A Trustee Generally May Not Recover an Actual Fraudulent Transfer if the Funds Have Been Reimbursed to the Debtor Pre-Petition

(Excerpt) Section 544 of title 11 of the United States Code (the “Bankruptcy Code”) grants a trustee the power to “avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by” certain classes of secured creditors, unsecured creditors, and bona fide purchasers. When seeking to avoid a transfer a trustee can look to various other provisions of the Bankruptcy Code, including: 11 U.S.C. § 545 (statutory liens), 11 U.S.C. § 547 (preferences), 11 U.S.C. § 548 (fraudulent transfers), 11 U.S.C. § 549 (post-petition transactions), 11 U.S.C. § 553(b) (impermissible setoffs), and 11 U.S.C. § 724(a) (specific liens that secure 11 U.S.C. § 726(a)(4) claims). However, once avoided, recovery to the estate is not guaranteed. A trustee’s ability to recover funds is limited by section 550(a), which provides: Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) 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; or(2) any immediate or mediate transferee of such initial transferee. This provision limits a trustee’s ability to recover pre-petition transfers by placing a bar on the recovery of all transfers that do not “benefit the estate.” In In re Incare, the Bankruptcy Court for the Eastern District of Pennsylvania held that the trustee could not recover pre-petition transfers found to be actually fraudulent when the funds were reimbursed to the debtor company pre-petition. In that case, Dr. Nikparvar was the principal of both the debtor corporation, Incare, and the corporation that received the fraudulent funds, Advanced Urgent Care. Dr. Nikparvar admitted in his testimony that he purposely transferred funds to Advanced Urgent Care, totaling $1,779,191.51, in order to prevent a judgment creditor from seizing Incare’s bank account for a second time. The record revealed that Advanced Urgent Care had transferred funds, totaling $1,779,738.95, back to Incare prior to the commencement of the bankruptcy case. The Bankruptcy Court applied section 550 to preclude recovery, stating “where there was no diminution of Incare’s assets as a result of the Advanced Urgent Care Transfers, the Trustee is not entitled to recover under 11 U.S.C. § 550(a).” This memorandum addresses the question of whether a trustee may recover an actual fraudulent transfer when the funds have effectively been returned to the estate. In short, the answer is no. Section I discusses how a survey of jurisdictions reveals that there is a general consensus among circuits that the “benefit of the estate” provision serves as a bar on the trustee’s ability to recover funds. Section II talks about Bankruptcy Courts’ strong policy against double dipping. Section III explains how bankruptcy courts are equitable tribunals and, as such, there is no place for punitive recoveries