A bunch of people are getting sued in an Oklahoma bankruptcy court, because they received dividends paid to them as holders of priority stock in GMX Resources, Inc. which subsequently filed for Bankruptcy. I have to admit that when I heard this even I scratched my head a bit. This case is so strange that it took me a while even to figure out who the Plaintiff, one John P. Madden as Trustee of the GMX Resources Creditors Trust, was and what the heck he had to do with this. It took me a little while longer to figure out why I think that these cases should all be defensible by the stock holders. My defense strategy is complicated, but I am making sure that it is cost effective for even relatively small stock holders. So, if you have received a Summons and Complaint from John P. Madden – contact me or another attorney well versed in fraudulent transfer defense soon. As is generally the case when you get sued, time is not on your side.

The cause of action involved in these cases is a poorly named concept, “fraudulent transfer”. There are a number of varieties of a fraudulent transfer, some of which involve actual fraud; but the most common (and the one at issue here) doesn’t usually involve real fraud. To boil it down to its most basic elements, this variety of fraudulent transfer is:

• A transfer of an asset (cash dividend);
• Made for less than fair consideration (i.e., akin to a gift, no value received in exchange);
• At a time when the transferor (GMX Resources) was insolvent; and
• Made within two years (four years under the State law Uniform Fraudulent Transfers law) of the time the transferor (GMX Resources) filed for Bankruptcy.

Basically, the idea is that you don’t want people transferring assets without getting fair value back in return (kind of, giving stuff away) if they can’t afford to pay their creditors. In the context of a typical consumer fraudulent transfer case, why should a debtor give his old car worth $4,000 – $5,000 away to a friend when he can’t pay his creditors? Shouldn’t he have sold the car and paid his bills? So, the Bankruptcy Code allows for his Bankruptcy Trustee to get the car back, sell it and distribute the money out to the creditors. That fact scenario seems less offensive – unless, of course, you are the friend who was given the car!

What makes fraudulent transfers so much fun is that it is relatively easy for a Trustee to make what is called a prima facie case that the transfer should be avoided. Basically, that means a case that on its face is sufficient to support the cause of action. That is not the same thing as saying that the Trustee should automatically win. There are a number of defenses to fraudulent transfer actions, several of which I think are applicable to the case at bar.

One of the things that I think the Trustee is counting on in this case is that at first blush it looks like defending these cases is going to be outrageously expensive. I respectfully disagree.

Any lawyer who has been out of school for more than six months will tell you that any time you walk into a courtroom anything can happen. There are never any guaranties, and generally both sides are equally convinced that they are absolutely right. Still, there are some facts in this case that make the Trustee’s argument less than compelling; and if you have been sued or if you represent someone who has – give me a call. My contact information is in the right hand column.

Elaine