Parker v. Titan Mining (US) Corporation

 Dated: April 11, 2022 □ □□ Dene ( @@ 2 Daniel P. Collins, Bankruptcy Judge 3 4 UNITED STATES BANKRUPTCY COURT 5 DISTRICT OF ARIZONA 6 || In re ) Chapter 11 Proceedings ) 7 STAR MOUNTAIN RESOURCES, ) Case No: 2:18-bk-01594-DPC g || INC., ) ) | Adversary No.: 2:19-ap-00412-DPC 9 Debtor. ) ) 10 || JARED PARKER, in his capacity as) 11 || Plan Trustee for the Star Mountain Plan ) UNDER ADVISEMENT ORDER Trust, ) REGARDING TITAN 12 ) DEFENDANTS’ DAMAGE Plaintiff, ) CAPPING MOTION 13 ) v. ) 14 ) (Not for Publication — electronic 15 || TITAN MINING (US) CORPORATION,) — Docketing ONLY)! a Delaware corporation; TITAN ) 16 || MINING CORPORATION, a British _) Columbia, Canada corporation; ) 17 || NORTHERN ZINC, LLC, a Nevada ) 18 limited liability company, JOHN AND _ ) JANE DOES 1-10; BLACK ) 19 || CORPORATIONS 1-10; WHITE ) PARTNERSHIPS 1-10; and GRAY ) 20 || TRUSTS 1-10, ) ) 21 Defendants. ) 22 Before this Court is Defendant Titan Mining (US) Corporation’s (“Titan US”) and 23 || Defendant Titan Mining Corporation’s (“Titan BC”) (collectively “Defendants”) Motion 24 || (“Capping Motion”)? for Partial Summary Judgment Limiting Any Recoveries to the 25. || ' This decision sets forth the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. 26 2 Adv. DE 228. “Adv. DE” references a docket entry in this adversary proceeding (“Adversary Proceeding”): 2:19- ap-00412-DPC. 1 Amount Necessary to Satisfy Legitimate Creditor Claims under 11 U.S.C. § 550(a).3 2 Plaintiff, Plan Trustee, Jared Parker (“Plaintiff” or “Plan Trustee”) filed a Response 3 (“Response”)4 to the Capping Motion and Defendants filed their Reply (“Reply”).5 The 4 Court heard oral argument (“Hearing”) on the Capping Motion.6 5 Having heard the parties’ arguments and having reviewed their briefs, this Court 6 now holds that Defendants’ Capping Motion is denied because there are genuine issues 7 of material fact as to the amount of allowable claims against this bankruptcy estate. 8 However, the Court will resolve the parties’ dispute regarding capping avoidance 9 recoveries under § 550(a) since doing so, in the Court’s opinion, might aid the parties in 10 settlement discussions. The Court is compelled to follow binding Ninth Circuit precedent. 11 The Court holds that the Plan Trustee’s recovery under § 550(a) is not capped at the 12 amount of allowed creditor claims. 13 14 I. BACKGROUND 15 A. Debtor’s Bankruptcy. 16 On February 21, 2018, Star Mountain Resources, Inc. (“Debtor”) filed its 17 voluntary chapter 11 bankruptcy petition.7 On April 18, 2018, the United States Trustee 18 appointed the official committee of unsecured creditors (“Unsecured Creditors’ 19 Committee”).8 On May 8, 2019, the Unsecured Creditors’ Committee filed its Official 20 Committee of Unsecured Creditors’ Amended Chapter 11 Plan of Liquidation (“Plan”).9 21 The Court approved the Plan (“Confirmation Order”) on July 5, 2019.10 The 22 3 Unless indicated otherwise, statutory citations refer to the U.S. Bankruptcy Code (“Code”), 11 U.S.C. §§ 101- 1532. 23 4 Adv. DE 235. 5 Adv. DE 238. 24 6 Adv. DE 256. 7 DE 1. “DE” references a docket entry in this administrative bankruptcy case (“Administrative Case”): 2:18-bk- 25 01594-DPC. 8 DE 42. 1 Confirmation Order created a liquidating trust (“Liquidating Trust”). The Plan Trustee 2 was appointed trustee of the Liquidating Trust (“Liquidating Trustee”) to “complete the 3 liquidation process, including any and all litigation.”11 4 The Plan provided for the transfer of all Debtor’s assets to the Liquidating Trust 5 on the effective date of the Plan.12 As of October 27, 2021, the Liquidating Trust held 6 assets in the aggregate amount of at least $3,110,182.11.13 The Plan provides that, after 7 all allowed creditor claims are satisfied, the Plan Trustee must distribute remaining assets 8 to allowed equity interest holders (“Equity Holders”).14 Equity Holders from Classes 3-6 9 received beneficial interests in the Liquidating Trust, but the Plan also canceled all equity 10 shares in the Debtor.15 11 B. Creditor Claims Against Debtor. 12 The claims bar date in Debtor’s chapter 11 case was set for July 9, 2018.16 Aviano 13 Financial Group, LLC (“Aviano”) and SGS Acquisition, Ltd. (“SGS”) filed the two 14 largest claims against Debtor’s bankruptcy estate. Aviano filed a proof of claim asserting 15 an unsecured claim for $118,211,597 (“Aviano Claim”).17 SGS filed a proof of claim 16 asserting an unsecured claim for $28,300,000 (“SGS Claim”).18 Debtor filed objections 17 to the allowance of both the Aviano Claim and SGS Claim, neither of which have been 18 resolved.19 At the Hearing, the Plan Trustee confirmed he would actively pursue Debtor’s 19 20 11 DE 355. 21 12 DE 334. 13 Adv. DE 238 and Adv. DE 229. $3,110,182.11 is the amount of assets Defendants allege the Liquidating Trust 22 holds. The Plan Trustee did not dispute this allegation. However, this amount is subject to change if the Plan Trustee is successful in this Adversary Proceeding. The Liquidating Trust’s currents assets would be reduced by the $1 million note the Debtor received from the sale which the Liquidating Trustee now seeks to avoid. If the Liquidating 23 Trustee’s avoidance action is successful, he would also need to return the shares of Titan BC’s stock, which Defendants transferred to the Debtor as consideration for the sale. Those shares at one point totaled $2,968,900. 24 14 DE 334, page 13-14. 15 DE 334, page 13-14. 25 16 DE 59. 17 Proof of Claim (“POC”) 3-1. 1 objections against both of these claims.20 Excluding the Aviano Claim and SGS Claim, 2 the aggregate amount of unpaid creditor claims totals $2,707,681.26.21 3 Defendants allege that the potential universe of allowed creditor claims will 4 amount to no more than $3,899,611.26 once the Aviano Claim and SGS Claim are finally 5 allowed or disallowed.22 This $3,899,611.26 sum is compromised of the undisputed, 6 unpaid claims against the estate and $1,191,930 for the Aviano Claim.23 Defendants 7 argue that Aviano Claim cannot exceed $1,191,930 and that the SGS Claim must be 8 denied in its entirety.24 9 C. The Adversary Proceeding. 10 On November 19, 2019, Plaintiff initiated this Adversary Proceeding by filing a 11 complaint against Defendants.25 On May 8, 2020, Plaintiff filed a Second Amended 12 Complaint (“Complaint”).26 Count I of the Complaint asserts an actual and constructive 13 fraudulent transfer avoidance claim (“Fraudulent Transfer Claim”) against Defendants 14 under §§ 544, 548, and 550 and Nev. Rev. Stat. § 112.140.27 The purported fraudulent 15 transfer stems from a December 30, 2016 Purchase Agreement (“Purchase 16 Agreement”)28 entered into between Titan US, Titan BC, Northern Zinc LLC (“Northern 17 Zinc”), Debtor, Balmat Holding Corporation (“Balmat”), and St. Lawrence Zinc 18 Company, LLC (“SLZ”). The Purchase Agreement involved Titan US’s purchase of the 19 issued and outstanding shares of Balmat (“Balmat Shares”) from Northern Zinc.29 20 Plaintiff’s Complaint asserts that Debtor and Northern Zinc are not distinct entities but, 21 22 20 Adv. DE 256. The Court sees on the docket no evidence of any 2022 developments in this regard. 21 Adv. DE 238. Comprised of (i) unpaid unsecured claims totaling $2,507.681.26 and (ii) unpaid administrative claims totaling $200,000. 23 22 Adv. DE 228. 23 Adv. DE 228 24 24 Adv. DE 228 25 Adv. DE 1. 25 26 Adv. DE 60. 27 Adv. DE 60. 1 rather, are one-and-the-same and that certain directors and officers of the Debtor 2 orchestrated the fraudulent transfer.30 Defendants believe the Plan Trustee seeks to 3 recover $70 - $100 million on the Fraudulent Transfer Claim.31 4 5 D. Summary of the Parties’ Positions. 6 i. Defendants’ Capping Motion 7 Defendants seek to cap the Plan Trustee’s potential recovery on the Fraudulent 8 Transfer Claim under § 550(a) at $900,000, which Defendants argue is an amount more 9 than sufficient to fully pay all potentially legitimate creditor claims according to the 10 Plan.32 Defendants read § 550(a)’s phrase “for the benefit of the estate” as limiting the 11 Plan Trustee’s ability to recover from an avoided transfer no more than the amounts 12 required to satisfy allowed creditor claims.33 Put another way, Defendants contend 13 avoidance recoveries under § 550(a) cannot benefit Equity Holders.34 14 ii. Plaintiff’s Position 15 The Plan Trustee’s Response disputes the Defendants’ characterization of 16 § 550(a). The Plan Trustee argues that § 550(a)’s “for the benefit of the estate” language 17 sets no limit on the amount of recovery but requires only that an avoidance recovery 18 provide, at a minimum, some benefit to Debtor’s creditors.35 Essentially, the Plan Trustee 19 contends that § 550(a) only prevents Equity Holders from being the sole beneficiaries of 20 21 30 Adv. DE 60. 22 31 Adv. DE 256. The exact amount of damages the Plan Trustee seeks to recover on the Fraudulent Transfer Claim is unknown. At the Hearing, Defendants stated that the Plan Trustee had made a demand for around $70-$100 million. 23 32 Adv. DE 228, page 3. This amount is calculated by taking the value of the assets in the Liquidating Trust ($3,110,182.11), less what Defendants’ claim to be the potential universe of allowed claims ($3,899,611.26), plus 24 an additional cash cushion ($110,570.85). This calculation, of course, ignores the Plaintiff’s contention that, if the transfer is avoided, the note and stock received by the Debtor will need to be returned to the transferor of such note 25 and stock. 33 Adv. DE 228, page 8. 1 the recoveries on the Plan Trustee’s avoidance actions.36 The Plan Trustee argues that, if 2 he succeeds on the Fraudulent Transfer Claim, he may recover the value of the avoided 3 transaction in its entirety.37 4 iii. Supplemental Briefing on § 726(a) 5 At the Hearing, the Plan Trustee argued that his interpretation of § 550(a)’s 6 meaning is supported by other sections of the Code, specifically § 726 (“§ 726 7 Argument”).38 Because the Plan Trustee did not raise the § 726 Argument in his initial 8 Response, Defendants sought to file supplemental briefing on the § 726 Argument.39 The 9 Court also inquired whether § 541, which describes property of the estate, had any 10 bearing on the meaning of § 550(a).40 11 The crux of the Plan Trustee’s supplemental argument is that “for the benefit of 12 the estate” under § 550(a) cannot be read to limit excess recoveries because § 726(a)(6) 13 contemplates the distribution of a surplus estate to equity.41 The Plan Trustee’s reasoning 14 can be broken down into three parts. First, § 550(a) refers to the principle that there must 15 be at least one creditor before a fraudulent transfer action may be brought (“Gating 16 Requirement”).42 Second, once the Gating Requirement is satisfied, and assuming the 17 transfer is avoided, § 541(a)(4) provides that the transferred property becomes property 18 of the estate.43 Finally, the Plan Trustee must distribute the estate property in accordance 19 with the priorities under § 726(a).44 20 Defendants argue that the Plan Trustee’s § 726 Argument is unsupported by the 21 actual language of the Code or caselaw.45 Defendants also argue that the Plan Trustee’s 22 36 Adv. DE 235, page 5. 37 Adv. DE 235, page 6-7. 23 38 Adv. DE 256. 39 Adv. DE 256. 24 40 Adv. DE 256. 41 Adv. DE 261. 25 42 Adv. DE 261, page 4-5. 43 Adv. DE 261, page 5. 1 § 726 Argument is directly refuted by § 541(a)(3), which provides that only property 2 recovered under § 550(a) becomes property of the estate.46 3 II. JURISDICTION 4 This Court has jurisdiction over this bankruptcy case and this Adversary 5 Proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(H). 6 7 III. ISSUE 8 The issue before the Court is, in the case of a confirmed chapter 11 liquidating 9 plan, whether the Liquidating Trustee’s fraudulent transfer avoidance recovery under 10 § 550(a) may exceed the total amount of allowed creditor claims, thus enabling Equity 11 Holders to receive that surplus. 12 13 IV. ANALYSIS 14 A. Motion for Summary Judgment. 15 Bankruptcy Rule 7056 applies Rule 56 of the Federal Rules of Civil Procedure in 16 adversary proceedings. Under Rule 56, summary judgment is appropriate only if “the 17 movant shows that there is no genuine issue as to any material fact and the movant is 18 entitled to judgment as a matter of law.”47 At the summary judgment stage, the court does 19 not weigh the evidence or determine the truth of the matter but determines whether there 20 is a genuine issue for trial.48 The moving party bears the initial burden of proving an 21 absence of a genuine issue of material fact.49 Courts have held that the use of partial 22 summary judgment to determine the amount of recovery under § 550(a) is appropriate.50 23 46 Adv. DE 254, page 4-5. 24 47 Fed. R. Civ. P. 56(a); Fed. R. Bankr. P. 7056. 48 In re Marciano, 459 B.R. 27, 52 (9th Cir. B.A.P. 2011) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 25 248 (1986)). 49 Celotex Corp v. Catrett, 477 U.S. 317, 323 (1986). 1 Defendants have failed to demonstrate that there is no genuine issue of material 2 fact. The exact amount of allowed creditor claims against Debtor’s estate is unknown and 3 cannot be determined at this time.51 The Plan Trustee is supposedly pursuing the Debtor’s 4 objections to the allowance of the Aviano Claim and SGS Claim. The Court must deny 5 the Capping Motion for this reason and because Defendants’ request is contrary to Ninth 6 Circuit law. 7 B. Capping Avoidance Recoveries Under § 550(a). 8 The purpose of avoiding fraudulent transfers is to “preserve assets of the 9 bankruptcy estate for the benefit of creditors, . . . and prohibit ‘the transfer of a debtor’s 10 property with either the intent or effect of placing the property beyond the reach of its 11 creditors’”52 (emphasis added). 12 The Code provides that the avoidance of a fraudulent transfer and recovery on 13 account of such avoided transfer are two distinctly separate concepts.53 First, the trustee 14 or estate representative must demonstrate the right to avoid a transfer under §§ 544 and/or 15 548.54 Once the trustee demonstrates the right to avoid the transfer, the trustee must then 16 establish the amount of recovery under § 550(a).55 A trustee’s right to avoid a fraudulent 17 transfer does not necessarily mean the trustee may actually recover the entire value of 18 that transfer under § 550(a).56 For the purpose of this analysis, the Court will assume, but 19 not decide, that the Plan Trustee will succeed on his Fraudulent Transfer Claim. 20 Section 550(a) provides that: to the extent that a transfer is avoided under section 544, . . . [or] 548 . . ., the 21 trustee may recover, for the benefit of the estate, the property transferred, or, 22 if the court so orders, the value of such property (emphasis added). 23 51 Adv. DE 256. 24 52 In re Feiler, 230 B.R. 164, 169 (9th Cir. B.A.P 1999). 53 In re Acequia, 34 F.3d 800, 809 (9th Cir. 1994). 25 54 Id. 55 Id. 1 The meaning of the phrase “for the benefit of the estate” is not defined in the Code 2 or discussed in the legislative history. Courts across the country have wrestled with the 3 meaning of this phrase. There are two viewpoints.57 A few courts take a “narrow view” 4 of § 550(a), interpreting “benefit of the estate” to mean a direct benefit to creditors.58 5 However, the majority of courts, including the Ninth Circuit, take a “broad” view of 6 § 550(a). Under the “broad view,” there is a “benefit to the estate” when creditors are 7 either directly or indirectly benefited by the trustee’s avoidance action.59 8 Despite these differing views, the caselaw is clear that recovery under § 550(a) 9 must provide some benefit to creditors. A trustee or debtor-in-possession may not recover 10 the property transferred or its value solely for a debtor’s (i.e., equity) benefit.60 11 Here, there is no dispute that creditors stand to significantly benefit if the Plan 12 Trustee is successful on his Fraudulent Transfer Claim. The Plan Trustee’s recovery 13 under § 550(a) may make it possible to pay all allowed creditor claims in full under the 14 Plan. The heart of the parties’ dispute is whether the Plan Trustee can recover excess 15 funds under § 550(a) for the benefit of Debtor’s pre-petition Equity Holders. 16 17 57 See Ashley D. Champion, Navigating the Upside Down: Whether § 550 Provides the Ceiling or Floor to Recovery 18 in Fraudulent Transfer Litigation, 28 NO. 4 J. BANKR. L. & PRAC. NL. ART. 5 (2019) (providing an overview and more in-depth discussion of the two viewpoints, often referred to as the ceiling and floor approach). 58 See In re DSI Renal Holdings, LLC, 2020 WL 550987, at *6 (holding “for the benefit of the estate” means “for 19 the benefit of creditors”); see also In re Harstad, 155 B.R. 500, 511-12 (Bankr. D. Minn. 1993) (dismissing the preference action where payment to creditors would be unaffected by any recovery). 20 59 See In re Acequia, 34 F.3d at 811(holding courts construe the “benefit to the estate” requirement broadly, permitting recovery under section 550(a) even in cases where distribution to unsecured creditors is fixed by the plan 21 of reorganization and in no way varies with recovery of avoidable transfers); see also In re Trans World Airlines, Inc., 163 B.R. 964, 973 (Bankr. D. Del. 1994) (holding that unsecured creditors would benefit from the enhanced 22 value of the reorganized debtor by reason of their shareholder interest); In re Centennial Industries, Inc., 12 B.R. 99,102-103 (Bankr. S.D.N.Y 1981) (reasoning that recovery would benefit the estate even where payments to unsecured creditors were fixed because it would increase the likelihood of creditors receiving their future payments). 23 60 See In re Acequia, 34 F.3d at 811, citing with approval Wellman v. Wellman, 933 F.2d 215, 218 (4th Cir. 1991) (holding “a debtor-in-possession of a bankruptcy estate cannot maintain an avoidance action . . . unless the estate 24 would be benefited by the recovery of the transferred property”); see also In re New Life Adult Medical Care Center, Inc., 2014 WL 6851258, at *6 (Bankr. D. N. J. Dec. 3, 2014) (granting summary judgment in favor of transferee 25 where only equity stood to benefit from any recovery because the chapter 11 liquidating plan provided for full repayment of all creditor claims); Adelphia Recovery Trust v. Bank of Am., N.A., 390 B.R. 80, 92-97 (S.D.N.Y. 1 i. Moore v. Bay’s Application to § 550(a) 2 Some courts hold that § 550(a)’s phrase “for the benefit of the estate” codifies the 3 Supreme Court’s 1931 decision in Moore v. Bay.61 In Moore, the Supreme Court 4 considered whether a trustee’s recovery on a fraudulent transfer claim under the 1898 5 Bankruptcy Act62 was limited to the rights of unsecured creditors with a valid state law 6 claim (i.e., “the triggering creditor”).63 7 In Moore, the debtor granted a creditor a lien on his personal property that was 8 determined to be invalid under state law and therefore avoidable under the 1898 9 Bankruptcy Act.64 The sole issue before the Court was whether the lien was avoidable as 10 to creditors who had extended credit after the lien was recorded.65 The Court held that 11 the trustee could avoid the lien on the debtor’s property for the “benefit of the estate . . . 12 distributed in ‘dividends of an equal per centum on all allowed claims . . ..”66 In essence, 13 the Court held that even creditors who could not have brought the fraudulent transfer 14 action on their own behalf under state law could benefit from the trustee’s avoidance 15 action.67 Courts and litigants across the country, including the Ninth Circuit, have relied on 16 Moore for the proposition that a trustee may recover the value of the transfer in its entirety 17 for the benefit of all creditors.68 However, the application of Moore to avoidance 18 19 20 61 See Congress Credit Corp. v. AJC Intern, 186 B.R. 555, 558 (D.P.R. 1995); see also In re DLC, Ltd., 295 B.R. 593, 606 (8th Cir. B.A.P. 2003). 21 62 § 70e of the 1898 Bankruptcy Act was the precursor to § 544 of the Code. 63 Moore v. Bay, 284 U.S. 4 (1931). 22 64 Id. 65 Id. 66 See id. 23 67 Id. 68 See In re JTS Corp., 617 F.3d at 1112-13 (holding that the Supreme Court in Moore and the Ninth Circuit have 24 interpreted claims under § 544 and § 550 to require that “once avoidance is shown, the trustee’s recovery cannot be limited in certain situations”); In re Tronox, 464 B.R. 606, 616 (Bankr. S.D.N.Y. 2012) (holding that “[b]ecause a 25 trustee’s recovery under § 544(b) is governed by § 550, it follows that Congress intended to incorporate Moore’s rule of complete avoidance into § 550); In re Parjaro Dunes Rental Agency Inc., 174 B.R. 577, 596 (Bankr. N.D. recoveries under § 550(a) is not without criticism.69 Interestingly, the 1973 Report from 1 the Commission on the Bankruptcy Laws of the United States (“Commission”) 2 recommended 3 that Moore v. Bay be overruled; this is done by the addition of the phrase ‘to 4 the extent of such allowable claim or claims for the benefit of such creditor or creditors’ . . . . Consistent with the overruling of Moore v. Bay, any judgment 5 recovered by the trustee on such claim should benefit only the creditors on whose behalf such claims were asserted in the suit.70 6 7 The Commission’s recommendation was derived from §70e(1) and (2) of the 1898 8 Bankruptcy Act but overruled Moore, “which allowed the trustee to avoid a transfer or 9 obligation entirely without regard to the size of the claims of the creditors whose rights 10 and powers the trustee was asserting . . . .”71 But, alas, Congress did not adopt the 11 Commission’s recommendation. Moore’s application is supported by the Ninth Circuit’s 12 holding in In re Acequia.72 13 ii. Ninth Circuit: In re Acequia 14 In re Acequia is the Ninth Circuit’s seminal case addressing a trustee’s recovery 15 on a fraudulent transfer claim under § 550(a).73 In Acequia, the defendant, debtor’s 16 former controlling shareholder, fraudulently transferred the debtor’s assets to himself.74 17 At the time of bankruptcy, defendant and his ex-wife each held a 50% ownership interest 18 19 69 See In re DSI Renal Holdings LLC, 2020 WL 550987, at *9 (holding the Supreme Court’s decision in Moore was 20 not relevant to the issue of whether the trustee’s avoidance recoveries under § 550(a) may be limited); see also Robert B. Bruner, The Unexplored Limits of Moore v. Bay: Statutory and Equitable Basis for Limiting Money 21 Damage Awards on Fraudulent Transfer Claims, 26 NO. 3. J. BANKR. L. & PRAC. NL ART. 2 (2017) (discussing why Moore v. Bay’s application should be limited to allow bankruptcy courts judicial discretion to limit fraudulent 22 transfer money judgments); Emily A. Klienhaus, Let’s Rethink Moore v. Bay, ABI Journal (Sept. 2015) (noting that Moore v. Bay’s application may lead to “extraordinary results”). 23 70 EXECUTIVE DIRECTOR, COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, 93D CONG, REP. OF THE COMMISSION ON THE BANKRUPTCY LAWS PART I (Comm. Print 1973). 71 EXECUTIVE DIRECTOR, COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, 93D CONG, REP. OF THE 24 COMMISSION ON THE BANKRUPTCY LAWS PART II (Comm. Print 1973). 72 See Robert L. Haig & Alexander Lees, § 152:31. Remedies in bankruptcy—“For the benefit of the estate,” 14 25 BUS. & COM. LITIG. FED. CTS. § 152.31 5TH ED. (Dec. 2021) (noting In re Acequia interprets Moore expansively, meaning the entire transfer may be recovered even if creditors have been paid in full). 1 in the debtor pursuant to their martial settlement agreement.75 The debtor’s chapter 11 2 plan of reorganization provided for the full repayment of all creditor claims.76 3 In a post-confirmation fraudulent transfer action filed with the bankruptcy court 4 and then removed to the District Court of Idaho, Magistrate Judge Mikel Williams77 held 5 that the defendant transferred the debtor’s assets with actual fraudulent intent.78 The 6 Magistrate Judge found that at the time of the fraudulent transfer, the defendant 7 maintained complete control over the debtor’s finances and had no documentation 8 explaining the transfers to himself.79 9 In Acequia the Magistrate Judge also held that debtor’s standing under § 544(b) 10 to recover “for the benefit of the estate” was capped at the total amount of unsecured 11 creditor claims since the unsecured creditors were paid in full under the debtor’s plan of 12 reorganization.80 Although the trial court did not expressly consider § 550(a), the court 13 held that “[t]o allow Acequia to recover more than it paid out to unsecured creditors 14 would necessarily benefit the debtor . . . to the extent of several million dollars over the 15 amount of unsecured claims that were paid.”81 16 On appeal, the Ninth Circuit held that the “[M]agistrate [J]udge erred by limiting 17 [debtor’s] recovery of the fraudulent transfers to the amount of unsecured claims against 18 the bankruptcy estate.”82 In reaching its decision, the Circuit explicitly recognized the 19 separate concepts of avoiding a transfer and recovery from a transferee.83 The Ninth 20 Circuit held that that “[w]hile [a] transfer or obligation must be voidable as against a 21 creditor holding an allowable claim, the measure and distribution of recovery is not 22 75 Id. at 803. 23 76 Id. at 807. 77 The parties in Acequia consented to the Magistrate Judge’s entry of final orders in that District Court action. 24 78 Id. at 804-805. 79 Id. at 806. 25 80 In re Acequia, 34 F.3d at 810. 81 Id. at 811. 1 limited by the creditor’s right.”84 To illustrate this point, the Circuit provided a scenario 2 of a debtor who makes four separate transfers for $10 each before bankruptcy. The Circuit 3 emphasized that, once in bankruptcy, the trustee could avoid any of the four transfers, 4 totaling $40, even if there existed only one unsecured creditor with a claim for $5.85 5 In Acequia, the Ninth Circuit explicitly disagreed with the defendant’s contention 6 that the law “does not justify invoking section 544(b) once a trustee recovers transfers in 7 an amount sufficient to satisfy unsecured claims.”86 The Circuit reasoned that if the 8 defendant were correct, a party could escape fraudulent transfer liability “merely by 9 making several small transfers instead of one large transfer.”87 10 The Ninth Circuit also disagreed with the Magistrate Judge’s implicit 11 determination that recovery over the amount of unsecured creditor claims would only 12 benefit the debtor and not the estate.88 Citing Collier with approval, the court noted that 13 “in general, the trustee . . . may not recover the property transferred or its value when the 14 result is to benefit only the debtor rather than the estate” (emphasis added).89 However, 15 adopting the “broad view” of § 550(a), the Ninth Circuit found that the debtor’s surplus 16 recovery would “benefit the estate” by (1) aiding the debtor’s post-confirmation 17 repayment obligations under the plan of reorganization, including payments under a long- 18 term note, and (2) reimbursing the bankruptcy estate for the costs of pursuing the 19 avoidance action.90 20 Unlike the Magistrate Judge, the Ninth Circuit was not concerned with a surplus 21 recovery providing the debtor a “windfall.”91 The Circuit reasoned that the debtor had a 22 “greater equitable claim to the transferred funds,” given the fact that the defendant—the 23 84 Id. at 809, citing with approval 4 Collier on Bankruptcy ¶ 544.03[1] at 544-17 (15th ed. 1994). 85 Id. at 809. 24 86 In re Acequia, 34 F.3d at 810. 87 Id. 25 88 Id. at 811. 89 Id, citing Collier on Bankruptcy ¶ 550.02 at 550-6 to 550-7 (15th ed. 1994). 1 sole perpetrator of the fraudulent transfer—acted with actual fraudulent intent in 2 transferring the debtor’s assets to himself on the precipice of bankruptcy.92 The Ninth 3 Circuit reasoned that allowing the debtor to recover the entire value of the fraudulent 4 transfer would “merely make the bankruptcy estate whole.”93 5 In Acequia, the Ninth Circuit did not explicitly define § 550’s phrase “for the 6 benefit of the estate.” However, by emphasizing that the purpose of recovery is to make 7 the “estate whole,” the court effectively held that the “estate” is not limited solely to 8 creditors’ interests in estate property, but includes equity holders’ interests in estate 9 property.94 In essence, the Ninth Circuit was not concerned with whether a surplus 10 recovery benefited equity holders so long as the estate was restored to the condition it 11 would have been had the transfer never occurred. 12 In the case at bar, Defendants correctly note that the Ninth Circuit in Acequia was 13 presented with very different facts than this Court. The debtor in Acequia reorganized 14 and continued operations post-confirmation.95 Here, the Debtor is liquidating. In 15 Acequia, the debtor’s excess avoidance action recovery provided a continued benefit to 16 creditors by bolstering the debtor’s post-confirmation repayment obligations, improving 17 the likelihood of a successful reorganization.96 Here, any surplus recovery over the 18 amount needed to satisfy creditor claims will benefit Equity Holders, and those Equity 19 Holders were not issued new stock under the Plan. In fact, their pre-petition stock was 20 cancelled and only their interests in the Liquidating Trust remains. 21 Despite these differences, this Court cannot ignore the Ninth Circuit’s plain, if not, 22 sweeping pronouncement that the entire avoided transfer or its value may be recovered 23 24 92 In re Acequia, 34 F.3d at 812. 93 Id. 25 94 See id; see also In re DLC, Ltd., 295 B.R. at 607 (holding “the ‘estate’ is not synonymous with the concept of a pool of assets to be gathered for the sole benefit of unsecured creditors”). 1 under § 550(a) even if allowed creditor claims are paid in full.97 Since the Ninth Circuit’s 2 decision in 1994, lower courts often cite Acequia for the proposition that § 550(a)’s 3 phrase “for the benefit of the estate” does not cap recovery but sets a minimum floor— 4 some “benefit to the estate”—which the Ninth Circuit interprets broadly.98 5 iii. Survey of Cases Outside the Ninth Circuit 6 The Plan Trustee cites numerous cases outside of the Ninth Circuit where courts 7 have also refused to cap the amount of recovery under § 550(a). 8 In In re Tronox, the Southern District of New York Bankruptcy Court considered 9 whether § 550’s “for the benefit of the estate” clause limited the debtor’s recovery at the 10 amount of unpaid creditor claims.99 Prior to bankruptcy, the debtor’s predecessor 11 transferred valuable oil and gas assets to the defendant through a multi-staged 12 transaction.100 The purpose of the transaction was to shield the debtor’s assets from 13 environmental and tort liabilities.101 The transfer left the chapter 11 debtor 14 undercapitalized and saddled with legacy liabilities.102 In consideration for plan support, 15 the debtor settled with certain environmental and tort creditors who agreed to receive the 16 proceeds, if any, from the fraudulent transfer avoidance action in return for satisfaction 17 of their claims.103 The settlement, in turn, made it possible for the debtor to provide 18 general unsecured creditors an equity stake in the reorganized debtor, free of the legacy 19 liabilities.104 The debtor listed the value of the environmental and tort creditors’ claims 20 at anywhere between $1.9 - $6.2 billion in debtor’s disclosure statement.105 The debtor 21 97 Id. at 803. 22 98 See In re CVAH, Inc., 570 B.R. 816, 840 (Bankr. D. Idaho 2017) (finding Acequia held “it was improper to limit a trustee’s recovery under § 544(b)(1) and § 550 to the amount of unsecured claims in the bankruptcy case”); see also In re Burn, 360 B.R. 669, 672 (Bankr. C.D. Cal. 2007) (citing Acequia for the proposition that the trustee’s 23 recovery should not be limited by the amount of the creditor’s claim). 99 In re Tronox, 464 B.R. 606, 611 (Bankr. S.D.N.Y. 2012). 24 100 Id. at 609. 101 Id. 25 102 Id. 103 Id. at 610. 1 sought to recovery approximately $15.5 billion in the fraudulent transfer adversary 2 proceeding.106 3 The defendant argued that § 550(a)’s phrase “for the benefit of the estate” capped 4 the debtor’s recovery at the amount of unsecured claims.107 The debtor argued that the 5 plain language of § 550 and relevant case law imposed no limit on its potential 6 recovery.108 7 Relying on the Ninth Circuit’s decision in Acequia, the court held that “once an 8 avoidance action creates some benefit for creditors . . .” § 550(a)’s language “for the 9 benefit of the estate” does not cap the debtor’s recovery.109 10 The court reasoned that its holding was supported by the Code, the policy behind 11 § 550(a) and the trustee’s avoidance powers. First, the court found that § 541, which 12 defines the “estate” as “all legal or equitable interests of the debtor in property as of the 13 commencement of the case,” supported the court’s conclusion that the “estate” was not 14 limited to only the interests of creditors.110 Next, the court proposed that Congress could 15 have written § 550(a) to explicitly state that the trustee could recover an avoided transfer 16 only “to the extent of benefit to the estate,” if Congress had intended the phrase to limit 17 recovery on an avoidance action.111 18 Third, the Tronox court reasoned that § 550’s plain language and underlying 19 policy of “restoring the estate to its position prior to the transfer” supported not capping 20 the debtor’s recovery under § 550(a).112 Finally, the Tronox court discussed the 21 differences between state fraudulent transfer laws and a bankruptcy estate 22 representative’s avoidance powers. While state fraudulent transfer laws provide that “a 23 106 Id. 24 107 Id. at 609. 108 Id. 25 109 Id. at 614, citing In re Acequia, 34 F.3d at 811. 110 In re Tronox Inc., 464 B.R at 614. 1 creditor in a fraudulent transfer action may not recover more than ‘the amount necessary 2 to satisfy the creditor’s claim,’” the court highlighted that no such limit applies in 3 bankruptcy.113 An action “pursued by a bankruptcy estate representative [is] on behalf of 4 the ‘estate.’”114 The court concluded that § 550’s “for the benefit of the estate” 5 requirement was satisfied through the settlement with the environmental and tort 6 creditors, which directed all recovered proceeds in the adversary proceeding to creditors 7 and provided general unsecured creditors an equity interest in the reorganized debtor.115 8 In In re Trans World Airlines (“TWA”)116 and MC Asset Recovery, LLC, v. 9 Southern Co. (“MC Asset”),117 the courts refused to cap damages under § 550(a) even 10 though all creditor claims were paid in full. Those courts reasoned that the excess 11 avoidance recoveries would “benefit the estate” because unsecured creditors had received 12 stock in the reorganized debtor on behalf of their allowed claims.118 13 iv. This Court’s Discomfort in Applying Acequia’s Mandate to This Case 14 A common theme binds the Tronox, TWA, and MC Asset cases, making them 15 distinguishable from the case before this Court. In all three cases, the debtors were 16 undergoing a reorganization. The debtors’ plans of reorganization also provided creditors 17 with an equity stake in the reorganized entity on account of their claims. Here, the Debtor 18 is liquidating, and the Plan does not provide creditors with any equity stake in the Debtor. 19 The Tronox, TWA, and MC Asset courts did not confront the issue of whether a liquidated 20 debtor’s pre-petition equity holders were entitled to a surplus recovery under § 550(a). 21 These distinguishing features give the Court reason to pause, especially because 22 this Court finds Judge Owens’ recent decision in In re DSI Renal Holdings, LLC (“DSI 23 24 113 Id. at 615-16. 114 Id. 25 115 Id. at 617 (holding there “is no cap on, ... recovery other than the value of the property fraudulently transferred”). 116 In re Trans World Airlines, Inc., 163 B.R. at 974. 1 Renal Holdings”)119 involving a liquidated debtor to be the most factually analogous case 2 to the case at bar. The issue before Judge Owens was whether a chapter 7 trustee could 3 recover more than the amount of the allowed claims asserted against the debtors’ estate, 4 enabling the debtors’ equity holders to benefit from the excess recovery.120 5 The trustee’s fraudulent transfer action in DSI Renal Holdings stemmed from a 6 complex pre-petition restructuring agreement effectuated by certain defendants, 7 including the debtors’ directors and officers. 121 As a result of the complex transaction, 8 the debtors were stripped of their valuable assets, namely a renal business, for little to no 9 consideration.122 A little over a year later, the assets were sold to a non-defendant third 10 party for $689 million.123 The trustee sought $678 million in damages on account of the 11 estate’s fraudulent transfer avoidance action.124 The debtors’ claim register showed only 12 approximately $166 million in creditor claims.125 The court noted that if the trustee were 13 to recover $678 million, all creditor claims would be paid in full and there would be a 14 substantial surplus distribution to the debtors’ equity holders.126 15 The defendants in DSI Renal Holdings argued that § 550(a) prevented the trustee 16 from recovering more than the amount necessary to pay all allowed creditor claims.127 17 The trustee, relying on Tronox, argued § 550(a) did not limit his recovery but only 18 “require[d] . . . that avoidance proceeds provide, at minimum, some benefit to 19 creditors.”128 The trustee further relied on the Supreme Court’s decision in Moore to 20 support his argument that the challenged transfer should be “avoided in its entirety . . . to 21 22 119 In re DSI Renal Holdings, LLC, 2020 WL 550987, at *1. 120 Id. at *4. 23 121 Id. at *3. 122 Id. at *3. 24 123 Id. at *4. 124 Id. at *4. 25 125 In re DSI Renal Holdings, 2020 WL 550987, at *4. 126 Id. 1 restore the [d]ebtors’ estates to their prior position regardless of the quantum of creditor 2 claims.”129 3 Relying on Third Circuit precedent, Judge Owens held that the trustee’s recovery 4 under § 550(a) was limited to the “total amount necessary to satisfy all allowed creditor 5 claims and expenses in the [d]ebtors’ bankruptcy case as provided for under section 6 726(a)(1)-(5),” including the allowed compensation of the trustee and his 7 professionals.130 Judge Owens reasoned that receipt of a more substantial recovery would 8 be impermissible because it “provide[d] no accompanying benefit to creditors,” given 9 that the creditors would be fully paid.131 The court further held that such excess recovery 10 would “give rights and value to the [d]ebtors to which they were not entitled outside, nor 11 were given inside, bankruptcy.”132 12 Judge Owens supported her holding by distinguishing the courts’ decisions in 13 Tronox and TWA. First, Judge Owens noted that the Tronox and TWA courts were tasked 14 with a different question—"whether creditors may receive more than their allowed 15 claims from avoidance recoveries.”133 Judge Owens reasoned that, unlike the creditors 16 in Tronox and TWA, who received an equity stake in the reorganized debtor, recoveries 17 above the amount of creditor claims in the debtors’ chapter 7 case provided no 18 accompanying benefit to creditors once paid in full.134 19 Finally, Judge Owens debunked the chapter 7 trustee’s reliance on Moore. Judge 20 Owens clarified that the Supreme Court’s decision in Moore addressed whether 21 “avoidance and recovery under section 544 is for the benefit of all creditors . . . and . . . 22 not limited to the amount of the triggering creditors’ claims.”135 Judge Owens notably 23 129 Id. 24 130 Id. at *9. 131 In re DSI Renal Holdings, 2020 WL 550987, at *7. 25 132 Id. 133 Id. at *8. 1 concluded that the Court’s decision in Moore was irrelevant to the decision of whether 2 to cap avoidance recoveries to the extent such recoveries only benefited debtor’s pre- 3 petition equity holders, like in the debtors’ case.136 4 Like DSI Renal Holdings, the Plan Trustee here seeks to recover anywhere from 5 $70 - $100 million on his Fraudulent Transfer Claim, while Defendants allege the 6 potential universe of creditor claims totals no more than approximately $3.8 million.137 7 Although the Court is not determining the allowed amount of creditor claims, taking 8 Defendants’ $3.8 million estimate as true would mean Equity Holders could realize 9 approximately $66 million138 from the Plan Trustee’s avoidance action. 10 Given the liquidating nature of Debtor’s case and the specific facts presented in 11 the case at bar, the Court finds Judge Owens’ reasoning in DSI Renal Holdings germane 12 to this Adversary Proceeding. Although the debtor in DSI Renal Holdings was in a 13 chapter 7 liquidation, this difference is immaterial.139 Judge Owens’ sound reasoning 14 equally applies to a chapter 11 liquidation. However, it should be noted that Judge 15 Owens’ ruling was largely the inescapable product of binding Third Circuit precedent.140 16 The Third Circuit interprets § 550(a)’s phrase “for the benefit of the estate” to mean “for 17 the benefit of creditors,” prohibiting debtors from benefiting from the trustee’s avoidance 18 powers.141 19 In this Court’s view, allowing Debtor’s Equity Holders—some of whom 20 orchestrated the allegedly fraudulent transfer—to recover a surplus to the tune of millions 21 of dollars would produce an absurd result. For example, under Acequia’s reasoning, a 22 136 Id. 137 Adv. DE 228 and Adv. DE 256. 23 138 The Court reaches this number by subtracting the alleged potential universe of allowed creditor claims ($3.8 million) from the minimum recovery value the Plan Trustee seeks ($70 million). 24 139 See In re DSI Renal Holdings, 2020 WL 550987, at *6. 140 Id. at *6. 25 141 See Id, citing In re Majestic Star Casino LLC, 716 F. 3d 736, 761 (3d. Cir. 2013) (concluding that “[a] debtor is not entitled to benefit from any avoidance”); In re Messina, 687 F.3d 74, 82(3d Cir. 2002) (holding “for the debtors 1 $1,000 allowed unsecured claim would open the door to a trustee filing a fraudulent 2 transfer avoidance adversary proceeding, and despite the de minimis claim amount, the 3 trustee could be in line to recover tens of millions of dollars for the benefit of the debtor’s 4 pre-petition equity holders. But for the $1,000 unsecured claim, the equity holders 5 themselves could not have pursed that fraudulent transfer action or benefited from the 6 recovery. While the Court recognizes that many of Debtor’s Equity Holders were not 7 involved in the alleged fraudulent transfer, their remedy should not be found in the Plan 8 Trustee’s avoidance powers under §§ 544 and 548 or the recovery on the avoided transfer 9 under § 550(a). Innocent equity holders have rights outside of bankruptcy, which could 10 remedy any damages they sustained by virtue of the fraudulent transfer orchestrated by 11 the Debtor’s directors and officers.142 12 The Court further questions the fact that the Plan Trustee's substantial recovery 13 will benefit not only Equity Holders but the Plan Trustee's counsel, whose 45% 14 contingency fee arrangement undoubtedly plays a role in the demand for recovery to 15 Equity Holders. In this Court’s view such outcome does not support the underlying 16 purpose of fraudulent transfer laws. Fraudulent transfer laws were designed to allow a 17 creditor to avoid an improper transaction by a debtor who unfairly reduced its assets to 18 the detriment of its creditors.143 The Plan Trustee’s fraudulent transfer avoidance powers 19 are, at bottom, creditor remedies. Moreover, in this Court’s view, the fundamental 20 purpose of recovery under § 550(a) should be to enlarge the estate for the benefit of 21 creditors.144 22 23 24 142 Shareholders, in general, have many legal remedies outside of bankruptcy to hold directors and officers 25 accountable, including actions for corporate waste, breach of fiduciary duty, and shareholder derivative lawsuits, none of which were brought here. 1 C. The § 726 Argument. 2 Lastly, to address all the parties’ arguments, the Court must say it is not persuaded 3 by the Plan Trustee’s § 726 Argument. Although § 726(a)(6) provides for the distribution 4 of a surplus estate to the debtor or, in this case, Equity Holders, § 726 does not have any 5 direct bearing on whether recovery under § 550(a) is “for the benefit of the estate.” 6 The Plan Trustee’s argument that, if the transfer is avoided, the fraudulently 7 transferred property or its value comes back into the estate under § 541(a)(4) does not 8 apply to the case at bar. Section 541(a)(4) applies to property that is either preserved for 9 the estate’s benefit or ordered transferred to the estate under §§ 510(c) or 551, neither of 10 which apply here. Section 510(c) involves the equitable subordination of claims, while 11 § 551 prevents junior lienholders from improving their position at the expense of the 12 estate when a trustee avoids a senior lien.145 13 If § 541(a)(4) did apply to the facts at hand, the Plan Trustee’s interpretation of 14 § 541(a)(4) would render § 541(a)(3) meaningless.146 Section 541(a)(3) expressly 15 provides that only property recovered by the trustee pursuant to an avoidance action 16 becomes property of the estate. The fact that a distinctly separate subparagraph of § 541 17 references property recovered by a trustee from a fraudulent transfer avoidance action 18 under § 550, highlights Congress’s intent that avoidance recoveries are not subject to 19 § 726’s distribution scheme until actually realized and brought into the estate under 20 § 541(a)(3).147 21 22 D. The Plan Trustee’s Recovery is Not Capped By § 550(a). 23 Notwithstanding this Court’s belief that the Third Circuit and DSI Renal Holdings 24 25 145 In re Van de Kamp’s Dutch Bakeries, 908 F.2d 517, 519 (9th Cir. 1990) citing S. Rep. No. 989, 95th Cong., 2d Sess. 91 (1978). 1 correctly analyzed § 550(a), this Court is bound by the Ninth Circuit’s sweeping 2 pronouncement in Acequia to the effect that recovery under § 550 is not capped at the 3 amount of allowed creditor claims.148 The Court questions the wisdom of applying 4 Acequia’s holding in a liquidation context where recovery above the amount needed to 5 pay allowed creditor claims will provide no accompanying benefit to creditors. Debtor’s 6 confirmed liquidation Plan did not distribute to allowed creditors an equity interest in the 7 Debtor.149 A distribution to equity from this Adversary Proceeding will not serve to 8 support a reorganized, operating entity, but will solely benefit Equity Holders on account 9 of their pre-petition equity interests in the Debtor. The Court, nonetheless, must find that 10 the Plan Trustee’s transfer avoidance recovery, if any, is not limited to the amount 11 necessary to pay all allowed creditor claims against the Debtor’s estate. 12 13 V. CONCLUSION 14 For the reasons stated above, Defendants’ Capping Motion is hereby denied. 15 Genuine issues of material facts exist as to the potential universe of allowed creditor 16 claims in this case. However, to aid the parties as they continue to prepare for trial, the 17 Court hereby advises the parties that it is compelled to find that, based on Ninth Circuit 18 precedent, the Plan Trustee’s recovery, if any, under § 550(a) in this fraudulent transfer 19 avoidance Adversary Proceeding will not be limited by the amount of allowed creditor 20 claims against this estate. 21 22 IT IS ORDERED 23 DATED AND SIGNED ABOVE. 24 148 In re Acequia, 34 F.3d at 804. 149 At the Hearing, the Court asked the Plan Trustee whether any party had traded a claim against the estate for an 25 allowed equity interest in the Debtor. The Plan Trustee could not definitively answer the question and subsequently filed a Notice of Requested Information (“Notice”) after the Hearing. Adv. DE 253. Defendants responded to the 1 To be Noticed through the BNC to: 2 Interested Parties 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25