Under the "single-satisfaction rule," although a bankruptcy trustee or a chapter 11 debtor-in-possession ("DIP") may seek to avoid and recover avoidable transfers of a debtor's property from more than one transferee, the aggregate recovery is limited to the value of the property transferred.
The Single-Satisfaction Rule
Section 550(a) of the Bankruptcy Code provides a mechanism for the recovery from initial, subsequent, "immediate," and "mediate" transferees of transferred assets (or their value) that have been avoided by a bankruptcy trustee or DIP as preferences, fraudulent transfers, unauthorized postpetition transactions, or otherwise voidable transfers. A limitation on the ability to recover avoided transfers is set forth in section 550(d) of the Bankruptcy Code, which provides that "[t]he trustee is entitled to only a single satisfaction under [section 550(a)]."
The "single-satisfaction rule" is designed to "prevent a single plaintiff from recovering its damages several times over from multiple defendants." Laborers Local 17
Belmonte
In
The bankruptcy court entered an order for relief in the case in
In
At the time of the bankruptcy filing, the debtor owned a house ("property") with her husband as tenants by the entirety. The two jointly had approximately
In
Arguing that the second mortgage loan proceeds were property of the debtor's estate, the trustee also commenced an adversary proceeding seeking to avoid the transfer of the proceeds to Brand under section 549 and to recover the
The trustee separately sought a court order under section 329(b) of the Bankruptcy Code directing Brand to disgorge the
In a
The bankruptcy court also found that half of the second mortgage loan amount was property of the debtor's estate because the property was jointly held by the debtor and her husband as tenants by the entirety. The court accordingly ruled that "because [Brand] retained
The court again rejected Brand's claim of a double recovery. According to the court, "[t]he estate simply succeeded to any lien rights claimed by [the lender] against the Debtor's home. But recovering the fruits of that unauthorized transfer does not result in a double recovery."
In its
Brand appealed the judgment. The trustee also appealed, arguing that he should have been able to recover the full amount of the
The District Court's Ruling
The district court consolidated the appeals and affirmed the bankruptcy court's ruling. According to the district court, the bankruptcy court's analysis under section 329 was sound. In addition, the district court explained, Brand could be liable for no more than the amount of criminal defense fees it retained because the remaining funds, which were held in its trust account, were clearly earmarked for the other criminal defense lawyers. It therefore found no error in the bankruptcy court's determination to award the trustee half of the fees retained by Brand under sections 549 and 550.
The district court rejected the trustee's argument that he should be able to recover the full amount of the
The trustee's argument was flawed, the district court wrote, "in that he seeks to recover the same funds under § 329 that the
Brand appealed to the Second Circuit.
The Second Circuit's Ruling
A three-judge panel of the Second Circuit affirmed.
Like the lower courts, the Second Circuit concluded that the trustee's recovery of a portion of the loan proceeds did not constitute a double recovery in violation of section 550. Because the transfer of the loan proceeds was avoided pursuant to section 549, the court reasoned that the trustee was permitted to seek recovery of either the transferred property or its value pursuant to section 550.
In so ruling, the court rejected the trustee's argument that the trustee had already recovered the debtor's interest in the proceeds of the loan when it approved the settlement avoiding and preserving the second mortgage. Rather, the Second Circuit panel found that the settlement gave the trustee only the rights of a lien creditor with respect to the property, and the second mortgage lien carried with it only the right to foreclose on the property in the event of default.
Moreover, the court noted that the bankruptcy court had denied a motion by the trustee to sell the property notwithstanding the husband's joint interest as a tenant by the entirety. The Second Circuit panel reasoned that, because the trustee was unable to liquidate the estate's equity in the property, preservation of the lien did not create any value for the estate's creditors. Thus, the court explained, the trustee's only route to recovery for the estate was by seeking to recover the loan proceeds unlawfully transferred to Brand. According to the court, "where (as here) avoidance does not result in the avoided lien becoming available for liquidation and distribution to creditors, § 550(d)'s single satisfaction rule is no obstacle to recovery by the Estate from other sources."
Concluding that recovery of a portion of the loan proceeds from Brand was not barred by section 550(d), the Second Circuit affirmed the lower court decisions. The court noted that, if the trustee were to realize any recovery on the debtor's interest in the property, this amount would be reduced by the amount already recovered under section 550 from Brand.
Outlook
The Second Circuit's ruling in Belmonte does not break new ground in applying the single-satisfaction rule under section 550(d), although the narrative is clouded somewhat by challenged transfers received by the debtor's attorneys in two different capacities. Section 550 is an important tool among the avoidance and recovery powers in bankruptcy. It casts a wide net by permitting the recovery of transferred assets or their value from multiple defendants—i.e., initial and subsequent transferees—subject only to the caveat that the total amount recovered from all defendants cannot exceed the value of the property transferred.
The courts' conclusion that only one-half of the amount received by Brand was recoverable as "estate property" is interesting. The debtor's one-half interest in the loan proceeds secured by the second mortgage amounted to
In addition, there is no indication in the court's rulings that the trustee pursued the other criminal defense attorneys to recover the approximately
The Second Circuit was not the only court of appeals to weigh in on the scope of the single-satisfaction rule in 2019. In Whitlock v. Lowe (In re Deberry), 2019 WL 7046904 (5th Cir.
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