Imputed and Traced

In Schmidt v. Rechnitz, the Fifth Circuit affirmed the bankruptcy court’s decision allowing a trustee to recover $10.3 million transferred to Shlomo and Tamar Rechnitz as part of a fraudulent scheme orchestrated by Mark Nordlicht, who had defrauded Black Elk Energy’s creditors.

The key issue was whether the Rechnitzes could claim they were good faith transferees under 11 U.S.C. § 550(b)(1), which would protect them from having to return the funds. The Court rejected their argument, holding that Nordlicht’s fraudulent knowledge, as their agent, was imputable to them.

The Court also upheld the bankruptcy court’s tracing methodology, which linked the funds received by the Rechnitzes to the fraudulent transfer orchestrated by Nordlicht. The Court concluded that the method used by the bankruptcy court, which assumed tainted funds were used first, was appropriate and not an abuse of discretion. No. 23-20386. Aug. 14, 2024.