Court: United States Bankruptcy Court, N.D. Indiana; January 14, 2005; Us Bankruptcy; United States Bankruptcy Court
Prior to bankruptcy, the debtor fraudulently transferred $34,100 to the defendant. The trustee, in this adversary proceeding, seeks not only to recover the transferred funds but also to obtain treble damages and attorney fees, amounting to over $102,000, based on Indiana law under the Uniform Fraudulent Transfer Act (I.C. 32-18-2 et seq.). The trustee claims that the defendant committed a crime by aiding the debtor in defrauding creditors, arguing that this entitles the trustee to seek damages under Indiana’s crime victim statute (I.C. 34-24-3-1). The trustee's action is grounded in the powers granted by 11 U.S.C. 544(b), which allows the trustee to step into the shoes of creditors and assert their rights. However, the argument is constrained by the limitations of 544(b), as it only permits the avoidance of transfers and does not extend to claims for damages. The trustee can only pursue the avoidance claim that a creditor like Hoosier Insurance could assert under state law, without the additional remedies available under I.C. 34-24-3-1. For broader powers beyond avoidance, the trustee would need to rely on 11 U.S.C. 544(a), which provides the rights of a hypothetical creditor at the time of the petition.
The trustee's counsel argued that the case should be treated as a general claim benefiting all creditors, rather than as a personal claim of an individual creditor, due to the commonality of factual allegations involving fraudulent transfers by the debtor. The debtor's intent to hinder, delay, or defraud allows any creditor to challenge the transfers, as per I.C. 32-18-2-14, meaning the trustee could utilize 11 U.S.C. 544(a) rather than being limited to 544(b). However, this route does not permit recovery of treble damages and attorney fees under I.C. 34-24-3-1, as only those who suffer actual pecuniary loss can invoke that statute, and the hypothetical creditor lacks such loss. Additionally, 11 U.S.C. 550 restricts the trustee's recovery to either the property transferred or its value, making it clear that the Bankruptcy Code supersedes state law in determining liability after a transfer is avoided. While state law may limit recovery to the amount owed to a specific creditor, Section 550 allows recovery of the full value of the transferred property. In this instance, the application of Section 550 may reduce the trustee’s potential recovery below what a creditor could obtain, raising concerns about fairness since the trustee is acting on behalf of all creditors. The distinction between the trustee's recovery rights and those of a creditor is a Congressional decision, and the court must adhere to the statute as written. Furthermore, the fraudulent conveyance action under 544(b) differs from the claim for treble damages under I.C. 34-24-3-1, with the focus on the intent of the debtor rather than the transferee in the context of the Indiana UFTA.
To recover treble damages, a plaintiff must demonstrate that the debtor intended to defraud and that the transferee knowingly and intentionally aided the debtor's fraudulent actions, as per Indiana Code (I.C.) 35-43-5-4(8) and I.C. 35-41-2-4. This requirement indicates that treble damage claims involve more proof than simply avoiding an actual fraudulent conveyance, highlighting a fundamental distinction between these two claims. The Trustee is awarded $34,100 from Wesley C. Stewart, along with litigation costs, following trial proceedings in this adversary case. The court's decision supplements prior findings and acknowledges the uncertainty regarding the application of I.C. 34-24-3-1 for recovering treble damages and attorney fees from a fraudulent conveyance's transferee, a matter recently certified to the Indiana Supreme Court by the Seventh Circuit. The court concurs with the trustee's interpretation of Indiana law regarding treble damages and attorney fees, noting that Hoosier Insurance Company qualifies as a creditor under I.C. 544(b). This section differentiates between the broader powers of a hypothetical creditor (I.C. 544(a)) and the limited powers of actual creditors, which is essential for understanding inconsistent court rulings on trustee authority to pierce corporate veils for debts. The distinction between personal and general claims is recognized, though not explicitly defined in I.C. 544. However, creditors pursuing treble damages and attorney fees are still bound by bankruptcy constraints and the automatic stay, as established in precedent cases like Fisher v. Apostolou and Bankers Trust Co. v. Rhoades.
