[Co-Author: Sharon Chen]

On June 21, 2022, the U.S. District Court for the Eastern District of Missouri denied a motion to dismiss a fraudulent transfer claim asserted by the borrower’s lender against the borrower’s principals’ lender. Plaintiff Hanover Insurance Company issued payment and performance bonds to construction contractor Harding Enterprises for multiple construction projects. When Harding began to struggle financially, Hanover advanced additional funds to Harding to be spent exclusively on labor and material costs for the bonded projects. Following Harding’s bankruptcy filing, Hanover discovered that Harding’s principals had misappropriated the bonded proceeds and taken the funds for themselves and to pay their personal lender, First Midwest Bank of Poplar Bluff. Hanover sued First Midwest, asserting claims under the Uniform Fraudulent Transfers Act, as enacted in Missouri, and for civil conspiracy.

In moving to dismiss the fraudulent transfer claim, First Midwest argued that the transfers it received fell outside the UFTA. Harding, as the alleged transferor, did not actually own the bonded proceeds, so, according to First Midwest, their transfer was not a “transfer” under the UFTA, which is “every mode . . . of disposing of or parting with an asset or an interest in an asset.” The court rejected First Midwest’s strict interpretation of “transfer,” noting that the term should be construed broadly to include the conveyance of any asset or any interest in any asset. The court reasoned that the bonded proceeds represented accounts receivable owed to Harding for work performed on the bonded projects—an “asset” under the UFTA. The court stated that fraudulent transfer law calls for a “flexible principle” that looks to “substance, rather than form” and “protects creditors from any transactions the debtor engages in that have the effect of impairing their rights.”

The case is Hanover Ins. Co. v. First Midwest Bank, No. 20-cv-192 (E.D. Mo. June 21, 2022). Hanover is represented by Levy Craig Law Firm. First Midwest is represented by Armstrong Teasdale LLP. The order is available here.