The United States Trustee filed a complaint seeking denial of Debtors discharge in their chapter 7 bankruptcy case. The complaint was based on alleged fraudulent vehicle transfers and numerous false oaths in Debtors’ bankruptcy schedules, at the Section 341 meeting, and in depositions. After a trial of the merits the Court concluded that Debtors’ discharge must be denied based on the allegations in the complaint, which the United States Trustee proved by a preponderance of the evidence, and on Debtors’ numerous false oaths at trial.

Trustee sought to avoid repayment of Debtor’s 401(k) loan on the eve of bankruptcy as preferential and/or fraudulent, and Debtors moved to dismiss for failure to state a claim, arguing that there were no transactions and no debtor/creditor relationship created between a debtor and her retirement plan. Following Johnson v. Home State Bank, 501 U.S. 78 (1991); In re Buchferer, 216 B.R. 332 (Bankr. E.D.N.Y. 1997); and BAPCPA, the Court held that nonrecourse loans can establish a debtor/creditor relationship, that the conversion of non-exempt to exempt assets can form the basis of a § 548 claim, and that borrowing from one’s 401(k) plan is much more complex than borrowing from oneself. Thus, at the motion to dismiss stage, the trustee has pleaded claims for which relief may be granted.

11 U.S.C. Section 550(a)(1) allows a case trustee to recover property that is subject to an avoidable transfer claim from an “initial transferee.”  In the Tenth Circuit an initial transferee is someone who has a beneficial interest in, or possesses dominion or control over, the property.  A person who acts as a “mere conduit” for a transfer is not an initial transferee. In this case, Defendant (the daughter of Debtor’s then owner and president) worked for Debtor as a “runner” when she was 17 years old. Debtor wrote 3 checks payable to Defendant, who was instructed to deposit them into her father’s personal or business accounts. Defendant endorsed the checks and deposited them as instructed. Defendant was a mere conduit of the funds between Debtor and her father; she was not an initial transferee. This otherwise uncomplicated disposition was affected by two procedural matters that worked against Defendant: (1) the fact that Defendant failed to plead the conduit theory as an affirmative defense, and (2) the fact that Defendant admitted and stipulated that the funds were “transferred” to her. To avoid an unjust and legally erroneous outcome, the Court granted Defendant’s day-of-trial motion to amend her pleadings to include the conduit defense and set aside the stipulation which, arguably, could be construed as a concession of liability under Section 550(a)(1).       

The UCC moved for authority to bring fraudulent transfer and turnover claims against parties after the Debtor-in-possession refused to do so. The Court concluded that it was within the Court’s power and was appropriate to grant derivative standing to the UCC to assert the claims, and that potential affirmative defenses would not forestall the UCC at this stage but could be considered if and when the Court reaches the merits of the UCC’s claims.