Opinion ID: 6931628
Heading Depth: 2
Heading Rank: 3

Heading: Trustee’s Cross Appeal For Money Judgment Against Debtor

Text: Finally, the trustee appeals the bankruptcy court’s determination that the Code vested no power in the trustee to recover the amount transferred to Tommy from Coggin. The bankruptcy court held that although the transfer from Coggin to Tommy was avoidable under section 548, “Section 550 does not authorize or permit recovery against a Debtor for the value of property fraudulently transferred.” Bankruptcy Court Memorandum of Decision at 13. Based on our analysis affirming the finding of a fraudulent transfer in violation of section 727(a)(2)(A), there is no question that the transfer here is avoidable under section 548(a)(1), which employs the same legal standard as section 727(a)(2)(A). 11 The relevant portion of section 550 provides: (a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section ... 548 ... of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from— (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made. 11 U.S.C. § 550(a)(1). The trustee argues that Coggin is an “entity for whose benefit such transfer was made,” id., and, therefore, that the estate is entitled to recover from Coggin the value of the property conveyed to Tommy. 12 This issue appears to be one of first impression. We have not found, and the parties did not cite, a single case in which a court decided whether a transferring debtor is an “entity for whose benefit such transfer was made” under the Code. By applying its plain language and apparent purpose, and by consulting our bankruptcy compass, however, we hold that section 550(a)(1) does not allow recovery of an avoided transfer from the transferring debtor. First, the plain language of the statute indicates that a debtor was not intended to be an entity from whom recovery may be had under section 550(a)(1). The statute states that the trustee may recover an avoided transfer from an “entity for whose benefit such transfer was made.” Id. In reality, an avoidable transfer of which section 550(a)(1) allows recovery will only occasionally directly benefit a debtor. Generally, a debtor has a fixed amount of assets and liabilities, and bankruptcy will schedule these in such a way as to deplete the debtor’s assets, aside from those which are exempt, in achieving the maximum possible satisfaction of the existing liabilities. The debtor will usually receive a benefit in making an avoidable transfer in only two situations. First, the debtor may benefit in the case of a fraudulent transfer where the debtor retains an interest in the transferred assets, thereby protecting some assets from the reach of the bankruptcy process and benefitting the debt- or. The second situation in which the debtor may benefit from an avoidable conveyance arises when the conveyance is made to satisfy a nondischargeable obligation, so that the debtor will receive his discharge with less post-discharge obligations remaining. Thus, it is arguable that section 550(a)(1) was intended to apply to debtors when the court finds that the transfer did, in fact, benefit the debtor in some way beyond that afforded by the liquidation or reorganization and the subsequent discharge. For this reason, we look for other guideposts. The traditional usage of section 550(a)(1) also indicates that it was not intended to allow recovery from a transferring debtor. The phrase “entity for whose benefit such transfer is made” typically has been employed when the trustee attempts to recover from a guarantor of an underlying debt. If one guarantees a debt of the debtor, and the debtor then satisfies that debt with an avoidable conveyance, the guarantor receives a direct benefit in the elimination of his matured obligation to pay the unsatisfied portion of the debt. This is particularly true in the bankruptcy context, where the underlying debt is generally listed as an obligation of the estate, it is not paid in full by the debtor, and the guarantor’s obligation matures. 13 In the typical case where a guarantor is the “entity” from which the trustee can recover under section 550(a)(1), there is a real and immediate financial benefit to the guarantor. By the debtor satisfying the underlying obligation, the guarantor is relieved of his matured obligation to pay any unsatisfied portion. This relief from an obligation to pay money is the economic equivalent of the receipt of money by one to whom money is owed. We have found no cases in which a court allowed a trustee to recover the value of an avoidable conveyance directly from the transferring debtor under section 550(a)(1). Having no guidance, we have applied the language of the statute and its apparent purpose, as well as economic reality and the contextual sense of the statutory scheme, to interpret the likelihood that Congress intended to include the debtor as an “entity” from which the trustee could recover under section 550(a)(1). 14 After examining these factors, we agree with the bankruptcy and district courts that there is no cause of action created by section 550(a)(1) in a trustee to recover the value of an avoidable conveyance from a transferring debtor.