Section 548 of the United States Bankruptcy Code provides that a trustee can recover transfers made by debtors with actual intent to hinder, delay, or defraud creditors during the two years period prior to the filing of the bankruptcy case from the recipients of the transfers. The Code defines “transfer” broadly to include any “mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an interest in property.”
The trustee in the involuntary bankruptcy case filed against James Whitley by certain of his creditors sought to use his powers under Section 548 to recover deposits made by Whitley to First Citizens Bank & Trust Company from the Bank and to use the funds recovered from the Bank to pay Whitley’s creditors. Whitley had operated a “Ponzi Scheme” in which he solicited funds from investors on the promise that their funds would be invested in “purchase order factoring contracts.” Whitley deposited the investors’ funds to the Bank. The “profits” earned by early investors were not generated by any such contracts, but were paid with the funds of later investors. As such schemes always do eventually, Whitley’s scheme failed when he could no longer find enough new investors to pay the earlier investors.
Whitley’s trustee asserted that the deposits to the Bank were transfers and that Whitley made them with actual intent to hinder, delay, or defraud his creditors, i.e., the investors. The bankruptcy court found that the deposits were indeed transfers, but ruled that the trustee could not recover them from the Bank even if Whitley made them with actual intent to defraud his creditors because the transfers did not deplete Whitley’s bankruptcy estate. The deposits simply converted one form of property, the investors’ money, into another form of property, the ability to withdraw funds from the account into which they were deposited. On appeal to the district court, the district court agreed with the bankruptcy court.
On further appeal to the United States Court of Appeals for the Fourth Circuit, the Fourth Circuit agreed with the results reached by the lower courts, but disagreed with their reasoning. In its January 31, 2017 opinion in In re Whitley, the Fourth Circuit held that the deposits to the Bank could not be recovered by the trustee because they simply were not transfers.
The Fourth Circuit acknowledged that Congress had intended the Bankruptcy Code’s definition of transfer to be “as broad as possible.” Legislative history indicates that Congress intended to include in the definition “any transfer of an interest in property is a transfer, including a transfer of possession, custody, or control even if there is no transfer of title, because possession, custody, and control are interests in property.” The Fourth Circuit also acknowledged that a number of courts had held that deposits to bank accounts are transfers, relying on a reference in the Senate Report to “any transfer of an interest in property,” including “[a] deposit in a bank account or similar account.”
Nevertheless, the Fourth Circuit said that it was “persuaded by the precedent in this Circuit and our sister circuits that the better interpretation of “transfer” does not include a debtor’s regular deposits into his own unrestricted checking account—a specific circumstance not explicitly contemplated by the Senate Report.” The Court continued:
When Whitley made deposits and accepted wire transfers into his checking account at First Citizens Bank, he continued to possess, control, and have custody over those funds, which were freely withdrawable at his will. Indeed, any funds in the account were at all times part of the bankruptcy estate. The Bank’s mere maintenance of Whitley’s checking account does not suffice to make deposits and wire transfers in that account “transfers” from Whitley to the Bank, and we decline to read § 101(54) to say otherwise.
The Fourth Circuit suggested that its holding was narrow, stating:
Our holding is limited to the narrow circumstances presented here: when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business, he has not transferred those funds to the bank that operates the account. When the debtor is still free to access those funds at will, the requisite “disposing of” or “parting with” property has not occurred; there has not been a “transfer” within the meaning of § 101(54).
Despite the Fourth Circuit’s attempt to limit the scope of its opinion, when the debtor’s “regular course of business” was acknowledged to be operation of a scheme to obtain money from investors on false pretenses and to conceal the scheme by paying earlier investors obtained from later investors, it is difficult to conceive of circumstances under which a deposit to an ordinary bank account could be a transfer.
The Fourth Circuit’s decision in Whitley is welcome news for banks who are often targeted by trustees as “deep pockets” in bankruptcy cases. Merely serving as a depository bank does not render a bank the recipient of an avoidable transfer even when the depositor intends to hinder, delay, or defraud creditors.