Victims of Indianapolis businessman Tim Durham, who was convicted in 2012 of running a Ponzi that defrauded investors out of $200 million, have hit another roadblock after the 6th Circuit Court of Appeals rejected an attempt to recoup some of their losses.
In a Sept. 10 ruling in In re: Brian A. Bash, Chapter 7 Trustee v. Textron Financial Corporation, 20-3351, the unanimous appellate panel blocked the bankruptcy trustee’s effort to claw back the money Durham’s company, Fair Finance Co., had paid to Textron Financial Corp. as part of a $17.5 million revolving loan agreement. The circuit court, which described one of the trustee’s arguments as convoluted, affirmed the Northern District of Ohio Court’s decision to grant partial summary judgment to Textron and found no error in the lower court’s instructions to the jury.
Through its attorney, Textron declined to comment. Chapter 7 Trustee Brian Bash also did not respond to a request for comment.
Bash filed an adversary proceeding against Textron in 2011 and by 2018 it was the last major lawsuit remaining of the more than 140 he had filed. He alleged Textron knew Fair Finance was a “house of cards,” but continued to lend money to the Akron, Ohio-based company. Moreover, Textron protected itself from harm and “helped prevent public exposure of Fair Finance’s precarious financial condition.”
Textron was paid in full in 2007, and two years later Fair Finance’s Ponzi scheme was exposed. Bash asserted the millions of dollars in transfers to Textron were fraudulent under the Ohio Uniform Fraudulent Transfer Act.
The Ohio district court was not convinced. On remand, it tossed two of Bash’s arguments but allowed the third which held that the 2004 agreement was a novation, to go before a jury. Bash contended the lien Textron placed on the assets of Fair Finance in 2002 was erased and replaced by a new agreement the two businesses entered into in 2004.
However in March of 2020, the jury returned a verdict in favor of Textron which left Fair Finance’s investors empty handed.
Before the 6th Circuit, Bash argued the jury was given faulty instructions that misstated Ohio law and poisoned their verdict. The appellate court concluded if there was any error, it did not alter the jury’s final decision.
“The space between the trustee’s proposed instruction and the one given is razor thin, “Judge John Nalbandian wrote for the panel. “He asked for an instruction that said novation is never presumed but must be shown by clear and definite evidence. What he got was an instruction that said the novation must be shown by clear and definite evidence. Any possible error was harmless.”
Bash countered even with the jury verdict, the money transferred post-2004 could be retrieved because the 2004 agreement extinguished the 2002 debt and replace it with a new debt “obligation.” That new “obligation,” he told the court, is recoverable under the OUFTA.
Textron called the trustee’s argument a “semantic re-cloaking of the novation theory” and the 6th Circuit agreed.
“So if we presume, as the trustee’s argument does, that the 2004 Agreement renewed rather than novated the 2002 debt, then the 2004 agreement renewed rather than extinguished the 2002 debt obligation,” Nalbandian wrote. “And that means that there was no new ‘obligation incurred’ in 2004 that could be avoidable as a fraudulent transfer. This district court correctly rejected this convoluted argument… .”