This essentially completes the expropriation of victim property for the benefit of the unsecured creditors, who are scarcely entitled to enjoy this stolen property.
Being estopped from this defense, the third party must surrender the transferred asset to the bankruptcy trustee. Second, when the third party points out that the victims (not the bankruptcy trustee) own the cause of action for restoration of the loot, the third party is making an impermissible ius tertii defense.
This claim reduces to the theory that a thief should not restore the loot to the victim when it is costly to do so. First, tracing is impossible or too costly. There are only two justifications for this expropriation. When a bankruptcy trustee characterizes the asset as a fraudulently conveyed asset, the trustee expropriates the asset from the victim on behalf of the unsecured creditors of the Ponzi scheme. Wedbush sent confirmation emails for the wires, but the hacker intercepted them. Whitaker’s email account was infiltrated by a third-party hacker, who sent 374,960 in wire transfer requests to Wedbush. If victims of the fraud can trace the proceeds of their investments into property transferred to a third party, the third party holds the asset transferred in trust for the relevant victim. Futures commission merchant Wedbush Securities held funds for its customers James Whitaker and Pathology Institute. Virtually all the assets held by a Ponzi scheme are held in constructive trust for the victims of the fraud. I conclude that in most respects improvement and modernization is overdue, but should proceed carefully with due regard taken of the effect of broadly written fraudulent transfer statutes on commercial transactions.When Ponzi schemes collapse and enter into bankruptcy liquidation, bankruptcy trustees assume that conveyances made by the debtor for no consideration are fraudulent conveyances. Part III reviews the need and prospects for reform of Kentucky's laws. Part II contrasts that development with the existing law in Kentucky and other non-uniform states. In Part I of this article, I review the development of modem fraudulent transfer and preference law. This background suggests that Kentucky's singularity is perhaps not a good thing, but rather evidence of old laws left to languish long past their time. Indeed, most other states have declared their policy to permit preferences, almost as a fundamental right of debtors to pay any debts they might have at any time, regardless of the effect on other creditors. In addition, Kentucky is one of only three states allowing creditors to set aside preferences, a power reserved otherwise for bankruptcy or other insolvency proceedings. Kentucky is one of only eight states that have not adopted one of two uniform laws offered on the subjects in the past ninety years. The most recent of these laws were written 140 years ago. Both the singularity and age of these laws are easily established with a few examples. Kentucky has a unique and antique collection of laws governing fraudulent transfers and preferences.
Fraudulent transfers and preferences are recoverable in state law collective actions such as assignments for the benefit of creditors, or in a proceeding under the federal Bankruptcy Code. Recovery of a preferential transfer to one creditor, in theory, makes all of the debtor's property available for an orderly distribution to all creditors.
FRAUDULENT CONVEYANCE THIRD PARTY FULL
Second, even a transfer to another creditor for full value can be considered "preferential" to that creditor. First, a transfer to another creditor or a third party can be fraudulent as to one or all of the remaining creditors, or may be deemed to be fraudulent because of the circumstances surrounding the transfer, such as a transfer made by an insolvent debtor for less than fair value. A Delaware bankruptcy court recently weighed in on this issue in PAH Litigation Trust v. There are two principal ways a creditor can seek to have a debtor's transfer characterized as unfair in order to recover it. Courts disagree as to whether the amount that a bankruptcy trustee or chapter 11 debtor-in-possession ('DIP' ) can recover in fraudulent transfer avoidance litigation should be capped at the total amount of unsecured claims against the estate. An important part of the law of creditors' remedies is the ability of creditors to recover property formerly held by the debtor, but transferred to others under circumstances that are considered to be unfair or inequitable.
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