Ninth Circuit holds that in a fraudulent transfer the creditor can reach assets of the debtor which exceed the value of the collateralized debt

The Ninth Circuit held in DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer, No. 15-35086 (9th Cir. Aug. 24, 2017) that where the debtor fraudulently transferred assets the creditor is not limited to recovering the value of the assets that were directly traceable to the bank’s security interest.
The case involved the purchase by debtors’ company of five insurance agencies and their business books financed by a credit and security agreement and a guarantee later acquired by the debtors’ bank. Over the next two years, the company and the bank entered into several forbearance agreements while at the same time the guarantors executed an elaborate series of transfers and sales in an effort to place their assets beyond the reach of their creditors.
A few months later, the company and the guarantors defaulted on the note and their personal guarantee. The bank filed suit leading the guarantors to file bankruptcy. The proceedings went forward against the company, eventually resulting in a final judgment of $1,710,469.93. But the bank could not collect the judgment because the company was insolvent. It filed an adversary action against the guarantors alleging that the transfer of assets out of a company controlled by the guarantor, Meyer Insurance, (“MI”) was a fraudulent transfer.
Although the bankruptcy court ruled in favor of the bank, it limited the judgment to the portion of the judgment that was traceable the bank’s security interest in MI’s assets. The district court affirmed that the bank could not maintain a fraudulent transfer claim as to the “non-collateral assets,” albeit on a slightly different ground. The court reasoned that the bank could only recover assets that were the property of the debtors i.e., legally titled in the guarantors’ name.
The Ninth Circuit disagreed. If MI had retained the assets, the bank would have been able to enforce a judgment against the guarantors, prior to their filing for bankruptcy, by executing against the guarantor’s ownership interest in MI. When the guarantor indirectly transferred all of MI’s assets to another corporation, he depleted the value of his assets to the detriment of his creditors. In other words, he prevented the bank from collecting $385,000 of the debt he owed. The bankruptcy court should have granted relief for the full $385,000 that the bank would have recovered if it had been able to execute against the guarantor’s ownership interest in MI.

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