The Eastern District of Pennsylvania Bankruptcy Conference (“EDPABC”) is a non-profit organization that was formed in 1988 to promote the education and interests of its members and the citizens of the Commonwealth of Pennsylvania residing in the ten counties within the United States District Court for the Eastern District of Pennsylvania. Members include lawyers, other professionals and paraprofessionals who specialize in the practice of Bankruptcy and Creditors’ Rights law in the Eastern District of Pennsylvania. Please visit EDPABC’s website, www.pabankruptcy.org, for more information or to join.
Each year, the EDPABC’s Education Committee formulates challenging hypotheticals based on recent case law. At the EDPABC’s Annual Forum, typically held in January each year, professors from local law schools facilitate lively discussions among EDPABC members about the hypotheticals in small-group breakout sessions. The hypotheticals are always engaging—and sometimes deliberately ambiguous—to mirror the complexity of everyday practice and foster debate among even the most seasoned bankruptcy professionals.
The hypotheticals are accompanied by summaries of the underlying case law and other relevant authorities inspiring the fact patterns. The summaries are intended to give readers insights into how similar issues have been argued before and decided by the courts, and to inform their answers to the questions presented in the hypotheticals.
In 2000, three brothers, determined to make their fortune in the online media market, incorporated Misconduct Media, Inc. in the Commonwealth of Pennsylvania. From the beginning, the brothers had clearly defined roles. Matt was the talent – the host of the online programming, lead writer, content provider, and editor, lead advertising salesman, CEO, CFO, and face of the company. Over the years, and despite a few rumors, Matt developed a wholesome reputation. Harvey, who preferred to lurk behind the scenes, provided the technical know-how as the CTO. Al was the silent partner, although everyone knew he was good enough and smart enough to run the entire company and people liked him.
For ten years, Matt and Harvey ran the day-to-day operations of the company at its headquarters in London, where Matt and Harvey lived. Because he lived in Pennsylvania, Al had little involvement in the day-to-day but did take the lead on periodic “domestic” issues for the Pennsylvania corporation, e.g., legal, tax, corporate, and financing matters. Over the ten years, Misconduct Media became very successful primarily in the U.S., where 90% of its customer and advertising bases were located. The company also became indebted to a regional Pennsylvania bank.
The years from 2010-2012 proved problematic for Misconduct Media. Al discovered that Matt had used his control of the company’s bank accounts in London to pay himself two times the amount of dividends received by the other brothers. When confronted, Matt refused to turn over any money. Al and Harvey then sued Matt and Misconduct Media in London alleging shareholder claims sounding in breach of fiduciary duty and improper dividends.
In discovery, Al and Harvey learned that Matt had been using the extra dividend money, in part, to make payments to current and former employees of Misconduct Media in furtherance of “private” settlement agreements Matt reached to resolve a swath of claims for workplace harassment. Amid swirling rumors of lavish gifts and apparent bribes, Al and Harvey appeared “on air” online and publicly fired Matt, describing detailed and numerous allegations of “sexual misconduct in the workplace.” Matt responded by filing counter and cross claims against Al, Harvey, and Misconduct Media in the already pending shareholder litigation in London, alleging claims against all three sounding in wrongful termination and defamation.
By the beginning of 2012, advertisers had pulled their sponsorships, customers had cancelled their subscriptions, and Misconduct Media had become insolvent, though it sat on a large pile of cash. Seeing the beginning of the end, Al secretly redirected a tax payment meant for the IRS to himself as a “catch-up” dividend and filed a false and fraudulent tax return for the company. Harvey aggressively pursued the litigation against Matt, believing that Matt had a large stash of money.
In late 2012, the three brothers met in London to attempt to settle their disputes. Matt proposed that: (a) Al’s and Harvey’s shareholder claims would be settled by Misconduct Media using all of its remaining cash to pay “catch up” dividends to Al and Harvey; (b) Al, Harvey, and Misconduct Media would release Matt; and (c) Matt would dismiss his claims against Al and Harvey with prejudice but stay and preserve his claims against Misconduct Media, including an agreed tolling of the statute of limitations. Tempted by the money grab, Al and Harvey agreed, and Matt caused all of Misconduct Media’s remaining cash to be transferred from the company’s London bank account to the bank account of Al in Pennsylvania and the bank account of Harvey in London.
The next day Matt committed suicide, citing in a letter, as the sole reason, his mental anguish from the destruction of his personal and professional reputation due to the allegations of “sexual misconduct in the workplace” made by his brothers in their online, public announcement of his termination.
Harvey’s suspicions of Matt’s stockpiled cash proved correct when they administered Matt’s estate and uncovered substantial liquid assets. However, the cash was quickly tied up in court processes when multiple alleged heirs suddenly surfaced and claimed rights to it.
In early 2017, the regional Pennsylvania bank finally got wind of Matt’s substantial estate in London and convinced two trade creditors of Misconduct Media to file an involuntary Chapter 7 bankruptcy case for Misconduct Media in the Eastern District of Pennsylvania.
Shortly thereafter, the Chapter 7 trustee brought breach of fiduciary duty, fraudulent transfer, and deepening insolvency claims under Pennsylvania law (all such claims are recognized under Pennsylvania law) against Al, Harvey, and the Estate of Matt predicated on the 2012 settlement in London. The Chapter 7 trustee argued that Matt had caused Misconduct Media to use its remaining cash while insolvent to pay dividends to settle Al’s and Harvey’s claims that were, as a matter of law, claims against Matt and not Misconduct Media.
The Estate of Matt responded by filing a claim against Misconduct Media for “damages arising from the personal injury torts suffered by Matt at the hands of Misconduct Media which ultimately resulted in his untimely death.”
- The chapter 7 trustee objected to the claim filed by the Estate of Matt on the basis that the bankruptcy court was without jurisdiction to determine such claim under 28 U.S.C. § 157(b)(2)(B) and such claim must be tried in the District Court for the Eastern District of Pennsylvania, citing 28 U.S.C. § 157(b)(5). The Estate of Matt argued that such claim must proceed in the already pending, but stayed, London litigation.
How should the bankruptcy court rule on the objection?
- Al, Harvey, and the Estate of Matt moved to dismiss the Chapter 7 trustee’s fraudulent transfer claims under Pennsylvania law on the basis that such claims were premised entirely on the 2012 settlement in London and the four year statute of limitations had run. The Chapter 7 trustee responded with proof that the IRS had been a creditor of Misconduct Media since 2012 because of Harvey’s misdirection of tax payments to himself and filing of false and fraudulent tax returns. Thus, the Chapter 7 trustee argued that the claims were timely under the longer statute of limitations provided by 26 U.S.C. §§ 6501, 6502 and applicable to such claims pursuant to 11 U.S.C. § 544.
How should the bankruptcy court rule on the trustee’s contention?
- Al, Harvey, and the Estate of Matt also moved to dismiss the Chapter 7 trustee’s fraudulent transfer claims under Pennsylvania law on the basis that such claims involved an impermissible extraterritorial application of the avoidance provisions of the bankruptcy code.
a. How should the bankruptcy court rule as to Al given that Al was an initial transferee of a constructively fraudulent dividend?
b. How should the bankruptcy court rule as to Harvey given that Harvey was an initial transferee of a constructively fraudulent dividend?
c. How should the bankruptcy court rule as to the Estate of Matt given that Matt was an indirect beneficiary of the fraudulent transfers to Al and Harvey, i.e., the dividends made by Misconduct Media to Al and Harvey indirectly benefitted Matt by paying his liabilities to Al and Harvey?
4. Prior to trial, Al and Harvey settled with the Chapter 7 trustee by paying to the debtor’s estate an amount equal to 100% of the dividends they received in 2012 under the London settlement agreement, plus interest and costs. In exchange, the Chapter 7 trustee provided them with a pro rata joint tortfeasor release under Section 8326 of Pennsylvania’s Uniform Contribution Among Tortfeasors Act, 42 Pa. C.S.A. §§ 8321 et seq. (“UCATA”).
The Chapter 7 trustee informed the bankruptcy court of the settlement and of the pro rata joint tortfeasor release. Citing 11 U.S.C. § 550(d), the Estate of Matt argued that the matter was over because all of the Chapter 7 trustee’s claims were predicated on the same 2012 transfers which were now fully remedied and any other conclusion would result in an impermissible “double recovery.”
The Chapter 7 trustee disagreed and provided the bankruptcy court with the following statutory language from Section 8326 of the UCATA:
A release by the injured person of one joint tortfeasor, whether before or after judgment, does not discharge the other tortfeasors unless the release so provides, but reduces the claim against the other tortfeasors in the amount of the consideration paid for the release or in any amount or proportion by which the release provides that the total claim shall be reduced if greater than the consideration paid.
The Chapter 7 trustee also provided the bankruptcy court with settled Pennsylvania Supreme Court authority holding that such statutory language mandates that, when a pro rata joint tortfeasor release is agreed to, the liability of the non-settling defendant is reduced – not by the amount of the settlement payment – but by the settling defendants’ pro rata share of the liability based on relative responsibility for the tort. Charles v. Giant Eagle Markets, 513 Pa. 474 (Pa. 1987).
The bankruptcy court agreed with the Chapter 7 trustee. It noted that the Chapter 7 trustee had brought fiduciary duty and deepening insolvency claims against the settling defendants in addition to fraudulent transfer claims and may have proven damages at trial greater than the settlement amount, rendering the total claim greater than the consideration paid under the settlement agreement.
The bankruptcy court then proceeded to:
- find Matt liable for the constructive fraudulent transfers as an indirect beneficiary,
- hold that transferees and indirect transferees of fraudulent transfers are joint tortfeasors within the meaning of UCATA, and
- apportioned responsibility for the constructive fraudulent transfers as follows:
- 10% for Al;
- 10% for Harvey; and
- 80% for Matt.
Consequently, the bankruptcy court ordered the Estate of Matt to pay 80% of the amount of the dividends received by Al and Harvey to the bankruptcy estate because Matt’s liability for such transfers was only reduced by 20%. The Estate of Matt appealed to the District Court.
- How should the District Court rule on appeal and for what reasons?
- Would your answer change if the Chapter 7 trustee had never alleged breach of fiduciary duty and deepening insolvency?
28 U.S.C. § 157(b)
(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to…(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;
(5) The district court shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy case is pending.
In re: Gawker Media LLC, 571 B.R. 612 (Bankr. S.D.N.Y Aug. 21, 2017)
Charles C. Johnson (“Johnson”) and his company, Got News LLC (“GotNews” and together with Johnson, the “Claimants”), brought a lawsuit against Gawker Media LLC (“Gawker”) and two of its employees in California state court (the “California Action”) alleging various torts sounding in defamation and injurious falsehood arising out of the publication of certain content on Gawker’s websites.
After Gawker filed a voluntary petition for Chapter 11 bankruptcy, the Claimants filed Proofs of Claim (collectively, the “Claims”) against Gawker based on the same allegations as the California Action.
Gawker objected to the Claims on various bases but only one is relevant: whether the Claims were “personal injury tort” claims which the Bankruptcy Court could not adjudicate pursuant to 28 U.S.C. § 157(b)(2)(B).
The Bankruptcy Court concluded that the Claims were not “personal injury tort” claims within the meaning of 28 U.S.C. § 157(b)(2)(B) and, accordingly, were within the Bankruptcy Court’s core jurisdiction.
Gawker operated seven distinct media brands with corresponding websites covering news and commentary on a variety of topics, including current events, pop culture, technology and sports.
Johnson is a web-based journalist and the owner of GotNews, which operates through the GotNews.com website.
According to the Claims, in the late summer of 2014, Johnson began investigating, and through GotNews reporting on, the events leading to the death of Michael Brown in Ferguson, Missouri, and its aftermath. Following Johnson’s and GotNews’s publication of those and certain other articles, and allegedly in retaliation for Johnson’s Ferguson-related reporting, Gawker published several articles about Johnson and GotNews.
The Gawker Articles included statements criticizing Johnson’s honesty as a reporter and his professional skills as a journalist, and citing salacious rumors. Johnson and GotNews alleged $20 million in damages including injury to their reputation, jeopardy to their business, emotional injury, and lost business and investments due to damaged business reputation.
The Bankruptcy Court began its analysis by explaining that the “liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution” in a bankruptcy case is not core and must be tried in the District Court where the bankruptcy case is pending or where the claim arose. The Bankruptcy Court then framed the issue as whether Claimants’ defamation and related claims asserted personal injury tort claims within the meaning of those statutory provisions.
The Bankruptcy Court noted that Title 28 does not define “personal injury” or “personal injury tort,” that the Second Circuit has not construed those terms as used in Title 28, and that those terms are ambiguous. The Bankruptcy Court further noted the differing approaches that lower courts have taken when interpreting those terms: (a) the narrow view; (b) the broad view; and (c) the hybrid approach.
The “narrow view” requires a trauma or bodily injury or psychiatric impairment beyond mere shame or humiliation to meet the definition of “personal injury tort.”
The “broad view” interprets “personal injury tort” to embrace a broad category of private or civil wrongs or injuries for which a court provides a remedy in the form of an action for damages, and include damage to an individual’s person and any invasion of personal rights, such as libel, slander and mental suffering.
Under the “hybrid approach,” a bankruptcy court may adjudicate claims bearing the earmarks of a financial, business or property tort claim, or a contract claim, even where those claims might appear to be “personal injury torts” under the broad view.
The Bankruptcy Court in Gawker adopted the “narrow view” as the correct interpretation, focusing on the fact that the relevant statutory provisions couple personal injury torts and wrongful death, which refers to a death caused by a tortious injury. Relying on the principle of noscitur a sociis (i.e., a word is known by the company it keeps), the Bankruptcy Court reasoned that the term “personal injury tort” should be construed in a manner meaningfully similar to wrongful death and require a physical trauma. The Bankruptcy Court further supported its interpretation with a discussion of the legislative history, which supported the argument that the use of “personal injury tort” was intended to create a narrow exception for asbestos, car accident, and similar cases.
The Gawker Court rejected the “broad view” on the grounds that it defined “personal injury tort” in a manner that was no different than the definition of the word “tort” and, therefore, wrongly created a broad exception that removed all tort claims from the jurisdiction of the bankruptcy court’s claims resolution process. In other words, in the Bankruptcy Court’s opinion, the broad view essentially equated personal injury tort with any tort and rendered the limiting phrase “personal injury” superfluous.
The Bankruptcy Court rejected the “hybrid approach” on the grounds that it was unworkable, especially under the facts of the case where the same statements allegedly injured both Johnson’s personal and business reputations.
Having adopted the narrow view, the Bankruptcy Court concluded that torts such as defamation, false light and injurious falsehood, which do not require proof of trauma, bodily injury or severe psychiatric impairment, are not “personal injury torts” even when they include incidental claims of emotional injury. As a result, the Bankruptcy Court concluded that it had core jurisdiction to liquidate the Claims.
In re: Residential Capital, LLC, 536 B.R. 566 (Bankr. S.D.N.Y. 2015)
Pamela D. Longoni (“Longoni”), individually and as guardian ad litem for Lacey Longoni, and Jean M. Gagnon (“Gagnon” and together with Longoni and Lacey Longoni, the “Claimants”) filed a complaint in Nevada state court against the Debtors (which included Residential Capital, LLC and other mortgage servicing entities) and other non-debtor entities for wrongful foreclosure and other causes of action such as a claim of intentional infliction of emotional distress (the “IIED Claim”), which action was removed to the United States District Court for the District of Nevada (the “Nevada Action”).
After the Debtors filed voluntary petitions for Chapter 11 bankruptcy, the Claimants filed Proofs of Claim against the Debtors based on the same allegations as the Nevada Action.
The Bankruptcy Court sua sponte raised the issue of whether the IIED Claim was a “personal injury tort” claim which the Bankruptcy Court could not adjudicate pursuant to 28 U.S.C. § 157(b)(2)(B).
The IIED Claim stemmed from an allegedly wrongful foreclosure. The operative complaint in the Nevada Action included the following allegations: “foreclosure and wrongful ousting of the plaintiffs from the family home was an invasion of property owners’ rights which occurred under circumstances of malice, willfulness, wantonness, and inhumanity;” the defendants’ “wrongful acts and foreclosure were a willful use of power with the expectation to humiliate and distress the mortgagors and plaintiffs;” and the defendants “engaged in conduct that they knew, or should have known and expected, would cause the plaintiffs to suffer and which did, in fact, cause the plaintiffs to suffer severe and mental and emotional pain, grief, sorrow, anger, worry, and anxiety.” The IIED Claim included alleged physical manifestations of the emotional distress, e.g. exhaustion and vomiting. The complaint requested at least $10,000 in general damages, at least $10,000 in exemplary and punitive damages, plus costs and attorneys’ fees.
The Bankruptcy Court began its analysis by explaining that the “liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution” in a bankruptcy case is not core and must be tried in the District Court where the bankruptcy case is pending or where the claim arose. The Bankruptcy Court then framed the issue as whether the Claimants’ IIED Claim asserted a personal injury tort claim within the meaning of those statutory provisions.
The Bankruptcy Court explored the same issues of defining “personal injury tort” under Title 28 with the narrow view, broad view, and hybrid approach as in In re: Gawker Media LLC discussed above. Here, and without discussion, the Bankruptcy Court adopted the “hybrid approach” as the correct interpretation (though noted that it would have reached its same conclusion had it adopted the “narrow view”).
Having adopted the “hybrid approach,” the Bankruptcy Court concluded that the Claimants’ IIED Claim was not a personal injury tort and, therefore, the Bankruptcy Court had core jurisdiction to liquidate such claim. The Bankruptcy Court reasoned that the allegations regarding the physical manifestations of the emotional distress did not rise to the level of “trauma or bodily harm” or to the level of the “traditional, plain-meaning sense” of a “personal injury tort.” Instead, they rose to the level of “shame and humiliation” but not more. Further, the IIED Claim unquestionably stemmed from allegedly flawed mortgage foreclosure and loss mitigation processes and, therefore, arose primarily out of financial, contract, or property tort claims. Thus, the IIED claim was not, by its nature, a personal injury tort.
Perino v. Cohen (In re: Cohen), 107 B.R. 453 (S.D.N.Y. 1989)
A blind patron (Perino) of Debtor Cohen’s restaurant brought a tort claim against the Debtor asserting a violation by the Debtor of a New York antidiscrimination law. Perino moved to withdraw the reference to the Bankruptcy Court, which the District Court denied.
Perino, a blind patron, contended that he was twice made to leave the Debtor’s restaurant because of the presence of his guide dog. Perino The Debtor denied Perino’s version of the incidents. Perino sought to litigate the disputed facts and recover damages and punitive damages, which would have made him a creditor in Debtor’s bankruptcy proceedings.
The District Court reasoned that a “personal injury tort” in the traditional, plain-meaning sense of those words required a physical injury or a psychiatric impairment beyond mere shame and humiliation.
Accordingly, the District Court held that a tort claim for a statutory violation of a New York State antidiscrimination law does not fall within the meaning of “personal injury tort.”
Boyer v. Balanoff (In re: Boyer), 93 B.R. 313 (Bankr. N.D.N.Y. 1988)
Debtor Boyer commenced an adversary proceeding against various bankruptcy court personnel alleging misstatements of fact and damages to Boyer’s “good name and peace of mind.”
The Bankruptcy Court sua sponte raised the issue of whether such claims were “personal injury tort” claims which the Bankruptcy Court could not adjudicate pursuant to 28 U.S.C. § 157(b)(2)(B).
Boyer was a joint debtor in a Chapter 7 proceeding when he filed this adversary proceeding against the bankruptcy trustee (Balanoff), various judges, and other bankruptcy court personnel. Boyer described his cause of action as follows: “By concert of actions defendants, by misstatement of facts, by misstatements of ecclesiastical civil law with common purpose to defraud a church trust under color of state law have acted in violation of USC 42:1983, 1985.” His complaint alleged that over a ten year period that began with the probate of his mother’s will in 1978, the defendants conspired to victimize him through a campaign of deceit and fraud upon the Kansas Courts by misrepresentation and deprive him “of a U.S. Constitutionally guaranteed right to hold and use property within the terms of the trust visited upon him be [sic] the actions of the Quarterly Conference of the Cortland Methodist Church in October 1947 and to further destroy his good name and peace of mind.” Boyer claimed total damages of over $4 million and demanded a jury trial.
The Bankruptcy Court reasoned that the term “personal injury tort” embraces a broad category of private or civil wrongs or injuries for which a court provides a remedy in the form of an action for damages, and includes damage to an individual’s person and any invasion of personal rights, such as libel, slander and mental suffering. Accordingly, the Bankruptcy Court construed “personal injury tort” to encompass federal and state causes of action for all personal injury tort claims.
The Bankruptcy Court concluded that it lacked subject matter jurisdiction and dismissed the adversary proceeding.
In re: Ice Cream Liquidation, Inc., 281 B.R. 154 (Bankr. D. Conn. 2002)
Claimants already in litigation against Debtor for purported acts of sexual harassment moved to allow their state court litigation to continue.
The Bankruptcy Court held that such claims were “personal injury tort claims” which the Bankruptcy Court could not adjudicate pursuant to 28 U.S.C. § 157(b)(2)(B), and allowed them to proceed in state court.
The Claimants filed a Proof of Claim in the bankruptcy action asserting a general unsecured claim in the amount of $6,000,000. The Proof of Claim related to a Complaint already pending in state court against the Debtor under successor liability for alleged sexual harassment. The Claimants were former employees of a predecessor of Ice Cream Liquidation, Inc.
The Bankruptcy Court began its analysis by noting that Title 28 does not define “personal injury” or “personal injury tort” and that those terms are ambiguous. After finding the legislative history not helpful, the Bankruptcy Court further noted the differing approaches that lower courts have taken when interpreting those terms: (a) the narrow view; and (b) the broad view.
The “narrow view” requires a trauma or bodily injury or psychiatric impairment beyond mere shame or humiliation to meet the definition of “personal injury tort.”
The “broad view” interprets “personal injury tort” to embrace a broad category of private or civil wrongs or injuries for which a court provides a remedy in the form of an action for damages, and include damage to an individual’s person and any invasion of personal rights, such as libel, slander and mental suffering.
The Bankruptcy Court found problems with both approaches.
The Bankruptcy Court argued that the “narrow view,” by requiring physical injury or trauma, apparently ignores the fact that, in Section 522(d)(11) of the Bankruptcy Code, Congress knew how to say “personal bodily injury” when it wanted to.
The Bankruptcy Court argued that the “broad view” may place too much reliance on whether the alleged claim would be considered a personal injury tort in a non-bankruptcy context, which presents at least some risk that financial, business or property tort claims also could be withdrawn from the bankruptcy system if the broad view is blindly followed.
The Ice Cream Liquidation court ultimately created the “hybrid approach” where, in cases where it appears that a claim might be a personal injury tort claim under the broad view but has earmarks of a financial, business or property tort claim, or a contract claim, the court should resolve the personal injury tort claim issue by a more searching analysis of the complaint.
The Bankruptcy Court concluded that sexual harassment claims were personal injury tort claims and, therefore, the Bankruptcy Court was without jurisdiction to adjudicate such claims. The Bankruptcy Court reasoned that sexual harassment claims had no earmarks of a financial, business or property tort claim or a contract claim.
11 U.S.C. § 544(b)(1)
… the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
26 U.S.C. § 6502
(a) Length of period.–Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun–
(1) within 10 years after the assessment of the tax, or
(A) there is an installment agreement between the taxpayer and the Secretary, prior to the date which is 90 days after the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer at the time the installment agreement was entered into; or
(B) there is a release of levy under section 6343 after such 10-year period, prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before such release.
If a timely proceeding in court for the collection of a tax is commenced, the period during which such tax may be collected by levy shall be extended and shall not expire until the liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied or becomes unenforceable.
(b) Date when levy is considered made.–The date on which a levy on property or rights to property is made shall be the date on which the notice of seizure provided in section 6335(a) is given.
In re Vaughn Company, 498 B.R. 297 (Bankr. D.N.M. 2013)
A Chapter 11 trustee (the “Trustee”) moved to amend a complaint to assert strong-arm claims to avoid certain transfers as fraudulent to creditors, and the defendant objected that such avoidance claims were time-barred and, therefore, the requested amendment must be denied as futile.
The Bankruptcy Court held that the Trustee could not circumvent New Mexico’s four-year statute of limitations on fraudulent transfer claims in order to bring strong-arm claims to avoid, as fraudulent transfers, transactions which took place more than four years prior to the petition date, by asserting that an unsecured creditor in whose shoes the trustee stood was the IRS and by raising the IRS’s sovereign immunity from state statutes of limitation.
For many years prior to 2010, Douglas Vaughan caused Vaughan Company Realtors (“VCR”) to operate as a Ponzi scheme. In 2004 or 2005, Mr. Vaughan engaged Ultima Homes, Inc. (“Ultima”) to construct his personal residence. On May 5, 2005 and July 29, 2005, VCR issued and delivered checks to Ultima totaling $501,849.33 as payment for the project.
More than four years later on February 22, 2010, VCR filed a voluntary Chapter 11 petition (the “Petition Date”). On February 14, 2012, the Trustee commenced an adversary proceeding against Ultima to recover the transfers made to it under the actual and constructive fraud provisions of 11 U.S.C. §§ 544 and 548 and applicable state law.
The Internal Revenue Service (“IRS”) filed a proof of claim in the bankruptcy case.
The Trustee sought to amend its Complaint to add separate counts against Ultima for fraudulent transfer under state law. Ultima contended that such amendments would be futile because the transfers at issue were time barred under the applicable statute of limitations.
The Bankruptcy Court began its analysis by noting that 11 U.S.C. § 544(b)(1) is most often used to recover transfers that would be voidable under state law. Thus, to the extent a trustee seeks to avoid such transfers, the claims are generally subject to state law limitations periods.
The Bankruptcy Court then pointed out that New Mexico’s version of the Uniform Fraudulent Transfer Act (“UFTA”), in conjunction with Bankruptcy Code Sections 108(a) and 544(b), only allows a trustee to void fraudulent transfers that occurred within four years before commencement of the bankruptcy case. Accordingly, under that limitations period, the Trustee’s state law fraudulent transfer claims against Ultima would be barred and the proposed amendments would be futile.
The Bankruptcy Court next addressed whether Section 544(b)(1) permits a debtor or trustee to invoke the statute of limitations available to any unsecured creditor of the estate, including the IRS. More specifically, the Bankruptcy Court addressed the Trustee’s argument that, since Section 6502 of the Internal Revenue Code (“IRC”) provides a ten-year statute of limitations for collection of taxes by the IRS, the Trustee is entitled to recover fraudulent transfers under the UFTA made within ten years before the Petition Date, provided the IRS is an unsecured creditor of the estate.
The Bankruptcy Court acknowledged case law support for such argument but found such case law unpersuasive.
The Bankruptcy Court agreed that, to the extent the IRS seeks to collect taxes using the UFTA, the action would not be governed by any state statute of limitations. Instead, the IRS benefits from the ten-year limitations period under IRC Section 6502.
The Bankruptcy Court also agreed that the Trustee may stand in the shoes of any unsecured creditor to set aside transfers to third parties.
However, the Bankruptcy Court reasoned that it did not necessarily follow that a bankruptcy trustee standing in the shoes of the IRS is immunized from state statutes of limitation. To the contrary, immunity from state statutes of limitation is a sovereign power of only the United States.
The Bankruptcy Court explained that Congress, by enacting Section 544(b) of the Bankruptcy Code, did not intend to vest sovereign powers in a bankruptcy trustee and thereby immunize a bankruptcy trustee from the strictures of state law in the pursuit of a private action for the general benefit of creditors.
The Bankruptcy Court concluded that because the IRS was only permitted to use the ten-year look back period in order to perform a government function, the Trustee was likewise limited under Section 544(b).
In re: Polichuck, 506 B.R. 405 (Bankr. E.D. Pa. 2014)
A Chapter 7 trustee (the “Trustee”) brought an adversary proceeding against the Debtor, family members of the Debtor, and entities owned or controlled by such family members (collectively, the “Defendants”), asserting claims to avoid and recover alleged fraudulent transfers. The Defendants filed motions for summary judgment.
The Bankruptcy Court held that the Trustee was not exercising the government’s taxing authority in asserting that the Debtor owed prepetition taxes, even though the Internal Revenue Service (“IRS”) had not filed a proof of claim in the bankruptcy case, and thus could use the IRS as the triggering creditor in bringing fraudulent transfer claims under Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”) pursuant to the Trustee’s strong-arm powers, so as to obtain the benefit of the IRS’s extended statute of limitations, subject to proving existence of a valid IRS claim at trial.
The Trustee contended that the Debtor orchestrated a massive scheme to fraudulently transfer his assets to members of his family and entities that they controlled. The Trustee asserted twelve claims seeking to avoid numerous asset transfers, going as far back as ten years prior to the commencement of the Debtor’s bankruptcy case.
The Bankruptcy Court began its analysis by noting that, under PUFTA, there are two potentially applicable limitations periods: for constructive fraud claims, the plaintiff is limited to a four year lookback period; and for claims based on actual fraud, the plaintiff may avoid transactions going back four years prior to the filing of the complaint or “within one year after the transfer or obligation was or could reasonably have been discovered.” The Bankruptcy Court further noted that most of the transfers referenced in the Complaint were beyond all of the possible PUFTA “lookback” periods.
However, the Bankruptcy Court concluded that, under 11 U.S.C. § 544(b), the Trustee may use the statute of limitations available to any actual creditor of the Debtor as of the commencement of the bankruptcy case. The Bankruptcy Court further concluded that if the IRS was an actual creditor of the Debtor at the time the transfers at issue occurred, the Trustee may step into the shoes of the IRS and has at least a ten-year lookback period pursuant to 26 U.S.C. §§ 6501, 6502, and such rights supersede any statute of limitations under state law.
The Bankruptcy Court rejected the argument that such conclusion was tantamount to delegating the taxing power of the federal government to the Trustee. The Bankruptcy Court reasoned that the Trustee was neither assessing nor collecting a federal income tax against the Debtor. Rather the Trustee was stepping into the shoes of an actual creditor who would be able to avoid the transfers under applicable non-bankruptcy law and was asserting legal claims that are available to that actual creditor, as is authorized by 11 U.S.C. § 544(b).
The Bankruptcy Court held that because the IRS is an unsecured creditor that is able to avail itself of the avoidance provisions of PUFTA, the Trustee may properly use the IRS’s status as a creditor to obtain the benefit of the IRS’s extended statute of limitations and setting aside a transfer is not exercising the government’s taxing authority.
2017 cases which followed In re: Polichuck confirming a majority position
In re: Behrends, 2017 WL 4513071 (Bankr. D. Col. Apr. 10, 2017)
The Bankruptcy Court followed In re: Polichuck, and reasoned that the plain language of Section 544(b) refers to the trustee having the power to avoid transfers that are voidable under “applicable law” and there was no indication that this phrase was limited to state law. The Bankruptcy Court noted that the Supreme Court has held that this same phrase used in another statute of the Bankruptcy Code is not limited to state law.
In re: Alpha Protective Services, Inc., 570 B.R. 914 (Bankr. M.D. Ga. Apr. 24, 2017)
The Bankruptcy Court followed In re: Polichuck, and reasoned that the phrase “applicable law” in Section 544(b)(1) allows the trustee to utilize federal and state non-bankruptcy laws providing rights to pursue fraudulent or preferential-transfer actions.
In the case, the Trustee was basing its claim on 28 U.S.C. § 3304(a)(2), a subsection of the Fair Debt Collections Procedures Act (“FDCPA”). The Trustee argued that the IRS would have had standing to bring an insider-preference claim against the Debtor for a transfer pursuant to 28 U.S.C. § 3304(a)(2), which states that
(a) … a transfer made … by a debtor is fraudulent as to a debt to the United States which arises before the transfer is made [if] (2)(A) the transfer was made to an insider for an antecedent debt, the debtor was insolvent at the time; and
(B) the insider had reasonable cause to believe that the debtor was insolvent.
28 U.S.C. § 3304(a)(2) (2017).
The Bankruptcy Court determined that the FDCPA was applicable non-bankruptcy law under which the Trustee may avoid insider-preferential transfers made by the debtor pursuant to Section 544. The Bankruptcy Court also addressed the applicable “reach back period” for such Section 544 actions. The FDCPA provides that claims for insider preferences under 28 U.S.C. § 3304(a)(2) “extinguish unless [the] action is brought … within two years after the transfer was made.” Applying that FDCPA limitation, the Bankruptcy Court determined that the trustee may avoid insider-preferential transfers made within two years of the debtor’s filing of its petition. However, the Trustee must prove the elements of 28 U.S.C. § 3304(a)(2) to avoid the transfer pursuant to Section 544(b).
In re: CVAH, Inc., 570 B.R. 816 (Bankr. D. Ia. May 2, 2017)
In a detailed and in-depth discussion, the Bankruptcy Court reached the same conclusions as the courts in In re: Polichuck and In re: Alpha Protective Services, Inc. More specifically, the Bankruptcy Court held that if, but for a bankruptcy filing, the IRS could have utilized either the FDCPA or the IRC as a legal basis to avoid transfers, then a trustee may exercise the same rights as the IRS, pursuant to Section 544(b)(1), and look to the provisions of the FDCPA and the IRC to avoid the transfers.
In re: Ampal-American Israel Corp., 562 B.R. 601 (Bankr. S.D.N.Y. Jan. 9, 2017)
Alex Spizz, the Chapter 7 trustee (the “Trustee”) for Ampal-American Israel Corp. (“Ampal”), filed an adversary proceeding to avoid and recover a single prepetition transfer made by Ampal in Israel to the Israeli law firm Goldfarb Seligman & Co. (“Goldfarb”) as a preference pursuant to Sections 547 and 550 of the Bankruptcy Code. Goldfarb argued that the presumption against extraterritoriality prevented the Trustee from avoiding the transfer.
The Bankruptcy Court concluded that Congress did not intend the avoidance provisions of the Bankruptcy Code to apply extraterritorially, and the transfer at issue occurred in Israel. Accordingly, the Bankruptcy Court awarded judgment to Goldfarb, dismissing the action.
Ampal was a corporation organized under New York law that served as a holding company owning direct and indirect interests in subsidiaries primarily located in Israel. At all relevant times, Ampal’s senior management worked out of offices located in Herzliya, Israel, where its books and records were also maintained.
Goldfarb is a law firm organized under the laws of Israel with its only office in Tel Aviv, Israel.
Ampal’s senior management in Israel retained Goldfarb to provide legal services to Ampal in connection with various corporate and securities matters in Israel and compliance with Israeli securities laws.
In the course of the work for Ampal, Goldfarb issued a series of invoices. On or about June 11, 2012, Ampal instructed Bank Hapoalim located in Tel Aviv, Israel to transfer money from its account to Goldfarb’s account with Bank Hapoalim in Tel Aviv, Israel (the “Transfer”). Ampal did not specify how to apply the Transfer, and Goldfarb applied it to outstanding legal bills, which left a balance due on the invoices issued by Goldfarb. The Transfer did not fully satisfy Ampal’s debt because Goldfarb filed a general unsecured claim for unpaid prepetition legal fees.
The Bankruptcy Court framed the issue as whether the presumption against extraterritoriality barred the Trustee from avoiding the Transfer.
The Bankruptcy Court explained that the “presumption against extraterritoriality” is a “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.” The Bankruptcy Court further explained that the United States Supreme Court has outlined a two-step approach to determine whether the presumption forecloses the claim:
“At the first step, we ask whether the presumption against extraterritoriality has been rebutted— that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially.” If the first step yields the conclusion that the statute applies extraterritorially, the inquiry ends.
“If the statute is not extraterritorial, then at the second step we determine whether the case involves a domestic application of the statute, and we do this by looking to the statute’s ‘focus.’ If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory. Courts however, must be wary in concluding too quickly that some minimal domestic conduct means the statute is being applied domestically: it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”
With respect to the first step, the Bankruptcy Court concluded that the avoidance provisions of the Bankruptcy Code, in this case 11 U.S.C. § 547(b), do not apply extraterritorially. In reaching this conclusion, the Bankruptcy Court adopted positions taken by other courts previously addressing this issue:
- Nothing in the language or legislative history of Section 547 expressed Congress’ intent to apply the statute to foreign transfers.
- While property of the estate under Bankruptcy Code Section 541(a) included property wherever located and by whomever held that the trustee recovered under 11 U.S.C. 550 and any interest in property that the estate acquired after the commencement of the case, a transfer subject to avoidance as a preference did not become property of the estate under 11 U.S.C. § 541(a)(3) until it was recovered. As a result, “Section 541 does not indicate that Congress intended Section 547 to govern extraterritorial transfers.”
With respect to the second step, the Bankruptcy Court explained that the “focus” of the avoidance and recovery provisions is the initial transfer that depletes the property that would have become property of the estate. The initial transfer is the transfer the trustee must avoid, and Section 550(a) imposes liability on the initial transferee, a subsequent transferee of the initial transfer, or the entity for whose benefit the initial transfer was made.
The Bankruptcy Court ultimately concluded that the transfers at issue were predominantly made overseas, i.e. the Transfer occurred in Israel between a U.S. transferor headquartered in Israel and an Israeli transferee accomplished entirely between accounts at the same Israeli bank. Consequently, the Trustee was seeking to recover foreign transfers that required the extraterritorial application of Section 550(a).
In re: Fah Liquidating Corp., 572 B.R. 117 (Bankr. D. Del. June 13, 2017)
Emerald Capital Advisors Corp., in its capacity as trustee (the “Trustee”) for FAH Liquidating Trust, filed a Complaint in which it sought to avoid, recover, and have turned over alleged constructively fraudulent transfers (the “Transfers”) under Bankruptcy Code Sections 542, 544, 548, and 550.
The defendant, Bayerische Moteren Werke Aktiengesellschaft (“BMW”), moved to dismiss the Complaint for failure to state a claim upon which relief can be granted, arguing, in part, that the avoidance powers of Section 548 do not apply to the Transfers because they were extraterritorial transactions that occurred in Germany.
The Bankruptcy Court denied the motion to dismiss and held that Section548 applied extraterritorially to allow the Trustee to avoid fraudulent transfers located outside of the United States.
At issue were payments made pursuant to two agreements between the Debtors and BMW (the “Parties”).
In April 2011, the Parties entered into the Preliminary Development Agreement (the “Development Agreement”) for the installation of BMW N26B20 engines with parts and components into vehicles the Debtors were manufacturing, for the purpose of securing the project’s milestones with the view of the conclusion of a final Purchase, Supply and Development Agreement.
Three months later, in July 2011 the Parties entered into the Purchase, Supply and Development Agreement (as subsequently amended, the “Supply Agreement,” and together with the Development Agreement, the “Agreements”) for the supply of BMW N20B20 engines, other standard BMW Powertrain and chassis parts and components in Debtors’ vehicles.
The Agreements recognize that BMW was a corporation organized under the laws of the Federal Republic of Germany with its principal place of business in Munich, Germany. Further, in the Agreements, the Parties included provisions specifying that they were governed by German law and that Munich should be the exclusive place of jurisdiction.
Pursuant to the Development Agreement, the Parties agreed that the Debtors would pay BMW for its services in three tranches. The Development Agreement required, among other services, BMW to develop and deliver six prototype N26B20 engines and related parts.
Pursuant to the Supply Agreement, the Debtors would pay three, upfront, yearly installments to BMW for expanding its production capacity as needed to manufacture 515,000 engines. The upfront payments were to cover BMW’s “structural investment, machining, tooling, and development costs” and were to be paid to BMW “regardless of the actual volumes attained.”
In 2012, the Parties amended the Supply Agreement and modified the upfront payment schedule to reflect the Debtors reduced forecast for production needs. The new schedule identified the Debtors’ first upfront payment made in 2011, relieved the Debtors of their payment in 2012, and obligated the Debtors to make reduced installment payments yearly between 2013 and 2016.
According to the Agreements, the Debtors made wire transfers totaling more than $32 million. (collectively, the “Transfers”), which satisfied all three payments required by the Development Agreement and one of the upfront payments required by the Supply Agreement.
The Trustee alleges that BMW did not manufacture or deliver to the Debtors any engines pursuant to the Agreements, otherwise give any value to the Debtors in exchange for the Transfers, or return the Transfers or their value.
The Bankruptcy Court framed the issue as whether the presumption against extraterritoriality barred the Trustee from avoiding the Transfers.
The Bankruptcy Court explained that there is a presumption against applying federal laws extraterritorially “unless a contrary intent appears.” The Bankruptcy Court further explained that courts engage in a two-step inquiry when determining whether to apply the presumption against extraterritoriality.
First, a court must determine whether the presumption applies by “identifying the conduct proscribed or regulated by the particular legislation in question” and by considering whether that conduct “occurred outside of the borders of the U.S.” To determine whether the conduct regulated by the statute at issue occurred outside the borders of the United States, courts apply a “center of gravity” test, examining the facts of the case to see whether they have a center of gravity outside the United States. This “flexible” approach allows courts “to consider all component events of the transfers,” including “whether the participants, acts, targets, and effects involved in the transaction at issue are primarily foreign or primarily domestic.”
Second, if the presumption is implicated, a court must examine the lawmakers’ intent to determine whether Congress “intended to extend the coverage of the relevant statute to such extraterritorial conduct.”
The Bankruptcy Court concluded that the Transfers were extraterritorial, noting that the Transfers centered on development work undertaken by a German company pursuant to German contracts which required the application of German law, and that BMW was to deliver the work in Germany in exchange for payment by the Debtors in Euros. The Bankruptcy Court found it insufficient to overcome the primarily foreign nature of the Agreements that the Transfers originated from the United States by a Delaware corporation headquartered in California, using funds provided by United States taxpayers through a Department of Energy loan program.
However, the Bankruptcy Court further held that Congress’ intent was to extend the scope of Section 548 to cover extraterritorial conduct. The Bankruptcy Court observed that although “[t]he text of § 548 does not contain any express language or indication that Congress intended the statute to apply extraterritorially … courts may look to ‘context,’ including surrounding provisions of the Bankruptcy Code, to determine whether Congress nevertheless intended that statute to apply extraterritorially.” The Bankruptcy Court then read Section 548 harmoniously with Section 541 to find that Congress expressed an intent for Section 548 to apply extraterritorially, i.e. Section 541(a)(3) provides that any interest in property that the trustee recovers under Section 550 becomes property of the estate; Section 550 authorizes a trustee to recover transferred property to the extent that the transfer is avoided under either Section 544 or Section 548; and it would be inconsistent (such that Congress could not have intended) that property located anywhere in the world could be property of the estate once recovered under Section 550, but that a trustee could not avoid the fraudulent transfer and recover that property if the center of gravity of the fraudulent transfer were outside of the United States. Accordingly, the Bankruptcy Court held that the presumption of extraterritoriality did not prevent the Trustee’s use of Section 548’s avoidance powers.
42 Pa. C.S.A. § 8322 – Definition
As used in [the UCATA] “joint tort-feasors” means two or more persons jointly or severally liable in tort for the same injury to persons or property, whether or not judgment has been recovered against all or some of them.
42 Pa. C.S.A. § 8326 – Effect of release as to other tort-feasors
A release by the injured person of one joint tort-feasor, whether before or after judgment, does not discharge the other tort-feasors unless the release so provides, but reduces the claim against the other tort-feasors in the amount of the consideration paid for the release or in any amount or proportion by which the release provides that the total claim shall be reduced if greater than the consideration paid.
12 Pa. C.S.A. § 5108 – Defenses, liability and protection of transferee
(b) Judgment for certain voidable transfers. Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor under section 5107(a)(1) (relating to remedies of creditors), the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy the creditor’s claim, whichever is less. The judgment may be entered against:
(1) the first transferee of the asset or the person for whose benefit the transfer was made; or
(2) any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee.
(c) Measure of recovery. If the judgment under subsection (b) is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.
Impala Platinum Holdings Limited v. A-1 Specialized Services and Supplies, Inc., 2017 WL 2840352 (E.D. Pa. June 30, 2017)
Plaintiffs Impala Platinum Holdings Limited and Impala Refining Services Limited (together, “Impala”), unsecured creditors of A-1 Specialized Services and Supplies, Inc. (“A-1”), brought fraudulent transfer, breach of fiduciary duty, and deepening insolvency claims against the four owners and directors of A-1and affiliated entities.
In post-trial motions, among other things, Kumar argued that his liability, as an indirect beneficiary, for such constructive fraudulent transfers was limited to the amount of such constructive fraudulent transfers found by the jury less the amount of the settlement proceeds received by Impala from two owners/directors.
Impala argued that it had entered into a “joint tortfeasors release” with those owner/directors, which allowed it to recover both (a) the settlement proceeds; and (b) the percentage of the constructive fraudulent transfers for which the jury found Kumar “responsible,” i.e. 59%. This position would allow Impala to ultimately recover funds in an amount greater than the amount of constructive fraudulent transfers actually found by the jury.
The District Court agreed with Impala’s position.
Impala and A-1 had a business relationship that existed for many years involving the recycling of used catalytic converters such that the precious metals therein could be sold on the open metals market and to car companies. The financial crisis of 2008 led to the dissolution of that profitable relationship by greatly reducing the value of the extracted metals, which in turn left A-1 unable to repay Impala for unsecured advances totaling more than $200 million. Impala sued A-1 in the London Court of International Arbitration (“LCIA”) in December 2015 to collect on A-1’s debt and obtained a $200 million judgment. Impala, as unsecured creditors of A-1, then brought fraudulent transfer, breach of fiduciary duty, and deepening insolvency claims against the four owners and directors of A-1and affiliated entities in the District Court for the Eastern District of Pennsylvania.
In the middle of the jury trial in the District Court action, three owners/directors and one affiliate of A-1 (the “Settling Defendants”) settled with Impala. However, the jury was not informed of the settlement and trial proceeded as though they remained defendants, though the only actual remaining defendants were one owner/director (Kumar) and one affiliate (Alliance).
As to Impala’s claims against Alliance, the jury found in favor of Alliance. As to Impala’s claims against the Settling Defendants, the jury found in favor of Impala but only for certain constructive fraudulent transfers, awarding damages of $11.5 million. Evidence supported the conclusion that Kumar was liable for some of those constructive fraudulent transfers (approximately $4.5 million) as an indirect beneficiary.
The settlement agreement included a provision stating that any judgment for money damages entered against other alleged tortfeasors in the matter shall be reduced by the pro rata share of liability the jury apportioned to the Settling Defendants.
In order to implement those terms, the District Court – over Kumar’s objection – instructed the jury to apportion “each defendant’s share of liability in terms of a percentage of the total” based on such defendant’s responsibility for the liability. The jury allocated 59% to Kumar.
Based on the foregoing, with respect to the $11.5 million award, Impala sought to recover both (a) the $9.3 million of consideration received from the Settling Defendants under the Partial Settlement; and (b) $6.785 million from Kumar, representing 59% of $11.5 million. In other words, Impala sought to recover over $16 million on a $11.5 million verdict, citing the UCATA at 42 Pa. C.S.A. § 8326.
Citing the PUFTA at 12 Pa. C.S.A. § 5108, Kumar argued that his liability for the $11.5 million of constructive fraudulent transfers was limited to (a) the $2.2 million of cash that had not been returned in the Partial Settlement; or (b) in the alternative, no more than the approximately $4.5 million indirect benefit that he received from such transfers.
The District Court framed the issue as whether the jury’s verdict, combined with the Partial Settlement, awards Impala monies in excess of any limits PUFTA imposes on the amount recoverable by a creditor from a transferee. The District Court explained that PUFTA provides for compensatory damages pursuant to Section 5108(b), which states that “to the extent a transfer is voidable in an action by a creditor under section 5107(a)(1) … the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy the creditor’s claim, whichever is less.” The District Court agreed with Kumar that, under the facts of the case, the judgment must be for the value of the assets transferred.
The District Court further explained that, where the judgment is based upon the value of the asset transferred, “the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.” The District Court also agreed with Kumar that if a nexus existed between the $11.5 million of transfers that the Settling Defendants received and the settlement payments made to Impala, then the judgment against Kumar, as an indirect beneficiary, must be reduced by such settlement payments. However, notwithstanding the actual assignment of the remaining liens to Impala and a dollar-for-dollar return of all cash received, the District Court failed to find that such a nexus existed, citing the existence of the additional claims of breach of fiduciary duty and deepening insolvency based on the exact same transfers as creating a lack of a clear nexus.
The District Court then addressed whether the UCATA., could be applied to fraudulent transfers under PUFTA.
The District Court rejected Kumar’s argument that, under PUFTA, “the debtor-transferor is the sole tortfeasor, and there are no joint tortfeasors.” Instead, based on the fact that multiple transferees can be held jointly and severally liable under PUFTA, the District Court held that the owner/directors were all joint tortfeasors within the meaning of UCATA. In reaching such conclusion, the District Court focused on the transferees involvement in causing A-1, the debtor, to make such transfers.
The District Court rejected Kumar’s argument that UCATA applied to negligence and strict liability cases and not intentional torts. The District Court rejected such argument, holding that UCATA applies to all torts.
The District Court then held that UCATA applied to the case. The District Court noted that, in Charles v. Giant Eagle Markets, 513 Pa. 474 (Pa. 1987), the seminal case interpreting UCATA, the Pennsylvania Supreme Court held that the UCATA “affords the parties to the release an option to determine the amount or proportion by which the total claim shall be reduced provided that the total claim is greater than the consideration paid.” In Charles, the parties had signed a pro rata release agreeing that any further recovery obtained by the plaintiff was to be reduced to the extent of the pro rata share of the settling defendant. Even though adherence to the parties’ agreement resulted in the plaintiff receiving a “windfall,” insofar as the settlement combined with the non-settling defendant’s proportionate share of the jury award exceeded the total jury award, the court enforced the pro rata release.
The Court acknowledged that the concept of a “windfall” was important here, where Impala stood to receive $10.7 million from the Partial Settlement, as well as Kumar’s 59% share of $16 million ($9.44 million), which would net Impala over $20.1 million, which is more than $4 million beyond the jury’s total award. Nevertheless, the Court awarded such windfall to Impala. With respect to the $11.5 million of constructive fraudulent transfers focused on in this summary, Kumar was held liable for $6.785 million of such transfers when (a) he never received any cash or liens with respect to them; (b) his indirect benefit from such transfers was approximately only $4.5 million; and (c) all of the liens were reassigned and all but $2.2 million of the cash returned.