Macdonald | Fernandez LLP


221 Sansome Street
San Francisco, CA 94104
Telephone: (415) 362-0449
Facsimile: (415) 394-5544
914 Thirteenth Street
Modesto, CA 95354
Telephone: (209)549-7949
Facsimile: (209) 236-0172

Thursday, January 29, 2015

Cramming Down Secured Debt and the Section 1111(b) Counter-Measure

On Tuesday, February 10, 2015, the Commercial Law & Bankruptcy Section of the Bar Association of San Francisco will present a lunch program entitled "Cramming Down Secured Debt and the Section 1111(b) Counter-Measure," explaining the most significant moves a debtor can make to modify mortgages and other liens and the countermoves the credit might take.  Reno Fernandez is the Section's Immediate Past Chair.

Cramming Down Secured Debt and the Section 1111(b) Counter-Measure


Robert G. Harris

Binder & Malter


Michael St. James

St. James Law



• The Nuts and Bolts of Cramming Down a Secured Creditor

• The (Under) Secured Creditor’s Leading Counter-Measures

• Future Value, Credit Bidding, and How it all Plays Out in Practice

Time and Place

February 10, 2015
Noon to 1:30 pm

The City Club
155 Sansome Street
San Francisco, California


Tuesday, January 27, 2015

Second Circuit Rules Bankruptcy Code Section Section 546(e) Protects Fraudulent Transfers in Bernard Madoff Ponzi Scheme Case


In In re Bernard L. Madoff Investment Securities LLC, ___ F.3d ___, 2014 WL 6863608 (2d Cir. 2014), the U.S. Court of Appeals for the Second Circuit considered whether the “safe harbor” provision of Bankruptcy Code section 546(e) provides a defense against a trustee’s claims to avoid Ponzi scheme payments under state fraudulent transfer law made applicable by section 544(b), and under Bankruptcy Code provisions allowing the avoidance of “constructive” fraudulent transfers.  The court ruled that section 546(e) did apply, and affirmed the dismissal of such claims against the recipients of the transfers.

For a copy of the Second Circuit’s decision, please click here.


For some time, the bankruptcy trustee of a Ponzi scheme perpetrator has been able to recover from investors the "fictitious profits" paid to them in excess of their investments.  In Madoff, the trustee appointed to oversee the SIPA liquidation of Madoff Securities’ investment advisory unit (“BLMIS”) sought to avoid payments of fictitious profits to investors as “actual” and “constructive” fraudulent transfers under bankruptcy and state law. Certain customers defended on the ground that the transfers were protected by the safe harbor provision of section 546(e), prohibiting the trustee from clawing back their distributions because the payments were made by a stockbroker “in connection with a securities contract” or, alternatively, because they were “settlement payments” made by a stockbroker.

After withdrawing the reference in multiple adversary proceedings, the U.S. District Court for the Southern District of New York (the “District Court”) dismissed the trustee’s “constructive” fraudulent transfer claims under section 548(a)(1)(B) and his state law fraudulent transfer claims (asserted pursuant to section 544) due to the applicability of section 546(e)’s safe harbor. SIPC v. BLMIC, 476 B.R. 715, 722 (S.D.N.Y. 2012).  The District Court also ruled that section 546(e) did not bar the trustee from avoiding “actual” fraudulent transfer claims asserted under section 548(a)(1)(A).  Id.  The trustee appealed as to the first ruling, and the Second Circuit affirmed.


Section 546(e) provides, in part, that notwithstanding sections 544 and 548(a)(1)(B) of the Bankruptcy Code, a trustee may not avoid a prepetition transfer that is a “settlement payment” made by or to (or for the benefit of) a stockbroker, or that is a transfer made by or to (or for the benefit of) a stockbroker “in connection with a securities contract.”  This safe harbor has been steadily expanded to embrace more transactions. The Second Circuit and other courts interpreting section 546(e) have acknowledged the breadth of the coverage of this safe harbor and have largely applied the plain language of the provision to broadly immunize enumerated transactions from avoidance even where the transactions at issue arguably did not impact the financial markets.

In Madoff, the Second Circuit imposed a broad and literal interpretation of section 546(e) in examining whether the agreements between BLMIS and its customers constituted “securities contracts” as defined in section 741(7) of the Bankruptcy Code, and whether the payments were made “in connection with” a securities contract. The trustee argued, among other things, that section 546(e) did not apply because BLMIS never actually initiated, executed, completed or settled any securities transactions. But the Second Circuit found that section 546(e) does not require an actual purchase or sale of a security. Rather, the transfer need only be broadly related to a securities contract and not an actual securities transaction. The Second Circuit also concluded that the interpretation of section 546(e) espoused by the trustee would in that case risk the very sort of market disruption Congress was concerned with when it enacted the provision.  Noting that BLMIS’ clients had every reason to believe that BLMIS was engaged in actual securities transactions, the Second Circuit ruled that they had every right to avail themselves of the protections afforded by section 546(e) because their agreements were “securities contracts” and because the payments made to them were “settlement payments,” as defined in section 741(8). The Second Circuit also rejected SIPC’s argument that Ponzi scheme payments are, by definition, not made “in connection with” a securities contract.


This is the latest in a string of decisions from the Second Circuit that broadly construe the section 546(e) safe harbor in accordance with the statute’s plain language.  There is a certain irony in the court’s holding, given that the profits of the Ponzi scheme were fictitious because the investment account was itself fictitious. This decision should provide comfort to recipients of transfers made in connection with both actual or purported securities transactions.

These materials were written by Iain A. Macdonald, the senior partner of MACDONALD | FERNANDEZ LLP in San Francisco, California.  Editorial contributions were provided by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, California.

Monday, January 26, 2015

Cities in Distress: Is Chapter 9 the Best Vehicle for Saving Cities and Providing Needed Governmental Services?

On Thursday, January 29, 2015, the Bay Area Bankruptcy Forum in cooperation with the Commercial Law & Bankruptcy Section of the Bar Association of San Francisco will present "Cities in Distress:  Is Chapter 9 the Best Vehicle for Saving Cities and Providing Needed Governmental Services?"  This program was a big hit at last year's Northern District Judicial Conference.  Come and help us further the discussion on this interesting topic!

Is Chapter 9 the Best Vehicle for Saving Cities and Providing Needed Governmental Services?

Moderated by:


Honorable Hannah L. Blumenstiel
United States Bankruptcy Judge


Panelists include:


Professor Michelle Wilde Anderson
Professor of Law, Stanford Law School


William A. Brandt, Jr.
President and CEO, Development Specialists, Inc.  and
Chair, Illinois Finance Authority


James E. Spiotto
Managing Director, Chapman Strategic Advisors LLC

Time and Place:

January 29, 2015
5:00 to 7:00 pm

The City Club
155 Sansome Street
San Francisco, California

Bay Area Bankruptcy Forum members, RSVP here.

Bar Association of San Francisco members, RSVP here.

Reno Fernandez is a member of the board of directors of the Bay Area Bankruptcy Forum and immediate past chair of the Commercial Law & Bankruptcy Section

Tuesday, January 20, 2015

Insolvency 101: Evaluating an Insolvent Entity and Rehabilitation Strategies

We are pleased to announce that Roxanne Bahadurji is organizing a program entitled "Insolvency 101:  Evaluating an Insolvent Entity and Rehabilitation Strategies" for the California Bankruptcy Forum's annual Insolvency Conference, set for Saturday, May 16, 2015, at 1:45 pm.  The program description is as follows:
The rehabilitation of a corporation is a delicate process often involving a variety of complex issues. In the context of a hypothetical reorganization, the panelists will identify some of the usual suspects that lead corporations into dire financial straits, how to address these issues from a practical standpoint, and how to evaluate the available reorganization mechanisms. In so doing, the panelists will discuss various insolvency tools, including receiverships, assignments for the benefit of creditors, distressed work-outs, and, of course, bankruptcy, and the pros and cons of each for debtors and creditors.

This is sure to be an excellent program.  Read more here, and register here.

Saturday, January 17, 2015

UCC Lien Priorities Altered When One Creditor Breaches Fiduciary Duties to Another Creditor

In Feresi v. Livery, 2014 LEXIS 1138 (Cal.App. 2d Dist. Dec. 15, 2014), a California court held that equitable principles control over the Uniform Commercial Code's priority scheme when a creditor breaches its fiduciary duty owed to another creditor.
Mesa and Faresi were husband and wife, respectively.  Feresi obtained a stake in a limited liability company -- half of the 25% she owned with Mesa -- pursuant to a judgment dissolving the marriage.  The husband granted the wife a lien against his 12.5% interest to secure other obligations related to the divorce.  However, he did not perfect the lien by filing a UCC Financing Statement.  The wife promptly notified the company's manager of her own 12.5% ownership stake and her lien against her former husband's 12.5% interest.
Thereafter, the manager made a loan to the husband and took a security interest in his 12.5% interest.  The husband defaulted on his obligations to his former wife, who attempted to foreclose her lien.  When the manager learned of the foreclosure attempt, he filed a UCC Financing Statement to perfect his lien.  
The wife's foreclosure was successful.  The husband later defaulted on his indebtedness to the manager.  The manager claimed a senior lien and attempted to foreclose his lien against the portion of the company now owned by the wife.  Specifically, the manager argued that the wife's lien was unperfected.
Although the court acknowledged that the manager's lien was senior to earlier unperfected liens, the UCC provides that that the code is supplemented by principles of law and equity.  Moreover, the court found that the manager owed fiduciary duties to the company's members (including the wife), and perfecting his lien ahead of the wife without her knowledge breach his fiduciary duties.  Accordingly, the court ruled that the wife holds her membership interest free and clear of the manager's lien.
This result cuts against the strict, predictable order of priorities under the UCC, and it is sure to cause commercial lawyers significant heartburn.  It is important to note that pursuant to Bankruptcy Code Section 544, an unperfected lien is avoidable regardless of the debtor's actual knowledge of other liens.

Friday, January 16, 2015

Top Ten California State Bar Insolvency Law Committee eBulletins Now Available Online!

The Insolvency Law Committee of the State Bar of California's Business Law Section has posted its top ten eBulletins for 2014!  Read more here.

Tuesday, January 13, 2015

Reno Fernandez Recognized as Outgoing Chair of BASF Commercial Law & Bankruptcy Section

Reno Fernandez ended his three-year term as chairperson of the Bar Association of San Francisco's Commercial Law & Bankruptcy Section, and the section thanked him for his service at a luncheon today by presenting him with a commemorative gavel.  Reno feels honored to have had the privilege of supporting the bankruptcy bar.

Medical Debt Collectors and the Telephone Consumer Protection Act

A court has ruled that a medical debt collector may make automated collection calls to a patient's cell phone notwithstanding the fact that the patient's wife provided the number to the hospital, not the collector.  Specifically, the United States Court of Appeals for the Eleventh Circuit reversed a district court's grant of summary judgment in a Telephone Consumer Protection Act (“TCPA”) action against a medical debt collector under the so-called “prior express consent” exception.  

In Mais v. Gulf Coast Collection Bureau, Inc., Case No. 13-14008 (11th Cir. 2014), the Eleventh Circuit focused upon a 2008 ruling of the Federal Communications Commission (“FCC”), which held that calls to wireless telephone numbers provided in connection with a pre-existing debt are permissible as calls made with the prior express consent of the called party.  23 FCC Rcd. 559, 564.
After receiving radiology treatment, the patient's wife signed hospital admission forms on behalf of the patient and provided the patient's mobile telephone number.  She also acknowledged receipt of the hospital privacy notice, which permitted it to use and disclose health information to bill and collect payment.  The number was eventually provided to Gulf Coast Collection Bureau, which is a debt collector that uses an automatic dialer to call telephone numbers and leave messages.  

The patient sued Gulf Coast, alleging inter alia that such collection practices violate the TCPA because the telephone phone number was provided to the hospital, not Gulf Coast.  The district court granted summary judgment in favor of Mais.  On appeal, the Eleventh Circuit reversed.
The Eleventh Circuit found that the FCC ruling was intended to reach a wide range of creditors and collectors, including medical debt collectors. Therefore, prior express consent was obtained in accordance with the ruling.  Moreover, the court held that there was no practical distinction between the patient providing his telephone number directly and disclosure by an intermediary because the main issue is whether the party gave consent to be contacted, not whether the number was provided directly.

This ruling raises a question as to how attenuated or distant must the connection be between the collector and the debtor before they fall out of the prior express consent exception.  Disputes over tracing such tenuous connections appear ripe for litigation.

Wednesday, January 7, 2015

Chapter 11 Bankruptcy in a Nutshell

Reno Fernandez spoke on this panel for the 2014 California State Bar Annual Meeting entitled "Chapter 11 in a Nutshell."  The video is now available here.

Viewers earn one hour of MCLE credit as well as one hour of Legal Specialization in Bankruptcy Law credit.

This program will take the mystery and confusion out of the Chapter 11 bankruptcy process.  Learn the basics of Chapter 11 from the filing of the bankruptcy petition and first day motions through confirmation of a plan of reorganization.