Templeton v. O'Cheskey (In Re American Housing Foundation)
785 F.3d 143
| 5th Cir. | 2015Background
- AHF, a nonprofit LIHTC developer run by Sterquell, raised capital through single-purpose limited partnerships (LPs); AHF or its subsidiaries acted as general partners and issued guaranties to investors including Templeton.
- Templeton invested over $2 million (part of >$5M overall investments) in five LPs between 2006–2008; some guaranty documents were poorly drafted and investments were partially "rolled over."
- Sterquell misused and diverted LP funds through interrelated entities (including AHFD), triggering AHF’s Chapter 11 filing; Sterquell died in 2009 and a Chapter 11 Trustee was appointed.
- Templeton filed claims in bankruptcy for reimbursement under AHF guaranties and for torts (fraud, breach of fiduciary duty, money had and received); Trustee sought to subordinate the claims (§510(b)) and to avoid alleged fraudulent (§548) and preferential (§547) transfers.
- The bankruptcy court found Templeton’s investments were equity in substance, subordinated his claims under §510(b), denied avoidance of fraudulent transfers (finding Templeton gave value in good faith), but avoided $157,500 in preferential transfers from AHFD; the district court affirmed.
- On appeal the Fifth Circuit affirmed subordination under §510(b), reversed the preference avoidance ruling (remanding to assess ordinary-course defense), and reversed/remanded the fraudulent-transfer/good-faith findings for further factual analysis.
Issues
| Issue | Templeton's Argument | Trustee's Argument | Held |
|---|---|---|---|
| Whether Templeton’s claims must be subordinated under 11 U.S.C. §510(b) | Claims are ordinary unsecured claims for guaranty breach and torts; not subordinable | Claims arise from purchase of LP securities (affiliate securities) and seek to recover equity, so §510(b) mandates subordination | Affirmed: All claims arise from purchase of affiliate securities and are subordinated under §510(b) |
| Whether LP interests are securities of an "affiliate" of AHF | LPs are separate entities; AHF was not necessarily party to LP agreements, so §510(b) shouldn’t apply | AHF controlled/operated the LPs (directly or via subsidiaries), so LP interests are securities of affiliates under §101(2)(C) | Held: LPs are affiliates (operated under agreements by AHF); securities of affiliates trigger §510(b) |
| Whether Trustee can avoid $157,500 in transfers under §547(b) (preference) | Transfers were ordinary-course payments (e.g., regular interest) and/or funds were not AHF’s property | Transfers came from AHFD account which was de facto controlled by AHF and were not in ordinary course due to fraud | Reversed and remanded: bankruptcy court’s avoidance of $157,500 vacated; remand to consider ordinary-course defense (business was not treated as a pure Ponzi scheme) |
| Whether Trustee can avoid ~ $1M as fraudulent transfers under §548 and whether Templeton has §548(c) good-faith/value defense | Templeton gave value and acted in good faith; therefore §548(c) protects him | Templeton did not give value to AHF (funds went to LPs) and was on inquiry notice of fraud/insolvency, so no good-faith defense | Reversed and remanded: bankruptcy court applied wrong good-faith standard and failed to resolve whether Templeton gave value to AHF; further findings required |
Key Cases Cited
- SeaQuest Diving, LP v. S&J Diving, Inc., 579 F.3d 411 (5th Cir. 2009) (policy rationale for §510(b) and broad reading of damages category)
- In re Telegroup, Inc., 281 F.3d 133 (3d Cir. 2002) (§510(b) prevents equity investors from using tort claims to equalize with general creditors)
- In re Lothian Oil Inc., 650 F.3d 539 (5th Cir. 2011) (recharacterization stems from bankruptcy court’s power to disallow claims)
- In re IFS Fin. Corp., 669 F.3d 255 (5th Cir. 2012) (de facto ownership/control of bank accounts can render account funds property of debtor’s estate)
- In re Southmark Corp., 49 F.3d 1111 (5th Cir. 1995) (control over accounts treated as part of debtor’s estate for preference law)
- In re Hannover Corp., 310 F.3d 796 (5th Cir. 2002) (value and good-faith issues under §548 and appellate review standards)
- In re Fairchild Aircraft Corp., 6 F.3d 1119 (5th Cir. 1993) (broad construction of "value" under Bankruptcy Code)
- Wider v. Wootton, 907 F.2d 570 (5th Cir. 1990) (transfers in Ponzi schemes are not in ordinary course for certain preference/exemption purposes)
- Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) (review judgments not opinions; affirm on any basis supported by record)