Repaying an avoided transfer does not give rise to a claim under Section 502(d) that must be allowed for the amount of the payment, in the opinion of District Judge Derrick K. Watson of Honolulu.
An investor paid $1 million for a 40% interest in a company in 1999. When the investor wanted out of the deal eight years later, the company agreed to redeem the stock for $2.5 million, paid in installments.
The company paid about $1 million before the business was revealed to be a Ponzi scheme and liquidated in chapter 7. The bankruptcy trustee won a $1 million judgment against the investor for receipt of a fraudulent transfer under Hawaii state law.
With interest, the investor satisfied the judgment in full by paying the trustee about $1.4 million. The investor then filed a claim for the $1.4 million and contended that Section 502(d) required allowance of the claim.
Judge Watson disagreed in his Jan. 30 opinion.
In relevant part, Section 502(d) requires the court to disallow a claim “of any entity from which property is recoverable under section . . . 548 . . . , unless such entity or transferee has paid the amount . . . for which such entity or transferee is liable . . . .”
Judge Watson said, “Nothing in Section 502(d), however, mandates that once an entity pays the ‘amount recoverable’ such entity is entitled [emphasis in original] to distributions from the estate . . . . No portion of this provision, nor any other in the Bankruptcy Code, states that once an entity pays what it owes to the estate, such entity is unconditionally entitled to participate in distributions from the estate.”
The trustee could have subordinated the claim under Section 510(b) as a claim arising from the rescission of the sale of a security. Without reaching the subordination theory, Judge Watson upheld disallowance of the claim under the principles of collateral estoppel because the prior fraudulent transfer judgment contained all the elements to disallow the claim.