Tenth Circuit: Fraudulently Transferred Assets Not Estate Property Until Recovered
The U.S. Court of Appeals for the Tenth Circuit―in Rajala v. Gardner, 709 F.3d 1031 (10th Cir. 2013)―has joined the Second Circuit and departed from the Fifth Circuit by holding that an allegedly fraudulently transferred asset is not property of the estate until recovered pursuant to section 550 of the Bankruptcy Code and therefore is not covered by the automatic stay. According to the court, its decision "gives Congress's chosen language its ordinary meaning, and abides by a rule against surplusage."
Bankruptcy Code Stays Acts to Obtain Possession of Property of the Estate
Section 362(a)(3) of the Bankruptcy Code provides that the filing of a bankruptcy petition "operates as a stay, applicable to all entities, of . . . any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." Sections 541(a)(1) and 541(a)(3) of the Bankruptcy Code, respectively, define "property of the estate" to include, with certain exceptions, "all legal or equitable interests of the debtor in property as of the commencement of the case" and "[a]ny interest in property that the trustee recovers under section . . . 550" of the Bankruptcy Code. Under section 550(a) of the Bankruptcy Code, a trustee may recover, for the benefit of the estate, transferred property "to the extent that a transfer is avoided under section 544 . . . [or] 548." Sections 544 and 548 of the Bankruptcy Code, in turn, enable the trustee to avoid fraudulent transfers. The question before the Rajala court was whether allegedly fraudulently transferred property, prior to the recovery of that property pursuant to section 550(a), is "property of the estate" under section 541(a) and therefore subject to the automatic stay imposed by section 362(a).
The Facts
Generation Resources Holding Company, LLC ("GRHC") was formed in 2002 for the purpose of developing wind-generated power projects. In June 2005, GRHC entered into a memorandum of understanding ("MOU") with Edison Capital ("Edison") that contemplated Edison's purchase of three GRHC wind-power projects, including the "Lookout" project. In late 2005, several GRHC insiders formed Lookout Windpower Holding Co., LLC ("LWHC"). Not long after its formation, LWHC closed a deal with Edison for the sale of the wind-power projects that were the subject of the MOU with GRHC. The GRHC insiders did so by causing a switch in the identity of the projects' developer from GRHC to LWHC. In...
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