May a trustee recover from an immediate or mediate transferee if the recipient received proceeds from a fraudulent transfer but not the fraudulently transferred property itself?
Answering a question where courts disagree, Bankruptcy Judge Robert D. Berger of Kansas City, Kan., invoked the “plain language” of Section 550(a) to rule that a trustee may recover from a mediate or immediate transferee without regard to what property the transferee received.
The facts of the case were a variation on a common theme. The same set of owners controlled both Company 1 and Company 2. Company 1 owned a wind power project. The owners caused Company 1 to transfer the project to Company 2, rendering Company 1 insolvent.
Company 2 later sold the project and received about $7 million. Later still, Company 2 transferred about $2 million to two law firms. A court found that the transfer from Company 1 to Company 2 was a fraudulent transfer.
The trustee for Company 1 then sued the two law firms, seeking to recover the $2 million under Section 550(a). The trustee and the firms agreed that Company 2 was the initial transferee and that the project was “property transferred,” as that term is used in Section 550(a).
The law firms filed a motion to dismiss under Rule 12(b)(6), pointing out how the complaint alleged that the firms received proceeds from the fraudulently transferred property but not the fraudulently transferred property itself. Judge Berger denied the motion to dismiss in a seven-page opinion on August 14. Because there is no controlling authority in the Tenth Circuit, Judge Berger has certified the question for direct appeal to the Tenth Circuit.
Judge Berger’s Analysis
To the extent that a transfer has been avoided, Section 550(a) provides that “the trustee may recover . . . the property transferred, or, if the court so orders, the value of such property, from (1) the initial transferee . . . ; or (2) any immediate or mediate transferee of such initial transferee.”
In the motion to dismiss, the law firms relied largely on Lassman v. Santosusso (In re Ruthaford), 2015 WL 1510566 (Bankr. D. Mass. Mar. 30, 2015). In Ruthaford, the court held that Section 550(a) “does not extend the right of recovery to the proceeds of the property transferred.” Id. at *12.
Judge Berger said that he “respectfully disagrees” with Ruthaford. In his opinion, the “absence of the word ‘proceeds’ from Section 550(a) is not dispositive, because Section 550(a) authorizes the recovery of either fraudulently-transferred property or the value of that property.” [Emphasis in original.]
To Judge Berger’s way of thinking, the “plain language” of the section permits a trustee to recover “the value of” the transferred property from any immediate or mediate transferee of Company 2 “without any reference to, or limitation on, what property [Company 2] transferred away.” [Emphasis in original.]
Viewing the firms as the immediate transferees from Company 2, Judge Berger denied the firms’ motion to dismiss.
Judge Berger “wrote a sound opinion,” Michael L. Cook from Schulte Roth & Zabel LLC in New York City told ABI. Cook taught bankruptcy and fraudulent transfer law for 26 years as an adjunct professor at New York University School of Law.
Unanswered Questions
Because the firms have defenses, denial of the motion to dismiss does not mean they will automatically be held liable, even if Judge Berger’s opinion is upheld in the Tenth Circuit. As Cook said, losing the motion to dismiss “does not mean they can’t prevail after trial.” The firms, he said, “can live for another day with the good faith defense.”
Under Section 550(b)(1), the firms will not be liable, even as immediate transferees, if they took “for value . . . , in good faith, and without knowledge of the voidability of the transfer avoided.” Thus, if the firms did not know there was a fraudulent transfer, they cannot be held liable. On the other hand, if they knew about the transfer from Company 1 to Company 2, they may not be eligible for the “good faith without knowledge” defense.
Even so, money is fungible. If Company 2 commingled proceeds from the transfer with other money, the firms may have defenses based on tracing and commingling. Those defenses raise the question of whether the firms were indeed immediate or mediate transferees of proceeds from a fraudulent transfer. As Cook said, the trial will be “a fact-intensive inquiry.”
Amicus Briefs in the Tenth Circuit?
Given the importance of the issue to fraudulent transfer law, scholars might consider filing friend of the court briefs in the Tenth Circuit, if the appeals court accepts the direct appeal.
On the other hand, perhaps the appeals court should decline to hear a direct appeal because the case could turn on the firms’ affirmative defenses.
May a trustee recover from an immediate or mediate transferee if the recipient received proceeds from a fraudulent transfer but not the fraudulently transferred property itself?
Answering a question where courts disagree, Bankruptcy Judge Robert D. Berger of Kansas City, Kan., invoked the “plain language” of Section 550(a) to rule that a trustee may recover from a mediate or immediate transferee without regard to what property the transferee received.
The facts of the case were a variation on a common theme. The same set of owners controlled both Company 1 and Company 2. Company 1 owned a wind power project. The owners caused Company 1 to transfer the project to Company 2, rendering Company 1 insolvent.
Company 2 later sold the project and received about $7 million. Later still, Company 2 transferred about $2 million to two law firms. A court found that the transfer from Company 1 to Company 2 was a fraudulent transfer.
The trustee for Company 1 then sued the two law firms, seeking to recover the $2 million under Section 550(a). The trustee and the firms agreed that Company 2 was the initial transferee and that the project was “property transferred,” as that term is used in Section 550(a).