Court Holds that Trustee May Recover Proceeds from Fraudulently Transferred Property

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

There is currently a split in authority on the issue of whether a trustee may recover from an immediate or mediate transferee if the recipient received proceeds from a fraudulent transfer but not the fraudulently transferred property itself.

In a recent opinion from the United States Bankruptcy Court for the District of Kansas, the court 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. See Rajala v. Busch Blackwell (In re Generation Resources Holding Co.), 18-06016 (Bankr. D. Kan. Aug. 14, 2019).

The Facts of the Case

The bankruptcy court explained the facts as follows:

“Three married couples (the “Insiders”) formed GRHC in 2002 to pursue opportunities in wind-generated electricity. GRHC developed several wind-power projects, including one in western Pennsylvania called Lookout Windpower (“Lookout”). The Insiders then formed a new company called Lookout Windpower Holding Company (“LWHC”) and transferred GRHC’s interest in Lookout (the “Lookout Interest”) to it, rendering GRHC insolvent. Next, LWHC sold Lookout to a subsidiary of Edison Mission Energy. GRHC filed for bankruptcy in 2008.

LWHC received $6,706,086.35 of the Lookout proceeds (the “Proceeds”) in 2012. LWHC then transferred some of that money to the Firms: $1,343,750 to Husch Blackwell and $722,566 to Spencer Fane. However, in 2017, the United States District Court for the District of Kansas entered a consent judgment avoiding the transfer from GRHC to LWHC of the Lookout Interest.”

Relying on Section 550, the Trustee sought to recover the money LWHC transferred to the Firms for the benefit of GRHC’s bankruptcy estate.

The Trustee and the Firms agreed that LWHC was the initial transferee and that the project was “property transferred,” as that term is used in Section 550(a).

The Firms moved to dismiss the complaint under Rule 12(b)(6), noting that the complaint alleged that the Firms received proceeds from the fraudulently transferred property but not the fraudulently transferred property itself. The court denied the motion to dismiss and, because there is no controlling authority in the Tenth Circuit, certified the question for direct appeal to the Tenth Circuit.

The Bankruptcy Court’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 Firms relied largely on Lassman v. Santosusso (In re Ruthaford), 2015 WL 1510566 (Bankr. D. Mass. Mar. 30, 2015). In that case, the court held that Section 550(a) “does not extend the right of recovery to the proceeds of the property transferred.” Id. at *12.

The court, however, was not persuaded by the opinion of the Ruthaford court. According to the court in Generation Resources, 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).

According to the court, the “plain language” of the section permits a trustee to recover “the value of” the transferred property from any immediate or mediate transferee of LWHC “without any reference to, or limitation on, what property LWHC transferred away.” (emphasis in original).

In denying the motion to dismiss, the court concluded its analysis by saying: “This Court’s inquiry ends with the plain language of the statute. As entities to whom LWHC has transferred portions of the Proceeds, the Firms are immediate transferees of LWHC under § 550(a)(2).”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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