Fraudulent Transfer Actions are Not Collection Actions
JASON S . RIGOLI
Generally , debtors file bankruptcy seeking , and the Bankruptcy Code provides for the discharge of all liability on prepetition debts to obtain a financial fresh start . Owaski v . Jet Florida Systems , Inc . ( In re Jet Florida Systems , Inc .), 883 F . 2d 970 , 972 ( 11th Cir . 1989 ) ( quotation marks omitted ). The discharge is subject to certain exceptions .
See 11 U . S . C . §§ 523 , 727 , 1141 , and 1192 .
There is another small exception to the discharge where a debtor could be sued in a “ nominal capacity ” to determine “ the debtor ' s liability upon which the damages would be owed by another party , such as the debtor ' s liability insurer .” Jet Florida , 883 F . 2d at 973 . See also 11 U . S . C . § 524 ( e ). The Eleventh Circuit addressed the scope of the discharge and the exceptions in Suvicmon Dev ., Inc . v . Morrison , 991 F . 3d 1213 ( 11th Cir . 2021 ).
Prepetition Suvicmon filed suit against the debtor , Morrison , for fraud and state law securities violations , which was subsequently amended to avoid the transfers of certain assets under Alabama ’ s Uniform Fraudulent Transfer Act (“ AUFTA ”). 991 F . 3d at 1218 . The debtor filed bankruptcy and Suvicmon obtained stay relief for the state court litigation to proceed to judgment but stayed execution . Id . Suvicmon then filed an adversary proceeding to determine the dischargeability of its debt while the state court litigation remained pending . Finally , the state court litigation went to trial and the jury found against the debtor on the fraud and securities violations , but in favor of the debtor and his sons on the fraudulent transfer claims . Id . Suvicmon appealed the judgments denying liability on the fraudulent transfer claims . Id .
The Bankruptcy Court then granted summary judgment in favor of Suvicmon determining the debt to be non-dischargeable under § 523 ( a ) ( 19 ) which excepts from discharge any debts arising from a securities violation . Id . In the meantime , the Debtor received his discharge under § 524 .
Suvicmon then filed a motion seeking authority to proceed with the appeal of the fraudulent transfer judgment against the debtor . Id . at 1219 .
The Eleventh Circuit addressed two issues related to Suvicmon ’ s ability to proceed on the fraudulent transfer claims : “ first that the fraudulent transfer suit is an action to collect a nondischargeable debt and is thus not subject to the discharge injunction , and second that proceeding nominally against Morrison is permitted under In re Jet Florida .” Id . at 1219 .
On the first issue , the Eleventh Circuit held that a fraudulent transfer action is “ not a mere collection action ,” but “ rather a claim that requires an independent adjudication of liability based on statutorily defined terms .” Id at 1220 ( internal citations and quotation marks omitted ). In so holding the Eleventh Circuit looked to Alabama law applying AUFTA and found that the remedies include not only the avoidance and recovery of the transferred property but the ability to recover both compensatory and punitive damages in certain instances under Ala . Code . 8-9A-4 ( c )( 3 ). Id . ( citing Johns v . A . T . Stephens Enters ., 815 So . 2d 511 , 516-17 ( Ala . 2001 ) and SE Prop . Holdings , LLC v . Judkins , No . 1:17-CV-00413-TM-B , 2019 U . S . Dist . LEXIS 5666 , 2019 WL 177981 , at * 8-9 ( S . D . Ala . Jan . 11 , 2019 ), aff ' d , 822 F . App ' x 929 ( 11th Cir . 2020 ); Alliant Tax Credit 31 , Inc v . Murphy , 924 F . 3d 1134 , 1149-50 ( 11th Cir . 2019 ) ( discussing compensatory and punitive damages under the Georgia Uniform Fraudulent Transfer Act )).
The determination is a close call because generally the recovery of an avoided fraudulent transfer is to satisfy another obligation and cannot result in double recovery , but the Eleventh Circuit ultimately found that not to be inconsistent with its holding that the debt arising from a fraudulent transfer is separate and distinct from the predicate debt obligation . Id . at 1221 FN . 5 .
Because the fraudulent transfer action is not a collection action , but an independent action , Suvicmon also had distinguish the
PBCBA BAR BULLETIN 8 nondischargeable debt of the securities violation from the fraudulent transfer claim . Id . at 1220-21 . With only the securities violation being excepted from discharge the fraudulent transfer claims had been discharged . Id . at 1221 .
On the second issue , addressing the scope of Jet Florida , the Court went on to clarify Jet Florida ’ s holding . Jet Florida imposes two requirements before a plaintiff can proceed against a discharged debtor nominally :
First , the debtor ' s status as a defendant in the case must be a genuine prerequisite to the plaintiff ' s recovering from the third party : it must be the case that the plaintiff could not meet the legal conditions for such recovery without suing the debtor . Second , it must be sufficiently certain that maintaining suit against the debtor will not place any economic burden on the debtor , such that the debtor ' s fresh start will not be interfered with .
Id . at 1223 . In Suvicmon , the debtor was not necessary for the plaintiff to proceed against the debtor ’ s sons on the fraudulent transfer claims . Id . at 1226 . On the second requirement the debtor was not protected from economic burdens by being named as a nominal defendant , as no third-party , such an insurer , was there to cover the litigation costs . Id . at 1226-27 . Suvicmon argued that the debtor could just default or his sons could cover his costs , and not suffer the economic burden of litigation , but the court found that to be “ speculative at best .”
Id . at 1227 . The Court went on to state , even if the debtor did default Suvicmon could have court costs taxed against him . Id . All of these factors weighed against the debtor receiving his fresh start and being free from the economic burdens of litigation in this instance . Id .
This article submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 301E , Boca Raton , FL 33431 , jrigoli @ furrcohen . com .