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Expanding The Ponzi Scheme Presumption, David R. Hague

Faculty Articles

Ponzi schemes and other investment frauds inevitably end up in bankruptcy or receivership, leaving behind numerous victims—many of whom invested their life savings in the scheme without any knowledge of its fraudulent nature. Although trustees and receivers can sometimes recover some of the fraudulently acquired funds from the assets of the perpetrators, in most cases, those assets fall woefully short of the victims’ losses. This leads to fraudulent transfer lawsuits (claw-back actions) against those who are suspected to have profited from the wrongdoing.

A transfer is fraudulent if it was made with the actual intent to defraud, but actual fraud …

International Financial Law: The Case Against Close-Out Netting, Vincent R. Johnson

Faculty Articles

In financial transactions today, a practice called “close-out netting” plays a key role in controlling and allocating risks. If anchored in the parties’ chosen contractual language and recognized by law, close-out netting can circumvent normal bankruptcy processes by providing for the acceleration of mutual obligations and the efficient calculations and settlement of the net balance. When correctly implemented, close-out netting can eliminate the risk that arises under ordinary bankruptcy principles.

Despite the support for close-out netting by lenders, scholars, regulators, and policy makers, a few attentive observers of financial law argue that close-out netting is unsound, and the argument against …

Postdefault Interest Rates In Bankruptcy, David G. Carlson

Faculty Articles

This Article shows that as Bankruptcy Code section 506(b) is currently written, postdefault interest rates are prohibited when the default is an “ipso facto event” — a filing for bankruptcy or insolvency as the event of a default. Yet some courts have insisted on postdefault interest in situations reinstating a loan agreement and have been ignoring restrictions on pendency interest to permit oversecured creditors from obtaining penalty rates of interest. This Article argues that those holdings violate section 506(b) and Supreme Court precedent. It begins with an analysis of ipso facto defaults, showing that the Bankruptcy Code prohibits ipso facto …