Mann v. LSQ Funding Group LC, No. 22-2436 (7th Cir. 2023)
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LSQ provides invoice-factoring services to other businesses, including Engstrom. Weeks before Engstrom declared bankruptcy, its CEO, Campion orchestrated a payoff agreement between LSQ and a new lender, Millennium. Pursuant to the agreement, Millennium paid Engstrom’s debt to LSQ, replacing LSQ as Engstrom’s creditor. In exchange, LSQ released all of its interest in Engstrom’s accounts, which immediately went to Millennium. Once Engstrom filed for bankruptcy, the Trustee of its estate sued LSQ in an attempt to avoid the payoff, alleging that the accounts Millennium purchased were worthless and that LSQ conspired with Engstrom to leave Millennium with the phony accounts when Engstrom’s business fell apart. The Trustee claims Engstrom used the new financing from Millennium to pay off LSQ, keep LSQ quiet about the Debtor having fake accounts, and keep its Ponzi scheme running. The Trustee argued that the payoff agreement was avoidable as both a preferential and a fraudulent transfer.
The bankruptcy court dismissed the suit, holding that the payoff agreement was not avoidable because it did not qualify as a transfer of “an interest of the debtor in property,” 11 U.S.C. 547, 548. The district court and Seventh Circuit agreed. Because the transaction had no effect on Engstrom’s bankruptcy estate, the Bankruptcy Code’s avoidance provisions play no role.
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