Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party

Posted by NCBRC - September 16, 2019

The chapter 7 trustee may “recover money from the entity who received the proceeds from the sale of fraudulently transferred property, but to whom the property itself was never transferred.” Rajala v. Husch Blackwell LLP, No. 08-20957, Adv. Proc. No. 18-6016; Rajala v. Spencer Fane LLP, Adv. Proc. No. 18-6020 (Bankr. D. Kans. Aug. 14, 2019).

Three couples started GRHC, a company designed to explore the possibilities of wind-generated electricity. GRHC initiated a wind-energy project in Pennsylvania called Lookout Windpower. The three couples then created the Lookout Windpower Holding Company (LWHC) and transferred Lookout Windpower from GRHC to LWHC rendering GRHC insolvent. LWHC then sold Lookout Windpower to Edison Mission Energy for over $6.7 million, and GRHC filed for chapter 7 bankruptcy. From the Lookout Windpower sale proceeds, LWHC paid the law firms of Husch Blackwell over $1.3 million and Spencer Fane over $700,000. The trustee in GRHC’s bankruptcy case successfully avoided the transfer of Lookout Windpower from GRHC to LWHC and sought to recover the funds paid to the law firms out of the proceeds from LWHC’s subsequent sale of the property. The law firms moved to dismiss the adversary complaints.

Section 550(a)(2) provides that a trustee may recover the value of fraudulently transferred property from the recipient of the property or “any immediate or mediate transferee of such initial transferee.” The law firms argued that the trustee could not reach the payments made to them by LWHC because that provision does not extend to third party recipients of the proceeds of fraudulently transferred property. The law firms pointed to the case of Lassman v. Santosuosso (In re Ruthaford), No. 11-1340-FJB, 2015 WL 1510566 (Bankr. D. Mass. March 30, 2015), where the court found that the trustee could not recover funds traced from property fraudulently transferred from the debtor to an immediate recipient and from that recipient to a good faith purchaser. That court held that “section 550(a) does not extend the right of recovery to the proceeds of the property transferred.”

The bankruptcy court disagreed, finding that the absence of the word “proceeds” from the provision was not dispositive where section 550 allows the trustee to recover the property or the “value of such property,” and, in fact, the trustee would have been able to recover the proceeds from the sale directly from LWHC. The court went on to find that “[a]s entities to whom LWHC has transferred portions of the Proceeds, the Firms are immediate transferees of LWHC under § 550(a)(2).” The court denied the law firms’ motions to dismiss.

The bankruptcy court certified the case for direct appeal to the Tenth Circuit, No. 19-607 (docketed Sept. 12, 2019).


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