How Bankruptcy Came Back to Bite a Company with Loose Lips…

Section 548, the fraudulent transfer portion of the Bankruptcy Code, is placing more emphasis on the importance of what is said. The law firm of Powell Goldstein, LLP highlighted two recent bankruptcy cases where loose lips from defendants came back to bite them.

In the recent bankruptcy hearing for Teligent Inc. in New York, the former CEO and chairman had in his employment agreement that a $15 million loan would be forgiven only if he left the company for “good reason” or was terminated other than “for cause.” The company switched hands several years after the agreement was signed and the CEO decided to part ways. He filed a separation agreement which reasserted that the loan would be forgiven and was terminated other than “for cause.” The trustee sued the CEO under section 548, alleging any forgiveness of the loan would constitute fraud. The reason being: at the time of his departure the CEO gave an interview to a local newspaper and was quoted in the article as saying he was dissatisfied with the new owners and wanted to explore new opportunities. The court found this evidence persuasive and voided the release, which deemed him liable for the loan. According to Powell Goldstein, if the CEO had simply declined to comment as to the reasons for his
departure, the outcome would have been different. The law firm remained that “a release can constitute a transfer under section 548.”

The second case Powell Goldstein highlighted involved Student Financing Corp. (SFC), which approached SWH Funding Corp.—the two having had a long-term relationship—for an $80 million loan. There was an application fee of $400,000 required by SWH. A little while later, SFC changed its mind and backed out, only to come back after a couple weeks to re-pursue the loan. SWH charged an additional $250,000 application fee. In the end, the loan was denied. During SFC’s bankruptcy case, the trustee sued SWH for the $650,000 on the grounds that the lender was attempting to hinder, delay and defraud creditors.

The trustee’s case relied on an email written by SWH’s president to SFC’s attorney that said, “No joke, you know from the last SFC deal we have no money. We were just using the old ‘the documents aren’t done’ to get out of financing.” SWH’s president said that the remark was supposed to be sarcastic, and of course, the bankruptcy case disagreed. Powell Goldstein reminded that, “the moral of the story is to write emails cautiously.”

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