Creditors who find themselves fighting for a piece of bankruptcy pie just got a boost. In a precedential ruling, the Ninth Circuit recently recognized in In re O’Gorman that the trustee in bankruptcy proceedings can void a pre-bankruptcy fraudulent transfer even without establishing creditor injury. 115 F.4th 1047 (2024).
Fraudulent Transfers Under the Bankruptcy Code
Codified at 11 U.S.C. § 548, the Bankruptcy Code’s fraudulent transfer provision in many ways parallels the Uniform Voidable Transactions Act. Section 548(a)(1) provides that a bankruptcy trustee:
“may avoid any transfer … of an interest of the debtor in property … that was made or incurred on or within 2 years before the date of the filing of the [bankruptcy] petition, if the debtor voluntarily or involuntarily …
[(A)] 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; …”
O’Gorman
In O’Gorman, the bankruptcy trustee sought to set aside the debtor’s alleged fraudulent transfer of her home to an irrevocable land trust that was established by several trustees (the “Land Trustees”) to make improvements to the home and then sell it. Id. at 1052. The Land Trustees—who stood to profit handsomely from the sale of the home—maintained that the bankruptcy trustee lacked standing to bring a Section 548 claim because no creditors had been injured as a result of the debtor’s transfer to the land trust. Id.
The bankruptcy court granted summary judgment on the bankruptcy trustee’s actual fraudulent transfer claim, and the Bankruptcy Appellate Panel affirmed.
On review, the Ninth Circuit explained that in order to have standing in bankruptcy court, the plaintiff must satisfy Article III constitutional requirements by showing that: (i) he suffered an injury in fact that is concrete, particularized, and actual or imminent; (ii) the injury was likely caused by the defendant; and (iii) the injury would likely be redressed by judicial relief. Id. at 1054-55. But in O’Gorman, the only (potentially) secured creditor purportedly injured by the transfer did not have a valid claim to the property, and the unsecured creditors could be paid from the anticipated distribution of funds to the debtor. Id. Hence, the Land Trustees argued, the bankruptcy trustee could not meet the “injury” showing needed for Article III standing. Id. at 1055.
The court rejected the Land Trustees’ argument as reading too much into Article III’s injury requirement. Id. at 1055. According to the Ninth Circuit, the bankruptcy trustee need not demonstrate injury to a creditor, just that they have a “judicially cognizable interest” in avoiding the transfer on behalf of the estate. Id. To have such a judicially cognizable interest, the bankruptcy trustee was required to establish an injury to the estate—not to other creditors. Id. at 1056. And that showing, the court held, was easily satisfied in O’Gorman because the debtor’s transfer of her home to the Land Trustees’ trust depleted the assets in the estate. Id.
In reaching its decision, the Ninth Circuit looked to Fourth Circuit and Eighth Circuit holdings for guidance, including case law focusing on the debtor’s intent: “for if a debtor enters into a transaction with the express purpose of defrauding his creditors, his behavior should not be excused simply because, despite the debtor’s best efforts, the transaction failed to harm any creditor.” Id. at 1057 (citing Tavenner v. Smoot, 257 F.3d 401, 407 (4th Cir. 2001).
Takeaways
In removing “creditor injury” as a hurdle that must be cleared for a bankruptcy trustee to set aside an actual fraudulent transfer by the debtor, the Ninth Circuit has made life more uncertain for even well-meaning creditors who happen to have done business with a party within two years of that party subsequently filing for bankruptcy. At the same time, the O’Gorman decision could be a boon to many other creditors as bankruptcy trustees increasingly void fraudulent transfers in an effort to increase overall payouts.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.
****
Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.
The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.
Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.