Court Rules CCCS Transfers Fraudulent

Court Rules CCCS Transfers Fraudulent

On January 13, 2018, the Indiana Court of Appeals rendered a significant ruling for creditors. In the case of Commercial Credit Counseling Services, Inc. (“CCCS”) vs. W.W. Grainger, Inc., Lose Bros., Inc., and XSE Group, Inc. (“Creditors”), the court affirmed two separate lower court rulings declaring transfers to CCCS fraudulent as to Creditors. The Creditors’ Rights Section of the Commercial Law League of America funded an Amicus brief, and the League was granted Amicus Curiae status in the appeal. The law firm of Rubin & Levin, P.C. represented the Creditors seeking to have the transfers declared fraudulent.

The facts of the cases on appeal are probably familiar to any creditors’ rights attorney. CCCS entered into debt restructuring agreements with the defendants against whom the Creditors held judgments. The CCCS agreement called for submission of debtors’ funds to CCCS in installments, purportedly to be used to settle debts with creditors generally. As part of the agreement, CCCS sought to retain a security interest in the debtors’ assets. Retention of the security interest by CCCS is used as leverage to induce creditors to accept settlement or payment on terms favorable to the debtor, with uncooperating creditors seeking to levy execution on debtor’s assets facing a priority dispute with CCCS.

The Creditors in the case on appeal attempted to attach funds being held by CCCS in post-judgment proceedings; CCCS alleged that it held a superior interest in the assets transferred. As a matter of fact, of the approximately $36,000 paid to CCCS by the debtors, less than $1,200 was paid out to creditors, and the rest was paid to CCCS as its fee. CCCS asserted a prior perfected security interest in the funds; claimed that the funds neither belonged to CCCS nor the debtors prior to disbursement (which the Appellate Court rejected as illogical); and argued that there was no evidence of intent to defraud.

In separate consolidated opinions, the trial courts each held that the transfers of funds to CCCS were null and void as fraudulent, concluding that the transfers from debtors to CCCS violated the Uniform Fraudulent Transfer Act as “made for the express purpose of hindering and delaying the efforts of creditors from realizing upon the property of the debtor in satisfaction of claims.” The trial courts noted of the CCCS arrangement, “[i]t is taken too far . . . when the agent becomes a ‘straw man’ of his principle for purposes of shielding assets from creditors.” The Court of Appeals agreed, finding that the transfers were “intended to prevent some creditors from obtaining remuneration to which they were legally and equitably entitled.” The Appellate Court went on to state that “[t]he trial courts’ conclusion that CCCS utilized its purported security interests as a shield to protect the assets of [the debtors] from [Creditors] by concealing them in plain sight is supported by the record.” In addition to declaring such an arrangement void as fraudulent, the court also undertook a good discussion pertaining to the alleged security interest and the minimal value that CCCS could have given in exchange for the transfers.

The Appellate decision, designated for publication, will be published in West’s Northeast Reporter (2nd). A full text of the opinion can be found on the League website, or on Lexis at 2018 Ind.App.Lexis 28.

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