There’s an Exception to the Rule that Fraudulent Transfer Recoveries Can’t Benefit Shareholders

This result is not that surprising. Defrauded equity investors have claims against the debtor, subordinated to other creditors' claims under 510(b). But subordinated or not, they still have claims and are creditors, not equity holders.

Bill
Always found this line of argument interesting. In a similar matter I litigated years ago in a bankruptcy matter within the 9th circuit, a recipient of a fraudulent transfer (FT) was arguing that there should be a "cap" on recovery from any FT to the amount needed to pay creditors (so equity should never benefit from a recovered FT). So assume $100 in unpaid creditors, with a FT involving $1000. The defendant argued (similar to the general proposition of the Third Circuit in your article) that to the extent there was a FT (which was not conceded), recovery should be limited to $100 (just enough to pay off creditors). We argued that FT laws were "restorative" in that once as much as $1 in unpaid creditor claims was found to exist (which, in effect, gave the trustee "standing" to pursue the FT under 544/548), the full FT could be recovered to "restore" the estate to where it would have been had no FT occurred. The proceeds of that recovered FT would be distributed in accordance with the priority scheme in Section 726. If money trickled down to equity under 726(6), so be it. Moreover nothing in Section 550 (dealing with liability of transferees of avoided transfers) limited the amount that could be recovered to creditors claims. That argument prevailed (somewhat grudgingly by the Bankruptcy Judge), and the matter settled shortly thereafter.
I continue to enjoy your articles and analyses!