Joining the Forth and the Eighth Circuits, the Ninth Circuit held that damage to creditors is not required for a trustee to maintain a fraudulent transfer suit. The appeals court upheld a nonprecedential decision from the Bankruptcy Appellate Panel likely written by Bankruptcy Judge Julia W. Brand, who upheld Bankruptcy Judge Roger L. Efremsky.

The individual debtor owned a 30-acre plot that included her home. The property was evidently worth $2.5 to $3 million. Facing foreclosure, the debtor did a deal with a lawyer who promised to save her home.

For no consideration, the debtor transferred the property to a trust and received a 20% interest in the trust. The lawyer promoting the trust promised to improve and sell the property. On sale, the deal would give the debtor a priority distribution of $235,000. [Note: This writer presumes that the 20% interest in the trust and the promised $235,000 distribution on sale were designed to fend off a fraudulent transfer suit.]

Disenchanted with the arrangement, the debtor filed a chapter 7 petition, still residing in the home. The trustee promptly filed an adversary proceeding alleging that the transfer of the property was a fraudulent transfer with “actual intent” to hinder, delay or defraud under Section 548(a)(1)(A).

The trustee filed a motion for summary judgment, attaching an affidavit by the debtor. In her affidavit, the debtor said that she had transferred the property to forestall foreclosure by a secured lender. The defendant filed a tardy response but no affidavit laying out allegedly disputed issues of fact.

Finding no factual disputes, Bankruptcy Judge Efremsky granted summary judgment and was upheld in the BAP. The defendant appealed to the circuit but lost in a September 9 opinion by Circuit Judge Morgan Christen.

The Trustee’s Standing

The defendant contended on appeal that the trustee lacked standing because creditors suffered no harm from the transfer, given that the $235,000 earmarked for the debtor on sale was more than enough to pay creditors in full.

Judge Christen said that the defendant “confuses justiciability with the merits of the Trustee’s claim.” She said that the debtor overlooked the principle that a trustee is a representative of the estate and that the transfer depleted estate assets. Since the estate therefore suffered “an injury-in-fact,” she held that the trustee had established Article III standing.

Injury to a Creditor as an Element of a Fraudulent Transfer

Next, the defendant contended that harm to a creditor was an element of a claim under Section 548.

Judge Christen agreed with decisions from the Fourth and Eighth Circuit by holding “that nothing in § 548 requires a trustee to show that a creditor was or could have been harmed by the transfer in order to bring an avoidance action.” For instance, she quoted the Fourth Circuit for saying that “[n]othing in § 548 indicates that a trustee must establish that a fraudulent conveyance actually harmed a creditor.” Tavenner v. Smoot, 257 F.3d 401, 407 (4th Cir. 2001).

Sufficiency of the Evidence

The defendant contended that the trustee has insufficient evidence to justify summary judgment.

Judge Christen disagreed, saying that the affidavit by the debtor was “uncontroverted” and “provided direct evidence of her fraudulent intent” by saying that she intended to delay foreclosure.

Discovery Not Warranted

At the hearing on the summary judgment motion, the defendant asked the bankruptcy judge for a continuance to accommodate discovery. The bankruptcy judge rebuffed the overture and proceeded to rule in favor of the trustee.

On appeal in the circuit, the defendant contended that the bankruptcy court committed error by not allowing discovery.

To begin with, Judge Christen said that the defendant “cite[d] no authority that would entitle them to discovery as a matter of right prior to the court’s ruling on summary judgment.” She said that the defendant could have submitted an affidavit describing his own intent “but failed to do so.”

On a motion for a continuance to delay a motion for summary judgment, Judge Christen said that the moving party must show: (1) in an affidavit the specific facts to elicit in discovery, (2) that the facts exist, and (3) that the facts are essential to oppose summary judgment.

Judge Christen remarked how the “bankruptcy court noted the absence of an affidavit or declaration from [the defendant] identifying what material facts [the defendant] hoped to discover and how those facts would preclude the entry of summary judgment.”

For failure to “comply with the requirements of Rule 56,” Judge Christen said that the bankruptcy judge did not abuse discretion by rejecting the motion for a continuance to permit discovery. She upheld the order granting summary judgment on the trustee fraudulent transfer claim.