The Supreme Court can resolve a split of circuits and in the process prevent debtors from winning discharges despite having committed fraudulent transfers with actual intent to hinder, delay or defraud creditors.
By taking on an important case and reversing the Fourth Circuit, the Supreme Court will also enable trustees to win suits against institutions that are aware they are being used to defraud.
The issue arises in Ivey v. First Citizens Bank & Trust Co. (In re Whitley), 848 F.3d 205 (4th Cir. Jan. 31, 2017), where the Fourth Circuit followed its own authority from 40 years before the adoption of the Bankruptcy Code and held that a deposit into someone’s own bank account is not a “transfer” within the meaning of Section 101(54), despite clear legislative history to the contrary.
In Ivey, the Fourth Circuit acknowledged the split of circuits when it rejected contrary holdings from the Ninth and Tenth Circuits. Soon after Ivey, the Ninth Circuit addressed the same issue in Schoenmann v. Bank of the West (In re Tenderloin Health), 849 F.3d 1231 (9th Cir. March 7, 2017), rejected the Fourth Circuit’s analysis, and adhered to its own prior authority.
Consequently, there is an intractable split of circuits, thus warranting the granting of the certiorari petition filed in May by the trustee who lost in the Fourth Circuit. Given the importance of the issue in bankruptcy practice nationwide, the Supreme Court should grant review.
In Ivey, the perpetrator of a Ponzi scheme deposited money obtained from victims into a bank account that he controlled. The trustee sued, alleging that the bank was aware it was being used to perpetrate fraud. The Fourth Circuit upheld dismissal of the suit, holding that depositing money into the debtor’s own bank account was not a “transfer” within the meaning of Section 101(54).
In deciding Ivey, the Fourth Circuit adhered to its own authority under the former Bankruptcy Act where “transfer” was defined more narrowly. In its report accompanying the Bankruptcy Code, the Senate said that “transfer” was intended to be defined “as broad[ly] as possible.” The report also said explicitly that a deposit into a bank account is a transfer.
Ivey makes the Fourth Circuit a haven for fraudsters. For example, assume that a debtor had transferred money into a secret bank account his creditors couldn’t find, to prevent them from executing a judgment. Under Ivey, there would be no transfer and thus no fraudulent transfer with actual intent to hinder or delay creditors under Section 548(a)(1)(A).
In the Ninth and Tenth Circuits, the transfer into a secret account would result in the denial of discharge under Section 727(a)(2) for commission of a fraudulent transfer with “actual intent.” In the Fourth Circuit, a debtor would receive a discharge despite his documented attempt at defrauding creditors.
The Fourth Circuit’s theory also disables trustees from recovering some preferences, because deposits into one’s own bank account would not be a transfer even though the bank, through its right of setoff, may have received an improvement in position.
In a case like Ivey where good faith defenses may be unavailable, a bank would nonetheless receive a get-out-of-jail-free card even if its officers were willfully blind to the use of their institution to commit fraud.
The justices will likely consider the Ivey certiorari petition at the so-called long conference on Sept. 25. An order granting or denying certiorari could come down as early as Sept. 28, although the justices often consider a petition at two or more conferences if they are inclined to grant review. It is also possible that the justices will ask for the views of the Solicitor General, thus delaying a grant or denial of certiorari until early 2018.
So far, there are no amicus briefs either for or against the Ivey petition.
To read ABI’s discussion of Ivey, click here. For Tenderloin Health, click here.