Bankruptcy Law LAW 0783 L01

1
Bankruptcy LawLAW 0783 L01

• Adjunct Professor Ivan J. ReichGray Robinson
• Thursdays during the Fall Semester
• 500 p.m. - 750 p.m.
• Room 3

2
Week Seven Thursday, October 15, 2009 5
p.m.-750 p.m.

• Bankruptcy, Warren Bussel, Chapter 7 Avoiding
  Powers of the Trustee (pgs. 368-430) (Section on
  Fraudulent Transfers)
• Bankruptcy Law Stories, Rasmussen, Chapter 4
  (pgs. 77-102), BFP v. RTC, 511 U.S. 531 (1994)

3
Chapter 5

• Avoiding Powers of the Trustee

4
Fraudulent Transfers

5
Who has standing?

• Trustee? Sec. 548 550
• Debtor in Possession? Stands in shoes of trustee
  under Sec. 1107(a)
• Creditors Committees?
• May seek permission if DIP has conflict or lacks
  incentive to do so
• Individual Creditors?
• State law yes, but no under bankruptcy and are
  stayed since it is an asset of the estate. In
  absence of committee, may also seek permission if
  DIP has conflict or lacks incentive to do so

6
550(a) Liability of transferee of avoided
transferWho can the trustee recover from?

• (a) Except as otherwise provided in this section,
  to the extent that a transfer is avoided under
  section 544, 545, 547, 548, 549, 553(b), or
  724(a) of this title, the trustee may recover,
  for the benefit of the estate, the property
  transferred, or, if the court so orders, the
  value of such property, from--(1) the initial
  transferee of such transfer or the entity for
  whose benefit such transfer was made or
• (2) any immediate or mediate transferee of such
  initial transferee.

7
550(b) The Good Faith Defense by a Subsequent
Transferee

• (b) The trustee may not recover under section
  (a)(2) of this section from
• (1) a transferee that takes for value, including
  satisfaction or securing of a present or
  antecedent debt, in good faith, and without
  knowledge of the voidability of the transfer
  avoided or
• (2) any immediate or mediate good faith
  transferee of such transferee.

8
Federal Bankruptcy Law

• Both preferences and fraudulent conveyances are
  avoidable under Sec. 547 548 and recoverable
  under Sec. 550
• Except for insider preference statutes, most
  states do not have preference laws, just federal
  bankruptcy law
• Sec. 544(b)(1) allows bankruptcy trustee to use
  longer limitation periods and sue under state
  fraudulent conveyance law

9
State Fraudulent Conveyance Law

• Most states have adopted Uniform Fraudulent
  Transfer Act (UFTA) including Florida
• State law usually has longer statute of
  limitations (4 years compared to 2 years under
  bankruptcy law)
• Available to present and future creditors

10
11 U.S.C 548(a)(1)Fraudulent transfers and
obligations

• (a)(1) The trustee may avoid any transfer
  (including any transfer to or for the benefit of
  an insider under an employment contract) of an
  interest of the debtor in property, or any
  obligation (including any obligation to or for
  the benefit of an insider under an employment
  contract) incurred by the debtor, that was made
  or incurred on or within 2 years before the date
  of the filing of the petition, if the debtor
  voluntarily or involuntarily--

11
Fla.Stat. 726.105 Transfers fraudulent as to
present and future creditors

• (1) A transfer made or obligation incurred by a
  debtor is fraudulent as to a creditor, whether
  the creditor's claim arose before or after the
  transfer was made or the obligation was incurred,
  if the debtor made the transfer or incurred the
  obligation

12
Actual Fraud548(a)(1)(A)

• (A) made such transfer or incurred such
  obligation with actual intent to hinder, delay,
  or defraud any entity to which the debtor was or
  became, on or after the date that such transfer
  was made or such obligation was incurred,
  indebted

13
Actual FraudFla.Stat. 726.105(1)(a)Transfers
fraudulent as to present and future creditors

• (a) With actual intent to hinder, delay, or
  defraud any creditor of the debtor

14
Badges of Actual FraudFla.Stat. 726.105(2)

• (2) In determining actual intent under paragraph
  (1)(a), consideration may be given, among other
  factors, to whether
• (a) The transfer or obligation was to an insider.
• (b) The debtor retained possession or control of
  the property transferred after the transfer.
• (c) The transfer or obligation was disclosed or
  concealed.
• (d) Before the transfer was made or obligation
  was incurred, the debtor had been sued or
  threatened with suit.
• (e) The transfer was of substantially all the
  debtor's assets.
• (f) The debtor absconded.
• (g) The debtor removed or concealed assets.
• (h) The value of the consideration received by
  the debtor was reasonably equivalent to the value
  of the asset transferred or the amount of the
  obligation incurred.
• (i) The debtor was insolvent or became insolvent
  shortly after the transfer was made or the
  obligation was incurred.
• (j) The transfer occurred shortly before or
  shortly after a substantial debt was incurred.
• (k) The debtor transferred the essential assets
  of the business to a lienor who transferred the
  assets to an insider of the debtor.

15
548(e) Asset Protection Trusts

• (e)(1) In addition to any transfer that the
  trustee may otherwise avoid, the trustee may
  avoid any transfer of an interest of the debtor
  in property that was made on or within 10 years
  before the date of the filing of the petition,
  if--
• (A) such transfer was made to a self-settled
  trust or similar device
• (B) such transfer was by the debtor
• (C) the debtor is a beneficiary of such trust or
  similar device and
• (D) the debtor made such transfer with actual
  intent to hinder, delay, or defraud any entity to
  which the debtor was or became, on or after the
  date that such transfer was made, indebted.

16
Constructive Fraud548(a)(1)(B)

• (B)(i) received less than a reasonably equivalent
  value in exchange for such transfer or
  obligation and
• (ii)(I) was insolvent on the date that such
  transfer was made or such obligation was
  incurred, or became insolvent as a result of such
  transfer or obligation
• (II) was engaged in business or a transaction,
  or was about to engage in business or a
  transaction, for which any property remaining
  with the debtor was an unreasonably small
  capital or
• (III) intended to incur, or believed that the
  debtor would incur, debts that would be beyond
  the debtor's ability to pay as such debts
  matured

17
Constructive FraudFla.Stat. 726.105(1)(b)Transf
ers fraudulent as to present and future creditors

• (b) Without receiving a reasonably equivalent
  value in exchange for the transfer or obligation,
  and the debtor
• 1. Was engaged or was about to engage in a
  business or a transaction for which the remaining
  assets of the debtor were unreasonably small in
  relation to the business or transaction or
• 2. Intended to incur, or believed or reasonably
  should have believed that he or she would incur,
  debts beyond his or her ability to pay as they
  became due.

18
Constructive FraudFla.Stat. 726.106(1)Transfers
fraudulent as to present creditors

• (1) A transfer made or obligation incurred by a
  debtor is fraudulent as to a creditor whose claim
  arose before the transfer was made or the
  obligation was incurred if the debtor made the
  transfer or incurred the obligation without
  receiving a reasonably equivalent value in
  exchange for the transfer or obligation and the
  debtor was insolvent at that time or the debtor
  became insolvent as a result of the transfer or
  obligation.

19
Religious and Charitable Contributions548(a)(2)

• (2) A transfer of a charitable contribution to a
  qualified religious or charitable entity or
  organization shall not be considered to be a
  transfer covered under paragraph (1)(B) in any
  case in which.--
• (A) the amount of that contribution does not
  exceed 15 percent of the gross annual income of
  the debtor for the year in which the transfer of
  the contribution is made or
• (B) the contribution made by a debtor exceeded
  the percentage amount of gross annual income
  specified in subparagraph (A), if the transfer
  was consistent with the practices of the debtor
  in making charitable contributions.

20
Insider Transfers or Obligations Under Employment
Contracts548(a)(1)(B)

• (B)(i) received less than a reasonably equivalent
  value in exchange for such transfer or
  obligation and
• (IV) made such transfer to or for the benefit of
  an insider, or incurred such obligation to or for
  the benefit of an insider, under an employment
  contract and not in the ordinary course of
  business.

21
Insider PreferencesFla.Stat. 726.106(2)Transfer
s fraudulent as to present creditors

• (2) A transfer made by a debtor is fraudulent as
  to a creditor whose claim arose before the
  transfer was made if the transfer was made to an
  insider for an antecedent debt, the debtor was
  insolvent at that time, and the insider had
  reasonable cause to believe that the debtor was
  insolvent.

22
Foreclosures

• Durrett v. Washington Natl Ins. Co., 621 F.2d
  201 (5th Cir.1980), which decided for the first
  time that a regularly conducted, noncollusive
  foreclosure sale of real estate, valid under
  state mortgage foreclosure statutes, could be set
  aside in bankruptcy as a fraudulent transfer if
  the amount paid by the foreclosure sale buyer was
  found by a bankruptcy court to be less than
  reasonably equivalent value.

23
BFP v. Resolution Trust Co.

• Chapter 11 debtor brought fraudulent transfer
  proceeding to avoid mortgage foreclosure sale, on
  theory that price received at mortgage
  foreclosure sale was less than reasonably
  equivalent value of property.
• The Supreme Court, through Justice Scalia, held
  that price received at mortgage foreclosure sale
  conclusively established reasonably equivalent
  value of mortgage property, as long as
  requirements of state's foreclosure law were met.

24
BFP v. RTC

• Reasonably equivalent value under bankruptcy
  fraudulent transfer provision is not to be
  equated, in context of mortgage foreclosure
  sales, either with fair market value or with fair
  foreclosure price
• Rather, reasonably equivalent value for
  foreclosed property is the price in fact received
  at foreclosure sale, as long as all of the
  requirements of state's foreclosure law have been
  met.
• Any irregularity in conduct of mortgage
  foreclosure sale that would permit judicial
  invalidation of sale under applicable state law
  deprives sales price of its conclusive force as
  reasonably equivalent value for property under
  bankruptcy fraudulent transfer provision, and
  foreclosure sale may be avoided as fraudulent
  transfer if sales price was not reasonably
  equivalent to property's actual value at time of
  sale (i.e., to foreclosure sale price that would
  have been received if foreclosure sale had
  proceeded according to law).

25
How did he get there?

• It is generally presumed that Congress acts
  intentionally and purposefully when it includes
  particular language in one section of statute but
  omits it in another, particularly where omission
  entails the replacement of standard legal
  terminology with neologism.
• Before federal statute will be construed to
  displace traditional state regulation in manner
  which radically readjusts balance of state and
  national authority, such a federal statutory
  purpose must be clear and manifest.
• When meaning of bankruptcy code's text is clear,
  its operation is unimpeded by contrary state law
  or prior practice.
• Federal statute may override historical state
  practice by implication, and not just expressly,
  if implication is unambiguous.
• When congressional intent to override historical
  state practice is doubtful, court must defer to
  long established traditions of state regulation
  in interpreting statute.

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Corporate Distributions as Fraudulent Transfers
27
Robinson v. Wangemann

• Assets of corporation are common pledge of its
  creditors, and stockholders are not entitled to
  receive any part of assets unless creditors are
  paid in full.
• Corporation's purchase of its own stock is
  invalid unless there is sufficient surplus to
  retire stock without prejudice to creditors at
  time payment for stock is made out of assets of
  corporation, regardless of good faith of parties
  or condition of corporation at time purchase was
  made.
• Claim based on note renewing note given by
  bankrupt corporation in payment for its own stock
  held subordinate to claims of other creditors of
  corporation, notwithstanding good faith of
  parties and solvency of corporation at time stock
  was purchased.

28
Reasonably Equivalent Value in Corporate
Transactions
29
Indirect Benefit Rule
30
Northern Merchandise, Inc.

• Trustee of corporate debtor's Chapter 7 estate
  brought adversary proceeding to avoid, as
  fraudulent transfer, debtor's grant of security
  interest and payments to lender that had made
  prepetition loan to its shareholders.
• Court of Appeals, held that
• (1) corporate debtor that received all of the
  proceeds of loan to its shareholders, which
  lender deposited directly in debtor's checking
  account, was thereby provided with reasonably
  equivalent value for security interest which it
  granted to lender in corporate assets and
• (2) lender acted in good faith in receiving
  security interest in debtor's assets, and was
  entitled to assert good faith for value defense
  to fraudulent transfer claims brought by Chapter
  7 trustee.

31
Northern Merchandise, Inc.

• Corporate Chapter 7 debtor that had received all
  of the proceeds of loan to its shareholders,
  which lender deposited directly in debtor's
  checking account, was thereby provided with
  reasonably equivalent value for security
  interest which it granted to lender in corporate
  assets, such that security interest could not be
  avoided by trustee as being in nature of
  constructively fraudulent transfer.
• Reasonably equivalent value, within meaning of
  constructive fraud provision of bankruptcy
  fraudulent transfer statute, can come from party
  other than recipient of allegedly fraudulent
  transfer.
• Primary focus of the bankruptcy fraudulent
  transfer statute is on net effect of transaction
  on debtor's estate and on funds available to
  unsecured creditors.
• Bankruptcy fraudulent transfer statute seeks to
  prevent debtor from depleting resources available
  to creditors by the gratuitous transfer of
  debtor's property.
• Lender that made prepetition loan to corporate
  Chapter 7 debtors' shareholders, with knowledge
  that loan proceeds would be used in debtor's
  operation, acted in good faith in receiving
  security interest in debtor's assets in return,
  and was entitled to assert good faith for value
  defense to fraudulent transfer claims asserted by
  Chapter 7 trustee to avoid its security interest.

32
Leveraged Buyouts
33
Gleneagles

• Mortgages executed to lender in connection with
  leveraged buy-out of corporation constituted
  fraudulent conveyances under Uniform Fraudulent
  Conveyances Act and would be set aside where at
  time lender advanced loan proceeds and accepted
  mortgages on corporation's assets, lender was
  aware that transaction would render the
  corporation insolvent and that no member of
  corporation would receive fair consideration.

34
Bay Plastics, Inc. v. BT Commercial Corp.

• Chapter 11 debtor-corporation brought adversary
  proceeding against selling shareholders of
  leveraged buyout (LBO) to recover funds that they
  received in buyout transaction.
• The Bankruptcy Court held that payment to selling
  shareholders was avoidable under California
  Uniform Fraudulent Transfer Act (UFTA) as
  transfer rendering debtor insolvent.
• Prima facie case was established under California
  Uniform Fraudulent Transfer Act (UFTA) based on
  leveraged buyout (LBO) which rendered Chapter 11
  debtor-corporation insolvent, for purposes of
  recovering funds that selling shareholders
  received in buyout transaction to finance third
  party's purchase of debtor, debtor undertook
  3.95 million obligation to lender, debtor
  transferred security interest in essentially all
  its assets to lender, and it transferred 3.5
  million to purchaser, which transferred it to
  selling shareholders, and transaction was
  attacked for principal benefit of creditor
  existing at time of transaction, which held more
  than 99 percent of outstanding unsecured debt.

35
Bay Plastics

• If debtor is unable to use the bankruptcy
  fraudulent transfer provision under 548, but
  state law provides a similar avoiding power to a
  creditor, the trustee or debtor in possession may
  stand in the shoes of creditor and assert the
  same cause of action pursuant to 544(b)

36
Bay Plastics(Fraudulent Transfer Basics)

• Purpose of fraudulent transfer law is to prevent
  debtor from transferring away valuable assets in
  exchange for less than adequate value, if
  transfer leaves insufficient assets to compensate
  honest creditors.
• Transfer or conveyance is fraudulent if it is
  intentional fraudulent transfer, which is
  transfer made with intent to defeat, hinder or
  delay creditors, or if it is transfer that is
  constructively fraudulent because debtor is in
  financial distress.
• Three kinds of financial distress that make
  transaction a fraudulent transfer include
  transfer while debtor is insolvent or that
  renders debtor insolvent, transfer that leaves
  debtor undercapitalized or nearly insolvent, or,
  in other words, with insufficient assets to carry
  on its business, and transfer when debtor intends
  to incur debts beyond its ability to pay.
• Constructive fraudulent transfer law applies
  without regard to intent, except intent to incur
  debts which must be proven when financial
  distress rendering transaction fraudulent is
  shown by fact of debtor's intention to incur
  debts beyond its ability to pay.

37
550(b)(1)Safe harbor for good faith transferees

• Bankruptcy Code safe harbor provision protects
  third parties who receive transfers from initial
  transferee of fraudulent transfer.

38
Subsequent creditors have no standing, must be a
pretransaction creditor

• Subsequent creditors, and bankruptcy trustees
  standing in the shoes of subsequent creditors,
  lack standing to challenge a leveraged buyout
  (LBO) if it has been widely publicized at the
  time, absent actual intent to defraud.
• Leveraged buyout (LBO) transaction should not be
  collapsed for benefit of subsequent creditors to
  deny selling shareholders the Bankruptcy Code
  safe harbor if there is no evidence that selling
  shareholders intended to defraud creditors,
  selling shareholders did not know that purchaser
  intended to finance purchase through LBO, there
  were no pretransaction creditors, and form of
  transaction reflects sale to entity other than
  issuer of stock.

39
Collapse into one integrated transaction

• Various transactions involved in leveraged buyout
  (LBO) of Chapter 11 debtor-corporation would be
  collapsed into one integrated transaction for
  purpose of analyzing whether debtor could recover
  funds that selling shareholders received in
  buyout transaction under California fraudulent
  transfer law, where selling shareholders had full
  knowledge that transaction involved LBO.
• Debtor undertook 3.95 million obligation to
  lender, transferred security interest in all its
  assets to lender, and transferred 3.5 million to
  purchaser, which transferred it to selling
  shareholders.

40
Reasonably Equivalent Value

• Reasonable equivalence must be determined from
  standpoint of creditors
• Payment of funds to parent corporation prevents
  transaction from satisfying reasonably
  equivalent value requirement
• 450,000 that debtor presumably received was not
  reasonably equivalent to 3.95 million obligation
  debtor undertook when debtor transferred security
  interest in essentially all its assets to lender,
  and transferred 3.5 million to purchaser, which
  then transferred that amount to selling
  shareholders

41
Give all you want so long as you can pay your
debts

• Financially healthy entity may give away its
  assets as it pleases so long as there remains
  enough to pay its debts, but financially
  distressed donor may not be so generous.

42
Debtors Balance Sheet

• Usual starting point for determining sufficiency
  of assets is balance sheet, particularly if
  balance sheet is prepared according to generally
  accepted accounting principles consistently
  applied, but these principles do not control
  court's decision regarding solvency of entity
  under fraudulent transfer law.
• After adjusting debtor's balance sheet by
  deleting unamortized goodwill, debtor was left
  with negative net worth of approximately 2
  million immediately after LBO nominally,
  debtor's corporate balance sheet showed debtor
  solvent after LBO, but this resulted only from
  addition of 2.26 million of goodwill to asset
  side, and debtor had not previously carried any
  goodwill on its balance sheets.

43
Fair Valuation

• For insolvency purposes under fraudulent transfer
  law, valuation of assets is based on fair
  valuation, and this differs from balance sheet,
  where most assets apart from publicly traded
  stocks and bonds are carried at historic cost,
  rather than current market value, and because
  balance sheet may include intangible assets such
  as goodwill, that may have no liquidation or
  going concern value, and which thus must be
  deleted in evaluating entity's solvency
• Values of assets must be updated in light of
  subsequent use and market conditions, so that, in
  accounting parlance, they must be marked to
  market.

44
Goodwill

• Goodwill is generally understood to represent
  value of intangible factors that are expected to
  translate into greater than normal earning power,
  and, in addition to advantageous relationship
  that business enjoys with its customers, goodwill
  also includes advantageous relationships with
  employees, suppliers, lenders and others.
• Because goodwill has no independent market or
  liquidation value, generally accepted accounting
  principles require that goodwill be written off
  over period of time.

45
Problems with LBO

• Application of fraudulent transfer law to
  leveraged buyouts (LBO) does not limit corporate
  entrepreneurial decisions, since LBO is not
  routine business transaction that should normally
  be given deference by courts but rather is
  investment of corporate assets, by borrowing
  against them, for personal benefit of both old
  and new equity owners
• LBO is not corporate investment in new venture,
  new equipment or property, and it normally does
  not affect business of corporation but only
  changes ownership and adds large layer of secured
  debt.

46
Two types of Good LBOs

• Although fraudulent transfer analysis may
  appropriately be applied to leveraged buyout
  (LBO) transactions, this will not always result
  in recovery for benefit of bankruptcy estate, but
  rather two kinds of LBOs will ordinarily escape
  fraudulent transfer attack.
• A legitimate LBO in which assets mortgaged by
  corporation to support LBO do not exceed the net
  equity of business, so that transaction will not
  make corporation insolvent
• A LBO which is unassailable because cash flow is
  sufficient to make debt payments, even if it
  leaves subject corporation insolvent.

47
How long are sellers exposed in a LBO?

• Proper application of fraudulent transfer law to
  a LBO does not make selling shareholders the
  guarantors of the LBO's success.
• A LBO that is leveraged beyond the net worth of
  the business is gamble, and the risks of this
  gamble, for purposes of applying fraudulent
  transfer law, should rest on shoulders of
  shareholders, both old and new, not those of
  creditors
• Shareholders enjoy benefits if gamble is
  successful, and they should bear burdens if it is
  not.
• For purposes of applying fraudulent transfer
  analysis to LBO transactions, selling
  shareholders should be exposed to risk that
  overleveraged LBO will go bad until time that
  statute of limitations runs under applicable
  fraudulent transfer law.

48
Good Faith Defense

• Did not have complete good faith defense since
  statutory defense of good faith in connection
  with receipt of reasonably equivalent value was
  not available for constructive fraudulent
  conveyance as alleged by debtor.
• Did not have limited good faith defense since
  there was no value given debtor
• Sellers gave up their shares of stock in debtor
  in exchange for their payment of 3.5 million,
  financed by loan taken out by debtor, but
  shareholders did not transfer their shares or
  give any other value to debtor, but rather shares
  went to debtor's new parent corporation and
  debtor's purchaser, while debtor itself received
  neither shares nor money.

49
Insolvency

• The bankruptcy test of insolvency is found in
  101(32) (insolvent) (the sum of such entitys
  debts is greater than all of such entitys
  property, at a fair valuation).
• This test must be contrasted with the equity
  test, which finds insolvency when a debtor is
  unable to pay debts as they become due, that is
  often applicable under state fraudulent transfer
  laws. UFTA 2.
• Immediately after an LBO, a debtor can be solvent
  under the equity test in that it is able to pay
  its debts then coming due but still can be left
  with unreasonably small capital because its
  projected cash flow in the future may be
  insufficient to meet its future obligations.
• A functionally similar, but different, test is
  found in the unreasonably small capital
  requirement of 548(a)(1)(B)(ii)(II) and UFTA
  5.
• The latter test requires that after the transfer
  the debtor have a reasonable likelihood of
  continuing to meet its obligations.

50
Solvency in LBOs

• The key inquiry that courts make about the
  solvency of the acquired company is whether it is
  left with the ability to generate sufficient
  profits after paying its debts (including
  acquisition-related debt) to sustain operations.
• From this, courts reason that a business debtor
  is left with adequate capital only when its
  projected cash flow is sufficient to meet its
  reasonably foreseeable obligations,

51
The Innocent Shareholder Defense 548(c)

• (c) Except to the extent that a transfer or
  obligation voidable under this section is
  voidable under section 544, 545, or 547 of this
  title, a transferee or obligee of such a transfer
  or obligation that takes for value and in good
  faith has a lien on or may retain any interest
  transferred or may enforce any obligation
  incurred, as the case may be, to the extent that
  such transferee or obligee gave value to the
  debtor in exchange for such transfer or
  obligation.

52
546(e)

• (e) Notwithstanding sections 544, 545, 547,
  548(a)(1)(B), and 548(b) of this title, the
  trustee may not avoid a transfer that is a margin
  payment, as defined in section 101, 741, or 761
  of this title, or settlement payment, as defined
  in section 101 or 741 of this title, made by or
  to (or for the benefit of) a commodity broker,
  forward contract merchant, stockbroker, financial
  institution, financial participant, or securities
  clearing agency, or that is a transfer made by or
  to (or for the benefit of) a commodity broker,
  forward contract merchant, stockbroker, financial
  institution, financial participant, or securities
  clearing agency, in connection with a securities
  contract, as defined in section 741(7), commodity
  contract, as defined in section 761(4), or
  forward contract, that is made before the
  commencement of the case, except under section
  548(a)(1)(A) of this title.

53
Special Defenses for Counterparties to Swaps,
Derivatives, RepurchaseAgreements and Other
Financial Contracts 546(g)

• (g) Notwithstanding sections 544, 545, 547,
  548(a)(1)(B) and 548(b) of this title, the
  trustee may not avoid a transfer, made by or to
  (or for the benefit of) a swap participant or
  financial participant, under or in connection
  with any swap agreement and that is made before
  the commencement of the case, except under
  section 548(a)(1)(A) of this title.

54
Insider Preferences

• Levit v. Ingersoll Rand Financial Corp., 874 F.2d
  1186 (7th Cir. 1989) ( Deprizio), held that the
  plain meaning of 550(a)(1) was that both an
  insider and noninsider initial transferee had
  liability for insider preferences.

55
550(c)

• (c) If a transfer made between 90 days and one
  year before the filing of the petition
• (1) is avoided under section 547(b) of this
  title and
• (2) was made for the benefit of a creditor that
  at the time of such transfer was an insider
• the trustee may not recover under subsection (a)
  from a transferee that is not an insider.

56
547(i)

• (i) If the trustee avoids under subsection (b) a
  transfer made between 90 days and 1 year before
  the date of the filing of the petition, by the
  debtor to an entity that is not an insider for
  the benefit of a creditor that is an insider,
  such transfer shall be considered to be avoided
  under this section only with respect to the
  creditor that is an insider.

57
The Strong Arm Clause
58
11 U.S.C 544Trustee as lien creditor and as
successor to certain creditors and purchasers

• (a) The trustee shall have, as of the
  commencement of the case, and without regard to
  any knowledge of the trustee or of any creditor,
  the rights and powers of, or may avoid any
  transfer of property of the debtor or any
  obligation incurred by the debtor that is
  voidable by--
• (1) a creditor that extends credit to the debtor
  at the time of the commencement of the case, and
  that obtains, at such time and with respect to
  such credit, a judicial lien on all property on
  which a creditor on a simple contract could have
  obtained such a judicial lien, whether or not
  such a creditor exists
• (2) a creditor that extends credit to the debtor
  at the time of the commencement of the case, and
  obtains, at such time and with respect to such
  credit, an execution against the debtor that is
  returned unsatisfied at such time, whether or not
  such a creditor exists or
• (3) a bona fide purchaser of real property,
  other than fixtures, from the debtor, against
  whom applicable law permits such transfer to be
  perfected, that obtains the status of a bona fide
  purchaser and has perfected such transfer at the
  time of the commencement of the case, whether or
  not such a purchaser exists.

59
544(a)(1)The Hypothetical Lien Creditor

• (a) The trustee shall have, as of the
  commencement of the case, and without regard to
  any knowledge of the trustee or of any creditor,
  the rights and powers of, or may avoid any
  transfer of property of the debtor or any
  obligation incurred by the debtor that is
  voidable by--
• (1) a creditor that extends credit to the debtor
  at the time of the commencement of the case, and
  that obtains, at such time and with respect to
  such credit, a judicial lien on all property on
  which a creditor on a simple contract could have
  obtained such a judicial lien, whether or not
  such a creditor exists

60
544(a)(3)Bona Fide Purchaser of Real Estate

• (a) The trustee shall have, as of the
  commencement of the case, and without regard to
  any knowledge of the trustee or of any creditor,
  the rights and powers of, or may avoid any
  transfer of property of the debtor or any
  obligation incurred by the debtor that is
  voidable by--
• (3) a bona fide purchaser of real property, other
  than fixtures, from the debtor, against whom
  applicable law permits such transfer to be
  perfected, that obtains the status of a bona fide
  purchaser and has perfected such transfer at the
  time of the commencement of the case, whether or
  not such a purchaser exists.

61
Knowledge of the Trustee in Bankruptcy
62
McCannon v. Marston

• Purchaser of condominium unit sought relief from
  automatic stay and specific performance of the
  agreement for purchase of the unit.
• The Court of Appeals held that strong arm
  clause of Bankruptcy Code which permits trustee
  to exercise rights and powers of certain
  creditors and purchasers without regard to any
  knowledge of trustee or of any creditor did not
  permit trustee to avoid purchase of condominium
  unit in bankrupt hotel where, even though
  purchase agreement was not recorded, purchaser's
  possession of unit obliged trustee under state
  law to inquire into possessor's claimed interest.

63
McCannon v. Marston(State Law)

• Considers purchaser under written agreement for
  sale of real property to be equitable owner of
  that property.
• Gives subsequent purchasers of real property
  priority over rights of prior purchasers if
  subsequent purchasers are bona fide purchasers
  for value without notice record notice defeats
  claims of subsequent purchaser.
• Clear and open possession of real property
  generally constitutes constructive notice to
  subsequent purchasers of rights of party in
  possession such possession, even in absence of
  recording, obliges any prospective subsequent
  purchaser to inquire into possessor's claimed
  interests, equitable or illegal, in that
  property.
• Rights of subsequent purchaser do not take
  priority over those of one in clear and open
  possession of real property.
• Once transferee of real property has given all
  potential subsequent purchasers actual or
  constructive notice of interest in that property,
  nothing else need be done to protect against
  claims of future purchasers.

64
McCannon v. Marston

• Strong arm clause under 544(a) of the
  Bankruptcy Code which permits trustee to exercise
  rights and powers of certain creditors and
  purchasers without regard to any knowledge of
  trustee or of any creditor did not permit trustee
  to avoid purchase of condominium unit in bankrupt
  hotel where, even though purchase agreement was
  not recorded, purchaser's possession of unit
  obliged trustee under state law to inquire into
  possessor's claimed interest.
• Possession of condominium apartment by claimed
  purchaser obliged bankruptcy trustee to inquire
  into claim of purchase even though number of
  other apartments were leased.

65
Property Held by Debtor as Nominee or Trustee
66
Belisle v. Plunkett

• Debtor's partners filed adversary proceeding to
  determine their interest in leasehold.
• Court of Appeals held that leasehold interest
  which debtor purchased in his own name with
  partnership funds, and which he therefore held in
  constructive trust pursuant to local law, could
  nevertheless be brought into debtor's bankruptcy
  estate pursuant to trustee's strong-arm powers.
• Constructive trust imposed in favor of debtor's
  fraud victims ordinarily survives bankruptcy.
• Property may not be used to satisfy debtor's
  obligations to other creditors, and debts to
  victims of fraud may not be discharged.
• Leasehold interest which debtor purchased in his
  own name with partnership funds, and which he
  therefore held in constructive trust pursuant to
  local law, could nevertheless be brought into
  debtor's bankruptcy estate pursuant to trustee's
  strong-arm powers.

67
Omegas Group, Inc.

• Company which had entered into agreement with
  industry remarketer of manufacturer's computers,
  for purchase of manufacturer's computers at
  discounted price through industry remarketer in
  alleged violation of remarketer's contract with
  manufacturer, brought adversary proceeding in
  remarketer's bankruptcy case to impose
  constructive trust on sums it advanced towards
  purchase of computers.
• Court of Appeals held that creditor's mere claim
  of entitlement to constructive trust based on
  debtor's alleged fraudulent prepetition acts was
  not an equitable interest in debtor's property,
  such as would exclude property from property of
  estate.

68
Omegas Group, Inc.

• Creditor's mere claim of entitlement to
  constructive trust based on debtor's alleged
  fraudulent prepetition acts was not an equitable
  interest in debtor's property, such as was
  excluded from property of estate, where no
  court had imposed any constructive trust on
  debtor's property prior to debtor's bankruptcy
  filing.
• Constructive trust is legal fiction, a
  common-law remedy in equity that can exist only
  by grace of judicial action.
• Distribution of assets in bankruptcy case is
  based on identification of what assets and
  liabilities debtor has as of commencement of
  case.
• Constructive trusts are anathema to equities of
  bankruptcy, since they take from bankruptcy
  estate, and thus directly from competing
  creditors, rather than from offending debtor.