American Bar Association
Media Alerts
Media Alerts - Ivey (Trustee) v. First Citizens Bank & Trust Co. -- Fourth Circuit
Decrease font size
Increase font size
March 27, 2017
  Ivey (Trustee) v. First Citizens Bank & Trust Co. -- Fourth Circuit
Ponzi Schemers Beware: Wire Deposits and Bank Transfers NOT "Transfers" Within Meaning of Bankruptcy Code

Areas of Law: Bankruptcy Law

Issue Presented: Whether deposit and wire transfers to a defendant's personal checking account are "transfers" within the meaning of § 101(54) of the Bankruptcy Code and, if so, whether they are avoidable as fraudulent transfers under 11 U.S.C. § 548(a)(1)(A).

Brief Summary: The United States Court of Appeals for the Fourth Circuit held that a debtor's deposit and wire transfers did not constitute "transfers" within the meaning of the Bankruptcy Code because the debtor continued to possess, control, and have custody over his funds even after he made deposits to his First Citizens Bank account. Thus, any funds in the account were at all times part of the bankruptcy estate.

Extended Summary: In early 2010, a group of eight individual creditors filed an involuntary petition in bankruptcy court against debtor Whitley for relief. Involuntary petitions are filed against debtors so that the debtor may not deplete the resources available to pay creditors. The petition was granted on March 30, 2010. In 2012, the trustee, Charles Ivey, filed a complaint on behalf of the bankruptcy estate against First Citizens Bank, where Whitley held a personal checking account in his name. Whitley used this account to deposit funds, receive wire transfers, and write checks as part of a Ponzi scheme he was involved in. These checks, deposits, and transfers were written or made in the two years before the filing of the involuntary bankruptcy petition. The trustee alleged that some of the deposits and wire transfers into the account, including personal and cashier's checks and wire transfers from Whitley's "investors," constituted transfers from Whitley to the Bank that were made with the actual intent to hinder, delay, or defraud creditors. The trustee argued that they were, therefore, avoidable as fraudulent transfers under 11 U.S.C. § 548(a)(1)(A). A fraudulent transfer is an attempt to avoid debt by transferring money to another person or company, in this case under the trustee's theory, to First Citizens Bank. The bankruptcy court granted summary judgment for First Citizens Bank holding that although the transactions at issue were transfers, the transfers did not diminish the bankruptcy estate and did not place the funds beyond the reach of creditors, so they were not avoidable as fraudulent transfers. The district court affirmed.

In the Fourth Circuit, the trustee alleged again that the transactions should be avoided as fraudulent transfers made from Whitley to the Bank with the actual intent to hinder, delay, or defraud Whitley's creditors. The trustee also argued that the bankruptcy and district courts erred by requiring that the transactions diminish the bankruptcy estate in order to qualify as fraudulent transfers under § 548(a)(1)(A). The trustee argued that where actual fraudulent intent was present, there is no requirement that the transactions diminish or move property away from the bankruptcy estate. First Citizens Bank argued that the bankruptcy court and district court properly required that transactions diminish the bankruptcy estate because § 548(a)(1)(A) requires that an avoidable transfer be one "of an interest of the debtor in property," which the Bank argued federal courts have interpreted to mean that the property would have been in the estate but for the transfer.

The Fourth Circuit noted that it asked the parties to address at oral argument the threshold question of whether the transactions at issue were transfers within the meaning of § 101(54) of the Bankruptcy Code, so that it could proceed to considering whether the transactions were avoidable transfers under § 548(a)(1)(A). The trustee argued that the transactions did not constitute transfers under § 101(54)'s broad definition and contended that depositing and accepting funds into a bank account, as Whitley did, constitutes parting with property under § 101(54) because of the Bank's access to and interest in the funds. Additionally, the trustee alleged that the transactions should be avoided as fraudulent transfers because they were made from Whitley to the Bank with the actual intent to hinder, delay, or defraud Whitley's creditors. First Citizens Bank countered, arguing that no parting with the property occurred. The Bank argued that there was no change to Whitley's rights and interests in the property after the deposits and wire transfers because Whitley retained access to his account; he could withdraw funds at will and the funds in the account were available to the bankruptcy estate.

The court held that the transactions at issue did not constitute transfers within the meaning of the Bankruptcy Code. Under 11 U.S.C. § 548(a)(1)(A), a "trustee may avoid any transfer that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily" made those transfers with the actual intent to hinder, delay, or defraud any creditor. The Bankruptcy Code defines "transfer" as 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 Fourth Circuit observed that Congress wanted to define "transfer" as broadly as possible in the Bankruptcy Code. Specifically, the Fourth Circuit noted that because Congress defined "transfer" broadly, courts have been divided on whether § 101(54)'s definition of "transfer," includes a debtor's deposits into his own unrestricted bank account in the regular course of business. In determining whether Whitley's "transfers" fell within the meaning of § 101(54), the Fourth Circuit followed its decision in Citizens' Nat. Bank of Gastonia, N.C. v. Lineberger. Due to this precedent as well as the decisions of sister circuits, the Fourth Circuit determined that the better interpretation of "transfer" does not include a debtor's regular deposits into his or her own unrestricted checking account. Specifically, the Fourth Circuit determined that when Whitley made his deposits, he continued to possess, control, and have custody over his funds. Thus, any funds in the account were at all times part of the bankruptcy estate. The Fourth Circuit affirmed the district court's judgment was affirmed.

To read the full opinion, click here.

Panel: Chief Judge Gregory and Judges Wynn and Davis

Argument Date: October 26, 2016

Date of Issued Opinion: January 31, 2017

Docket Number: No. 15-2209

Decided: Affirmed by published opinion

Case Alert Author: Dena Robinson, Univ. of Maryland Carey School of Law

Counsel: Charles Marshall Ivey, III, IVEY, MCCLELLAN, GATTON & SIEGMUND, L.L.P., Greensboro, North Carolina, for Appellant. Gary J. Rickner, WARD AND SMITH, P.A., Greenville, North Carolina, for Appellee. ON BRIEF: Charles Marshall Ivey, IV, IVEY, MCCLELLAN, GATTON & SIEGMUND, L.L.P., Greensboro, North Carolina, for Appellant. Benjamin E. F. B. Waller, WARD AND SMITH, P.A., Greenville, North Carolina, for Appellee.

Author of Opinion: Chief Judge Gregory

Case Alert Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 03/27/2017 12:36 PM     4th Circuit  

FuseTalk Enterprise Edition - © 1999-2018 FuseTalk Inc. All rights reserved.

Discussion Board Usage Agreement

Back to Top