Rajala v. Gardner

Rajala v. Gardner, et al., No. 12-3113 (10th Cir. March 12, 2013)
The Tenth Circuit affirmed the U.S. District Court's (Kansas) order granting motions to distribute funds held in escrow to two non-debtor parties over the objection of the Chapter 7 trustee, who claimed the funds. The trustee claimed the funds were fraudulently transferred, and though the claim was unliquidated, asserted that the funds were therefore property of the bankruptcy estate, and could not be distributed because of the automatic stay. The Tenth Circuit, recognizing contrasting circuit authority (Fifth Circuit - prejudgment/prerecovery fraudulently transferred property is property of the estate; Second Circuit - only recovered property is property of the estate) affirmed the District Court's ruling that allegedly fraudulently transferred property is not property of a bankruptcy estate until recovered and therefore is also beyond the reach of the automatic stay.
Procedural context:
Appellant appealed the rulings of the U.S. District Court for the District of Kansas in an avoidance action commenced as an adversary proceeding (Avoidance Suit). Separately, the nondebtor parties had sued the nondebtor purchaser for the balance of the purchase price in U.S. District Court in the Western District of Pennsylvania. After entering judgment in favor of the nondebtor claimants in Pennsylvania, the court transferred the issue of whether the judgment was property of debtor's bankruptcy estate to the Kansas bankruptcy court, and ordered that the judgment funds be deposited with the Kansas bankruptcy court. The nondebtor claimants then removed the case to the Kansas District Court. The Kansas District Court then joined the removed suit with the Avoidance Suit.
Chapter 7 debtor GRHC was formed to develop wind-generated power projects. It employed FreeStream to provide advisory services. GRHC entered into a Memorandum of Understanding ("MOU") with Edison Capital whereby Edison would pay GRHC for construction and development of various wind projects. Subsequently, several GRHC insiders formed LWHC, and allegedly revised the Edison MOU to replace GRHC as project developer. LWHC then entered into a second contract with Edison whereby Edison would pay a percentage of funds from one of the projects to FreeStream, an entity controlled by LWHC. After GRHC filed bankruptcy, the Chapter 7 trustee filed suit to avoid various transfers and recover the balance of the payment from Edison.
Kelly, Murphy, and Tymkovich

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