Saturday, March 18, 2017

FYI: 4th Cir Rejects Bankruptcy Trustee's Effort to Hold Bank Liable for Fraudulent Transfers

The U.S. Court of Appeals for the Fourth Circuit recently held that certain deposits and wire transfers into a bankrupt debtor's personal, unrestricted checking account in the ordinary course were not "transfers" under § 101(54) of the Bankruptcy Code, affirming the district court and bankruptcy court's entry of summary judgment in favor of the bank in an adversary proceeding brought by the bankruptcy trustee.


A copy of the opinion is available at:  Link to Opinion


The debtor orchestrated a Ponzi scheme that unraveled in 2009, in which "he defrauded his friends, family, and acquaintances out of millions of dollars under the guise of investing their money in a purchase order factoring contract business."  The debtor was convicted of wire fraud and money laundering.  Eight individual creditors filed an involuntary bankruptcy petition under 11 U.S.C. § 303 against the debtor. 


The bankruptcy trustee filed an adversary proceeding on behalf of the bankruptcy estate against the bank where the debtor had his personal checking account, alleging that certain deposits and wire transfers from "investors" constituted fraudulent transfers "made with the actual intent to hinder, delay, or defraud creditors, and that they were therefore avoidable" under 11 U.S.C. § 548(a)(1)(A).


The bankruptcy court granted summary judgment in the bank's favor, reasoning that the transfers from the debtor the bank "neither diminished the bankruptcy estate nor placed the funds beyond the creditors' reach, and they were therefore not avoidable as fraudulent transfers." The district court affirmed, and the bankruptcy trustee appealed to the Fourth Circuit.


On appeal, the trustee argued that the bankruptcy and district courts erred because where actual fraudulent intent exists, "there is no requirement that the transactions diminish or otherwise move property away from the bankruptcy estate."


The bank countered that section 548(a)(1)(A) "requires that an avoidable transfer one 'of an interest of the debtor in property,'" and because the debtor deposited the checks and received wire transfers into his personal account, "he neither transferred his interest in the funds to the Bank nor diminished the bankruptcy estate, since [the debtor] at all times had access to and control of the funds."


The Fourth Circuit asked the parties to address the threshold question whether the transactions at issue were "transfers" at all under section 101(54) of the Bankruptcy Code before deciding whether they were avoidable transfers under subsection 548(a)(1)(A).


The Court found that the deposits and incoming wire transfers were not "transfers within the meaning of the Bankruptcy Code." It explained that courts are "divided on whether § 105(54)'s definition of 'transfer,' even interpreted as broadly as Congress intended, includes a debtor's deposits in his own unrestricted bank account in the regular course of business."


Relying on two Fourth Circuit decisions from 1930 and 1931 predating the Bankruptcy Code as well as the Supreme Court's 1904 decision in N.Y. Cty. Nat'l Bank v. Massey, which held that the deposit of money into a bank account creates an "ordinary debt" with the bank having an obligation to make the funds available to the depositor and "does not change the debtor's interest in the funds[,] the Court reasoned that "the better interpretation of 'transfer' does not include a debtor's regular deposits into his own unrestricted checking account [because] he continued to possess, control, and have custody over those funds, which were freely withdrawable at his will. Indeed, any funds in the account were at all times part of the bankruptcy estate. The Bank's mere maintenance of [debtor's] checking account does not suffice to make deposits and wire transfers in that account 'transfers' from [debtor] to the Bank." Accordingly, the Court "decline[d] to read § 101(54) to say otherwise."


The Fourth Circuit cautioned that it was not deciding whether "other types of deposits, such as those made to restricted checking accounts, would constitute transfers under § 101(54)", and that it held only that "when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business he has not transferred those funds to the bank that operates the account. When the debtor is still free to access those funds at will, the requisite 'disposing of' or 'parting with' property has not occurred; there has not been a 'transfer' within the meaning of § 101(54)."


Thus, although the Court disagreed with the bankruptcy and district courts that subject deposits and wire transfers were "transfers" within the meaning of the Bankruptcy Code, it affirmed on the narrower basis that the transactions were not avoidable transfers under § 548(a).





Ralph T. Wutscher
Maurice Wutscher LLP
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