Fraudulent Transfers and Juries: Was Granfinanciera Rightly Decided?

• Author: Carlson, David Gray

In Granfinanciera, S.A. v. Jdprdberg, (1) a bankruptcy trustee (T) sued a third party (X) who had received fraudulent transfers from a bankrupt debtor (D). X demanded a jury trial, probably as a litigation tactic based on delay. (2) The bankruptcy court denied the request and held a bench trial where X was justly clobbered. (3)

Striking a blow for obfuscation and delay, (4) the Supreme Court reversed on the ground that, in 1791, fraudulent transfers were torts actionable at law. Accordingly, the seventh amendment to the United States Constitution (5) guaranteed X a jury trial. T would have to start all over again.

The case fomented consternation because it was not clear that a bank' ruptcy court was empowered to conduct jury trials. (6) Whether they may do so has been covered elsewhere (7) and is not my present concern. I am more interested in what this case has to say about whether or not receiving a fraudulent transfer is a tort. I define a tort as the right to a money judgment for some wrong, with damages assessed at the time of the wrong. (8) Torts are actions at law. In Granfinanciera, the Supreme Court implied that, in 1791, a creditor (C) with a judgment against a non-bankrupt D could sue X for damages.

In this Article, I will demonstrate that this was palpably not true. C had no tort cause of action against X for fraudulent transfer, in the "action at law" sense. Accordingly, I will show that Granfinanciera was wrongly decided. The Supreme Court analogized the modern American T to an eighteenth century English bankruptcy administrator (A). This is a false analogy between T and A--a quaternio terminorum. (9) American bankruptcy trustees are deemed to have judgments against D. (10) Judgment creditors had access to the creditor's bill in equity. Juries did not have to be impanelled in such actions (though advisory juries were sometimes impaneled). (11) English bankruptcy administrators were not deemed to be judgment creditors and had no access to equity. Thus, the Supreme Court effectively compared apples to oranges.

As a result, I contend that the Supreme Court's ruling is trivial. T can always plead around the jury issue by simply requesting the remedy of an equitable accounting. In Granfinanciera, T pleaded ambiguously and, as a result, T fell into the seventh amendment trap. As subsequent case law has demonstrated this can be avoided.

This Article has four parts. Part I establishes that, in 1791, C always sued X in rem when X was the recipient of fraudulently transferred property. Equity was prepared to give money judgments to C only if C's in rem right had been wrongfully impaired by X. But this did not mean C's action was at law. It clearly was in equity. Part II describes the Supreme Court's false analogy. The Supreme Court effectively compared modern American T to antique English A. It should have compared T to a judgment creditor of D, as of 1791. Had it done so, it would have seen that C always proceeded in equity--never at law. Part III reviews the academic literature on fraudulent transfers--particularly a fine article by Professor John C. McCoid, in order to show that the quaternio terminorum I set up here is an original contribution. Part IV suggests that Granfinanciera is actually or at least should be trivial. I consider the sparse case law since Granfinanciera to determine whether this is so.

1. SOME CIVIL PROCEDURE BASICS AS APPLIED TO FRAUDULENT TRANSFERS

   Before we get to fraudulent transfers, we need to establish a truth about torts. The legal remedy for torts is a money judgment. Suppose D commits a tort against C. At the time of the tort, D happens to own a gold brick. Prior to entry of a judgment, C is a general creditor only, meaning that C had no in rem interest in any of D's brick. D owns all of it and C owns none of it. If C wants a piece of the brick, C will have to reduce her tort claim to a money judgment. When the money judgment is entered, the tort theory goes out of existence and merges into the judgment. (12) The law of judgment, not the law of tort, applies thereafter.

   The "legal remedy" for a money judgment is the writ of execution. (13) Suppose C obtained a money judgment against D and D owned a valuable gold brick. C could serve an execution on a sheriff, who could then seize and sell D's brick in order to pay C's judgment. Execution was C's remedy "at law." (14)

   Fraudulent transfer law addresses this situation: C, an unsecured creditor, has obtained or soon will obtain a money judgment against D. To hinder, delay and defraud C, D transfers the gold brick to a third party X, so that C cannot reach it. X either pays no value to D or pays value in bad faith to enable D to abscond. (15) Fraudulent transfer law invites C to execute on X's brick to pay the C v. D judgment.

   Classically, C's claim against X was quasi in rem. That is, C aims to get a lien on X's brick. If the brick is still in X's possession, that is the end of the matter. C may execute upon the brick. But often X's fraudulently received property cannot be found, perhaps because X disposed of it by selling it to a buyer (B). In such cases, C can reach the proceeds that X received from B. (16)

   Under the in rem concept, sometimes neither the original thing nor its proceeds were available. In that case--and only in that case--courts were willing to substitute a money judgment in C's favor against X. But this was strictly a last resort. (17) If the fraudulently received property was available, C could not have a money judgment.

   One way to express this in rem idea is to say that, in classic times, receipt of fraudulently transferred property was not a tort. C had no in personam right against X. C had an in rem right against X's brick, if X fraudulently received it. C was not entitled to a money judgment against X for receiving the brick. If X disgorged the brick, X could avoid the money judgment. (18) The great Garrard Glenn summarized the matter as it stood in 1940:

   [T]he notion that an action [for fraudulent transfer] lies in tort is so discredited that one may venture upon a generality. It may safely be said, then, that there is no tort cause of action, when a transfer is made before the creditor obtains judgment, and it only remains to notice the exceptions, actual or apparent. (19)

   Fraudulent transfer law belongs to the law of judgments, not to the law of torts. It follows that execution is also the legal remedy in cases of fraudulent transfer. Suppose just before C served an execution on the sheriff, D conveyed the brick to X with intent to hinder C. C could disregard the transfer, serve the execution on the sheriff and obtain the sheriffs levy of X's brick as if it were still D's brick. In the language of the Uniform Fraudulent Conveyance Act (1918), D could "[disregard the conveyance and attach or levy execution upon the property conveyed." (20) This was the sum total of the "legal" theory of fraudulent transfer. (21) In the eyes of the law, the D-X transfer was "void." It never happened! (22)

   To be sure, where the sheriff disregarded the D-X transfer and executed against X's thing as if it were D's thing, subsequent litigation might ensue to determine whether the D-X transfer was indeed fraudulent. Suppose, stirred to action by C's writ of execution, the sheriff levied on X's fraudulently received gold brick and sold it to B. B's title was cloudy. If, in retrospect, D had validly conveyed the brick to X, B had no title to it. But if D had fraudulently transferred the brick to X, the sheriff's sale conveyed X's title to B, and B was in rightful possession. The usual way the question of title was resolved was for X, after the execution sale, to sue B in replevin or (at X's option) for the tort of conversion--wrongful interference with X's right to possess the brick. If X so wished, there would be litigation turning on whether the transfer was indeed fraudulent. (23)

   If, however, D had fraudulently transferred to X, B had good title to the brick from C's execution sale, and X had none. The fraudulent nature of the D-X transfer was pleaded defensively by B. In this picture, what never happened was C's action for a money judgment at law against X for receipt of fraudulently transferred property. By the time B and X squared off over title to the gold brick, C was out of the picture, happily counting the proceeds received from the "as is" no-warranty-of-title execution sale. (24)

   According to law, the D-X transfer was void if fraudulent. How did equity view the brick? Generally speaking, equity would aid in the enforce' ment of a money judgment if the legal remedy of execution was inadequate. This was the function of the "creditor's bill in equity." Equity generally re' quired there to be a pre-existing judgment in C v. D. (25) In addition, to show that the legal remedy was inadequate, the chancellor wanted to see an execution returned nulla bona by the sheriff. (26)

   Presented with an execution nulla bona, equity courts were willing to give declaratory relief--the judgment that X's brick was really D's brick. This was known as """avoiding""" or "setting aside" the fraudulent transfer. Thereafter the court of equity would declare that C had a lien on X's brick (27) or perhaps would order X to convey the brick back to D, (28) in which case C would serve an execution on the sheriff to allow the legal remedy to proceed. (29)

   In equity, the D-X transfer was valid but voidable. X had voidable title and. was viewed as holding the brick in trust for D's creditors. (30) The OX trust relation has important ramifications. First, if X were to sell the brick to B, a bona fide purchaser for value, B took the legal title from X and the equitable title from C. C could not enforce an in rem right against B. The equity courts insisted that trustees had power to dispose of C's equitable interest. What C received from B--proceeds--newly became the res of the trust because X was deemed to be acting as the agent of C...