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A Trustee May Not Recover an Actual Fraudulent Transfer Claim if the Funds are Returned to the Debtor Pre-Petition

By: Carina Zupa

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In general, a trustee may avoid and recover certain transfers made by a debtor prior to its bankruptcy filing.  In In re Incare,[1] the United States Bankruptcy Court for the Eastern District of Pennsylvania held a trustee could not recover funds fraudulently transferred prior to the bankruptcy filing because the recipient had returned the funds to the debtor.[2] Dr. Mehdi Nikparvar was the managing and sole member of Incare, the debtor.[3] Incare initially provided hospitalist service managers to various hospitals in Ohio, Pennsylvania, and New York. However, in 2010, Dr. Nikparvar turned Incare into an urgent care provider with urgent care facilities in Pennsylvania and New Jersey.[4] These facilities were individual LLCs owned by Incare.[5] Dr. Nikparvar was the sole shareholder of all the entities and provided physician services.[6]  In 2011, Incare began experiencing cash flow problems, and in “early 2012” Incare stopped “making money.”[7]

In June 2013, Incare filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). Shortly thereafter, the case was converted to chapter 7 and a trustee was appointed.[8] In May 2014, the trustee filed a complaint against Dr. Nikparvar, his wife Niusha Houshmand, Merck Real Estate, the Nikparvar Family Trust, and the Advanced Urgent Care entities seeking to avoid and recover two sets of transfers under both the Bankruptcy Code and State law.[9] The first set involved transfers to Dr. Nikparvar from Incare, including: a $412,791.40 transfer on April 30, 2010, which Dr. Nikparvar used to acquire property and additional distributions throughout 2010 totaling $165,388.60. The court found the record insufficient to meet the constructive fraud requirements, and that Dr. Nikparvar probably returned equivalent value to Incare via his physician services and monetary contributions.[10]  Second, the trustee alleged that a series of thirteen transfers made from Incare to Advanced Urgent Care P.C., totaling $1,779,191.51,[11] were actually and intentionally fraudulent under 11 U.S.C. § 544(b), via 12 Pa. C.S. § 5104(a)(1).[12] In his testimony, Dr. Nikparvar admitted that, after a judgment creditor successfully attached and froze Incare’s bank account, “he caused Incare to transfer funds to Advanced to prevent [the judgment creditor] from again attaching Incare’s bank account.”[13] Thus, the court found the thirteen transfers were made with actual intent to hinder and delay the payment of the creditor. Despite this, the court held the Trustee failed to overcome the “’diminution of the estate’ limitation” under § 544(b) because Advanced Urgent Care had subsequently made payments to Incare, totaling $1,779,738.95, and so “equitable adjustment under 11 U.S.C. § 550 preclude[d] the Trustee’s recovery.”[14]

Section 5108(a) of the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”) provides an affirmative defense to transfers deemed voidable under section 5104(a)(1). Section 5108(a) states: “A transfer or obligation is not voidable under section 5104(a)(1) (relating to transfer or obligation voidable as to present or future creditor) against a person that took in good faith and for a reasonably equivalent value given the debtor or against any subsequent transferee or obligee.”[15]  However, debtors lacking good faith may still be able to obtain an equitable credit under 11 U.S.C. 550(a), which acts to bar the trustee from avoiding a transfer that has already been reimbursed.[16]

Section 550(a) allows the trustee to recover “for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from . . . the initial transferee of such transfer or the entity for whose benefit such transfer was made.”[17] Courts consistently interpret the phrase “benefit of the estate” “as a bar on fraudulent transfer claims when no creditors would benefit from any recovery.”[18] Further, a bankruptcy court may apply “equitable principles to reduce or eliminate the amount of the trustee’s recovery” in instances where recovery of the transfer “would result in an inequitable windfall to the bankruptcy estate.”[19] In In re Kinglsey, the Eleventh Circuit Court of Appeals affirmed a bankruptcy court’s decision to apply an equitable credit to the transferee because of payments made to the estate after his acceptance of an intentionally fraudulent transfer.[20] Similarly, in Polichuk, regarding a constructively fraudulent transfer, the Polichuk court held, “if the debtor has received the property back, the debtor's estate has not been diminished, creditors have not been prejudiced and there is no reason for the trustee to invoke the avoidance power.” [21] Relying on these equitable principles, the Incare court found “where there was no diminution of Incare’s assets as a result of the Advanced Urgent Care Transfers, the Trustee is not entitled to recover under 11 U.S.C. § 550(a).”[22]

The Incare decision seemingly allows individuals to remedy their fraudulent conduct by simply transferring the assets back to the debtor. Courts have recognized that since the underlying purpose of the transfer avoidance provisions of the Bankruptcy Code is remedial, rather than penal, if the estate’s deficiency is already restored, the avoidance of the transfer would work as a “double recovery.”[23]



[1] In re Incare, 2018 WL 2121799 (Bankr. E.D.Pa. May 7, 2018).

[2] Id. at *13.

[3] Id. at *2.

[4] Id. at *2–3.

[5] Id. at *1 (Advanced Urgent Care of City Line, LLC; Advanced Urgent Care of Feasterville, LLC; Advanced Urgent Care of Franklin Market, LLC; Advanced Urgent Care of Langhorne Square, LLC; Advanced Care of Montgomeryville, LLC; Advanced Urgent Care of Roosevelt Boulevard, LLC; Advanced Urgent Care of Scranton, PC; Advanced Urgent Care, P.C.; Advanced Urgent Care of Willow Grove, LLC; Advanced Urgent Care of Sinking Spring, LLC; and Advanced Urgent Care of Lawrenceville, LLC).

[6] Id. at *5 (highlighting that Dr. Nikparvar works approximately four hundred 12-hour shifts per year and made exuberant capital contributions to Incare: $48,670 in 2006, $129,844 in 2007, $536,950 in 2008, and $657,00 between 2010-2012).

[7] Id. at *4–5.

[8] Id. at *1.

[9] Id. (“The Trustee invokes the actual and constructive fraudulent transfer provisions of the Bankruptcy Code, 11 U.S.C. §§ 544(b) and 550, and the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa. C.S. §§ 5104 and 5105.”).

[10] Id. at *12–13. This claim will not be addressed in this blog.

[11] Id. at *13.

[12] Id. at *4.

[13] Id. at *13.

[14] Id. at *4.

[15] 12 Pa. C.S. § 5108(a) (2017) (requiring the transferee to prove: (1) she provided reasonably equivalent value; and (2) she acted in good faith.[15] To determine good faith, courts are required to “examine what the transferee objectively ‘knew or should have known,’” a transferee cannot establish good faith if she “has sufficient knowledge to place [her] on inquiry notice of the voidability of the transfer.” In re Burry, 309 B.R. 130, 136 (Bankr. E.D.Pa. 2004)); see also Image Masters, Inc. v. Chase Home Fin., 489 B.R. 375, 390–391 (E.D.Pa. 2013) (“’Good faith’ is an affirmative defense for which the transferee bears the burden of proof.” (citing In re Lockwood, 428 B.R. 629, 636 (Bankr. E.D.Pa. 2010)).

[16] See In re Polichuck, 596 B.R. 405, 435 (Bankr. E.D.Pa. 2014).

[17] 11 U.S.C. § 550(a) (2017).

[18] Robert B. Bruner and Gerard G. Pecht, The Unexplored Limits of Moore v. Bay: Statutory and Equitable Basis for Limiting Money Damage Awards on Fraudulent Transfers Claims, 26 No. 3 J. Bankr. L. & Prac. NL Art. 2 (2017) (when only the debtor's equity interest holders would benefit from the fraudulent transfer recovery, courts have held that the “benefit of the estate” limitation precludes the claims.”)

[19] In re Kingsley, 518 F.3d 874, 877-878 (11th Cir. 2008).

[20] Id. (finding that although the transferee had accepted a pre-petition transfer to defraud creditors, he subsequently made payments into the estate, and under § 550, and other equitable principles governing bankruptcy courts, recovering the full amount of the pre-petition transfer would be inequitable).

[21] In re Polichuk, 506 B.R. at 435 (“If the estate already has recovered the property (or its value), what reason is there for the trustee (or in a traditional PUFTA action, the creditor) to obtain any further remedy? That would be a double recovery from the same party, which is not a result that the drafters of the statute could have intended.”)

[22] In re Incare, 2018 WL 2121799 at *16.

[23] In re Polichuk, 506 B.R. at 435.

 

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