BANKRUPTCY CORNER
BANKRUPTCY CORNER
Agent ’ s Knowledge is Imputed to the Principal
JASON S . RIGOLI
The intersection of the principal-agent relationship and bankruptcy has come to the fore for the second time in the last couple of years , this time in the Fifth Circuit case of Schmidt v . Rechnitz ( In re Black Elk Energy Offshore Operations ,
LLC ), Case No . 23-20386 , --F . 4th -- , 2024 U . S . App . LEXIS 20540 , 2024 WL 3800650 ( 5th Cir . Aug . 14 , 2024 ) . to retain the benefits of an agent ’ s fraud .
Id . at * 12-14 . Further , “‘ the knowledge of an agent acquired while acting within the scope of his or her authority is imputed to the principal ,’” id . at 15 ( citations and alterations omitted ), even to criminal acts provided they are foreseeable considering the agent ’ s duties . Id . ( quotations marks and citations omitted ).
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In Black Elk , Mark Nordlicht defrauded the debtor ’ s creditors out of nearly $ 80 million and transferred those funds to his hedge fund , Platinum Partner ’ s investors . 2024 U . S . App . LEXIS at * 1 . Platinum was the controlling shareholder in the debtor .
Id . at * 2 . Nordlicht caused Platinum to create a fund to raise capital for the debtor .
Id . The Rechnitzes were investors in Platinum and Nordlicht convinced them to invest in the Black Elk fund . Id . at * 2- 3 . Yet another Platinum entity , for which Nordlicht was the managing member , was named as agent “‘ handling and managing the [ PPBEO ] investment ’ for them .” Id . at * 3 and fn 2 .
Black Elk ultimately filed for bankruptcy and the trustee sued the Rechnitzes to avoid and recover $ 10.3 million under 11 U . S . C . §§ 548 and 550 . The issue , with respect to the transfers from Black Elk , was whether the Rechnitzes were good faith transferees from whom the Bankruptcy Code specifically says a trustee cannot recover . Id . at * 11 ( citing 11 U . S . C . § 550 ( b ) (“ the trustee may not recover from a transferee who ‘ takes for value . . . in good faith , and without knowledge of the voidability of the transfer avoided .’").
The problem for the Rechnitzes arises from the agency agreement they entered with Nordlicht ’ s Platinum Entity . The Fifth Circuit held that the use of the term “ knowledge ” in § 550 ( b )( 1 ) did not sever the common law principles that the knowledge of an agent is imputed to the principal or that a principal is not entitled
In Black Elk , Nordlicht was on both sides of the fraud with full power and discretionary authority through the agent entity , resulting in his knowledge being imputed to the Rechnitzes ( the principals ) rendering the defense in § 550 ( b )( 1 ) unavailable .
In Black Elk , the applicable agency law was either Delaware or Texas , but the parties agreed that for purposes of the decision there was no meaningful difference between the laws . It appears that applying Florida agency law , the result would be the same . See e . g ., Lemand Invs ., LLC v . RGF Athena , LLC , 2024 Fla . App . LEXIS 2513 at * 14-15 ( Fla . 3d DCA Apr . 3 , 2024 ( citing Seidman & Seidman v . Gee , 625 So . 2d 1 , 3 ( Fla . 3d DCA 1992 ); Nerbonne , N . V . v . Lake Bryan Int ' l Props ., 685 So . 2d 1029 , 1031 ( Fla . 5th DCA 1997 ); O ' Halloran v . PricewaterhouseCoopers LLP , 969 So . 2d 1039 , 1045 ( Fla . 2d DCA 2007 )).
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
1
The other case is Bartenwerfer v . Buckley , 598 U . S . 69 , 143 S . Ct . 665 , 214 L . Ed . 2d 434 ( 2023 ), where the U . S . Supreme Court held that the Debtor was liable for her partner ’ s fraud under applicable partnership / principal-agent law .
2
11 U . S . C . §§ 101 , et seq .
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