Opinion ID: 1189324
Heading Depth: 2
Heading Rank: 3

Heading: Receivers and Fraudulent Conveyances

Text: Not surprisingly, the relatively few cases dealing with the issue have held that receivers have standing to pursue fraudulently conveyed assets only when one of the entities in receivership is a creditor of the transferor. This distinction is nicely explained in a pair of Seventh Circuit decisions authored by Judge Posner. See Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274 (7th Cir.1997); Scholes v. Lehmann, 56 F.3d 750 (7th Cir.1995). In Scholes, Michael Douglas created three corporations and caused them, in turn, to create limited partnerships. Scholes, 56 F.3d at 752. The corporations were the general partners and sold limited partner interests to investors in a Ponzi scheme. [7] Id. In the civil enforcement action, the district court appointed one receiver to represent both Douglas and the corporations, who then sought to recover assets conveyed to third parties. Id. at 752-53. Those third parties argued that the receiver was suing on behalf of the investors, not Douglas or the corporations, and lacked standing to do so. Id. The Seventh Circuit disagreed, noting that the corporations  Douglas's robotic tools  were still distinct legal entities with separate rights and duties. Id. at 754. The appointment of the receiver removed the wrongdoer from the scene. The corporations were no more Douglas's evil zombies. Freed from his spell they became entitled to the return of the moneys ... that Douglas had made the corporations divert to unauthorized purposes. Id. Once the zombie corporations were under the control of the receiver, the receiver's only object was to maximize the value of the corporations for the benefit of their investors and any creditors. Id. at 755. The receiver pressed a claim that the corporations had a right to a return of their assets that had been distributed by Douglas in his scheme. Because Douglas controlled the corporations completely, the transfers were, in essence, coerced. Id. The court cautioned that if the receiver had been appointed to guard only Douglas's individual assets, the question of standing might have a different answer. Id. Two and a half years later, the Seventh Circuit was presented with that exact situation in Troelstrup  the receiver was appointed only for the assets of the Douglas figure, John Tobin. Troelstrup, 130 F.3d at 1275-76. The court held that the receiver lacked standing to assert his claim. Looking back, the court said of Scholes: We held that [Douglas's] receiver, who had also been appointed the corporations' receiver, had standing to sue on behalf of the corporations, because they were entitled to the return of the money that the defrauder had improperly diverted from them.... Troelstrup ... was just Tobin's receiver, and so he could not sue ... on behalf of [the investment entity], not having been appointed its receiver. Id. at 1277 (emphasis in original). Tobin's receiver lacked standing because he was suing a third party on behalf of Tobin's creditors to enforce a personal right of theirs, not a right of Tobin's in which they have an interest by virtue of being his creditors. Id. We agree with the Seventh Circuit's analysis and hold that a receiver's standing to bring a fraudulent conveyance claim will turn on whether he represents the transferor only or also represents a creditor of the transferor.