1. Why does Kelley believe that Cypress acted in bad faith?

2. Why did Kelley sue Cypress in the first place? 

3. Isn’t Cypress a victim here? If there was no indication that Cypress knew that Petters was running a Ponzi scheme, should it be held responsible for paying back any money it received? Is it fair to the other investors who lost all of their money in the scheme if Cypress is allowed to keep the money it received?

In 2009, Thomas Petters (Petters) was convicted of operating a $3.6 billon Ponzi scheme and sentenced to 50 years in jail. Using Petters Company Inc. (PCI) as a vehicle for accepting investors’ money, Petters fraudulently convinced investors that he was purchasing electronic goods and selling them to large retailers. One of those investors was Cypress Financial Trading Company, L.P. (Cypress). During the Ponzi scheme, Cypress was paid more than $11.4 million. After the Ponzi scheme was uncovered, PCI filed for bankruptcy and attorney Douglas Kelley (Kelley) was appointed as bankruptcy trustee. In his attempt to recover as much as possible for the bankruptcy estate, Kelley sued Cypress and its individual partners, alleging that the funds paid to Cypress were fraudulent transfers. Cypress then filed a petition for bankruptcy, reporting that it had no assets. In response, Kelley filed a motion to have Cypress’s bankruptcy petition dismissed on the basis that it was filed as a litigation delay tactic and therefore constituted a bad faith filing. The Bankruptcy Court denied the motion and Kelley appealed.

The U.S. District Court for the Northern District of Texas reversed the Bankruptcy Court’s decision and ruled in favor of Kelley. The court noted that the twin pillars of bankruptcy are: (1) the discharge of the debtor; and (2) the satisfaction of valid claims against the estate. Since Cypress is a corporation, it may not obtain discharge from a Chapter 7 filing. Therefore, the first pillar of bankruptcy could not be achieved through this bankruptcy filing. Additionally, since Cypress has no assets for the trustee to liquidate to pay claims, it cannot achieve the second pillar of bankruptcy. The court reasoned that since neither pillar of bankruptcy could be achieved, none of the parties to this bankruptcy proceeding will be prejudiced by dismissal.

“A finding of bad faith can be cause for dismissal of a Chapter 7 proceeding. [E]very bankruptcy statute since 1898 has incorporated literally, or by judicial interpretation, a standard of good faith for the commencement, prosecution, and confirmation of bankruptcy proceedings . . . Resort[ing] to the protection of bankruptcy laws is not proper when ‘there is no going concern to preserve, there are no employees to protect, and there is no hope of rehabilitation’ . . . No legitimate end will be served by keeping this case on the docket.”