June 18, 2019

Tenth Circuit: Bankruptcy 11 U.S.C. § 363(m) Mootness Does not Apply to Purely Statutory Claim for Money Damages

The Tenth Circuit Court of Appeals published its opinion in In re C.W. Mining Co. on Wednesday, January 22, 2014.

These appeals arise from a Chapter 7 asset sale for the liquidating bankruptcy estate of C.W. Mining Co., a former coal mining operation in Emery County, Utah. The four appellants did business with C.W. Mining before its involuntary bankruptcy. They now claim various assets that the bankruptcy trustee, Kenneth A. Rushton, sold to an unrelated entity, Rhino Energy LLC. Under 11 U.S.C. § 363(m), the court cannot grant the appellants any relief that would affect the validity of Rushton’s sale to Rhino. The district court dismissed the appeals as moot because of this statute.

The Tenth Circuit affirmed the dismissal of all the appeals with the exception of Charles Reynolds’s appeal because he raised a statutory claim for relief that did not affect the validity of the sale. Reynolds and his family lived in the mine’s scale house. Reynolds opposed Rushton’s action to evict Reynolds and return the house to the bankruptcy estate by arguing he was the rightful owner of the house and counterclaiming under the Utah Occupying Claimant Statute (UOCS).

On appeal, Reynolds sought damages under UOCS of the value of improvements to the house, not undoing the sale to Rhino. Section 363(m) mootness does not apply to this claim, nor does equitable mootness because this is a purely statutory claim for money damages. The court reversed and remanded the dismissal of Reynolds’s claim.

Tenth Circuit: If Debtor Transfers More Than 15% of GAI to Qualified Organization, Trustee May Recover Entire Amount, Not Just Amount in Excess of 15%

The Tenth Circuit Court of Appeals published its opinion in Wadsworth v. The Word of Life Christian Center on Monday, December 16, 2013.

Debtors Lisa and Scott McGough filed for bankruptcy relief under Chapter 7 in 2009. During 2008, the McGoughs made contributions to the Word of Life Christian Center (the Center), totaling $3,478. During 2009, they made contributions to the Center totaling $1,280. Their taxable income for 2008 and 2009 was $6,800 and $7,487, respectively. They also received social security benefits in 2008 and 2009 totaling $22,036 and $23,164, respectively.

The Trustee filed an adversary proceeding against the Center seeking to recover the contributions made to it by the McGoughs under 11 U.S.C. §§ 548(a)(1)(B) and 550. Both parties filed motions for summary judgment. According to the Center, because the individual amounts of each contribution made by the McGoughs did not exceed 15% of their gross annual income (“GAI”), none were avoidable under the safe harbor provision of § 548(a)(2). The Trustee took the opposite view: the contributions must be considered in the aggregate and because the total contributions made by the McGoughs exceeded 15% of their GAI in those years, he could recover them in their entirety.

The bankruptcy court agreed with the Trustee in part: for purposes of the safe harbor provision of § 548(a)(2), a debtor’s contributions must be considered in their annual aggregate. However, it sided with the Center on the avoidance issue—if the contributions exceeded 15% of a debtor’s GAI, only the amount exceeding 15% is subject to avoidance. Thus, the Trustee’s recovery was limited to the amount of the contributions exceeding 15% of the McGoughs’ GAI. The Trustee appealed to the Bankruptcy Court of Appeals (BAP). Therefore, the only issue before the BAP was whether § 548(a)(2) allows a trustee to recover the entire amount of a charitable contribution if it exceeds 15% of GIA or only the amount in excess of 15%. The BAP agreed with the bankruptcy court—only the amount exceeding 15% was avoidable.

The sole question on appeal was a narrow one: If a restricted debtor transfers more than 15% of his GAI to a qualified religious or charitable organization, may the trustee avoid the entire annual transfer or only the portion exceeding 15%? The bankruptcy court and Bankruptcy Court of Appeals (BAP) said circumstances here only permitted the trustee to avoid the portion of the transfer exceeding 15%. The issue presented was a matter of first impression in the Tenth Circuit.

The Tenth Circuit agreed with the Trustee’s argument: § 548(a)(2) is unambiguous and clearly provides a safe harbor from the trustee’s avoidance power only if the “transfer” does not exceed 15% of GAI. Thus the converse must also be true—if the “transfer” exceeds 15% of GAI, then the “transfer”—meaning the entire transfer—is subject to avoidance. Had Congress intended for only the portion of the transfer exceeding 15% of GAI to be subject to avoidance, it would have added limiting language to that effect.  It did not.

REVERSED.

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.