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Creditor Defeats Recovery of Antecedent Credit Card Debt Under §550(b)(1) Because it Took Payment in Good Faith and Without Knowledge of its Voidability

Desmond v. Am. Express Centurion Bank, Inc. (In re Callas), Nos. 13 B 43900, 15 A 00140, 2016 Bankr. LEXIS 3523 (U.S. Bankr. N.D. Ill. Sep. 27, 2016)

Michael K. Desmond, the Chapter 7 Trustee for the bankruptcy estate of Debtor Sam Callas brought an adversary complaint against Defendant American Express Centurion Bank, Inc. to avoid and recover the allegedly fraudulent transfers made by Katina Callas, the Debtor’s non-filing spouse pursuant to §§§547,548(a)(1) and 550(a) of the Bankruptcy Code. American Express did not challenge the avoidability of the transfer, but contended that even if the transfer was avoidable, it cannot be recovered from American Express as an immediate or subsequent transferee of Katina. American Express asserted an affirmative defense under §550(b)(1) to the Trustee’s recovery claims. It argued that as a subsequent transferee under §550(b)(1), it was allowed to avoid liability for avoided transfers because it took the transfer for value, towards satisfaction of an antecedent debt, in good faith, and without knowledge of the voidability of the transfer. The Trustee disputed that American Express did not prove the elements of §550(b) defense.
However, the Court found it was uncontested that the Debtor owed an antecedent debt to American Express and that the alleged transfer reduced that debt. Katina transferred funds to American Express to pay down antecedent credit card debt owed to American Express by the Debtor. American Express accepted the transfer for value by reducing the antecedent debt owed to it by the Debtor. By reducing the debt, American Express “gave up” its right to collect that amount from the Debtor. Accordingly, American Express took the transfer for value for purposes of § 550(b)(1). Next, the Court found that the facts established that American Express did not have enough knowledge of the events in connection with the transfer to permit the Court to conclude that American Express had a duty to investigate further. Thus, American Express had no reason to think that it was not “trading normally” with the Debtor and Katina or that the transfer was part of a scheme on their part to defraud their creditors. So, it was clear that American Express received the alleged transfer in good faith and without knowledge of its voidability. The Court ruled that American Express successfully established a valid affirmative defense to liability under §550(b)(1).