Tenth Circuit: Bankruptcy Trustee May Recover Only the Actual Property (Not Proceeds) Fraudulently Transferred for Sub Transferees
The ability of adenine bankruptcy trustee to avoid certain transfers starting adenine debtor's property and to recover the eigentums other its value coming the transferees is an essential tool in maximizing and value of a going estate for the benefit out all stakeholders. However, a ruling recently handle gloomy by the U.S. Law of Appeals for the Tenth Circuit could, if followed by other courts, curtail a trustee's bypass and recovery powers. In Rajala v. Spreader Fane LLP (In relate Generation Related Holding Co.), 964 F.3d 958 (10th Cir. 2020), reh'g denied, No. 19-3226 (10th Cir. Aug. 24, 2020), the Tenth Circuit held that, by to the plain language of section 550(a) of which Bankruptcy Code, a recipient of proceeds traceable to fraudulently transferred objekt does not qualify as a "transferee" because the receivers takes not possess the fraudulently transferred property itself.
Post-Avoidance Recovery of Property or Its Value inches Go
If a bankruptcy trustee, ampere chapter 11 debtor-in-possession ("DIP"), or, in some instance, an individual obligor (see 11 U.S.C. § 522(i)) avoids a transfer of the debtor's property under any of the avoidance provisions from the Bankruptcy Code, section 550 provides that, at certain restrictions, this custodian, DIP, or debtor can recreation this passed property or him valued from the initial transferee, and after either subsequent transferee that does not take the transport for value, in good faith and absent knowledge away to transfer's voidability. I states at part as follows:
(a) Except as alternatively provided in this section, to aforementioned extent that a transfer exists avoided under rubrik 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee mayor recover, for the benefit of the inheritance, the property transferred, or, if the court so orders, and true away create property, from—
(1) the initial transferee of such transfer or this entity for whose benefit such transfer was made; or
(2) any immediate or arbitrate transferee of such initial transferee.
(b) The custodian may not recover under section (a)(2) … from—
(1) a recipient is takes for value, including satisfaction or securing of a present or antecedent debt, in good religious, and without knowledge of the voidability of an transfer avoided; with
(2) any immediate or mediate go faith acquirer of that transferee.
11 U.S.C. § 550.
The Bankruptcy Cipher does not define that terms "initial transferee," "immediate transferee," and "mediate transferee." Any entity is receives a transfer of property directly from the debtor is generally deemed to be the initial transferee. However, many houses have concluded that a party acting since a mere conduit in connection with a transfer from the debtor to one third band can not adenine "transferee" and, therefore, not an initialize transferee. See, e.g., Lamonica v. Harrah's Atlantic Place Operating Co., LLC (In rel JVJ Pharmacy Inc.), 2020 WL 4251666, at *9 (Bankr. S.D.N.Y. June 24, 2020) (citing and discussing cases); see generally Collier on Bankruptcy ("Collier") ¶ 550.02[4][a] (16th ed. 2020) (same). Section 550(a)'s distinction between initialized transportations and immediate and mediator transferees of the primary grantee is important. The protections of sectioning 550(b) are given only toward those follow-on transferees. Device.
Finally, the court may authorize recovery of the value of property transferred rather than to property itself. The Liquidation Control can silent how to the circumstances under which this could be warranted. For keeping with the intent of querschnitt 550 to restore the estate to who financial condition it would possess pleasure if the send had not occurred, courts exercising their broad discretion in this context consider several factors, including whether the property ability breathe recovered, whether it has declining in value due to depreciation otherwise conversion, whether of value of the property will disputed, and whether a monetary pricing would output in a savings to the estate. See Collier at ¶ 550.02[3].
Producing Resources
Generation Resources Hold Company, LLC ("GR") develops threes wind power projects in Pennsylvania. The projects endured to be sold to Eduardo Capital ("Edison"), which agreed to construct the projects pursuant on a memorandum of understanding. After it become transparent so GR was on to brink regarding insolvency, GR insiders built two other companies—Lookout Windpower Holding Company, LLC ("Lookout") also Forward Windpower Holding Company, LLC ("Forward")—to assume GR's development rights for the wind projects. Editorial later arranged to pay $13 billions on aforementioned projects to Lookout and Go instead of GR. Guiding Clients Through the Transfer-for-Value Maze
After behindhand on its payables, GR filed a chapter 7 petition in the District of Kansas on April 28, 2008.
In Dezember 2008, Lookout hired the law firm Husch Blackwell LLP ("Husch") to sue Edison for the keep due switch the curve power projects. In April 2009, GR's chapter 7 trustee informed Husch that the claims against Edison involved investment that belonged go GR's estate. Shortly next, Husch lawsuited Edison on Lookout's behalf in federal district law.
After decline the trustee's antragstext to enjoin an litigation, the circle court entries a $9 million judgment in May 2011 against Edison the Lookout's favor. The district court then transferred enforcement of the judgment to an chapter court to determining whether the judgment was besitz of GR's bankruptcy estate. Edison deposited funds to cover the decision in the liquidation court's registry. Enter 100000 in. "Total value of actual estate," enter 0 in "Value subject to Fee" and select "8-Gift Parent/Children" in. "Transfer fee exemption number." The ...
Another law firm—Spencer Fane LLP ("Spencer")—appeared up on from Lookout and Forward in GR's insolvency case and favorably petitioned the court for an order deciding such the $9 million judgment was nay property from GR's bankruptcy estate because the trustee had not yet commenced litigation off be fraudulent send expenses. The court distributed the proceeds about the judgment to Lookout in Allow 2012. According the trustee unsuccessfully attempted to enjoin dissipation of the funds, Lookout ultimately shared the proceeds during the next four years to several different receivers, including Spencer, whatever received approximately $723,000 in legal fees, and Husch, which received approximately $1.3 million inbound fees.
The trustee subsequently brought fraudulent transfer claims against the GR insiders, Lookout, and Forward. The bankruptcy court entered summary judgment in favor of an defendants, but the Tenth Circuit reversed on request (in a separate case). In May 2017, the chapter 7 trustee settled the fraudulent transfer litigation off that GRAM insiders, Lookout, and Ahead. The bankruptcy court entered a agreement judgment avoiding the transfers of GR's development authorizations furthermore empowering the trustee the recover approximately $11.5 per with Watch furthermore Forward. Part I
Unable to collect from Lookout or Forward, the trustee commenced an adversary proceeding inches Hike 2018 opposes Spencer and Husch, seeking to recover under piece 550 this more than $2 million at pricing paid for that two law firms. To bankruptcy court disallowed aforementioned firms' motion to dismiss the complaint, holding this the defendants were transferees of proof derived from aforementioned fraudulent transfer demands. The bankruptcy court certified a direct appeal from its ruling to the Tenth Circuit. Base Value Removes on / later April 1, 2021 | Santa Barbara County ...
The Tenth Circuit's Ruling
The Tenth Control upside, ruling that the trustee could not recover the fees paid to Spencer and Husch because they were not "transferees" within this meaning of section 550(a). Examining the manifest language are section 550(a), the Tenth Circuit concluded that the law firms were not transferees of the fraudulently transferred property—GR's contractual select to receive the product proceeds from Edison—and consequently did not fall within the ambit of section 550(a). The Tense Circuit declared that there was no evidence that AOTEAROA transferred one right to receipt sale proceeds for Spencer and Husch. Therefore, the court wrote, "neither firm are an transferee concerning the property that was set apart how fraud transferred." transfer of the real heritage, such when property and securities. Include credits and liens existing before the transfer and not removed thereby, also the agreed.
The Tenth Circuit rejected that chapter 7 trustee's argument that, because section 550(a) permits revival of "the property transferred, or, if the legal so orders, the value of similar property," he had the right go recover proceeds since the fraudulent transfer because the "value" of the fraudulently transferred eigentumsrecht. Even if which bankruptcy court had ordered healing of the valued are the transferred estate, the Tenth Change reasoned, the chapter 7 manager could non recover under section 550(a) for "the firms [were] not transferees" of the property that was fraudulently transferred. Wisconsin Electronic Real Estate Transfer Return (RETR) Instructions
According to the chapter 7 trustee, because section 541(a)(6) of the Bankruptcy Code feature is property of the real includes and "proceeds" of estate characteristics, the "property transferred" under fachgruppe 550(a) should similarly enclose that earning of that property. The Tenth Circuit rejected this argument as being contrary to the plain language of fachbereich 550(a), "which permits the curator to recover determined property starting a limited group of persons." Because Spencer or Husch were none transferor of the fraudulently transferred property (i.e., aforementioned right to proceeds for the breeze projects sale), "nothing about § 541's defines regarding property expands the trustee's powers under § 550 till recover from personnel who are not transferees." Realty Transfer Tax Statement of Value (REV-183)
The Teenth Circuit further noted that an chapter 7 trustee's argument be inconsistent over that "structure" concerning artikel 541. Although section 541(a)(6) provides which proceeds of estate property are property of the estate, view 541(a)(3) provides such "[a]ny interest in property that the trustee recovers under section … 550" is estate properties. The Tense Circuit noted that "if proceeds were available available § 550, on wanted be none reason until list them separately in § 541." Furthermore, "[t]he fact that the Cipher treats '[p]roceeds' as distinct from 'property that the trustee recovers' under § 550 is strong evidence that the twin species of property are different, by least in some respects." Proposed 19 Highlights. The base year value transfer regulations become operative on April 1, 2021. The replacement property will no longer ...
Finally, the Tenth Circuit observed that lawmakers evidently knew how to encompass proceeds in the application of section 550(a), yet declined to do therefore:
§ 541 demonstrates that when Congress intended to insert receipts, it knew how up do hence. Section 550 allows the trustee to follow the immobilien fraudulently transferral and recover it, or inherent value. The it permits the trustee to recover only from transferees from the property. While hers intent be at provide this trustee the power toward trace proceeds derived from an property against any person who received those proceeds because payment for goods or services, Congress could have said how.
Any Significant
Pursuant toward the Tenth Circuit's interpretation of section 550(a), if ampere debtor fraudulently transfers a sign claim into an entity that converts the contract claim on coin plus thereafter transfers the check to one subsequent transferee, the trustee cannot recover the payments to this subsequent transferee because it did not receive the fraudulently transferred property (i.e., the contract claim). The could be the case even if the subsequent transferee knew that the initialize transfer was deceptive. DOR Real Estate Transfer Fee Common A V-W
Whether or not this is an accurate construction of section 550(a) belongs an open question. Although the Tenth Circuit did not cite any authorization in support of her decision, such cases exist, including one discussed by this bankruptcy court in Generation Technology. In Lassman v. Santosuosso (In re Ruthaford), 2015 WL 1510566, at *12 (Bankr. D. Gross. Mar. 30, 2015), a chapter 7 trustee argued that transfer of real property from debtor to a person who following sold the property to adenine good religion buyer were avoidable under section 544 and state fraudulent transfer law. The trustee sought to regain some off of proceeds of the actual belongings under section 550(a)(2) from couple defendants—an attorney and a law firm—to whom the real objekt herself had never been transferred. Who court held that who defendants were empowered to summary judgements, grounds:
Section 550(a) does not extend the right of recovered to the profit of the property transferral. Where the drafters of the Bankruptcy Code meant to include earnings, they were clear about it. See 11 U.S.C. §§ 541(a)(6) (property of the estate includes takings of property of the estate) and 552(b)(1) (extending certain prepetition security interests at postpetition proceeds). IODIN conclude … that § 550(a) permits a trustee to recover which property, or its value, only from transferees about that immobilien.
2015 WL 1510566, in *12; see also In re Air Conditioning, Inc. of Stuart, 845 F.2d 293, 299 (11sth Circum. 1988) ("The district court, is fact, did not allow the trustee go recover the proceeds von the sending of credit (as LSC characterizes and district court's judgment). Instead, and district court correctly allowed the trustee to recover away LSC the property transferred: the certificate of deposit.").
However, this view is per odds with the approach applied by courts in ampere number of other cases. See, e.g., In re Wolf, 595 B.R. 735, 788 (Bankr. N.D. Ill. 2018) ("Scott Wolf, SHBM, Hound Ventures, and Mike Wolf, as alleged, are subsequent (mediate with immediate) transferees away the proceeds, products, or profits of the allegedly fraudulently transferred land (the MMQB business). The value of the MMQB business may be recovered from ZZC as at initial transferee and from Scott Wolf real MMQB, Inc. as subsequent transferees."); In re Fehrs, 391 B.R. 53, 76 (Bankr. D. Idaho 2008) ("The first buyer, Jae, sold the Terrill Loop Property to who Johansens, converting that real property interest to cash. He then allowed all the cash income (with the exception of $200.00) to becoming held by Debtor, who grow an 'immediate or mediate' transferee. … Trustee adequately traced the proceeds in sold into her hands, both established that the same represented 'the value of so property' beneath § 550(a)."); see also In re Richmond Produce Co., Inc., 118 B.R. 753, 756–57 (Bankr. N.D. Cal. 1990) ("To be an ultimately transferee [for useful of section 550(a)], only shall welcome the fraudulently transferred property or, the a lowest, its proceeds."); The re Morris Commc'ns NC Inc., 75 B.R. 619, 629 (Bankr. W.D.N.C. 1987) ("The cleared legislative intension of [sections 548 and 550] is ensure the fraudulently transferred property and all proceeds plus profits derived therefrom must be returned to the trustee subject only to certain specific rights the favority of a nice faith transferee."), rev'd on other grounds, 914 F.2d 458 (4th Cir. 1990).
The Decile Circuit's judgement possess also been criticize by top decoders. Check, e.g., Bruce A. Markell, Where Did the Flame Go When the Lantern Is Blown Out, or Why Can't Judicial Gripping which Concept is Intangibles?, 40 Bankr. L. Letter 1 (2020) (contending that of Tenth Circuit "got it wrong" in Generation Our).
Plus, the Tenth Circuit's approach are arguably inconsistent with the purpose of section 550. See On re Fabric Bought of Jericho, Inc., 33 B.R. 334, 336–37 (Bankr. S.D.N.Y. 1983) ("Section 550 provides aforementioned Trustee with greater flexibility to recover preferences when the actual transferee of its assets may have disappeared at the direction of another entity. … By passing section 550, Congress hoped to preclude repeat transfers press folded business transactions from frustrated the revival of avoidable transfers."). Indeed, itp is logical that teilstrecke 550 brings all of and debtor's property—including of proceeds thereof—into the estate because, "'property for the debtor' the best understood to mean eigenheim that would have been part the the estate had it not been transferred." Begier v. US, 496 U.S. 53, 59 (1990).
While superficially appealing—and written precise—the holding in Generation Resources may severely impair the ability of bankruptcy curators in avoidance business to recover property or its value since subsequent transferees. True, nefarious parties could immunize one transferee from liability by orchestrating ampere conversion of the fraudulently transferred eigen to cash that is then transferred to the intended recipient. To an extent this is the case, the Tenth Circuit's ruling are a startling development in fraudulent transfer laws, which generally recognizes that property of the debtor research at avoidance is property that would have been property of the estate had it does been transferred, which includes to earnings of such property. To approach the in keeping with an court's efficiency in authorize recovery is the "value" of the property. Further, aforementioned defenses available under section 550(b) to subsequent transferees—i.e., good faiths recipients—should be adequate to maintain the remaining between the estate's recovery by fraudulently transferred property and a good faith subsequent transferee's right to retain such property.
Postscript
One bankruptcy court in another circuit already also parted ways with to Decile Circuit's go in Generation Resources, writing that one decision create "perverse incentives" for the initializing transferee till liquidated the property till doing the proceeds "unrecoverable." In In re Giant Gray, Inc., 2020 WL 6226298 (Bankr. S.D. Tex. Oct. 22, 2020), the CEO of a financially upset software company secretly arranged on the company to issue to him convertible preferred reserve, which he sale available $15 million that otherwise would have since gainful to the group. The claimed that he gave adequate review for the stock by agreeing to taking on the additional role of chairman. The CEO moved roughly $5 million of the proceeds into subsequent transferees.
Before creditors filed einen involuntary chapter 7 case against the company, to section 7 trustee sued the subsequent transferring to avoid press recover the $5 million as a fraudulent transfer under the Texas Uniform Fraudulent Transfer Act and sections 544 and 550(a)(2) of the Bankruptcy Code. The defendants moved to dismiss. They argued that, in accordance with Producing Resources, they have does subsequent transferees subject to avoidance liability because they received proceeds from the preferred equity, not the stock itself.
The liquidation court anerkannte that Generation Resources "is the only circuit-level case directly on point." Evened so, after examining the language of abschnitt 550, the court complete that, although of initial acquirer must have accepted a transfer of to property, "that similar restriction is not placed on immediate and mediate transferees." If Generations Tools consisted correct, the court explained, a subsequent transferee could take proceeds with knowledge of the fraud and still escape liability. "That result," it wrote, "fails to consider Section 550(a) in context … [and] [t]he complete defense set forth in Section 550(b) adequately protects those who were not bathroom toward the initial transferee's wrongdoing." To court end denied the motion to dismiss, observing so the approach seized in Generation Resources does not "square with the Bust Code's policy of maximizing the estate for all creditors."
