A chapter 7 trustee was prosecuting a fraudulent transfer lawsuit with the prospect of recovering almost $700 million, but Bankruptcy Judge Karen B. Owens of Delaware capped the trustee’s recovery at some $170 million, the total claims filed against the corporate debtors.
In her February 4 opinion, Judge Owens did not decide as yet whether she would limit the trustee’s recovery on state law claims for breach of fiduciary duty, aiding and abetting and corporate waste. However, she said her ruling would “streamline issues at trial and may enhance settlement possibilities.”
The defendants were the debtors’ former shareholders, officers and directors. The trustee alleged that the defendants sold the business to themselves for “almost nothing,” but turned around and sold the assets for more than $500 million. With interest going back almost a decade, the trustee sought almost $700 million in a complaint based on claims of fraudulent transfer, breach of fiduciary duty, aiding and abetting and corporate waste.
The defendants filed a motion for partial summary judgment to cap the trustee’s recovery at no more than $170 million, the claims filed against the estate. Although neither side had consented to allowing Judge Owens to enter final judgment, she found authority to rule on the capping motion.
Judge Owens first dealt with the fraudulent transfer claims. Without a cap, the defendants argued there could be an “absurd result” where those who participated in the fraudulent scheme would end up profiting from the trustee’s recovery after creditors were paid in full and the remainder spilled over to the debtors and their owners.
The defendants based their motion on Section 550(a), which provides that a trustee may recover fraudulently transferred property “for the benefit of the estate” once the trustee has avoided the transfer under Section 548.
To apply by analogy, Judge Owens had authority all the way down from the Supreme Court, but nothing exactly on point in the Third Circuit. At the top of the heap, she dealt with a landmark bankruptcy opinion, Moore v. Bay (In re Estate of Sassard & Kimball, Inc.), 284 U.S. 4 (1931), where the Supreme Court ruled that a trustee pursuing a claim under Section 544 that could be asserted by a creditor is entitled to a recovery not limited to the amount of the “triggering” creditors’ claims.
Closer to home, the Third Circuit had interpreted the statutory language, “for the benefit of the estate,” to mean “for the benefit of creditors.” In re Cybergenics Corp., 226 F.3d 237, 243-47 (3d Cir. 2000). She cited decisions by the Second and Ninth Circuits barring suit when only the debtor would recover from a fraudulent transfer claim.
Also in her backyard, Judge Owens had a case from the Third Circuit where the trustee avoided an unperfected mortgage on the debtor’s home in which the debtor otherwise had no equity. The debtor asserted the homestead exemption to claim a portion of the proceeds after avoidance and sale. The Third Circuit upheld the trustee’s objection to the exemption claim, saying that bankruptcy did not confer new property rights on the debtor when the avoided mortgage still would have been enforceable against the debtor. In re Messina, 687 F.3d 74 (3d Cir. 2002).
Before issuing her ruling, Judge Owens distinguished nonbinding precedent, such as
Tronox, Inc. v. Anadarko Petroleum Corp. (In re Tronox, Inc.), 464 B.R. 606 (Bankr. S.D.N.Y. 2012). In Tronox, the court would allow creditors, not the debtor, to recover more than their claims. And in Trans World Airlines Inc. v. Travellers International AG (In re Trans World Airlines Inc.), 163 B.R. 964 (Bankr. D. Del. 1994), the court allowed a reorganized chapter 11 debtor to pursue avoidance actions where there was some benefit for unsecured creditors.
Judge Owens noted that the authorities relied on by the trustee were chapter 11 cases. In the case at hand, she said there was “no reorganized debtor to receive avoidance recoveries.”
Drawing on authorities from the Third Circuit, Judge Owens held that it was “impermissible for the Debtors to receive any surplus avoidance recoveries obtained in this proceeding.” She refined her holding by ruling that the trustee’s recovery could aggregate the secured, priority, administrative and unsecured claims. She was careful to point out that the permitted recovery would include compensation for the trustee and professionals.
With regard to the trustee’s claims under state law, such as a breach of fiduciary duty, Judge Owens said the defendants had not satisfied their burden under Rule 56. She therefore denied the defendants’ motion for summary judgment, because the record did not definitively show the rights of former shareholders under the restructuring agreement from years ago.
A chapter 7 trustee was prosecuting a fraudulent transfer lawsuit with the prospect of recovering almost $700 million, but Bankruptcy Judge Karen B. Owens of Delaware capped the trustee’s recovery at some $170 million, the total claims filed against the corporate debtors.
In her February 4 opinion, Judge Owens did not decide as yet whether she would limit the trustee’s recovery on state law claims for breach of fiduciary duty, aiding and abetting and corporate waste. However, she said her ruling would “streamline issues at trial and may enhance settlement possibilities.”
The defendants were the debtors’ former shareholders, officers and directors. The trustee alleged that the defendants sold the business to themselves for “almost nothing,” but turned around and sold the assets for more than $500 million. With interest going back almost a decade, the trustee sought almost $700 million in a complaint based on claims of fraudulent transfer, breach of fiduciary duty, aiding and abetting and corporate waste.
The defendants filed a motion for partial summary judgment to cap the trustee’s recovery at no more than $170 million, the claims filed against the estate. Although neither side had consented to allowing Judge Owens to enter final judgment, she found authority to rule on the capping motion