Funds Transferred From a Client Trust Account Can Be Property of the Debtor That Is Subject to a Fraudulent Transfer Claim
By: Adam C.B. Lanza
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Dayton Title Agency, Inc., where a title company’s bankruptcy estate sued a paid-off lender to recover a fraudulent transfer, the Sixth Circuit Court of Appeals held that the funds paid out of the debtor’s trust account constituted property of the debtor at the time of transfer for purposes of avoiding a fraudulent transfer. In Dayton Title, the chapter 7 trustee (“trustee”) commenced an adversary proceeding to avoid, as a constructively fraudulent transfer, a payment the debtor had made to its client’s lender from the trustee’s client trust account without waiting for a forged check to clear. The funds used to make the payment were from a provisional credit that the debtor’s bank extended to it. In response to the fraudulent transfer action, the lender argued, among other things, that the transfer was not constructively fraudulent because the money that the lender received was not property of the title agency, as the money was being held in trust for a third party. The bankruptcy court entered summary judgment in favor of the trustee, holding that majority of the payment was constructively fraudulent. On appeal, the district court held that only a small portion of the payment was fraudulent. However, the Sixth Circuit reversed the district court and affirmed the bankruptcy court’s ruling.