Once upon a time a good way to commit oil patch theft was to back a truck up to the tank battery in the middle of the night, fill ‘er up, and drive off into the darkness. In re: Black Elk Energy Offshore Operations LLC shows that modern methods don’t require heavy machinery.
The facts
Black Elk was an offshore Gulf of Mexico operator in financial straits, plagued by rampant mismanagement, poor financial planning and “opulent spending by executives and employees”. After an explosion on one platform the regulators shut down another one, and Black Elk declared bankruptcy. The trustee initiated an adversary proceeding to recover money received by favored investors Schlomo and Tamar Rechnitz.
Anticipating Black Elk’s insolvency, Nordlicht, the boss of Black Elk’s controlling shareholder, concocted a scheme to pay the Rechnitzes rather than paying Black Elk’s substantial debts. Nordlicht was found to have defrauded Black Elk’s creditors of $80 million by a complex series of machinations involving (among other moving parts) the sale of Black Elk’s best assets for $125 million, issuance of Series B equity shares to the Rechnitzes, having the Rechnitzes appoint him as their agent for all Black Elk transactions, creation of a special purpose entity to hold bonds, rigging a vote to subordinate the bonds to equity holders through manipulation of entities secretly controlled by Nordlicht, the result of which was the transfer $10.3 million to the Rechnitzes.
Fraudster’s knowledge was imputed to the transferees
The question for the bankruptcy court was whether the Rechnitzes received Black Elk’s funds in good faith and whether their payment was properly traced to Nordlicht’s acts of fraud. In allowing the trustee to recover the $10.3 million the court rejected their argument that they were protected because they were good faith transferees.
Under Bankruptcy Code Sections 544, 548 and 550, a bankruptcy trustee may avoid or unwind transfers of a debtor’s assets and recover property from a transferee unless the transferee received the property in good faith and without knowledge of the voidability of the transfer.
The court’s decision turned on whether Nordlicht’s knowledge as the Rechnitzes’ agent was imputed to them as principals. They argued that Nordlicht acted outside the scope of his agency and that they should not be charged with knowledge of his fraudulent activities. Their hole card was that the trustee did not prove that they personally knew about Nordlicht’s wrongdoing and that their knowledge cannot be imputed or constructive. The court disagreed. Personal knowledge was not required.
Tracing
To decide the fraudulent transfer claim the court had to trace the funds paid to the Rechnitzes back to the proceeds received from the sale of the assets. The court found expert reports for both sides to be unsatisfactory and based the damage award on its own review of the flow of funds.
Tracing is a ”tool of equity” and the court’s conclusion was subject to review under an abuse of discretion standard. In other words, the ruling must have been so arbitrary and unreasonable as to constitute a clear and prejudicial error of law, or if it clearly fails to correctly analyze or apply the law.
Here, great musicians who were called to the celestial chorus before their time (we’re going beyond the usual rock and roll suspects):
Tim Buckley
Sandy Denny
Charlie Parker
Gram Parsons
Townes Van Zandt
Mozart
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