Fraudulent conveyance litigation, whether filed in federal or state court, is typically designed to recover assets intentionally transferred to a third party as part of a debtor’s scheme to avoid the claims of its creditors. What is often misunderstood in such litigation is whether a defendant’s lack of knowledge regarding the debtor’s fraudulent intent warrants a motion to dismiss. Unfair as it may seem, the U.S. Court of Appeals for the Third Circuit has recently confirmed that only the debtor’s intent is relevant in SB Liquidation Trust v. Preferred Bank (In re Syntax-Brillian), 2014 U.S. App. LEXIS 15359 (3d Cir. Aug. 11, 2014). This decision sends a clear message to defendants facing intentional fraudulent-transfer actions that, although their lack of knowledge may provide an affirmative defense, it does not prevent such claims from going forward.
In Syntax-Brillian, a liquidation trust was established pursuant to the debtor’s Chapter 11 liquidation plan. All of the estate’s causes of action were vested in the trust. The trust sued Preferred Bank, seeking, inter alia, to avoid and recover allegedly fraudulent transfers under the fraudulent transfer avoidance provisions of the U.S. Bankruptcy Code and the Delaware Uniform Commercial Code.
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