Tags: Bankruptcy

A recent bankruptcy court opinion from Bankruptcy Judge Robert Berger of Kansas City, Kansas addressed a question bankruptcy courts around the country are divided on—can a bankruptcy Trustee recover proceeds from a fraudulent transfer, as opposed to the fraudulent transferred property itself, from an immediate or a mediate transferee? According to Judge Berger the answer is, “Yes,” pursuant to the “plain language” of Section 550(a) of the Bankruptcy Code. An in interesting twist, however, Judge Berger also immediately certified the question for direct appeal to the Tenth Circuit.

The facts at issue in Rajala v. Husch Blackwell[1] is a variation on a rather common bankruptcy scenario. Company 1 and Company 2 were both controlled by the same owners. Company 1 owned a wind power project, which project the common owners caused Company 1 to transfer to Company 2. The transfer of the project to Company 2 left Company 1 insolvent. Company 2 then sold the project and received roughly $7 million as a result of the sale. Later, Company 2 transferred approximately $2 million to two law firms. In 2017, the United States District Court for the District of Kansas entered a consent judgment avoiding the transfer from Company 1 to Company 2 as a fraudulent transfer.

The Trustee for Company 1 later sued the law firms for recovery of the $2 million pursuant to Section 550(a), and the law firms moved to dismiss pursuant to Rule 12(b)(6), pointing on the basis that the Trustee’s complaint alleged the firms received proceeds from the fraudulently transferred property but not the fraudulently transferred property itself.

The Trustee and the defendant 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 only issue presented then was whether defendant firm was an “immediate transferee” under Section 550(a)(2). The firms argued that that term “immediate transferee” is limited to an entity to whom the fraudulently transferred property itself—in this case, the wind power project—was transferred. The Trustee disagreed, arguing that the term includes an entity who, like each firm, received the proceeds of fraudulently-transferred property.7

Judge Berger denied the motion to dismiss finding 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 Judge Berger’s 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.” Accordingly, Judge Berger found the “plain language” of Section 550(a) 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.” Viewing the firms as the immediate transferees from Company 2, Judge Berger denied the firms’ motion to dismiss.

It is important to note that each defendant firm has further defenses to the cause of action and denial of the motion to dismiss does not mean either will automatically be held liable, even if Judge Berger’s opinion is upheld in the Tenth Circuit.  Specifically, pursuant to 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.”  Furthermore, the firms may also have defenses based on tracing and commingling of funds, which question implicates whether the firms were indeed immediate or mediate transferees of proceeds from a fraudulent transfer.  

This case is certainly one bankruptcy lawyers in the Tenth Circuit should keep an eye on.


[1] Rajala v.Husch Blackwell (In re Generation Resources Holding Co.), 18-06016 (Bankr. D. Kan. Aug. 14, 2019)

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