Article Courtesy of Clint Culpepper (Baker Botts)
Schmidt v. Nordlicht (In re Black Elk Energy Offshore Operations, LLC), 649 B.R. 249 (Bankr. S.D. Tex. 2023)
In In re Black Elk Energy Offshore Operations, LLC, a partnership created and operated an investment fund to finance a natural gas company (the debtor) owned and operated by the partnership. To invest in the fund, investors signed a contract acknowledging that a specific principal of the partnership had the power to act as an agent for the fund. Years later, both the partnership and the debtor became insolvent. The partnership sold all the debtor’s assets, and the debtor filed for bankruptcy. The money from the asset’s sale was supposed to pay the debtor’s secured creditors; instead, the agent took $125 billion from the sale and funneled it as profits to the fund instead of paying the creditors. Upon discovering the fraudulent act, the debtor’s bankruptcy trustee sued the fund investors seeking to recover the $125 billion. The investors maintained an affirmative defense of good faith, claiming they lacked knowledge of the agent’s actions and did not consent to the agent’s fraudulent dealings. The trustee moved for partial summary judgment, asking the court to deny the investors’ good faith defense.
An agency inquiry notice determination consists of three elements: (1) whether the principal was the investor’s agent; (2) whether, through agency, the principal imputed his knowledge to the investors; and (3) whether that knowledge would put the investors on notice. The court held that all three elements were satisfied. The court denied both arguments because the agent acted in the investors’ best interest in funneling money to the fund and that the agent did not exceed his authority because his crimes were foreseeable given his job duties. The court granted partial summary judgment in favor of the bankruptcy trustee.
