Fraudulent Transfer Applicable to Secured Lenders – September 2014

 

During the summer, a decision of potential significance to secured lenders was issued by the Massachusetts Supreme Judicial Court. For the first time the SJC has expressly ruled that the Uniform Fraudulent Transfer Act, G.L.c.109A applies to secured lenders in an action brought by an unsecured creditor.

 

In Weiler v. PortfolioScope, Inc., 469 Mass. 75 (2014), an unsecured creditor sued a private secured lender asserting that it fraudulently rendered its borrower insolvent through the seizure of assets and left it unable to pay unsecured debt. Lender held a security interest in the proceeds of a substantial litigation successfully settled by the borrower. The lender directed borrower to pay it from those proceeds. At the same time the lender's principal directed that the remaining part of the settlement be paid to a principal of the borrower, who had apparently provided some assistance in the litigation.  The trial judge found that neither the borrower or lender had acted in good faith and awarded the unsecured creditor double damages under G.L.c.93A - against both the borrower and the lender.  The Appeals Court reversed, but the Supreme Judicial Court granted a petition for further review and, thereafter, affirmed much of the trial judge's decision - including fraudulent transfer remedies and the award of double damages.

 

Although the finding that the secured lender had not acted in good faith is an obvious distinction from the usual course of loan enforcement, the SJC's decision is noteworthy for its broad language drawn from caselaw outside Massachusetts. "Fraudulent conveyance laws, such as the Bankruptcy Code and Uniform Fraudulent Conveyance Act are intended to prevent ... secured creditors ... from benefitting at the expense of others, including unsecured creditors." In re Hechinger Investment Co. of Delaware, 274 B.R. 71,81 (D.Del. 2002).  The SJC continues, relying upon an Illinois Appeals Court decision, with the general declaration that "compliance with the law of secured transactions ... does not by itself protect a secured creditor from a fraudulent transfer claim." Weiler, 469 Mass. at 91. While the SJC expressly recognizes cases under prior law holding that a borrower's payment of substantially all its assets to one creditor over another is insufficient to support a fraudulent transfer claim, it notes that this rule does not apply where the debtor has acted in bad faith.

 

The SJC's analysis of the borrower's motivation in making a fraudulent transfer is, of course, typical. However, scrutiny of the lender's enforcement of a security interest fraudulent as a transfer by the borrower is noteworthy, as is the attribution of the borrower's bad faith to the lender.

 

It would seem that accommodations to borrowers in the workout context would be particularly susceptible to review under the principles of this decision where the interests of third party creditors are adversely affected.