Cox v. Grube (In re Grube), 500 B.R. 764

Background

Chapter 7 petition filed June 2, 2009; initial adversary by Trustee Barber against Suzanne filed June 3, 2010 seeking to avoid transfers to Jill's on Galena for Suzanne's benefit
Subsequent related adversaries: Adversary Nos. 09-8111 and 10-8011 involving DRG/INC transfers and alleged fraud
Trustee Cox replaced Barber; new trustee pursued amended complaints and possible summary judgment motions in 2011–2012
Second Amended Complaint (Aug. 14, 2012) separated transfers to INC from DRG and pleaded six counts
Counts I–VI allege constructive and actual fraud under the Illinois UFTA and Bankruptcy Code, with transfer amounts and recipients identified by date
Court denied Suzanne’s motion to dismiss and allowed the Trustee to file a second amended complaint; set 21 days to answer

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a trustee may sue transfer beneficiaries without naming the initial transferees	Trustee may sue downstream transferees or beneficiaries under 11 U.S.C. §550 without naming initial transferees	Trustee must name initial transferees as necessary parties	Trustee may sue a transfer beneficiary without naming the initial transferee
Relation back of actual fraud claims to constructive fraud claims	Actual fraud claims relate back to constructive fraud allegations	Actual and constructive fraud should not relate back	Actual fraud claims relate back under Rule 15(c) as arising from same conduct
Whether Counts III and VI satisfy Rule 9(b) pleading for actual fraud	Counts allege intent and specify transfers by date/amount; badges of fraud present	Insufficient particularity for actual fraud	Counts III and VI satisfy Rule 9(b) or its relaxed standard in bankruptcy context
Statute of limitations and waiver against actual fraud claims	Relation back preserves timely pleading; waiver not applicable	Limitations bar delayed actual fraud claims; waiver may apply	Actual fraud claims not time-barred due to relation back; waiver not established
Misnomer and failure to name INC/DRG as defendants	Identity of interest and notice to Suzanne; initial transferees not necessary parties	Misnomer and lack of naming prevents action	Misnomer does not bar claims; not necessary to name INC/DRG as defendants
Whether the trustee's filing of an inconsistent proof of claim affects liability	Proof of claim against Jill does not preclude recovery from Suzanne	Inconsistent claim could preclude recovery	No inconsistency; trustee may pursue recovery from Suzanne despite Jill's claim

Key Cases Cited

Bonded Fin. Servs., Inc. v. European American Bank, 838 F.2d 890 (7th Cir. 1988) (addresses intent and benefits under §550(a)(1))
In re V.N. Deprizio Constr. Co., 874 F.2d 1186 (7th Cir. 1989) (preclusion and party-boundary considerations in avoidance actions)
In re McCook Metals, L.L.C., 319 B.R. 570 (N.D. Ill. 2005) (elements of §550(a)(1) include actual receipt, quantifiability, and accessibility of benefit)
In re Phillips, 379 B.R. 765 (Bankr. N.D. Ill. 2007) (avoidance may proceed against downstream transferee or beneficiary without initial transferee)
In re M. Fabrikant & Sons, Inc., 394 B.R. 721 (Bankr. S.D.N.Y. 2008) (supports action against downstream transferee/beneficiary under §550)
In re International Administrative Services, Inc., 408 F.3d 689 (11th Cir. 2005) (avoidance/recovery actions proceeding against beneficiaries)
Securities Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 480 B.R. 501 (Bankr. S.D.N.Y. 2012) (discussion of avoidance/recovery under §550)
Airborne Beepers & Video, Inc. v. AT&T Mobility LLC, 499 F.3d 663 (7th Cir. 2007) (Rule 9(b) pleading standards in fraud context)
In re Walter, 462 B.R. 698 (Bankr. N.D. Iowa 2011) (pleading actual fraud with particularity in bankruptcy)
In re Actrade Financial Technologies Ltd., 337 B.R. 791 (Bankr. S.D.N.Y. 2005) (distinction between actual and constructive fraud in relation back)