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Delaware: No Cap on Fraudulent Transfer Claim Damages under Section 550(a)

November 1, 2017, Delaware – The litigation trust for Debtor Physiotherapy Holdings, Inc. brought an adversary proceeding against Defendant Water Street HealthCare Partners to recover the funds that the Defendant allegedly took from the Debtors in connection with Physiotherapy’s LBO. The complaint asserted extensive accounting manipulations that led to the allegedly fraudulent sale of Physiotherapy.

The Defendants moved to dismiss the litigation trust’s complaint. The Court resolved that motion granting it in part but sustaining the litigation trust’s claims for actual fraudulent transfer under §548 of the Bankruptcy Code and constructive fraudulent transfer under the Pennsylvania Uniform Fraudulent Transfer Account.

Subsequently, the litigation trust moved for leave to amend its complaint and to seek punitive damages under the PUFTA claim. After that, another company acquired the Reorganized Debtors and paid about $421 million in cash.

The trust asserted that it was entitled to receive the full measure of its damages under its claim for actual fraudulent transfer and constructive fraudulent transfer as Section 550 damages are not capped to permit creditors to receive only the amount of their claim.

The Defendants argued that the trust cannot recover what they view as a windfall, a recovery over unpaid claims which was received from the later sale of the Reorganized Debtors. They maintained that Section 550 provides for partial avoidance because creditors are entitled to recover only what is necessary to satisfy their claim.

The Court ruled in favor of the litigation trust, holding that it could avoid the fraudulent transfer in its entirety, for the benefit of the estate, and that recovery under §550(a) would not be capped by the Defendant’s claims.

The Court added that any recovery by the litigation trust would benefit the estate and the amounts received in excess of the sale consideration will not be a windfall. The Court denied the Defendants’ motion for partial summary judgment and granted the litigation trust’s motion for the partial summary judgment.

PAH Litig. Tr. v. Water St. Healthcare Partners, L.P. (Physiotherapy Holdings, Inc.), Nos. 13-12965(KG), 15-51238(KG), 2017 Bankr. LEXIS 3774 (Bankr. D. Del. Nov. 1, 2017)