Circuit Judge Andrew S. Oldham, the most recent appointment to the Fifth Circuit, was tasked with writing another bankruptcy opinion. He ruled that the recipient of a fraudulent transfer cannot be tagged with a judgment if the transferee has retransferred the property to the debtor, even if the debtor “frittered the money away” before bankruptcy.
The debtor was a man later sentenced to two years in prison for bankruptcy fraud. Before bankruptcy, the debtor’s wife took $275,000 from the joint account with her husband and used the money to open a new bank account with her sister-in-law.
A month later, the debtor’s wife took herself off the account with her sister-in-law. At the direction of the debtor’s wife, the sister-in-law subsequently transferred $33,500 for the benefit of the debtor’s daughter. After being sued, the daughter returned the $33,500, so that transfer was no longer at issue.
From the remaining $241,500, the sister-in-law transferred $200,000 to a company owned by the debtor and $32,000 to the debtor’s wife’s personal account. Both transfers were before bankruptcy.
The trustee sued the sister-in-law for the $241,500. Affirmed in district court, the bankruptcy court held the sister-in-law liable for $241,500 as the initial recipient of a constructive fraudulent transfer and a transfer with “actual intent” to hinder, delay or defraud.
On appeal in the circuit, the sister-in-law conceded that the transfer was avoidable. However, she argued that she was a mere conduit and not liable for the transfer. Reversing on other grounds in an opinion on December 23, Judge Oldham did not reach the mere conduit defense.
The sister-in-law successfully contended that she could not be liable for $232,000 because she returned that much money to the debtor before bankruptcy.
Judge Oldham said that “Section 550(a) permits the trustee to ‘recover’ the property.” Citing dictionary definitions, he said that “recover” means to “‘get back or regain in full or in equivalence.’”
Judge Oldham said that property already returned “cannot be ‘recovered’ in any meaningful sense.” “Obtaining a duplicate of something is not getting it back; it’s getting a windfall,” he said.
In similar cases, Judge Oldham said that other courts bar recovery by relying on the single-satisfaction rule in Section 550(d). Other courts, he said, exercise “equitable discretion to adjust the trustee’s recovery to prevent a windfall.”
Whatever the theory, Judge Oldham said that a “bankruptcy trustee cannot ‘recover’ property that the transferee returned to the debtor before the bankruptcy filing.”
The debtor or his wife had spent the $232,000 before bankruptcy. “If the [debtor and his wife] frittered the money away – and perhaps they did – it has nothing to do with the fraudulent transfer or [the sister-in-law],” Judge Oldham said.
Judge Oldham reversed and remanded for further proceedings. Evidently, the sister-in-law is not out of the woods.
According to a footnote, the bankruptcy court did not decide whether $232,000 made its way back to the debtor himself, because $200,000 went to a company owned by the debtor and $32,000 was transferred to the wife’s personal account. The appeals court instructed the bankruptcy court to decide whether the $232,000 was in fact “returned” to the debtor.
Will it be enough on remand for the sister-in-law to show that the debtor directed how the $232,000 was spent, even if it was frittered away? And if the $232,000 did not return to an account for the debtor or a joint account with his wife, will it be sufficient if there is evidence that the money was spent for the benefit of the debtor and his wife.
Will the trustee prevail if there is proof on remand that the debtor directed the disposition of the $232,000 in a manner showing intent to hinder and delay creditors? Or does Judge Oldman’s language about the debtor’s right to “fritter away” the money preclude a claim for actual or constructive fraudulent transfer? Perhaps the “fritter away” language was dicta that will not bind the bankruptcy court or a subsequent panel of the Fifth Circuit.
And who will bear the burden of proof?
Last January, Judge Oldham was the author of Ultra Petroleum Corp. v. Ad Hoc Committee of Unsecured Creditors (In re Ultra Petroleum Corp.), 913 F.3d 533 (5th Cir. Jan. 17, 2019), where he wrote at length about the allowance of claims for a so-called makewhole premium. Granting a motion in November for panel rehearing, Judge Oldman withdrew the January opinion and issued a shorter opinion eliminating pages of dicta about makewhole premiums and limiting the ruling to a declaration that disallowance of portions of a claim by the operation of provisions of the Bankruptcy Code does not amount to “impairment” of the claim entitling the creditor to vote for or against confirmation of a chapter 11 plan. Ultra Petroleum Corp. v. Ad Hoc Committee of Unsecured Creditors (In re Ultra Petroleum Corp.), 943 F.3d 758 (5th Cir. Nov. 26, 2019). To read ABI’s reports on the opinions, click here and here.
Circuit Judge Andrew S. Oldham, the most recent appointment to the Fifth Circuit, was tasked with writing another bankruptcy opinion. He ruled that the recipient of a fraudulent transfer cannot be tagged with a judgment if the transferee has retransferred the property to the debtor, even if the debtor “frittered the money away” before bankruptcy.
The debtor was a man later sentenced to two years in prison for bankruptcy fraud. Before bankruptcy, the debtor’s wife took $275,000 from the joint account with her husband and used the money to open a new bank account with her sister-in-law.
A month later, the debtor’s wife took herself off the account with her sister-in-law. At the direction of the debtor’s wife, the sister-in-law subsequently transferred $33,500 for the benefit of the debtor’s daughter. After being sued, the daughter returned the $33,500, so that transfer was no longer at issue.
From the remaining $241,500, the sister-in-law transferred $200,000 to a company owned by the debtor and $32,000 to the debtor’s wife’s personal account. Both transfers were before bankruptcy.
The trustee sued the sister-in-law for the $241,500. Affirmed in district court, the bankruptcy court held the sister-in-law liable for $241,500 as the initial recipient of a constructive fraudulent transfer and a transfer with “actual intent” to hinder, delay or defraud.
On appeal in the circuit, the sister-in-law conceded that the transfer was avoidable. However, she argued that she was a mere conduit and not liable for the transfer. Reversing on other grounds in an opinion on December 23, Judge Oldham did not reach the mere conduit defense.