Earlier this month, the chapter 11 trustee (the "Trustee") in the DBSI bankruptcy began filing adversary actions seeking the avoidance and recovery of alleged fraudulent transfers. The Trustee filed the adversary actions against various defendants, some of whom the Trustee identifies as "John Doe 1 -10." This post will look briefly at the DBSI bankruptcy proceeding, why DBSI filed for bankruptcy, as well as some of the events that have transpired since the compnay filed for bankruptcy.


On November 10, 2008, DBSI, Inc. (“DBSI” or “Debtors”) filed petitions for chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. As reflected in the Declaration of DBSI’s CEO, Douglas Swenson, (read the DBSI Declaration here), at the time it filed for bankruptcy, DBSI described itself as a conglomerate of real estate entities valued at over $2.65 billion. From its beginnings in 1980, to the date that it filed for bankruptcy, DBSI claimed to have raised over $1.5 billion in capital, allowing it to operate numerous commercial real estate projects and businesses. At the time the company filed for bankruptcy, DBSI employed 131 employees.

Not Your Ordinary Chapter 11 Bankruptcy

According to the Debtors’ bankruptcy petition, DBSI’s 50 largest unsecured creditors hold claims ranging from $26.7 million to $2.4 million (read the DBSI bankruptcy petition here). In a more “typical” bankruptcy, these creditors would consist of large trade vendors of the debtor, or unsecured lenders and stakeholders in the bankrupt company. For DBSI, however, all fifty of its largest unsecured creditors are individuals, not corporations.

The reason individuals have such large stakes in DBSI, instead of corporations, has to do with the nature of its business. DBSI generated revenue through the creation of tenants-in-common real estate transactions. Under such transactions, DBSI acquired an interest in commercial or residential real estate and then sold off fractional interests of the real estate to investors as tenants-in-common. DBSI then entered into master leases with the tenants-in-common investors, subleasing the property to commercial tenants. DBSI collected rent from the tenants, paying the operating expenses for the venture, and keeping a management fee for itself and distribute the proceeds to investors.

The Slide Into Bankruptcy

DBSI provided four reasons for its bankruptcy filing: the credit crisis, rising costs, a weakening real estate market and various activities by stakeholders. Without lenders providing capital, DBSI could not continue its real estate purchase and sales operations. Additionally, with costs rising, many of DBSI’s master lease programs became unprofitable. Next, the drop in real estate values interrupted DBSI’s ability to market land collateral for its bond and note debtor-entities. Finally, some of the Debtors’ investors commenced actions in court seeking temporary restraining orders against DBSI. Combined, these events led DBSI to seek restructuring in bankruptcy court.

Appointment of the Chapter 11 Trustee

On August 14, 2009, the Bankruptcy Court appointed the Trustee. Prior to the Trustee's appointment, the bankruptcy was managed by DBSI as debtors in possession. On October 26, 2010, the Bankruptcy Court confirmed the Second Amended Joint Chapter 11 Plan of Liquidation (the "Plan"). Under the Plan, the "DBSI Estate Litigation Trust" was created whereby the Trustee was granted the authority to prosecute and settle estate causes of actions. Acting under this authority, the Trustee commenced the avoidance actions.

In some of the adversary complaints, the Trustee alleges DBSI engaged in fraudulent schemes. According to the Trustee, DBSI's cost structure prevented it from operating at a profit. Starting in 2004, the Trustee alleges that DBSI "took on the characteristics of a Ponzi scheme" whereby its guaranteed returns to investors were maintained through the intake of new investors. By 2006, the company was facing serious cash shortages. By the Fall of 2008, DBSI quit making payments to its TIC investors and certain note and bond holders.

Fraudulent Transfers

Through certain of the adversary complaints, the Trustee seeks to avoid and recover what he claims are fraudulent transfers. Specifically, the Trustee claims that during the four years prior to DBSI filing for bankruptcy, the company made transfers to certain parties while DBSI was either insolvent or had assets that were "substantially small." The Trustee brings these fraudulent transfer claims under both the Bankruptcy Code and applicable state law.

The DBSI bankruptcy proceeding, including the adversary actions filed by the Trustee, are before the Honorable Peter J. Walsh. Judge Walsh previously served as Chief Judge of the Delaware Bankruptcy Court. The Chapter 11 Trustee for DBSI is represented by the law firm Gibbons P.C. Below are links to prior posts I have written regarding issues relevant to fraudulent conveyance actions and/or avoidance actions:

What is a Fraudulent Transfer? Decision in Elrod Holdings Explains

Defending Avoidance Actions: The "Settlement Payment" Safe Harbor Receives Broad Interpretation Under In re Elrod Holdings