Alerts

Tenth Circuit Allows Secured Creditor to Recover Converted Cash Collateral

January 7, 2005

The U.S. Court of Appeals for the Tenth Circuit in U.S. v. Henshaw, 288 F.3d 738 (10th Cir. 2004) handed secured creditors a key victory on November 2, 2004. It gave a secured creditor recourse against a third party transferee (i.e., a lawyer) when the borrower improperly transferred cash collateral from a commingled bank account. It also upheld the selection and application of a "tracing" method supporting the creditor's conversion claim despite the existence of an inconsistent alternative methodology. The federal government in Henshaw, as the holder of a tax lien, sued the debtor’s attorney for conversion, alleging that he had knowingly collected his fee from cash proceeds subject to the government's lien. The Tenth Circuit held that the district court had not abused its discretion in tracing the fee paid to the attorney from the encumbered proceeds, and upheld the district court's judgment in favor of the government.