Up Against the Wall (design)
By Wayne Silver,
Wayne Silver Law
Mountain View, California
(First appeared: https://www.bankruptcymastery.com/up-against-the-walldesign/)
Bankruptcy’s avoiding powers often
turn otherwise unexceptional transfers
on their heads. Henry to recover all of the money she
was paid for her work as fraudulent
transfers. outcomes in quite some time.
But who expected that an unsuspecting
business would have to disgorge nine
years of honestly earned payments
because the customer paid with a
check on his LLC? And the third court to hear the case
held that the payments were fraudulent
as to the debtor, since Bello got the
benefits, and Ms. Henry didn’t get the
good faith defense of Bankruptcy Code
550(b)(1). At first, the Ninth Circuit correctly
focused on the critical distinction
between an initial and subsequent
transferee, because trustees have
an absolute right of recovery against
the “initial transferee” and any “entity
for whose benefit such transfer was
made.”
Welcome to the 9th Circuit’s decision in
Walldesign.
Paid with someone else’s money.
For nearly a decade, Ms. Henry
provided design and construction-
related services for a building owned
by Mr. Bello at her standard rates, in
arms’ length transactions.
Aside from their commercial dealings,
she had no ongoing relationship
with Bello, his family, or any of his
businesses.
He spent over $230,000 on Ms. Henry’s
design services and paid for them using
checks from businesses he operated,
one of which was called Walldesign.
What Ms. Henry didn’t know was
that the payments from Walldesign
came from a secret Walldesign bank
account Bello used to siphon money
from Walldesign to support his lavish
lifestyle.
When Walldesign filed for bankruptcy,
the creditors’ committee sued Ms.
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CONSUMER BANKRUPTCY JOURNAL
Can she get to the safe harbor?
At trial in the bankruptcy court,
the court held that the Committee
could only recover the fraudulently
transferred funds solely from the
corporate cheat (Bello), and not from
Ms. Henry, because Ms. Henry was a
subsequent transferee who accepted
these payments for value, in good faith,
and without any knowledge of their
voidability. (See 11 U.S.C. §550(b)(1)
(the “safe-harbor” provision)).
Seems like a logical and equitable
result for a court of equity like the
bankruptcy court.
But wait. The Committee appealed and
the District Court reversed, finding the
Committee could recover the funds
from both the corporate cheat and
those parties to whom Bello first made
payments from the secret Walldesign
corporate account.
The Ninth Circuit affirmed, giving us
one of the most inequitable bankruptcy
Winter 2018
Who was the initial transferee?
And while trustees theoretically can also
recover from subsequent transferees,
those subsequent transferees who
accepted the property “for value, in
good faith, and without knowledge” of
the voidability of the transfer are safe.
§ 550(b).
But then the Ninth Circuit found that
although “transfer” is defined broadly
in §101(54)(D), the definition was
“misplaced in connection with the
inquiry at hand: determining whether
Ms. Henry qualified as an initial
transferees under §550(a)(1)”.
Instead, the Ninth Circuit decided to
use the Seventh Circuit’s approach in
Bonded Fin. Servs., Inc. v. European
Am. Bank, 838 F.2d 890, 894 (7th
Cir. 1988), which found that treating
anyone who touches the money as a
transferee could lead to absurd results
and require useless analytical steps.
National Association of Consumer Bankruptcy Attorneys