Opinion ID: 4564821
Heading Depth: 1
Heading Rank: 9

Heading: The Prejudgment Interest Issue

Text: Finally, Defendants challenge the district court’s award of prejudgment interest. In both cases, the court concluded that Minnesota rather than federal law governed the award and therefore it was required to apply a 10 percent per annum rate from the “commencement of this action,” namely, from September 23, 2010, the date the Summons was issued, to the present. See Minn. Stat. § 549.09, subd. 1(b), -26- (c)(2). This resulted in awards increasing the total judgment against Boosalis by over 80 percent and the total judgment against Papadimos and Kanios by 47 percent. Whether Minnesota law governs is an issue of law reviewed de novo. Though we are reversing both final judgments and remanding for further proceedings, we will address the issue because it may be relevant on remand. We will not address Defendants’ alternative argument that, even if Minnesota law governs the award of prejudgment interest, the district court abused its discretion by awarding prejudgment interest under the circumstances in these cases. In general, prejudgment interest presents “a question of federal law where the cause of action arises from a federal statute,” Mansker v. TMG Life Ins. Co., 54 F.3d 1322, 1330 (8th Cir. 1995), while “[i]n a diversity case, the question of prejudgment interest is a substantive one, controlled by state law,” Emmenegger v. Bull Moose Tube Co., 324 F.3d 616, 624 (8th Cir. 2003). Whether the Trustee’s avoidance action under 11 U.S.C. § 544(b)(1) is a state or federal cause of action for purposes of prejudgment interest is a question we have not previously addressed that has divided other courts. See Harris Winsberg and Karen Visser, A Survey on Prejudgment Interest Awards in Preference and Fraudulent Conveyance Avoidance Actions, 24 Norton J. Bankr. L. & Prac. n.45 (2015) (comparing cases). “In fraudulent transfer actions, there is a distinction between avoiding the transaction and actually recovering the property or the value thereof.” In re Int’l Admin. Servs., Inc., 408 F.3d 689, 703 (11th Cir. 2005). The Trustee’s authority to recover money judgments against Defendants is conferred by 11 U.S.C. § 550. Section 550(a) lists seven avoidance provisions in the Code, including § 544, and provides that “the trustee may recover, for the benefit of the estate, the property transferred or, of if the court so orders, the value of such property.” See, e.g., In re H & S Transp. Co., 939 F.2d 355, 358 (6th Cir. 1991). Because “Section 544(b)(1) says nothing about recovery . . . . [t]he recovery of fraudulent transfers is authorized by federal law -- Section 550(a)(1).” In re DBSI, Inc., 869 F.3d 1004, 1015 (9th Cir. -27- 2017). Therefore, § 550 provides the entire basis for the Trustee to recover once the transfer has been avoided through one of the provisions listed in § 550(a), such as § 544(b)(1). See In re DLC, Ltd., 295 B.R. at 602. In concluding the Trustee’s action is governed by state law, the district court relied principally on In re Keefe, 401 B.R. 520 (B.A.P. 1st Cir. 2009). Keefe held that while § 550 “identifies the entities from whom recovery may be made,” Massachusetts fraudulent transfer law provided “the substantive basis for the judgment.” 401 B.R. at 527. “Therefore, as state law is the substantive basis for the fraudulent transfer judgment, the bankruptcy court should have looked to state law to determine the applicable rate of prejudgment interest.” Id.; accord In re Agric. Rsch. & Tech. Grp., 916 F.2d 528, 541 (9th Cir. 1990) (“Hawaii law regarding prejudgment interest is applicable via 11 U.S.C. § 544(b).”). We conclude the decision in Keefe reflects a misunderstanding of how § 544 and § 550 interact because the court ignored the Bankruptcy Code’s separation of avoidance and recovery. “This demarcation . . . is underscored by § 550(f), which places a separate statute of limitations on recovery actions.” Int’l Admin., 408 F.3d at 703; see H.R. Rep. No. 595, 95th Cong. 1st Sess. 375 (1977) (“Section 550 . . . enunciates the separation between the concepts of avoiding a transfer and recovering from the transferee.”); In re Acequia, Inc., 34 F.3d 800, 809 (9th Cir. 1994). MUFTA provided the substantive basis for Defendants’ fraudulent transfer liability but not the right to a recovery to which the Trustee was therefore entitled. As the source of recovery, § 550 was the source for the award of prejudgment interest: The right to recover prejudgment interest on a fraudulent conveyance arises from that language in [11 U.S.C.] § 550(a) which allows a trustee to recover “the value” of the transferred property. To obtain such value, the plaintiffs need some accommodation for the time value of money. Prejudgment interest fulfills this purpose. -28- In re CNB Intern., Inc., 440 B.R. 31, 46 (W.D.N.Y 2010) (quotation omitted). For this reason, the district court erred in awarding prejudgment interest under Minnesota rather than federal law. By holding that state law applies to the award of prejudgment interest through 11 U.S.C. § 544(b), the district court also endorsed what we see as an expansion of the Erie10 doctrine. Application of state law turns on diversity or supplemental jurisdiction. Emmenegger, 324 F.3d at 624 & n.9. “The award of prejudgment interest in a diversity action is determined by referring to the law of the state in which the cause of action arose.” Kisco Co. v. Verson Allsteel Press Co., 738 F.2d 290, 296 (8th Cir. 1984) (emphasis added). Here, it is undisputed that the district court’s jurisdiction was based on a federal question, not on diversity or supplemental jurisdiction, leaving no basis for applying state law other than § 544(b). Proceedings to avoid fraudulent conveyances under § 544 are “core proceedings arising under title 11” that the district court may delegate to a bankruptcy court judge for final disposition. 28 U.S.C. § 157(b)(1), (b)(2)(H). As the Ninth Circuit has bluntly stated, § 544(b)(1) “permits a trustee to pursue a federal cause of action in bankruptcy court.” DBSI, 869 F.3d at 1015; see In re Weinberg, 153 B.R. 286, 290-91 (Bankr. D.S.D. 1993). “[A] case arises under federal law when federal law creates the cause of action asserted.” Gunn v. Minton, 568 U.S. 251, 257 (2013). That the Trustee’s claim under § 544 is a federal cause of action compels the application of federal law to an award of prejudgment interest. In Monessen Sw. Ry. v. Morgan, for example, the Supreme Court concluded that Pennsylvania courts erred in treating the availability of prejudgment interest in Federal Employers’ Liability Act actions as a matter of state rather than federal law: 10 Erie R. Co. v. Tompkins, 304 U.S. 64 (1938). -29- The proper measure of damages under the FELA is inseparably connected with the right of action, and therefore is an issue of substance that must be settled according to general principles of law as administered in the Federal courts. . . . The question of what constitutes ‘the proper measure of damages’ under the FELA necessarily includes the question whether prejudgment interest may be awarded to a prevailing FELA plaintiff. 486 U.S. 330, 335 (1988) (quotation omitted). That logic applies here. Since the recovery of fraudulently transferred property and the attachment of prejudgment interest are “inseparably connected with the [federal] right of action” created by the Bankruptcy Code, prejudgment interest is governed by federal standards in determining the proper measure of damages.