Fraudulent Transfers: U.S. Supreme Court Lets an Injustice Stand (Henry v. Weiss)

By: Donald L. Swanson

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An injustice and a travesty

The case is Henry & Buresh v. Weiss (Supreme Court Case No. 17-1210). The U.S. Supreme Court denied certiorari on May 29, 2018.

This denial allows an injustice to stand, which is a travesty.

I’ll try to explain.

Facts

Michael Bello was sole shareholder, director, and president of Walldesign, Inc. Over a ten year period, Bello deposited nearly $8 million of Walldesign funds into a separate Walldesign account and used such funds to support a lavish lifestyle.

Mr. & Mrs. Buresh owned real property in St. Helena, California. In 2009, they sold the property to one of Bello’s entities—their purpose was to produce cash for paying debts and funding retirement. The sale was for a fair value and at arms-length. Over the next two years, Bello made purchase-price payments totaling >$200,000 to Buresh from checks drawn on the separate Walldesign account. They had no other relationship with Bello.

Ms. Henry provided interior design and construction-related services for Bello over nine years, at her standard rates and in arms-length transactions. Bello paid for her services by checks totaling “over $230,000” drawn on the separate Walldesign account. She had no other relationship with Bello.

Bankruptcy Court Proceedings

Walldesign filed Chapter 11 on January 4, 2012. An Official Creditors Committee filed ninety-six fraudulent transfer lawsuits to recover payments Bello made from the separate Walldesign account, including lawsuits to recover $220,350.00 from Buresh and $232,948.16 from Henry.

On October 2, 2014, the Bankruptcy Court, on summary judgment, dismissed the lawsuits against Buresh and Henry. The Court found that they:

Received the challenged payments, “(i) for value, (ii) in good faith, and (iii) without knowledge” of “voidability”; and

Were not “initial transferees under 11 U.S.C. § 550(a)(1).”

Appellate Proceedings

The Committee appealed to the U.S. District Court, which reversed, holding that Buresh and Henry were “initial transferees.” They appealed to the Ninth Circuit, which affirmed. Then they appealed to the U.S. Supreme Court, which denied certiorari.

So, the case is remanded to the Bankruptcy Court “for further proceedings” consistent with the Ninth Circuit’s ruling. This means, apparently, that Buresh and Henry will be required to return the money they received.

Fraudulent Transfer Laws

–State Laws

Over the past century, uniform laws on fraudulent transfers [Fn. 1] have been adopted by all but a handful of the U.S. States and Territories.  These uniform laws protect transferees who acted in good faith and gave reasonably equivalent value in exchange for the transfer.

Such uniform laws, over the past century, have contained some version of this provision protecting initial transferees in actual fraudulent intent cases:

“A transfer is not voidable [for actual fraudulent intent] against a person [including initial transferees] who took in good faith and for a reasonably equivalent value.”  [Fn. 2]

[Note:  Such protections for initial transferees against “actual fraud” claims do not extend to “constructive fraud” claims.  This distinction is unremarkable, however, since an essential element of a constructive fraud claim is the failure to give a reasonably equivalent value in exchange for the transfer.]

Under such State laws, both Henry and Buresh win.

–Bankruptcy Laws

The Bankruptcy Code has its own fraudulent transfer statutes (§§ 548 & 550) that are similar to the uniform state statutes. But there is one huge difference.  Unlike uniform state laws, § 550 of the Bankruptcy Code:

distinguishes between an “initial transferee” and a subsequent transferee;

provides that only a subsequent transferee can assert a “good faith” and “for value” defense; and

makes “initial transferees” strictly liable for the transferor’s wrongdoings.

The Ninth Circuit explains that, under § 550,  the distinction between initial and subsequent transferees is “critical”:

Plaintiffs “have an absolute right of recovery” against the “initial transferee”; and

Subsequent transferees are the only ones who can use the “for value, in good faith, and without knowledge” defense.

Under § 550, both Henry and Buresh will, apparently, lose.

The Ninth Circuit dissent by Judge Nguyen does yeoman’s work trying to fit Henry and Buresh into the subsequent transferee category—but, ultimately, to no avail.

Even the Ninth Circuit acknowledges that “the equities” of its result “seem harsh.”

What Was Congress Thinking?!

Why would Congress depart from uniform fraudulent transfer laws that have applied throughout the U.S. over the past century?

The Ninth Circuit explains Congress’s action:

“By enacting 11 U.S.C. § 550, Congress assigned liability for repaying voidable transfers” to “initial transferees, like the appellants,” because they “generally stand in a better position to guard against corporate fraud than do unsuspecting creditors.”

Seriously?! That’s the reasoning?! Congress created an irrebuttable presumption that initial transferees are in a “better position” than “unsuspecting creditors” to detect corporate fraud?!

This case proves how ridiculous the irrebuttable presumption actually is.

A “Better Position” Comparison

Let’s compare the Henry and Buresh circumstances with the largest unsecured creditors in the Walldesign bankruptcy.

–Henry & Buresh

Henry and Buresh are individuals trying to make money for basic living and retirement purposes. And they exchanged real-and-fair value for the payments they received.

As the Bankruptcy Court found from evidence presented, Henry and Buresh had no way of knowing about Bello’s fraud.

–Major Unsecured Creditors

Here are three of the largest unsecured claims filed in the Walldesign bankruptcy:

Claim # 65-1: $9,199,977.46 by Liberty Mutual Insurance Company for “Debtor’s Workers’ Compensation Self-Insurance,” which had been in place since 2004;

Claim # 73-2: $3,256,033.00 by American Home Assurance Co., for “general liability” and other “insurance coverages” over “varying periods” from 1999 through 2011; and

Claim # 72-3: $2,080,353.71 by VFS Financing, Inc., as a “deficiency claim,” after liquidating its Beechcraft airplane collateral, under a promissory note dated August 22, 2008.

–Seriously?!

Congress actually believes that Henry and Buresh are in a “better position” to detect Bello’s corporate fraud than these three creditors?!

That might be true for insider transactions, but it’s certainly not true for arms-length transactions like these.

Scheesh!!!

–Ninth Circuit Piles On

And the Ninth Circuit even says Henry and Buresh are in a “better position”:

“As between Walldesign’s creditors, who had no idea of the fraudulent transfers, and the Bureshes and Ms. Henry, who had some indication of these irregularities, the Bureshes and Ms. Henry stood in a better position to monitor for fraud.”

What the Ninth Circuit means by “these irregularities” is the fact that checks to Henry and Buresh were drawn on a Walldesign bank account. But the Bankruptcy Court found otherwise, and as dissenting Judge Nguyen explains:

“Businesses often pay for their executives’ personal expenses . . . I don’t see anything inherently suspicious about Bello paying his personal debts from the account of a closely-held corporation”; and

Buresh and Henry are “not well placed to question the legitimacy of a reputable organization’s bank account.”

And how can anyone actually say, with a straight face, that Henry and Buresh were in a “better position” to detect fraud than Liberty Mutual and American Home and VFS Financing? Those three creditors have combined claims of $14.5 million and did business directly and extensively with Bello and Walldesign over long periods of time.

Committee and Liquidating Trustee

The Committee started the lawsuits against Henry and Buresh, but a liquidating trustee (Brian Weiss) took over somewhere along the way.

Who is making the judgment calls on pursuing these two cases? Both cases pursue highly-sympathetic defendants. And the amounts being pursued would create but a speck against the vast universe of claims in the Walldesign bankruptcy case.

Why pursue such claims in the first place?

–Just because someone can be a bully . . . doesn’t mean they have to.

And it appears likely that the costs of pursuing these claims will exceed the amounts (if any) that can be recovered.

Conclusion

The entire case is an injustice and a travesty—and we haven’t even mentioned the defense fees incurred by Henry and Buresh.

Everyone is to blame:

Congress. Why would Congress depart from uniform fraudulent transfer laws and create an irrebuttable presumption, under § 550, that unsuspecting “initial transferees” are in a “better position” to detect corporate fraud than “unsuspecting creditors” like the three noted above?

Ninth Circuit. Why couldn’t the Ninth Circuit find a way, as suggested by Judge Nguyen, to correct the injustice?

Supreme Court. Why would the Supreme Court punt on this issue, when it could have addressed and corrected the injustice?

Committee/Trustee. Why would the Committee and Trustee pursue these claims against innocent individuals—in favor of the massive creditors listed above—especially since the lawsuits against Henry and Buresh are likely to produce no-net-value to the bankruptcy estate?

Can’t someone correct or prevent the injustice? Anyone?

Footnotes

Footnote 1.  Such uniform state laws consist of:

(i) The Uniform Fraudulent Conveyance Act, promulgated by the Conference of Commissioners on Uniform State Laws in 1918;

(ii) a revised version in 1983, titled the Uniform Fraudulent Transfer Act; and

(iii) a revised version in 2014, titled the Uniform Voidable Transactions Act.

Footnote 2.  Such language is contained in Section 8 of both the Uniform Fraudulent Transfer Act and the Uniform Voidable Transactions Act.  The same effect is created by Section 9 of the Uniform Fraudulent Conveyance Act, which provides for remedies of creditors:

“as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase” (emphasis added).

 

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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