Caryl E. Delano, United States Bankruptcy Judge.
Defendant Regions Bank ("Regions") has filed two factually and legally intertwined motions for partial summary judgment as to various counts of Plaintiff's Second Amended Complaint.
The basic facts are not in dispute. Together, Debtor Frank Mongelluzzi ("Debtor") and his wife Anne Mongelluzzi owned about 100 corporations and limited liability companies (the "Mongelluzzi Entities"). The Mongelluzzi Entities engaged in numerous diverse businesses, including a restaurant,
Debtor, Anne Mongelluzzi, and the Mongelluzzi Entities maintained 61 bank accounts at Regions (the "Mongelluzzi Accounts").
On June 28, 2010, Regions' fraud prevention department flagged some of the Mongelluzzi Accounts as suspicious for a possible check-kiting scheme.
In early July 2010, Regions froze all the Mongelluzzi Accounts.
The Mongelluzzi Entities also maintained 77 bank accounts at Synovus Bank ("Synovus") and had loans with Synovus.
In 2011, Debtor filed a voluntary Chapter 11 case and shortly thereafter converted the case to a Chapter 7. Plaintiff was appointed as the Chapter 7 trustee. In January 2014, Plaintiff commenced this adversary proceeding by filing a complaint against Regions in the United States District Court, Middle District of Florida, Case No. 14-cv-188-EAK-TGW. The District Court referred the case to this Court.
Meanwhile, in May 2013, Plaintiff filed Chapter 7 cases for sixteen of the Mongelluzzi Entities (the "Corporate Cases"). Christine Herendeen was appointed as the Chapter 7 Trustee in the Corporate Cases. In January 2015, Trustee Herendeen filed complaints against Regions in 14 of the Corporate Cases seeking, inter alia, to avoid fraudulent transfers arising from the Forbearance Agreement and subsequent transfers of funds to Regions.
In November 2016, the pending adversaries against Regions were consolidated for administrative and discovery purposes only, with this adversary proceeding (8:14-ap-653-CED) serving as the lead adversary proceeding.
Plaintiff alleges that the Mongelluzzi Accounts and the Revolver were used to orchestrate a massive check-kiting scheme between 2007 and 2010;
Plaintiff seeks to avoid and recover three different types of transfers to Regions as fraudulent transfers under Chapter 726 of the Florida Statutes, the Florida Uniform Fraudulent Transfer Act, 11 U.S.C. § 548, and other applicable provisions of the Bankruptcy Code. The three types of transfers are described by Plaintiff as the "Overdraft Loan Repayment Transfers," the "Deposit Transfers," and the "Other Loan Repayment Transfers"
Plaintiff alleges that Overdraft Loan Repayment Transfers were payments by Debtor to Regions to repay overdrafts in his accounts ("Overdrafts") in the amount of $1,229,374.38. The Overdraft Loan Repayment Transfers are summarized on Exhibit 9 to the Complaint as follows:
Acct. Date of Date of Amount No. Overdraft Repayment 4648 2/17/10 2/18/10 $123,885.34 4648 2/24/10 2/25/10 $423,885.34 4648 04/02/10 04/05/10 $37,528.88 4648 04/23/10 04/26/10 $213,561.88 4648 04/27/10 04/28/10 $107,596.88 4648 05/13/10 05/17/10 $251,893.28 4648 05/19/10 05/20/10 $71,022.78 Total $1,229,374.38
Plaintiff does not allege any Overdrafts in Account No. 9671.
Plaintiff alleges that the Deposit Transfers consist of $12,893,805.97 deposited into Debtor's Regions' bank accounts in the four-year period preceding the filing of his bankruptcy petition. The Deposit Transfers are summarized in Exhibit 10 to the Complaint as follows:
Account No. Statement Date Deposit Amount 4648 1/1/09-3/31/09 $743,633.25 4648 5/1/09-5/29/09 $400,000.00 4648 1/30/10-2/26/10 $1,275,547.00 4648 2/27/10-3/31/10 $2,081,655.24 4648 4/1/10-4/30/10 $1,763,000.00 4648 5/1/10-5/28/10 $2,192,987.97 4648 5/29/10-6/30/10 $3,937,882.51 9671 8/12/08-9/10/08 $500,000.00 Total $12,893,805.97
The Other Loan Repayment Transfers are transfers to Regions, in amounts that Plaintiff has not alleged, made to repay Debtor's outstanding loan obligations in the four-year period preceding the filing of his bankruptcy.
The following summary of Plaintiff's claims for relief as set forth in the Complaint may assist in understanding the counts of the Complaint to which the Motions are addressed:
Plaintiff's final count, Count XVI, seeks the recovery of avoided Transfers under 11 U.S.C. § 550.
Regions filed a counterclaim against Plaintiff and Trustee Herendeen, seeking an accounting of the claims asserted by them.
Regions has filed two separate motions for partial summary judgment
The first motion for partial summary judgment ("First Motion") is directed to Plaintiff's claims to avoid the Deposit Transfers as both actual and constructive fraudulent transfers (Counts IV, V, VI, XII, and XIII of the Complaint) and to
The Court recognizes, as Plaintiff has pointed out, that the issues of law presented in the Motions were previously raised in Regions' motion to dismiss an earlier iteration of the Complaint, which this Court denied in November 2014.
The record in this adversary proceeding reflects that during the three and one-half years since the Court ruled on Regions' motion to dismiss, Plaintiff and Regions have engaged in extensive factual discovery that Plaintiff could use, if relevant, to oppose the Motions.
Under Federal Rule of Civil Procedure 56, incorporated by Federal Rule of Bankruptcy Procedure 7056, a moving party is entitled to summary judgment if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
The court in In re Fields,
If the movant meets it burden, then the nonmovant's burden depends upon how the movant's burden was met. If the movant put on affirmative evidence, then the nonmovant must respond with evidence sufficient to withstand a motion for directed verdict.
Here, Plaintiff bears the burden of proof at trial to establish each element of her fraudulent transfer and recovery claims. Therefore, as the moving party on summary judgment, Regions has the burden to show that there is an absence of record evidence to support Plaintiffs' case or to show affirmative evidence that Plaintiff will be unable to prove her claims. Although Plaintiff argues that the Motions are not supported by affidavits, Regions relies on Plaintiff's own exhibits to the Complaint to meet its burden.
The bankruptcy court in In re Montgomery
Many court decisions involving check-kiting schemes arise in the context of criminal cases. The bank left holding dishonored checks is the victim of the scheme as it is the bank who suffers the loss — not the creditors of the check-kiter.
Here, Plaintiff alleges that in the summer of 2010, Regions returned to Synovus numerous checks drawn on the Mongelluzzi Accounts that had been deposited to accounts at Synovus, resulting in $15 million in overdrafts in the Synovus accounts.
Regions has moved for partial summary judgment on each of Plaintiff's constructive fraudulent transfer claims.
Under § 726.105(1)(b), a transfer is fraudulent as to present or future creditors if the debtor made the transfer without receiving a reasonably equivalent exchange of value and the debtor (1) was engaged, or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (2) intended to incur, or believed or reasonably should have believed
Under § 726.106(1), a transfer is fraudulent as to a creditor whose claim arose before the transfer was made if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation. Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied.
Under 11 U.S.C. § 548(a)(1)(B), a transfer is constructively fraudulent if the debtor "received less than a reasonably equivalent value in exchange for such transfer or obligation; and was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation. . . ." The Bankruptcy Code defines value as "property, or satisfaction or securing of a present or antecedent debt of the debtor. . . ."
Transfers are voidable under FUFTA if they took place within four years prior to the filing of the bankruptcy petition,
The Court will analyze each of the types of Transfers to determine whether Plaintiff is able to prove the elements necessary to avoid the Transfers as being constructively fraudulent.
The Deposit Transfers consist of $12,893,805.97 deposited into Debtor's two Regions' bank accounts in the four-year period preceding the filing of his bankruptcy petition.
The threshold question in the First Motion is whether the Deposit Transfers qualify as "transfers" under FUFTA and the Bankruptcy Code such that they are subject to avoidance. Regions contends that, notwithstanding Plaintiff's definition of the Deposit Transfers as "transfers," the Deposit Transfers do not meet the statutory definitions of a "transfer."
Under FUFTA, the term "transfer" is defined as meaning
A line of cases holds that a customer's "regular deposits" into his own unrestricted bank accounts are not transfers within the meaning of the Bankruptcy Code.
The Deposit Transfers exceed the amount of the Overdrafts by $11,664,431.59. In fact, more than half of the Deposit Transfers were completely unrelated to Overdraft Loan Repayment Transfers as shown by a comparison of Plaintiff's list of the Overdraft Loan Repayment Transfers during the four-year period preceding the bankruptcy filing (Exhibit 9 to the Complaint) to the list of Deposit Transfers during that same time period (Exhibit 10 to the Complaint). The comparison below reflects that there were no Overdrafts at all during the following statement periods:
Account No. Statement Date Deposit Amount 4648 1/1/09-3/31/09 $743,633.25 4648 5/1/09-5/29/09 $400,000.00 4648 2/27/10-3/31/10 $2,081,655.24 4648 5/29/10-6/30/10 $3,937,882.51 9671 8/12/08-9/10/08 $500,000.00 Total $7,663,171.00
Plaintiff contends that the cases supporting Regions' position were decided in the context of Ponzi schemes—in which the debtors' banks had no knowledge of or participation in the debtors' fraudulent activity. But the issue here is whether Debtor had complete autonomy and unfettered ability to withdraw the deposited funds. Whether that autonomy and unfettered ability arose in the context of a Ponzi scheme or a check-kiting scheme does not change the analysis.
The Court finds that there are no factual issues regarding Plaintiff's summaries of Overdraft Loan Repayment Transfers and Deposit Transfers. To the extent that Deposit Transfers exceeded Overdrafts, $11,664,431.59, they were "regular deposits" and not "transfers" because Debtor had unfettered access to those funds.
Plaintiff contends that the $1,229,374.38 in Overdrafts were extensions of credit and that deposits made to repay those extensions of credit are avoidable
Courts have held that deposits into a debtor's bank account that are used by the bank to cover overdrafts are transfers that may be avoided as preferences under 11 U.S.C. § 547. For example, in In re Montgomery,
The Court finds that to the extent the Deposit Transfers were used by Regions to repay the extensions of credit Regions represented by the Overdrafts, the Court finds that a "transfer" occurred.
Regions next contends that even if the Deposit Transfers were "transfers" for avoidance purposes, those transfers may not be recovered because Regions was not an "initial transferee" of the transfer.
Under 11 U.S.C. § 550(a)(1), a transfer that has been avoided as a fraudulent transfer may be recovered from the "initial transferee of such transfer or the entity for whose benefit the transfer was made." In Wiand v. Wells Fargo Bank, N.A., a Ponzi scheme case, the district court held the defendant bank was not an "initial transferee", stating that "[w]hen banks receive money for the sole purpose of depositing it into a customer's account. . . the bank never has actual control of the funds and is not a section 550 initial transferee."
However, in In re Harwell,
The Harwell court held that in most cases, funds transferred in and out of a lawyer's trust account, just like bank transfers, will be entitled to mere conduit status because the lawyer lacks control over the funds. But the court concluded in Harwell that the defendant attorney could not claim he was a mere conduit for funds transferred to his trust account because he had been involved in the debtor's scheme to use the funds to pay preferred creditors and insiders. The Eleventh Circuit stated:
Here, Plaintiff contends that Regions was not the mere recipient of deposits to Debtor's accounts but, that Regions knowingly participated in Debtor's and the Mongelluzzis' check-kiting scheme over a period of years for its own gain. This Court has already found that Regions had actual knowledge of the check-kiting scheme as of at least June 28, 2010.
Regions contends that even if the Deposit Transfers are otherwise avoidable transfers, Debtor received reasonably equivalent value because:
Because Debtor received reasonably equivalent value, either in the form of unfettered access to the Deposit Transfers or to the extent that the Deposit Transfers were used to pay Overdrafts, the Deposit Transfers are not subject to avoidance as constructive fraudulent transfers under FUFTA or 11 U.S.C. § 548.
The Overdraft Loan Repayment Transfers are payments by Debtor to Regions to repay overdrafts in Debtor's accounts, totaling $1,229,374.38.
As set forth above, the Court has found that if Deposit Transfers were not applied to Overdrafts (in other words, to the extent that the Deposit Transfers are not Overdraft Loan Repayment Transfers), the Deposit Transfers are not "transfers" subject to avoidance under FUFTA or 11 U.S.C. § 548 and Regions is not an "initial transferee." The Overdraft Loan Repayment Transfers themselves ($1,229,374.38) were "transfers" and, as to that amount, Regions is an "initial transferee." This leaves one remaining issue: whether Debtor received reasonably equivalent value in exchange for the Overdraft Loan Repayment Transfers.
Plaintiff's list of the Overdraft Loan Repayment Transfers she seeks to avoid (Exhibit 9 to the Amended Complaint) are in the exact amount of the Overdrafts; Plaintiff does not seek to recover related fees or costs, but seeks to recover only the principal of the amount of the "credit" that Regions extended to Debtor. But when the payment is for the principal amount of a loan, reasonably equivalent value is given.
The court in In re Petters Co., Inc.,
In other words, in Petters, as in the facts presented here, the bank would honor a check when the debtor's account had insufficient funds to cover the check by making a short-term "loan." When the debtor deposited funds into the account to cover the check, the bank would apply those funds to the negative balances in the account in the exact amount of the short-term credit extended.
As in Petters, Plaintiff alleges that the Overdrafts were loans and has not moved to recover any interest or fees associated with the Overdrafts. Therefore Debtor's repayment of the principal of the loans to Regions in amounts that are exactly equal to the amount of principal it received constitute reasonably equivalent value.
If Plaintiff were suing Regions to recover Overdraft Loan Repayment Transfers made within the 90-day period prior to Debtor's bankruptcy petition as preferential transfers under 11 U.S.C. § 547, Plaintiff would likely prevail.
Although Plaintiff argues that that dismissal of constructive fraudulent transfer claims is improper as a matter of law, relying upon Welch v. Highlands Union Bank,
In its reply brief,
Accordingly, the Court considers Region's request for partial summary judgment on the Other Loan Repayment Transfers to be unopposed.
Regions seeks summary judgment on Count IV and XII, Plaintiff's claims to avoid the Deposit Transfers as actual
Under § 726.105(1)(a), a transfer made by a debtor is fraudulent as to either a present or future creditor if the transfer was made with the "actual intent to hinder, delay, or defraud any creditor of the debtor." Likewise under 11 U.S.C. § 548(a)(1)(A), the trustee may avoid a transfer made 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.
In order to establish a prima facie case of actual fraud a plaintiff must prove that there was a creditor to be defrauded, there was a transfer of property, and there was a debtor intending fraud.
Regions' argument with respect to Counts IV and XII is limited to its contention that the Deposit Transfers are not "transfers" subject to avoidance and that Regions is not an "initial transferee." As set forth in the Court's analysis of Plaintiff's constructive fraudulent transfer claims, above, the Court has found that to the extent that Deposit Transfers were not applied to Overdrafts, they were not transfers within the meaning of FUFTA or the Bankruptcy Code, but to the extent Deposit Transfers were applied to Overdrafts, they were "transfers." Similarly, the Court found that Regions is an "initial transferee" only to the extent that the Deposit Transfers were applied to the Overdrafts.
Therefore the only issue remaining on Plaintiff's actual fraud claim with respect to Deposit Transfers that were applied to Overdrafts is whether those deposits were made with "actual intent to hinder, delay, or defraud any creditor of the debtor." Regions has presented no evidence on this issue. Therefore, the Court will deny the Motions to the extent that the Deposit Transfers would otherwise be recoverable, i.e., to the extent applied to Overdrafts in the amount of $1,229,374.38.
11 U.S.C. § 550 provides for the recovery by a trustee of claims that are avoided under, inter alia, §§ 544(b) and 548. To the extent that the Court has granted summary judgment in Regions' favor on Plaintiff's avoidance claims, partial summary judgment as to Count XVI is appropriate.
Plaintiff argues that summary judgment is not appropriate given the fact-intensive nature of reasonably equivalent value in cases like this, particularly on the issue of good faith. Plaintiff cites Welch v. Highlands Union Bank,
But as the Eleventh Circuit explained in In re Caribbean Fuels America, Inc.,
The Court finds that although reasonably equivalent value may in certain cases be a factual determination, here, Debtor directly received dollar for dollar credit for the Overdraft Loan Repayment Transfers. By definition, dollar for dollar credit is reasonably equivalent value.
Plaintiff argues that judicial estoppel precludes summary judgment because Regions asserted a counterclaim against Plaintiff and Trustee Herendeen as to the ownership of the funds on deposit in the Mongelluzzi Accounts
But judicial estoppel does not apply here; it applies when a party asserts a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.
Here, Plaintiff alleges that Debtor made deposits into his accounts, and that Debtor incurred Overdrafts and later paid Regions the amount of the Overdrafts. Regions does not dispute these factual allegations and merely argues, as a matter of law, that they do not give rise to avoidable fraudulent transfer claims. The fact that Regions' counterclaim raises the question of the entitlement or ownership of the funds on deposit does not contradict Regions' positions taken in its counterclaim or its defense to Trustee Herendeen's claims. And to the extent that Regions asserted alternate legal theories in its defense of Trustee Herendeen's fraudulent transfer claims on the issue of reasonably equivalent value, this is merely a divergent legal position. Divergent legal positions do not warrant the application of judicial estoppel.
The Court finds, as a matter of law, that to the extent that Deposit Transfers were
Therefore, on Plaintiff's claims to avoid the Transfers as constructively fraudulent transfers (Counts II, III, V, VI, VIII, IX, XI, XIII, XV), the Court finds that Regions, as the moving party, has met its burden by pointing out the absence of evidence to support Plaintiff's claims, and that Plaintiff has failed to meet her burden to show that Regions overlooked or ignored evidence in the record that would withstand a motion for directed verdict or to come forward with sufficient evidence to withstand a motion for directed verdict.
On Plaintiff's claims to recover the Deposit Transfers as actual fraudulent transfers (Counts IV and XII), the Court finds, first, that the Deposit Transfers were "transfers" only to the extent that they were applied to Overdrafts and as to the amount of the Overdrafts, $1,229,374.38, Regions was an "initial transferee." The remaining issue is whether these transfers to Regions were made with the requisite intent to hinder, delay, or defraud; Regions has not met its summary judgment burden on this issue. Second, the Court finds that the remaining amount of the Deposit Transfers, $11,664,431.59, were not "transfers," and as to that amount of the Deposit Transfers, Regions was not an "initial transferee." Therefore, the Court will grant the Motions as to Counts IV and XII in part and deny in part.
And last, because Plaintiff's Count XVI recovery claim is dependent upon the underlying avoidance claims, the Court will grant the motion as to that claim in part.
For the foregoing reasons, the Court finds it appropriate to grant Plaintiff's Motions for Partial Summary Judgment in part. Accordingly, it is
1. Summary judgment is GRANTED in Regions' favor on Counts II, III, V, VI, VIII, IX, XI, XIII, and XV.
2. Summary judgment GRANTED in part on Counts IV and XII as to that portion of the Deposit Transfers that were not applied to Overdrafts, $11,664,431.59, and DENIED as to that portion of the Deposit Transfers that were applied to Overdrafts, $1,229,374.38.
3. Summary judgment is GRANTED in part and DENIED in part at to Count XVI, consistent with the foregoing rulings.
The Clerk of Court shall serve this order on the parties via CM/ECF.
ORDERED.
