In The Lovering Tubbs Trust, et al. v. Hoffman (In re O’Gorman), No. 23-60005 (9th Cir. Sept. 9, 2024), the Ninth Circuit affirmed the Bankruptcy Appellate Panel’s decision that a trustee can avoid a fraudulent transfer under 11 U.S.C. § 548(a)(1) even if creditors were not directly harmed by the transfer. The Ninth Circuit confirmed that “actual harm” to creditors is not required for a trustee to pursue an avoidance action; highlighting the expansive power of trustees to recover property for the sole benefit of the bankruptcy estate.
In the case, Debbie O’Gorman (”Debtor”) owned a valuable property in Calistoga, California (“Property”). Facing foreclosure by her previous attorney, who held a junior lien on the property, Debtor transferred the Property to the Lovering Tubbs Trust (the “Trust”) for no consideration. The Trust was created by attorney William Utnehmer, who offered to save the Property from foreclosure by transferring it into the Trust (the “Transfer”), with his company holding an 80% interest and Debtor holding a 20% interest. After the transfer, Debtor continued to reside on the Property. The Chapter 7 trustee (“Trustee”) sought to avoid the Transfer under 11 U.S.C. § 548(a)(1)(A) on the grounds that it was made with actual intent to hinder, delay or defraud Debtor’s creditors. The bankruptcy court granted summary judgment in favor of the Trustee, and the Bankruptcy Appellate Panel affirmed.
The primary issue before the Ninth Circuit was whether the Trustee needed to prove that creditors were harmed by the Transfer to establish a claim under 11 U.S.C. § 548(a)(1). The appellants argued that the Trustee lacked Article III standing because the Transfer did not harm any specific creditors. The Ninth Circuit rejected the appellants’ argument, ruling that “actual harm” to creditors is not a required element for a fraudulent transfer claim under § 548(a)(1). The Ninth Circuit explained that the purpose of § 548 is to protect the bankruptcy estate’s assets, not necessarily to compensate individual creditors. The Ninth Circuit noted that the depletion of estate assets due to a fraudulent transfer constitutes a sufficient injury-in-fact for Article III standing.
The Ninth Circuit also emphasized that “actual harm” is not a prerequisite for proving fraudulent intent. The Ninth Circuit’s finding aligned with decisions from other circuits, holding that trustees only need to show that the debtor made the transfer with intent to hinder, delay, or defraud creditors, regardless of whether the transfer ultimately caused harm. The Ninth Circuit further found that the bankruptcy court properly granted summary judgment because the trustee provided ample evidence of Debtor’s fraudulent intent as the Debtor’s own declaration confirmed that she transferred the property to prevent or delay her prior counsel’s foreclosure.
Therefore, the Ninth Circuit affirmed the Bankruptcy Appellate Panel’s decision, holding that the Trustee had Article III standing and that the transfer was avoidable under 11 U.S.C. § 548(a)(1)(A). The Ninth Circuit emphasized that fraudulent transfer claims should focus on the debtor’s intent rather than actual harm to creditors.