress: Business was legitimate receivables buying/servicing; Ponzi presumption inapplicable; transfers not in furtherance	Court finds as a matter of law that Fair Finance operated as a Ponzi scheme and transfers to Fortress were made in furtherance of it; intent element satisfied
Good‑faith/value defense under §548(c)	Trustee: Fortress was on inquiry notice of red flags (growing related‑party loans, accounting changes, principals’ conduct) so cannot show good faith as a matter of law	Fortress: Performed due diligence focused on receivables; no objective red flags required a further inquiry; even if some signs existed, its investigation was diligent	Hybrid (subjective + objective) inquiry applies; genuine issues of material fact exist on whether Fortress had inquiry notice, pursued a diligent inquiry, and whether a reasonable investigation would have revealed the fraud — summary judgment denied
True‑sale defense to avoidability of sale to Fair SPE	Trustee: Sale was not a true sale (recourse, loss reserves, control retained) so transfers are avoidable	Fortress: Loan documents and true‑sale opinion show bona fide sale; structure insulated Fortress	Disputed facts in documents and intent preclude summary judgment for Trustee; true‑sale unresolved
Post‑petition transfers (§549) and damages/offsets	Trustee: Fortress received post‑petition transfers and must disgorge; no offset if not in good faith	Fortress: Whether funds were estate property and offsets available — disputed	Because estate‑property and good‑faith issues are disputed, summary judgment on §549 and damages is denied
Affirmative defenses (laches, waiver, judicial estoppel, estoppel/quasi‑estoppel)	Trustee: Trustee’s pre‑suit statements did not waive avoidance claims and do not trigger judicial estoppel; any inconsistent statements do not satisfy elements	Fortress: Trustee’s schedules, payoff agreement, and letters led Fortress to rely and suffer prejudice	Court: Grants summary judgment to Trustee on laches, waiver, and judicial estoppel; genuine issues remain on estoppel and quasi‑estoppel (reliance/detriment) so those defenses survive summary judgment

Key Cases Cited

Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
Anderson v. Liberty Lobby, 477 U.S. 242 (genuine dispute/materiality standards for summary judgment)
Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc., 67 Ohio St.3d 274 (veil‑piercing test in Ohio)
In re Int’l Adm. Servs., Inc., 408 F.3d 689 (11th Cir.) (Trustee may pursue subsequent transferee without first avoiding intermediate transfer)
New Hampshire v. Maine, 532 U.S. 742 (judicial estoppel doctrine)
In re Bernard L. Madoff Inv. Sec. LLC, 740 F.3d 81 (2d Cir.) (good‑faith/value defense discussion in fraudulent transfer context)
In re Bayou Group, LLC, 439 B.R. 284 (S.D.N.Y.) (Ponzi presumption discussion)
Perkins v. Haines, 661 F.3d 623 (11th Cir.) (transfers in furtherance of Ponzi scheme presumed fraudulent)