August 22, 2014

Tenth Circuit: Allegedly Fraudulently Transferred Property is Not Part of the Bankruptcy Estate Until Recovered

The Tenth Circuit issued its opinion in Rajala v. Gardner on Tuesday, March 12, 2013.

Plaintiff-Appellant Eric Rajala, Trustee of the bankruptcy estate of Generation Resources Holding Company, LLC (GRHC), appeals from the district court’s order granting motions to distribute approximately $9 million held in escrow. This amount represents part of the purchase price of a wind power project allegedly developed by GRHC. In a nutshell, the Trustee claims that the Debtor, GRHC, has been left with $5 million in debt while the individual Defendants-Appellees and their affiliated entities received some $13 million in proceeds from the sale of several wind power projects, unburdened by the debt.

At issue was what constitutes property of the bankruptcy estate and whether allegedly fraudulently transferred property is subject to the Bankruptcy Code’s automatic stay before a trustee recovers the property through an avoidance action. The district court held that allegedly fraudulently transferred property is not part of the bankruptcy estate until recovered and therefore is beyond the reach of the automatic stay. The Trustee appealed.

Under 11 U.S.C. § 362(a)(3), the filing of a Chapter 7 bankruptcy petition automatically stays “any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.” Section 541(a)(1) defines property of the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case,” and § 541(a)(3) also includes in the estate “[a]ny interest in property that the trustee recovers under section . . . 550.” Under § 550, a trustee may recover transferred property, “to the extent that a transfer is avoided under section . . . 548.” In turn, § 548 enables the trustee to avoid fraudulent transfers.

After reviewing a split among the circuits on this issue, the plain meaning of the statute led the Tenth Circuit to conclude that the bankruptcy estate does not include fraudulently transferred property until that property is recovered. Interpreting § 541(a)(1) to include fraudulently transferred property would render § 541(a)(3) meaningless with respect to property recovered in a fraudulent transfer action.

The Tenth Circuit held that fraudulently transferred property is not part of the bankruptcy estate until recovered.

AFFIRMED.

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