Court Discusses Double Recoveries Under the Bankruptcy Code

In bankruptcy actions, creditors will often seek to recover some or all of the debts they are owed. While they have the right to do so, the Bankruptcy Code prohibits them from recovering the same debt twice. As discussed by the Ninth Circuit Court of Appeals in a recent case, though, payments and transfers that may seem like double recovery often are not recoveries at all. If you have debt obligations you cannot meet, you may be eligible to file for bankruptcy, and you should speak to a California bankruptcy lawyer.

History of the Case

It is alleged that in February 2018, the defendants entered into an agreement with the plaintiffs for the sale of a warehouse in California for $8 million. The plaintiffs’ company, a California business, transferred a down payment of approximately $2.4 million, with the remaining amount financed through a loan secured by the warehouse. The title of the warehouse was transferred to a special purpose entity created by the plaintiffs. This transaction was later discovered to be part of an extensive Ponzi scheme.

Reportedly, in December 2018, federal authorities raided the plaintiffs’ business operations, uncovering substantial fraud, which led to the plaintiffs and several related entities filing for Chapter 11 bankruptcy. The warehouse, owned by a non-debtor entity, was included in federal forfeiture actions against the plaintiffs’ properties. Despite an attempt by one trustee to enforce an automatic stay against the forfeiture, the sale of the warehouse proceeded, and the loan was repaid from the sale proceeds.

It is alleged that a “Coordination Agreement” was later negotiated between the trustees and the federal government to resolve competing claims on the forfeited properties. The trustee, not initially involved in the negotiations, signed the agreement, which led to the approval of the agreement by the bankruptcy and district courts. Subsequently, the trustee filed an adversary complaint to recover the down payment transferred to the defendants, alleging fraudulent transfer under the Bankruptcy Code. Both parties moved for summary judgment, with the defendants arguing that the trustee’s claims were satisfied through the Coordination Agreement, thus barring further recovery. The bankruptcy court, however, granted summary judgment in favor of the trustee, leading to the defendants’ appeal.

Double Recoveries Under the Bankruptcy Code

On appeal, the court focused on whether the trustee’s recovery of the down payment through the Coordination Agreement constituted a double recovery under § 550(d) of the Bankruptcy Code. The court first clarified the nature of the transfer in question, emphasizing that the $2.4 million down payment, not the warehouse itself, was the subject of the fraudulent transfer claim.

It determined that the Coordination Agreement, which addressed the division of forfeited properties and other claims between the government and the trustees, did not constitute a recovery of the fraudulent transfer by the trustee under § 550(a). The court noted that the agreement’s primary focus was on the allocation of properties and not on satisfying specific fraudulent transfer claims.

The court also highlighted that the trustee did not release any fraudulent transfer claims through the agreement, nor did she receive any monetary benefit equivalent to the down payment. It further explained that the government’s recovery of the warehouse did not equate to the trustee’s recovery of the fraudulent transfer, as the proceeds from the warehouse sale did not benefit the estate. Therefore, allowing the trustee to pursue recovery of the down payment did not violate the single satisfaction rule under § 550(d).

As such, the court concluded that the Coordination Agreement did not impair the trustee’s ability to seek recovery from the defendants and that the bankruptcy court correctly granted summary judgment in favor of the trustee.

Meet with a Trusted California Bankruptcy Attorney

If you are carrying debts you are unable to pay, you may be eligible to file for bankruptcy, and you should speak to an attorney. Matthew D. Roy is a trusted California bankruptcy lawyer who can assess your case and help you pursue the best legal result possible. To arrange a meeting with Mr. Roy, please use our online form or call us at (916) 361-6028.