Bankr. L. Rep. P 76,068 in Re Acequia, Inc., an Idaho Corporation, Debtor. Acequia, Inc., an Idaho Corporation v. Vernon B. Clinton, and Rosemary Haley, Acequia, Inc., an Idaho Corporation v. Vernon B. Clinton Rosemary Haley

In this case, we consider issues arising from chapter 11 debtor Acequia, Inc.'s ten-year effort to recover certain prebankruptcy conveyances made to Vernon Clinton, founder and former controlling shareholder of the corporation. Clinton appeals the magistrate judge's determination that he fraudulently transferred Acequia's assets to himself. Acequia, now under the control of adverse parties, cross-appeals the magistrate judge's calculation of Clinton's liability for the transfers.

Resolution of the multitude of issues in this case requires consideration of the common law of restitution, Idaho's community-property law, the equitable doctrine of setoff, and, most importantly, the fraudulent conveyance provisions of both the Bankruptcy and Idaho Codes. We scrutinize each doctrine and, ultimately, conclude the magistrate judge correctly determined that Clinton made transfers with an actual intent to hinder and delay Acequia's creditors. We hold, however, that the magistrate judge erred by limiting Acequia's recovery of the fraudulent transfers to the amount of unsecured claims against the bankruptcy estate. Accordingly, we affirm in part, reverse in part, and remand.

In 1974, while married to Rosemary Haley, Vernon Clinton formed Acequia, Inc., a Subchapter S family corporation, to conduct farming and management operations on his land in Idaho. In 1981, Clinton and Haley divorced and, pursuant to a marital settlement agreement, each took fifty-percent ownership of the corporation. Acequia filed a petition under chapter 11 of the Bankruptcy Code the following year. Shortly thereafter, Haley and several creditors requested the bankruptcy court to appoint a trustee, alleging that Clinton had failed to disclose material information in Acequia's bankruptcy schedules and had engaged in blatant mismanagement. In response, Clinton eventually gave an irrevocable voting proxy to Haley, who took control of the corporation.

In 1984, Acequia confirmed a plan of reorganization over Clinton's objection. Both the district court and the Ninth Circuit subsequently affirmed. See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352 (9th Cir.1986) [Acequia I ]; see also Clinton v. Acequia, Inc. (In re Acequia, Inc.), No. 91-36176, 996 F.2d 1223 (9th Cir. June 21, 1993) (mem.) (affirming the bankruptcy court's denial of Clinton's motion to terminate the plan) [Acequia II ]. Led by Haley, Acequia then commenced an eleven-count action in bankruptcy court, seeking to recover as fraudulent certain prepetition transfers the corporation made to Clinton.

After the district court withdrew reference to the bankruptcy court, the parties consented to adjudication by magistrate judge. The magistrate judge conducted a two-month bench trial and rendered judgment in favor of Acequia on several counts and in favor of Clinton on one counterclaim. In total, the magistrate judge entered a final judgment against Clinton for $233,346.72 plus prejudgment interest, with an allowed deduction against Acequia of $117,000.00 plus prejudgment interest. Both parties appeal.

Section 548 of the Bankruptcy Code empowers a bankruptcy trustee to recover "fraudulent transfers" made by the debtor within one year of the bankruptcy petition:

(a) The trustee may avoid any transfer of an interest of the debtor in property ... that was made ... on or within one year before the date of the filing of the petition, if the debtor ...

(1) made such transfer ... with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made ..., indebted....

11 U.S.C. Sec. 548(a)(1) (emphasis added). Under section 548(a)(1), "[t]he transfer of any interest in the property of a debtor, within one year of the filing of a petition in bankruptcy, is voidable by the trustee in bankruptcy if the purpose of the transfer was to prevent creditors from obtaining satisfaction of their claims against the debtor by removing property from their reach." Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir.1991).

As a debtor-in-possession, Acequia invoked section 548 on its own behalf,1 alleging in Counts I through IV and parts of Count IX of its complaint that Clinton received fraudulent transfers within the scope of the statute. The magistrate judge analyzed the relevant transfers from Acequia to Clinton by tracing the funds "to determine if the money was used by Clinton for personal purposes, as alleged [by Acequia], or if the money was returned to Acequia [as claimed by Clinton]." Ultimately, the magistrate judge concluded that Acequia could recover $118,367.97 as fraudulently transferred within the meaning of section 548(a)(1):

The transfer the Court is concerned with is the transfer of Acequia funds to Clinton's personal name. Such transfers could not help but hinder and delay payment to Acequia's creditors[,] a fact Clinton would certainly have been aware of as the Chief [O]perating [O]fficer of the corporation in charge of all books and records. By then Acequia had missed the two principal payments due to Prudential [a secured creditor] on March 15, 1979 and 1980. Clinton was negotiating a settlement with Prudential to fend off a foreclosure action. Other suits were pending involving KLW [another creditor] and its operation of [Clinton's] ranch. The bankruptcy filing was imminent and[,] when filed[,] Clinton only listed cash from which Acequia could meet its debts in the amount of $2,000.00. Clinton has not attempted to explain the transfer[s] other than that the funds were used for personal expenses. Therefore, Clinton will be required to return the funds to Acequia as the transfer[s] hindered and delayed Acequia creditors.

(emphasis added). On Clinton's motion for reconsideration, the magistrate judge clarified his analysis:

... The Court agrees with Clinton that[,] if the sole indicia of fraud was that Clinton personally used the funds[,] that Acequia did not meet its burden of proof. However, the Court found and sets forth more clearly at this point, that Acequia presented evidence that by the beginning of 1981 numerous badges of fraud existed which shifted the burden of proof to Clinton to explain or uphold the transfer. It was Clinton's sole explanation that the funds were used for personal expenses that [led] this Court to find that Clinton had not met his burden of proof to explain the transfer.

(emphasis added) (citation and footnotes omitted).

We review for clear error the magistrate judge's factual determination that Clinton intended to hinder and delay Acequia's creditors. E.g., Harman v. First Am. Bank (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d 479, 481 (4th Cir.1992) ("For a finding of fraudulent intent in an actual fraudulent transfer, a reviewing court must apply a clearly erroneous standard."); Gough v. Titus (In re Christian & Porter Aluminum Co.), 584 F.2d 326, 335 (9th Cir.1978); 4 Collier on Bankruptcy p 548.02 at 548-49 n. 62 (15th ed. 1994) ("A finding of a trial judge, ... who has heard the oral testimony that a transfer has or has not been effected with actual fraudulent intent, is undoubtedly entitled to great weight on appeal in view of the peculiar importance in section 548(a)(1) cases of the witness examined on the intent issue.") [Collier ]. Applying this deferential standard of review, we affirm the magistrate judge's holding that Clinton is liable for fraudulent transfers in violation of section 548(a)(1).

Clinton argues that, instead of intending to defraud Acequia's creditors, he considered the corporate conveyances to be personal loans or, alternatively, reimbursement for living expenses in lieu of salary. Uniquely, Clinton grounds this contention in his complete failure to observe corporate formalities and his consistent treatment of Acequia "merely as an extension of himself."

We cannot agree. Although novel, Clinton's "white heart, empty head" argument ignores the use of circumstantial "badges of fraud" in fraudulent transfer cases:

It is often impracticable, on direct evidence, to demonstrate an actual intent to hinder, delay or defraud creditors. Therefore, as is the case under the common law of fraudulent conveyance, courts applying Bankruptcy Code Sec. 548(a)(1) frequently infer fraudulent intent from the circumstances surrounding the transfer, taking particular note of certain recognized indicia or badges of fraud.

Among the more common circumstantial indicia of fraudulent intent at the time of the transfer are: (1) actual or threatened litigation against the debtor; (2) a purported transfer of all or substantially all of the debtor's property; (3) insolvency or other unmanageable indebtedness on the part of the debtor; (4) a special relationship between the debtor and the transferee; and, after the transfer, (5) retention by the debtor of the property involved in the putative transfer.

The presence of a single badge of fraud may spur mere suspicion; the confluence of several can constitute conclusive evidence of actual intent to defraud, absent "significantly clear" evidence of a legitimate supervening purpose.

Max Sugarman, 926 F.2d at 1254-55 (emphasis added) (citations and additional emphasis omitted). Accord, e.g., Hayes v. Palm Seedlings Partners (In re Agricultural Research & Technology Group, Inc.), 916 F.2d 528, 534-35 (9th Cir.1990); Kupetz v. Wolf, 845 F.2d 842, 846 (9th Cir.1988). Thus, once a trustee establishes indicia of fraud in an action under section 548(a)(1), the burden shifts to the transferee to prove some "legitimate supervening purpose" for the transfers at issue.

As the magistrate judge noted, several badges of fraud exist in this case. At the time of the transfers at issue, lawsuits were pending, Acequia's bankruptcy filing was imminent, and Clinton maintained total control over the corporation's finances. Moreover, Clinton produced no documentation, other than ambiguous check memo-line notes, to confirm his "innocent" explanations for the transactions. These facts support an inference of actual fraudulent intent. See Max Sugarman, 926 F.2d at 1255 (fraudulent intent is properly inferred where debtors transferred assets "to two entities entirely owned and controlled by a judgment creditor with whom the debtors had long had an intimate financial relationship [and where] [t]he transfers were effected nine months before involuntary bankruptcy, while [the debtors] were in desperate financial condition"); Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 984 (1st Cir.1983) ("We may impute any fraudulent intent of [the transferee] to the transferor [the debtor] because, as the company's president, director, and sole shareholder, he was in a position to control the disposition of its property."); Nordberg v. Republic Nat'l Bank (In re Chase & Sanborn Corp.), 51 B.R. 739, 740-41 (Bankr.S.D.Fla.1985) ("The extensive and often circuitous movement of funds among the several entities controlled by [the debtor's principal], to his personal benefit and in this instance to the benefit of a ... relative, and to the injury of the debtor, coupled with the facts that the records of these transactions are in general disarray and no exculpatory explanation has been offered, ... [establish an] actual[ ] intent to hinder, delay and defraud this debtor's creditors."); Collier, supra pages 10015-16, p 548.02 at 548-41 to 548-46 ("Circumstances from which courts have been willing to infer fraud include ... a transfer for no consideration where the transferor and the transferee have knowledge of the claims of creditors and know the creditors cannot be paid ... [and] the fact that the transferee was an officer or was an agent or creditor of an officer of an embarrassed corporate transferor....") (collecting cases).

The fact that Clinton never documented Acequia's "loans" or "salary payments," and filed bankruptcy schedules and tax returns that made no reference to these transfers, supports the magistrate judge's determination that Clinton failed to rebut the circumstantial inference arising from the "badges of fraud." Accordingly, we affirm the magistrate judge's conclusion that Clinton received fraudulent transfers in violation of section 548(a)(1).2III.

Section 544 of the Bankruptcy Code empowers a bankruptcy trustee to invoke state law to recover the debtor's prepetition transfers:

The trustee may avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under ... this title.

11 U.S.C. Sec. 544(b). Because section 548(a)(1) applies only to transfers made within one year of a bankruptcy petition, the magistrate judge used section 544(b) to analyze Acequia's conveyances to Clinton made more than one year prior to the corporation's bankruptcy. See Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589, 593 (9th Cir.1991) (using section 544(b) to apply state fraudulent conveyance law); Agricultural Research, 916 F.2d at 534 (same); Kupetz, 845 F.2d at 845 (same). Specifically, the magistrate judge invoked section 544(b) to apply Idaho Code section 55-916, a state-law analog of section 548(a)(1):

Conveyance made with intent to defraud--Every conveyance made ... with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.

Idaho Code Sec. 55-916 (superseded in 1987 by Sec. 55-913(1)(a)). However, reasoning that Acequia's avoidance rights under section 544(b) derive from those of its unsecured creditors, the magistrate judge limited the corporation's section 544(b) recovery to the total amount of unsecured claims against the bankruptcy estate. In total, the magistrate judge found Clinton liable for an additional $64,000 under this provision. Both parties appeal.

Clinton argues that Acequia's entire section 544(b) action is now moot because the corporation paid all unsecured creditors in its plan of reorganization and thereby nullified any foundation for application of the statute. In support, Clinton recites the axiomatic proposition that, "[i]n seeking recovery of [ ] monies [under section 544(b) ], the trustee stands in the overshoes of the debtor corporation's unsecured creditors," Agricultural Research, 916 F.2d at 534. We reject Clinton's argument for several reasons.

First, the existence of a section 544(b) cause of action "depends upon whether ... a creditor existing at the time the transfers were made ... still had a viable claim against [the] debtor at the time the bankruptcy petition was filed. " Karnes v. McDowell (In re McDowell), 87 B.R. 554, 558 (Bankr.S.D.Ill.1988) (emphasis added) (holding that a bankruptcy petition tolls the statute of limitations on a creditor's state-law fraudulent conveyance action and permits the trustee to initiate avoidance litigation even where the limitations period otherwise would have expired). See generally Collier, supra pages 10015-16, p 544.03 at 544-21 to 544-22. In this case, unsecured creditors clearly held claims against Acequia when it filed the bankruptcy petition.

Second, section 1123(b) of the Bankruptcy Code authorizes postconfirmation pursuit of a debtor's bankruptcy causes of action. See 11 U.S.C. Sec. 1123(b)(3)(B) ("a plan may ... provide for ... the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any ... claim or interest"); Citicorp Acceptance Co. v. Robison (In re Sweetwater), 884 F.2d 1323, 1327 (10th Cir.1989) (representative designated in a confirmed plan of reorganization may assert section 544(b) "as a claim of the estate for purposes of Sec. 1123(b)(3)(B)"); In re Consolidated Capital Equities Corp., 143 B.R. 80, 85 (Bankr.N.D.Tex.1992) (same). In this case, Acequia's plan of reorganization specifically contemplated that, after confirmation, the corporation would continue to "litigate claims and causes of action which exist in favor of the Debtor arising prior to and subsequent to the commencement of the Debtor's Chapter 11 case." If the confirmation of a plan of reorganization and subsequent payment of creditors sufficed to eliminate section 544(b) causes of action, both section 1123(b)(3)(B) and the litigation-enabling provision of Acequia's plan would be pointless. See Duvoisin v. East Tenn. Equity Ltd. (In re Southern Indus. Banking Corp.), 59 B.R. 638, 642 (Bankr.E.D.Tenn.1986) ("[The] aim [of section 1123(b)(3)(B) ] was to make possible the formulation and consummation of a plan before completion of the investigation and prosecution of causes of action such as those for previous insider misconduct and mismanagement of the debtor. Thus, the statute was in furtherance of the purpose of preserving all assets of the estate while facilitating confirmation of a plan.") (emphasis added).

And, third, if confirmation and payment precluded application of section 544(b), debtors undoubtedly would delay filing plans of reorganization until completing all potential litigation, a result that would contravene the Bankruptcy Code's goal of quick and equitable reorganization. Cf. Tennessee Wheel & Rubber Co. v. Captrol Corp. Air Fleet (In re Tennessee Wheel & Rubber Co.), 64 B.R. 721, 727 (Bankr.M.D.Tenn.1986) ("Defendants' theory would not permit the administration of bankruptcy estates in the common situation ... where the general unsecured claimholders have accepted cash soon after confirmation, but other classes of creditors and interestholders await payment for months or years after confirmation.... [That result would conflict with] Chapter 11[, which] provides debtors with great flexibility in the design and execution of plans of reorganization."), aff'd, 75 B.R. 1 (M.D.Tenn.1987).

The two cases cited by Clinton are inapposite. In Allard v. DeLorean, 884 F.2d 464 (9th Cir.1989), we dismissed as moot the appeal of a bankruptcy trustee who had settled fraudulent conveyance litigation against the debtor: "[The trustee] is no longer a creditor in this action because ... [he] executed and filed a full satisfaction of judgment.... [He therefore] is not entitled to the remedy of setting aside [the debtor]'s conveyance ... as fraudulent ... [and] does not have an interest in the outcome of the appeal." Id. at 466 (citation omitted). In this case, on the other hand, Acequia continues to pursue section 544(b) claims against Clinton and most assuredly has an "interest in the outcome of the appeal." Unsecured Creditors' Committee v. Banque Paribas (In re Heartland Chemicals, Inc.), 103 B.R. 1012 (Bankr.C.D.Ill.1989), is similarly inapplicable. In that case, the court applied state law to determine that creditors could not "avoid a transaction where the debt owed at the time the bankruptcy petition was filed is not identical to the debt owed at the time of the challenged transaction." Id. at 1016. Clinton makes no such allegation in this case.

We therefore hold that Acequia may invoke section 544(b) despite the fact that it paid unsecured creditors in its confirmed plan of reorganization.

Although determining that Acequia could in fact utilize section 544(b), the magistrate judge imposed a novel limitation on the corporation's recovery under the statute:

In the normal situation, a debtor-in-possession is attempting to set aside fraudulent transfers so that assets can be brought back into the estate so that unsecured creditors can hopefully receive some percentage of their claims. Under such circumstances case law has applied the broad language in Moore v. Bay [284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931) ] ("for the benefit of the estate") so that the class of unsecured creditors will benefit from any recovery equally even if the action is brought on behalf of only one unsecured creditor so that the entire class of unsecured creditors can benefit. Such recovery rarely pays unsecured creditors fully. In this case the circumstances are such that the unsecured creditors, in whose shoes Acequia stands, were paid in full on the distribution date. Therefore, this Court will limit Acequia's standing, thus the right to recover for the benefit of the estate, to the amount of unsecured claims paid on the distribution date identified in the Plan of Reorganization....

We review de novo this question of statutory interpretation, e.g., Ernst & Young v. Matsumoto (In re United Ins. Management, Inc.), 14 F.3d 1380, 1383 (9th Cir.1994), and conclude that the magistrate judge erred by imposing a "cap" on Acequia's section 544(b) recovery.

As noted above, section 544(b) places "the trustee [ ] in the overshoes of the debtor corporation's unsecured creditors." Agricultural Research, 916 F.2d at 534. See Collier, supra pages 10015-16, p 544.03 at 544-17 ("Like Prometheus bound, the trustee is chained to the rights of creditors [when invoking section 544(b) ]."). This relationship does not support the magistrate judge's analysis, however, because the Bankruptcy Code "enunciates the separation between the concepts of avoiding a transfer and recovering from the transferee." H.R.Rep. No. 595, 95th Cong. 1st Sess. 375 (1977).

Specifically, after demonstrating the right to recover conveyances under section 544(b), a trustee must then establish the amount of recovery under section 550(a) of the Bankruptcy Code, which provides that, "to the extent that a transfer is avoided under section 544 ..., the trustee may recover, for the benefit of the estate, the property transferred." 11 U.S.C. Sec. 550(a) (emphasis added).

... [S]ection 550 specifies the conditions under which, once a transfer is avoided under section 544 or other provisions, a trustee can recover from various transferees. The legislative history explains that "Section 550 prescribes the liability of a transferee of an avoided transfer and enunciates the separation between the concepts of avoiding a transfer and recovering from the transferee." There are, in effect, three conceptual steps to the trustee's case; the trustee must establish: 1) fraud or illegality under the applicable substantive law; 2) resulting voidness or voidability of the transfer under the applicable law so as to allow avoidance pursuant to 544(b); and 3) liability of the particular transferee pursuant to the provisions of section 550.

Lippi v. City Bank, 955 F.2d 599, 605 (9th Cir.1992) (citation omitted). Thus, "[w]hile the transfer or obligation must be voidable as against a creditor holding an allowable claim, the measure and distribution of recovery is not limited by the creditor's right." Collier, supra pages 10015-16, p 544.03 at 544-17 n. 12 (emphasis added). See Danning v. Miller (In re Bullion Reserve), 922 F.2d 544, 546 n. 2 (9th Cir.1991) ("The theory under which a transfer has been avoided is irrelevant to the liability of the transferee against whom the trustee seeks to recover [pursuant to] Section 550....").

Under this statutory framework, the existence of a "triggering creditor" under section 544(b) gives the trustee an unlimited right to invoke state-law avoidance powers. The extent of the trustee's ability to exercise that right is, in turn, governed by section 550(a). For example, suppose a debtor makes four transfers of $10, each of which is avoidable under state law, and then files for bankruptcy, listing one unsecured creditor with a claim of $5. The unsecured creditor could recover any one of the four $10 avoidable transfers prior to bankruptcy and, as a result, each transfer is "voidable under applicable law by a creditor holding an unsecured claim." 11 U.S.C. Sec. 544(b). After the debtor files a bankruptcy petition, section 544(b) gives the trustee the right to avoid any of the four transfers (which total $40) despite the fact that only $5 of unsecured claims exist. Section 550(a) governs the extent to which the trustee may exercise that right, specifically permitting recovery "for the benefit of the estate." Id. Sec. 550(a).

The case law recognizes this distinction. As several courts have noted, under section 544(b) "[a] transaction that is voidable by a single, actual unsecured creditor may be avoided in its entirety, regardless of the size of the creditor's claim." Harris v. Huff (In re Huff), 160 B.R. 256, 261 (Bankr.M.D.Ga.1993). Accord, e.g., Abramson v. Boedeker, 379 F.2d 741, 748 n. 16 (5th Cir.1967) ("[I]f the transfer is avoidable at all by any creditor, it is avoidable in full for all creditors regardless of the dollar amount of the prevailing claim."), cert. denied, 389 U.S. 1006, 88 S.Ct. 563, 19 L.Ed.2d 602 (1967); Bergquist v. Theisen (In re Theisen), 45 B.R. 122, 126 (Bankr.D.Minn.1984) ("[O]nce avoidability is determined under state law, the transfer is entirely avoidable by a trustee in bankruptcy regardless of the amount of the creditor's claim relied on by the trustee."); Gennet v. Silver (In re Harry Kaiser Assocs.), 14 B.R. 107, 109 (Bankr.S.D.Fla.1981) (Section 544(b) "gives the trustee the right to challenge on behalf of the estate any transfer voidable under state law if there is at least one creditor of the estate who had standing under state law to challenge the transfer. There are seven such creditors with claims totalling more than $72,000. The amount of these claims does not limit the trustee's cause of action.") (citation omitted).

Clinton concedes these cases establish that "a single transfer is avoidable in its entirety when the amount of that transfer is necessary to meet the amount of unsecured creditors' claims but [exceeds] them. For example, if unsecured creditors' claims equal $20,000 and the transfer involves $50,000, the cases ... confirm that the transfer is voidable in its entirety." Clinton asserts, however, that the cases do not justify invoking section 544(b) once a trustee recovers transfers in an amount sufficient to satisfy all unsecured claims. We disagree because, were Clinton correct, a party could escape fraudulent conveyance liability merely by making several small transfers instead of one large transfer. Acequia illustrates:

... Let's assume that the president of a corporation transfers $3 million of corporate assets to his personal account over a period of three years prior to the filing of a bankruptcy petition. The transfers are made by writing separate checks of $1 million each year. The last $1 million transfer was made within one (1) year before the filing of the bankruptcy petition. At trial, the trustee is able to prove that all of the transfers were made with the intent to hinder and delay creditors. The controlling law of the state prohibits such transfers. At the time the bankruptcy petition was filed, there existed ten unsecured creditors with claims totalling $500,000.

In this scenario, under Sec. 548(a) the trustee may avoid only the $1 million transfer that occurred within one year before the filing of the bankruptcy petition. Under Sec. 544(b), the trustee may clearly avoid the $1 million transfer made two years before the filing of the bankruptcy petition.... Under [Clinton]'s analysis, the trustee may not avoid the first $1 million transfer, even though it violated Sec. 544(b), because that transfer exceeds the claims of the unsecured creditors. If, however, the first and second transfers occurred by the president writing one $2 million check instead of two $1 million checks, then Clinton concedes that the entire $2 million would be voidable.

Similarly, suppose a debtor with $50 in unsecured claims makes avoidable transfers of $10, $20, and $45. Under Clinton's reasoning, the order in which a trustee sought to recover the transfers would determine their avoidability. For example, by pursuing the $10 and $20 transfers first, the trustee could later avoid the $45 transfer in full. By recovering the $45 transfer first, however, the trustee could later avoid either the $10 or $20 transfers, but not both, because the final avoidance action would commence after the trustee had received an amount in excess of the unsecured claims. We refuse to interpret the Bankruptcy Code in such an arbitrary way.

Clinton contends that, without a "cap" on section 544(b) avoidance powers, section 548(a) would be a "nullity" because a trustee could recover fraudulent conveyances under both sections 544(b) and 548(a). The fact that both provisions might be available in some cases, however, is completely irrelevant to the interpretation of either statute because "[s]ection 544(b) presents a separate and distinct method of avoidance." Collier, supra pages 10015-16, p 544.03 at 544-16 (footnotes omitted). In fact, courts regularly apply section 544(b) to analyze transactions that also fall within the scope of section 548(a). See, e.g., United Energy, 944 F.2d at 594; Kupetz, 845 F.2d at 845.

Thus, we conclude that the magistrate judge erred by "capping" Acequia's recovery under section 544(b) at the amount of unsecured claims against the bankruptcy estate.

Our conclusion that Acequia has a right under section 544(b) to avoid transfers in excess of the amount of unsecured claims does not lead inexorably to the conclusion that Acequia may actually recover every transfer avoidable under that provision. Rather, the extent of Acequia's recovery is governed by section 550(a), which enables the corporation to pursue section 544(b) actions where recovery will accrue "for the benefit of the estate." 11 U.S.C. Sec. 550(a). See, e.g., Wellman v. Wellman, 933 F.2d 215, 218 (4th Cir.) ("[A] debtor-in-possession of a bankruptcy estate cannot maintain an avoidance action ... unless the estate would be benefitted by the recovery of the transferred property."), cert. denied, --- U.S. ----, 112 S.Ct. 339, 116 L.Ed.2d 279 (1991); Collier, supra pages 10015-16, p 550.02 at 550-6 to 550-7 n. 3 ("The preamble to section 550(a) limits the trustee by permitting recovery only for the benefit of the estate. Thus, in general, the trustee or debtor in possession may not recover the property transferred or its value when the result is to benefit only the debtor rather than the estate.").

Although not expressly considering section 550(a), the magistrate judge did reason that "[t]o allow Acequia to recover more than it paid out to unsecured creditors would necessarily benefit the debtor, and in this case to the extent of several million dollars over the amount of unsecured claims that were paid." We disagree with this implicit determination that Acequia's recovery would not in fact "benefit the estate."

Courts construe the "benefit to the estate" requirement broadly, permitting recovery under section 550(a) even in cases where distribution to unsecured creditors is fixed by a plan of reorganization and in no way varies with recovery of avoidable transfers. In several cases, for example, courts have refused to dismiss avoidance actions even though the unsecured creditors had received full distributions under a plan of reorganization. The courts reasoned that the litigation could "benefit the estate" because the creditors had received an equity stake in the reorganized debtor and any recovery would increase the corporation's value. See Trans World Airlines, Inc. v. Travellers Int'l AG (In re Trans World Airlines, Inc.), 163 B.R. 964, 973 (Bankr.D.Del.1994) ("[T]he unsecured creditors will benefit from the enhanced value of reorganized TWA by reason of being shareholders of the reorganized debtor."); Southern Indus. Banking, 59 B.R. at 641 ("[T]o the extent that ... recovery of fraudulent transfers ... operates to increase the assets and financial health of the [debtor's] successor-in-interest, it also operates to proportionally increase the value of those ownership rights in the successor-in-interest which constitute a portion of the unsecured creditors' distribution under the plan.").

Other courts find even more tenuous "benefits" to satisfy section 550(a). In Centennial Industries, Inc. v. NCR Corp. (In re Centennial Industries, Inc.), 12 B.R. 99 (Bankr.S.D.N.Y.1981), for example, the bankruptcy court permitted a debtor to pursue avoidance actions where the plan of reorganization provided for fixed payments to unsecured creditors over a five-year period. The court reasoned that "any recovery by [the debtor] will increase the likelihood of the creditors receiving their future payments.... The recovery of [a] preference will be additional security for the fulfillment of the debtor's plan." Id. at 641. Similarly, in Tennessee Wheel, the bankruptcy court refused to dismiss the debtor's avoidance actions e