CyberNET Ponzi Bank Deposits Not Fraudulent Transfers

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By Daniel Gill

A bankruptcy trustee for a bogus company could recover from a bank certain loan repayments but not deposits, the Sixth Circuit held Feb. 8 ( Meoli v. The Huntington Nat’l Bank , 2017 BL 37852, 6th Cir., No. 15-2308/2362, 2/8/17 ).

The Huntington National Bank didn’t have “dominion and control” over the deposits because Cyberco Holdings Inc. remained free to withdraw money from the deposit account. So the deposits weren’t “transfers” subject to the trustee’s power to recover fraudulent conveyances, Judge John M. Rogers wrote in his opinion for the court.

The trustee could recover loan payments made after the date when the bank could no longer claim to be an innocent, good faith transferee, the U.S. Court of Appeals for the Sixth Circuit said.

Barton Watson created Cyberco, aka CyberNET, and Teleservices Group Inc. as part of an elaborate Ponzi scheme, the court said.

Both Huntington National Bank and the FBI discovered the fraud by 2004. Not long after the latter raided Cyberco’s offices, Watson killed himself by gunshot.

The company’s creditors put Cyberco into an involuntary Chapter 7 bankruptcy case in Dec. 2004. In Chapter 7, a debtor company’s assets are liquidated by a trustee, and the proceeds are distributed to creditors.

Teleservices was also declared bankrupt. Its Chapter 7 trustee sued Huntington National to recover payments from Teleservices on loans extended to Cyberco by the bank and deposits made to Cyberco’s account.

The bank argued it was a good faith transferee providing value in exchange for the transfers, but that defense requires that the bank receive the payments “without knowledge of the voidability of transfer,” the court said.

The bank lost its good faith defense when its investigator discovered Watson had a criminal record, had served time as a fraudster, and was banned by the National Association of Securities Dealers, the court said. Even though the investigator failed to alert the bank of these facts, the bank was found to have knowledge as of the investigator’s discovery.

The appeals court sent the case back to the lower courts to determine whether the bank had access to enough information to find that it had “knowledge of the voidability of the transfers” at an earlier time.

Judge David B. Sentelle of the U.S. Court of Appeals for the District of Columbia Circuit, sitting by designation, joined in the decision. Judge Karen Nelson Moore concurred, suggesting that the bank had enough information to justify a finding of “knowledge of the voidability of the transfer” at an earlier point in time.

Covington & Burling LLP represented the trustee. Mika Meyers PLC represented the bank.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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