Eighth Circuit Rules Fraudulent Conveyances Subject to Statutory 502(b)(6) Cap

The Bottom Line

In Lariat Cos. v. Wigley (In re Wigley), Case No. 18-3489 (8th Cir. March 9, 2020), the Eighth Circuit held that a claim against Debtor B that arose out of a fraudulent transfer made by Debtor A to Debtor B was subject to the statutory cap applicable to lease rejection damages where Debtor A’s underlying liability was premised on its breach of a lease.

What Happened?

In 2011, Lariat Companies, Inc. (Lariat), obtained a judgment for past due and future commercial rents against Michael Wigley (Mr. Wigley), the husband of the debtor, and Barbara Wigley (Debtor, and together with Mr. Wigley, the Wigleys), and separately, a judgment against the Wigleys jointly and severally under the Minnesota Uniform Fraudulent Transfer Act (MUFTA) to recover $800,000 of transfers the Debtor received from Mr. Wigley (MUFTA Judgment).

Mr. Wigley filed for bankruptcy and the Bankruptcy Court determined Lariat’s claims against him were subject to the cap provided in Section 502(b)(6) of the Bankruptcy Code. Following confirmation of Mr. Wigley’s Chapter 11 plan, Lariat’s claim against Mr. Wigley was discharged.

In 2016, the Debtor filed for bankruptcy, and Lariat filed a proof of claim based on the MUFTA Judgment in an amount exceeding $1 million (the MUFTA Claim). The Debtor objected to Lariat’s MUFTA Claim, arguing that Mr. Wigley had satisfied Lariat’s claim and that the MUFTA Claim was subject to the Section 502(b)(6) cap. The Bankruptcy Court held that Mr. Wigley’s payments to Lariat did not extinguish the Debtor’s liability, but that the MUFTA Claim was subject to the Section 502(b)(6) cap. On appeal, the BAP reversed, holding that because MUFTA provides an “alternate remedy” for recovery, Mr. Wigley’s plan payments satisfied Lariat’s claim.

The Eighth Circuit reversed the BAP, and held that in light of Section 524(e) of the Bankruptcy Code — providing that the “discharge of a debt of the debtor does not affect the liability of any other entity” — “Mr. Wigley’s discharge does not extinguish [the Debtor’s] liability.” However, the Eighth Circuit held that the Debtor’s liability to Lariat for the MUFTA Judgment was subject to the breach-of-lease cap under Section 502(b)(6). The court acknowledged that the Debtor’s liability was “one step removed from the breach of the lease,” but nevertheless determined that “Lariat, as lessor, should not avoid the cap – and receive a windfall – because it is filing a claim based on a fraudulent-transfer judgment from a breach of the lease, instead of a claim based just on breach.”

Why This Case Is Interesting

The Eighth Circuit analogized the Debtor’s liability under the MUFTA Judgment to that of a lease guarantor, in that in each case the liability was “one step removed from the breach of lease” claim. Citing to case law applying the Section 502(b)(6) cap to claims against lease guarantors, the court reasoned a similar result was warranted here. In further support of this position, the Eighth Circuit noted that the language of Section 502(b)(6) made clear that it was the identity of the claimant and not the identity of the debtor that mattered for purposes of applying the cap, in that the provision applies to a “‘claim of a lessor’—not a claim against a lessee.’” The opinion is not a total loss for lessors, however, in that the lessor was able to assert its capped claim twice, once in the bankruptcy of Debtor A and once in the bankruptcy of Debtor B.