Major Victory For Diamond McCarthy in the Dreier Bankruptcy Case
June 21, 2011
On Thursday, the U.S. Bankruptcy Court for the Southern District of New York rejected in principal part the motions filed by four hedge fund groups — Amaranth, Patriot, Novator, and Xerion (the “Funds”) — seeking dismissal of the adversary proceedings brought by Sheila M. Gowan, Chapter 11 Trustee for Dreier LLP, represented by Diamond McCarthy LLP. Dreier LLP was a 200-plus attorney law firm with its main office in New York, NY. Its founder, Marc Dreier, was charged with, and ultimately convicted of, operating a massive Ponzi scheme involving the sale of $700 million in fictitious notes to investors, primarily hedge funds. After Marc Dreier’s arrest, Dreier LLP was placed into bankruptcy, and Ms. Gowan, a partner of Diamond McCarthy LLP, was appointed Chapter 11 Trustee.
Represented by Diamond McCarthy LLP, the Trustee brought preference and fraudulent transfer claims against several of the hedge funds that received payments from Dreier LLP as part of Marc Dreier’s Ponzi scheme. The Funds moved to dismiss the complaints but the Bankruptcy Court rejected their principal arguments in three decisions totaling 140 pages:
• The Funds argued that the money Dreier LLP transferred to them was not property of the bankruptcy estate because Marc Dreier had forfeited that money to the federal government in connection with his criminal conviction. The bankruptcy court rejected that argument holding that the criminal orders at issue did not forfeit that money.
• The Funds argued that the money Dreier LLP transferred to them was not property of the bankruptcy estate because the money was transferred from an account nominally labeled an attorney escrow account. But the Bankruptcy Court ruled that the account’s label was not dispositive. What mattered was whether the money transferred to the Funds was held subject to a trust agreement which, the Court found, the Funds could not establish at the motion to dismiss stage.
• The Funds argued that the Trustee’s actual fraudulent conveyance claims must be dismissed because she did not allege that the Funds had actual fraudulent intent. The Bankruptcy Court resolved conflicting case law regarding whether claims of actual fraudulent transfer require proof of actual fraudulent intent on the parts of both the debtor and the transferee, holding that the Trustee need not plead or prove the Funds’ actual fraudulent intent.
• The Trustee relied upon the “Ponzi scheme presumption” to establish Dreier LLP’s actual fraudulent intent. Pursuant to this presumption, all of a Ponzi schemer’s transfers made pursuant to the scheme are presumed made with the actual intent to defraud creditors. Patriot argued that the Ponzi scheme presumption no longer applied in the Second Circuit, but the Bankruptcy Court rejected this argument.
The Funds are represented by Wachtell, Lipton, Rosen & Katz; Davis Polk & Wardwell LLP; Winston & Strawn LLP; and Weil Gotshal LLP. Xerion settled the Trustee’s claims against it prior to the Bankruptcy Court’s ruling by agreeing, among other things, to pay the Dreier LLP estate the sum of $11.5 mm in cash.
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