In re Acequia, Inc.

Vernon Clinton (defendant) founded Idaho-based Acequia, Inc. (plaintiff) with his then-wife, Rosemary Haley. Acequia filed for Chapter 11 bankruptcy in 1982, after which Haley gained control of Acequia. In 1984, the bankruptcy court confirmed Acequia’s reorganization plan, which called for Acequia to fully repay its unsecured creditors. Acequia, as the debtor-in-possession (and thus having the same rights as a bankruptcy trustee), sued Clinton, seeking to recover certain prebankruptcy transfers from Acequia as either (1) fraudulent transfers within one year of Acequia’s bankruptcy under Bankruptcy Code (code) § 548 or (2) fraudulent transfers that Acequia could void on behalf of Acequia’s unsecured creditors under code § 544(b) and Idaho law. Regarding § 548, Clinton argued that the transfers were proper. Acequia responded that (1) its records did not match Clinton’s innocent characterizations; (2) at the time of the transfers, Acequia was past due on its obligations to creditors, lawsuits were pending against it, and its bankruptcy filing was imminent; and (3) the transfers left Acequia with just $2,000. Clinton argued that Acequia’s § 544(b) claim was moot because Acequia stood in the shoes of the unsecured creditors, which would be fully repaid under the reorganization plan. Acequia responded that its § 544(b) claim was not moot because its unsecured creditors held claims against Acequia as of the bankruptcy. The magistrate (to whom the case was transferred) ruled that Acequia was entitled to recover (1) under § 548, the challenged transfers made within one year of the bankruptcy because Clinton intended to hinder and delay creditors and (2) under § 544(b), the amount of the unsecured claims that Acequia had to pay. Clinton appealed the liability ruling. Acequia appealed the § 544(b) damages ruling, arguing that it was entitled to recover all the fraudulent transfers.