Ninth Circuit: No Injury to Creditors Required for Avoidance of Intentionally Fraudulent Transfer

To assist a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") in maximizing the value of the bankruptcy estate for the benefit of all stakeholders, the Bankruptcy Code authorizes a trustee or DIP to avoid certain pre-bankruptcy transfers made, or obligations incurred, that either intentionally defrauded creditors or are constructively fraudulent because the debtor was insolvent at the time of the transaction (or rendered insolvent thereby) and received less than fair value in exchange. In In re O'Gorman, 115 F.4th 1047 (9th Cir. 2024), the United States Court of Appeals for the Ninth Circuit considered as a matter of first impression whether a trustee or DIP may avoid an intentionally fraudulent transfer in the absence of injury to creditors. The Ninth Circuit joined the Fourth and Eight Circuits in ruling that proof of injury to creditors is not required to avoid a fraudulent transfer under the Bankruptcy Code. The court also held that injury to creditors is not necessary for a bankruptcy trustee to have constitutional standing to assert an avoidance claim because the trustee has a "judicially cognizable interest" in avoiding the transfer on behalf of the bankruptcy estate.  

Avoidance of Transfers in Bankruptcy 

Section 548 of the Bankruptcy Code provides that, subject to the requirements of that section, a trustee (or a DIP) "may avoid any transfer … of an interest of the debtor in property, or any obligation … incurred by the debtor, that was made or incurred within 2 years before the date of the filing of the petition." 11 U.S.C. § 548(a)(1).

Fraudulent transfers that can be avoided include both: (i) actually fraudulent transfers, which are transfers made with "actual intent to hinder, delay, or defraud" creditors (see 11 U.S.C. § 548(a)(1)(A)); and (ii) constructively fraudulent transfers, which are "transactions that may be free of actual fraud, but which are deemed to diminish unfairly a debtor's assets in derogation of creditors." Collier on Bankruptcy ("Collier") ¶ 548.05 (16th ed. 2024); 11 U.S.C. § 548(a)(1)(B). A transfer is constructively fraudulent if the debtor received "less than a reasonably equivalent value in exchange for such transfer or obligation" and was, among other things, insolvent, undercapitalized, or unable to pay its debts as such debts matured. See Collier at ¶ 548.05; 11 U.S.C. § 548(a)(1)(B). 

Fraudulent transfers may also be avoided by a trustee or DIP under section 544(b) of the Bankruptcy Code, which provides that, with certain exceptions, "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of [the Bankruptcy Code] or that is not allowable only under section 502(e) of [the Bankruptcy Code]." 11 U.S.C. § 544(b)(1). This provision permits a trustee to step into the shoes of a "triggering" unsecured creditor that could have sought avoidance of a transfer under applicable non-bankruptcy law (e.g., the Uniform Fraudulent Transfer Act or its successor, the Uniform Voidable Transactions Act, which has been enacted in many states). See generally Collier at ¶ 544.06. Section 544(b) is an important tool, principally because the reach-back period for avoidance of fraudulent transfers under state fraudulent transfer laws (or even non-bankruptcy federal laws, such as the Internal Revenue Code) is typically longer than the two-year period for avoidance under section 548. Id. 

Section 547(b) of the Bankruptcy Code provides in relevant part that, with certain exceptions, a trustee or DIP may avoid any transfer made by an insolvent debtor within 90 days of a bankruptcy petition filing (or up to one year, if the transferee is an insider) to a creditor for or on account of an antecedent debt, if the creditor, by reason of the transfer, receives more than it would have received in a chapter 7 liquidation and the transfer had not been made. 11 U.S.C. § 547(b). 

Unauthorized postpetition transfers of estate property may be avoided under section 549, and other provisions of the Bankruptcy Code authorize the trustee or DIP to avoid certain other kinds of transfers. See 11 U.S.C. § 545 (certain statutory liens); 11 U.S.C. § 553(b) (certain setoffs); 11 U.S.C. § 724(a) (avoidance of liens securing certain claims for damages, fines, penalties, and forfeitures). 

If a transfer is avoided under any of these provisions, section 550 of the Bankruptcy Code authorizes the trustee or DIP to recover the property transferred or its value from the initial or subsequent transferees, with certain exceptions. 

Standing 

"Standing" is the legal capacity to commence litigation in a court of law. It is a threshold issue—a court must determine whether a litigant has the legal capacity to pursue claims before the court can adjudicate the dispute. 

To establish "constitutional" or "Article III" standing, a plaintiff must have a personal stake in litigation sufficient to make out a concrete "case" or "controversy" to which the federal judicial power may extend under Article III, section 2, of the United States Constitution. See Pershing Park Villas Homeowners Ass'n v. United Pac. Ins. Co., 219 F.3d 895, 899 (9th Cir. 2000); accord TransUnion LLC v. Ramirez, 594 U.S. 413, 423 (2021). It is a long-settled point of federal law that, if the plaintiff does not claim to have suffered an injury caused by the defendant for which the court can provide a remedy, then there is no case or controversy for a federal court to resolve. Lujan v. Defs. of Wildlife, 504 U.S. 555, 563 (1992). 

In bankruptcy cases, various provisions of the Bankruptcy Code confer another type of standing on various entities (e.g., the debtor, the DIP, the trustee, creditors, equity interest holders, official committees, or indenture trustees), among other things, to participate generally in a bankruptcy case or commence litigation involving causes of action or claims that either belonged to the debtor prior to filing for bankruptcy or are created by the Bankruptcy Code. For example, in a chapter 11 case, section 1109 of the Bankruptcy Code provides that "[a] party in interest, including the debtor, the trustee, a creditors committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee may raise and may appear and be heard on any issue" in a chapter 11 case. 

This "bankruptcy" or "statutory" standing is distinct from constitutional standing. Among other differences, constitutional standing is jurisdictional—if a potential litigant lacks constitutional standing, the court lacks jurisdiction to adjudicate the dispute. See In re Wilton Armetale, Inc., 968 F.3d 273, 280–81 (3d Cir. 2020). 

O'Gorman 

Debbie O'Gorman (the "debtor") owned a 30-acre parcel of land in California (the "property"). In 2010, she recorded a second deed of trust against the property in favor of an attorney ("Reynolds") who had performed certain pre-bankruptcy legal services for the debtor. By 2019, the debtor had defaulted on the senior mortgage. Reynolds cured the debtor's $300,000 default through advance mortgage payments. However, in February 2020, he initiated a nonjudicial foreclosure on his second deed of trust.  

Another lawyer ("Utnehmer") contacted the debtor in July 2020 and offered to save the property from foreclosure by transferring it to an irrevocable land trust. The transfer agreement provided that upon the sale of the property, after payment of all liabilities and reimbursement of capital contributions, the debtor would receive a priority distribution of $235,000. 

To effectuate the transfer, Utnehmer created three entities: a land trust; Pacific Equities, a real estate investment group created to fund and develop the property; and a corporate trustee for the land trust. The beneficiaries of the land trust were a separate trust settled by the debtor (with a 20% interest) and Pacific Equities (80%). Utnehmer held an interest in Pacific Equities and was an officer of the trustee.  

The debtor transferred the property to the land trust in January 2021. The grant deed showed that no transfer tax was paid, and the debtor attested that she received no money in exchange for the transfer of the property, which she estimated had a value of $2.5 million at the time of the transfer. The debtor continued to live on the property after the transfer to the land trust.  

The debtor filed a chapter 7 case in August 2021 in the Northern District of California. She scheduled her interest in the property as an asset, stated that it was worth approximately $3 million, and asserted that the January 2021 transfer of the property to the land trust was "voidable." The debtor estimated that her non-real estate assets were worth a total of approximately $26,000. She also scheduled 26 secured and unsecured creditors. 

Reynolds—the beneficiary of the second deed of trust on the property—filed a secured claim for approximately $1.5 million. The bankruptcy court disallowed Reynolds's claim, however, finding that Reynolds never loaned the debtor the money secured by the deed of trust. 

In November 2021, the chapter 7 trustee sued the land trust, the land trustee, and Pacific Equities to avoid the transfer of the property as: (i) an actual and constructive fraudulent transfer under sections 548(a)(1)(A) and 548(a)(1)(B); and (ii) a preferential transfer under section 547(b).  

Finding that several "badges of fraud" existed with respect to the transfer of the property to the land trust (e.g., the debtor remained in control of the property, the transfer was designed to thwart foreclosure, the transfer involved substantially all of the debtor's assets, and the debtor received no consideration in exchange) and that there were no disputed material issues of fact, the bankruptcy court granted the trustee's motion for partial summary judgment on the intentional fraudulent transfer claim. 

A Ninth Circuit bankruptcy appellate panel upheld the ruling on appeal. Among other things, the appellate panel rejected the defendants' argument that harm to creditors (in this case, Reynolds and the debtor's 26 other creditors) is a necessary element for an avoidance claim under section 548(a)(1)(A). According to the court, the defendants never raised the argument below, and "[i]n any case, they are wrong … [because] '[a]ctual damages' or 'actual harm' is not an element of an actual fraudulent transfer claim." In re O'Gorman, 2022 WL 17851422, at *6 (B.A.P. 9th Cir. Dec. 21, 2022), aff'd, 115 F.4th 1047 (9th Cir. 2024). 

The Ninth Circuit's Ruling 

A three-judge panel of the Ninth Circuit affirmed the ruling below. 

Before the Ninth Circuit, the defendants argued that the chapter 7 trustee lacked Article III standing to bring a claim under section 548(a)(1)(A) of the Bankruptcy Code because none of the debtor's creditors were harmed by the transfer of the property. Although they cited no controlling authority, the defendants asserted that "[c]ourts have consistently held that an avoidance action can only be pursued if there is some benefit to creditors and may not be pursued if it would only benefit the Debtor." In re O'Gorman, 115 F.4th at 1055 (internal quotation marks omitted). According to the defendants, the transfer did not cause an actionable injury to any creditor because Reynolds did not have a valid claim at the time of the transfer, and the unsecured creditors would be paid in full by the anticipated $235,000 priority distribution to the debtor from the sale of the property. 

U.S. Circuit Court Judge Morgan Christen rejected this argument, writing that it "confuses justiciability with the merits of the [chapter 7] Trustee's claim." Id. The Ninth Circuit held that, "to satisfy Article III's injury requirement, the Trustee has the burden to demonstrate only that he has a 'judicially cognizable interest' in avoiding the transfer on behalf of the estate, irrespective of the particular statute under which he seeks relief." Id. (citations omitted).  

"To have standing to bring this suit," Judge Christen explained, the chapter 7 trustee was "required to establish an injury to the estate—not, as [the defendants] argue, to Reynolds or any of the Debtor's other creditors." Id. at 1056. Because there was no question that the transfer of the property to the land trust depleted the assets of the debtor's estate, the Ninth Circuit court held that the estate suffered an injury in fact that could be remedied by avoidance of the transfer. Consequently, the chapter 7 trustee satisfied the requirements for Article III standing. 

The Ninth Circuit then considered whether injury to a creditor is a required element of section 548(a)(1)(A). Noting that it had not yet faced this question, the Ninth Circuit panel agreed with other circuits that, based on the plain language of the provision, which focuses on the debtor's intent, avoidance of a transfer as an intentionally fraudulent transfer does not require any showing of injury to creditors. Id. at 1057 (citing Tavenner v. Smoot, 257 F.3d 401, 407 (4th Cir. 2001); In re Sherman, 67 F.3d 1348, 1355 n.6 (8th Cir. 1995)). 

According to Judge Christen, "[t]his interpretation upholds the goals of efficiency and finality in bankruptcy," because a reading of section 548 that "makes the fraudulent nature of a transfer dependent upon the post hoc determination of the validity of creditors' claims would risk upending the work trustees perform at the outset of bankruptcy proceedings to marshal the assets available to pay creditors' claims." Id. 

The Ninth Circuit found no error with the bankruptcy court's decision to grant partial summary judgment, noting the weight of the evidence establishing actual fraudulent intent and the defendants' failure to present any admissible evidence raising any genuine dispute as to whether there was a legitimate purpose behind the transfer. 

Outlook 

In O'Gorman, the Ninth Circuit, as a matter of first impression, joined the Fourth and Eighth Circuits in concluding that injury to creditors is neither: (i) an element of a claim for the avoidance of an intentionally fraudulent transfer under section 548(a)(1)(A) of the Bankruptcy Code; or (ii) necessary for a bankruptcy trustee to have constitutional, or Article III, standing to bring avoidance litigation because the trustee has a "judicially cognizable interest" in avoiding the transfer on behalf of the estate, which is harmed by a fraudulent transfer.  

Although, apparently, no other circuit court of appeals has ruled squarely on the issue, the Sixth Circuit has at least suggested without directly addressing the issue that harm to creditors may be an element of an intentional fraudulent transfer claim under section 548(a)(1)(A). See Zentek GBV Fund IV v. Vesper, 19 F. App'x 238, 244 n.4 (6th Cir. 2001) (noting that "even if [the debtor's majority owner] intended only to hinder, delay or defraud [a secured creditor], the fact that other creditors were harmed brings [the owner's] actions squarely within the strictures of § 548(a)(1)(A)").