Recently, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania clarified that funds returned to the debtor are not recoverable as intentional fraudulent transfers. See Holber v. Nikparvar (In re Incare, LLC), Adv. No. 14-0248 (Bankr. E.D.Pa. May 7, 2018).
The Debtor, Incare, LLC, was a medical care provider that provided services to a variety of hospitals and medical facilities in Pennsylvania. After Incare filed for bankruptcy in 2013, a chapter 7 trustee brought a fraudulent transfer case against the managing and sole member of Incare, his wife, and related entities seeking to avoid and recover fraudulent transfers pursuant to Sections 544 and 550 of the U.S. Bankruptcy Code.
Section 544 allows a trustee to avoid a transfer that would otherwise be avoidable by the debtor’s creditors under applicable state law, in this case, the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa.C.S. § 5101, et. seq. Like the Bankruptcy Code, PUFTA permits recovery for intentional or actual fraudulent transfers – transfers made with “actual intent to hinder, delay or defraud” creditors. 12 Pa.C.S. § 5104(a)(1).
In Holber, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania considered whether 13 transfers between the Debtor and an entity affiliated with the debtor’s sole member totaling approximately $1.8 million constituted intentional fraudulent transfers. However, during the same time frame, the debtor received approximately $1.8 million from the same entity. Holber at 30.
Section 550 of the Bankruptcy Code allows a transfer avoidable under Section 544 to be recovered “for the benefit of the estate.” 11 U.S.C. § 550(a). The Court explained that Section 550 is remedial and not penal and “the bankruptcy court may reduce or eliminate a trustee’s recovery under §550 where some or all of the transferred property was returned to the debtor pre-petition.” Id. at 35.
Here, the court applied an “equitable credit” for the money returned to Incare because the Court could not identify how the creditor body was harmed by the transfers that were reversed within the year and to allow the trustee to recover the returned funds would result in a windfall to the estate. Id. (citing In re Kingsley, 518 F.3d 874, 877-78 (11th. Cir. 2008)).
As the Court recognized, this ruling creates the possibility that a party can avoid the consequences of an intentional fraudulent transfer by simply returning the funds or reversing the transaction. Holber at 31. It will be interesting to see if other courts follow suit.