ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE.
In July 2009, Universal Marketing, Inc. ("the Debtor" or "UMI") was one (1) of more than seventy (70) entities in a vertically integrated business ("the Universal Network"). The Universal Network operated approximately thirty-six (36) gas stations in the Northeast and Mid-Atlantic regions of the United States and also distributed gasoline to unaffiliated gas stations.
On July 23, 2009, UMI commenced this chapter 11 bankruptcy case. UMI was the only Universal Network entity that filed a bankruptcy petition. The reorganization phase of the case was short-lived; the case was converted to chapter 7 on August 18, 2009.
Eight (8) months after the conversion of the case, on April 19, 2010, Charles R. Goldstein, the chapter 7 trustee ("the Trustee") filed a motion seeking substantive consolidation of UMI's estate with the estates of certain other Universal Network entities, including Universal Delaware, Inc. ("UDI"). Wilmington Savings Fund Society ("WSFS"), a bank that provided both commercial credit and cash management services to UDI, contested the Trustee's motion for substantive consolidation.
In this adversary proceeding, the Trustee seeks to recover money from WSFS based on a variety of claims which may be grouped into three (3) legal categories.
First, the Trustee raises what the parties have referred to as "common law" claims, seeking to impose liability for breach of contract. The Trustee asserts that a "post no debits" policy WSFS implemented as to UDI's bank accounts for a few days in July 2009 breached the UDI-WSFS contract and triggered a "chain-reaction liquidity crisis"
Second, based largely on the same events giving rise to his common law claims, the Trustee asserts a statutory claim under 6 Del. C. § 4A.
Third, the Trustee asserts traditional bankruptcy transfer avoidance legal theories (preference, fraudulent transfers) under 11 U.S.C. §§ 544, 547, 548, 550, 553(b), analysis of which is more complex due to the substantive consolidation issues also present in the proceeding.
In response, WSFS maintains that the Trustee's common law claims are based on a gross exaggeration or mischaracterization of the undisputed facts. WSFS contends, quite simply, that it did nothing more than exercise ordinary and proper, garden-variety contractual remedies against UDI after UDI breached its contractual duties to WSFS in various ways (including fraudulently inducing WSFS to enter into the banking and lending relationship with UDI in the first place). WSFS also asserts that no avoidable transfers occurred.
Presently before the court are the parties' cross-motions for partial summary judgment on the issue of liability.
As explained in Part IX.B., infra, all of the claims at issue are either (1) non-core claims, which require transmission of proposed findings of fact and conclusions of law to the district court absent consent of the parties, see 28 U.S.C. § 157(c)(1), or (2) core claims, for which the bankruptcy court lacks constitutional authority to enter a final judgment (again, absent consent of the parties), see Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In both its Answer to the Second Amended Complaint and its main brief on summary judgment, WSFS unequivocally declined to consent to the entry of a final judgment by the bankruptcy court. Cf. Wellness Int'l Network, Ltd., v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) (parties may consent to entry of judgment by bankruptcy court). Therefore, I cannot enter a final judgment for either party in this adversary proceeding.
For the reasons stated below, I conclude that WSFS is entitled to summary judgment on all but one (1) of the Trustee's claims, there being one (1) claim in which
The Universal Network was a vertically integrated business involved in the purchase of gasoline and its resale to both Universal entities and to unrelated, third-party businesses. Generally, each of the Universal Network gas stations was owned or leased by a single purpose entity ("SPE"). Within the Universal Network, UMI served as the entity that purchased gasoline from major oil companies and then resold the gasoline to the SPE's and the unrelated third parties. UDI, acted as the management company for UMI and the SPE's.
In 2009, UMI and UDI each had separate banking relationships — UMI with TD Bank and UDI with WSFS. Other Universal Network entities had banking relationships with other institutions, such as Wachovia Bank, Citizens Bank, The Bancorp Bank and PNC Bank, N.A.
The cash needs of the various entities were met by numerous inter-company money transfers, often in the magnitude of hundreds of thousands of dollars on a daily basis.
The dispute before me centers on UDI's and WSFS' lending and cash management relationships.
UDI and WSFS first connected in November 2008, when Singh inquired about WSFS' loan and banking services. (Ex. W-29, WSFS 02026).
On January 26, 2009, Foley submitted a Credit Memorandum to WSFS' Senior Loan Committee ("the Credit Memorandum"). (Ex. W-31). The Credit Memorandum sought approval for a $5 million working capital line of credit to be used for UDI's "general working capital needs,"
In March 2009, UDI and WSFS executed several agreements to formalize two (2)
On March 19, 2009, UDI and WSFS entered into a line of credit loan transaction ("the Loan"). The Loan was memorialized by various documents, including a Business Loan Agreement ("BLA"), Promissory Note ("the Note"), Security Agreement, Guaranty ("the Guaranty"), Confession of Judgment, and an Assignment of Leases and Rents. (See Ex. W-14). The Note defined these documents collectively as "the Loan Documents." (Ex. W-14, WSFS 00276, Note ¶ 3 (hanging paragraph)).
The BLA obligated WSFS to make available to UDI a commercial line of credit in the principal sum of $5 million. (Ex. W-14, WSFS 0259, BLA ¶ 1.1). UDI agreed to repay the Loan which was evidenced by the Note. (Id. ¶ 1.2).
The BLA includes several representations that UDI made to induce WSFS to extend the Loan. Among those relevant to the pending motions were:
The BLA enumerated several events of default:
The BLA provided various remedies to WSFS in the event of a default:
The Note provided for a $5 million revolving credit facility, with a term commencing on March 19, 2009, with monthly installments of interest on the principal balance, due on the 19th of each month. (Ex. W-14, WSFS 00274-00275, Note Preamble & ¶ 2(b)). The Note provided for its term to end upon demand by WSFS, in its discretion, at any time, and yearly extensions of the facility, the first extension falling on June 30, 2009, just slightly more than three (3) months after the inception of the Loan. (Id. ¶ 2(a)). The Note also required UDI to reduce the principal balance to zero ($0.00) once per year upon request of WSFS, beginning after June 30, 2009, and to maintain a zero balance for thirty (30) days before UDI could once again draw down on the facility. (Id., WSFS 00276, Note ¶ 2(I)).
Paragraph 6 of the Note specified both monetary and non-monetary Events of Default, including:
Paragraph 7 of the Note provided certain remedies to WSFS in the Event of Default, including the right to accelerate the Loan without presentation, demand, or protest. (Id. ¶ 7(a)). Like the BLA, the Note imposed no obligation on WSFS to provide notice of an Event of Default. (Id. ¶ 6 (hanging paragraph)). UDI expressly waived any notices (including presentment for payment, dishonor, and protest) under the Note. (Id., WSFS 00279, Note ¶ 9(a)).
Under the Guaranty, Singh served as an absolute and unconditional guarantor of the Loan. Upon default, the Guaranty allowed WSFS to proceed against Singh initially and directly without having to proceed against any other property first. (Id., WSFS 00303, Guaranty Agreement ¶ 2).
The Guaranty enumerated several events of default, including:
(Id. ¶ 7(b)).
In the event of default, the Guaranty granted WSFS the right to accelerate the indebtedness, whether due or not, and required Singh to pay the Loan on demand with immediately available funds. (Id. ¶ 7(hanging paragraph)).
On March 13, 2009, UDI and WSFS entered into a Cash Management Services Agreement ("the CMA"), which required WSFS to provide certain financial services to UDI. (See Ex. W-38).
The CMA consisted of several documents for each of the selected services, including "riders."
In May 2009, less than two (2) months after formalizing its relationship with UDI, WSFS developed concerns about its new customer. Its suspicions arose after a flurry of Automated Clearing House ("ACH") activity and a $1 million dollar transfer occurred on May 1, 2009. (Ex. W-19, Foley Dep. at 35-38; Ex. W-20, WSFS 02568). Also, UDI quickly drew down the entire $5 million credit line, necessitating a conversation between Foley and Singh later that month. (Ex. W-28, Foley Dep. at 97). Singh explained the full usage of the line was for capital expenditures. (Id.). This was not an intended
The next month (June 2009), UDI sought to borrow an additional, $2.1 million from WSFS, increasing the credit line to $7.1 million. Foley, as UDI's customer representative and relationship manager, prepared a credit memo to present UDI's new request to WSFS's Loan Committee. (See Ex. W-40). Glenn Kocher, Chair of the Loan Committee and Chief Credit Officer, was uncomfortable with the request. (Ex. W-37, Kocher Dep. at 45). He initially understood UDI to be a "healthy company," (Id. at 72), but given UDI's misuse of the credit line at such a rapid pace, he questioned the accuracy of UDI's initial financial statements.
Based on its concerns, WSFS did not act on the request for additional credit. It also deferred a decision on extending the existing credit facility under ¶ 2(a) of the Note by pushing out its internal review date for ninety (90) days, from June 30, 2009 to September 30, 2009. (Ex. W-44, WSFS 00541).
A dramatic turn of events took place a few weeks later. On the evening of Tuesday, July 14, 2009, WSFS learned that Singh might have another identity. While certain facts are in dispute as to exactly how WSFS became aware of this information, it is clear from the record that WSFS
The next day (Wednesday, July 15, 2009), the Red Notice was brought to the attention of WSFS' security department. Foley confirmed to the security department that the face of "Batra" on the Red Notice was Singh. (Ex. W-19, Foley Dep. at 42). That evening, following several emails and meetings, WSFS management resolved they still needed to authenticate the Red Notice, but in an abundance of caution, placed a "post no debits" ("PND") restriction on the UDI accounts, effective the next business day, July 16, 2009. (Ex. W-2, WSFS 006171). The PND was put in place to stop automated debiting and allow WSFS time to review UDI's account and ensure there were sufficient funds for outgoing transfers. (Ex. W-7, Brogan Dep. at 78-79, 81-82).
By the end of day on July 16, 2009, after having spoken to two (2) FBI agents, WSFS confirmed that the Red Notice was authentic and there was an actual arrest warrant in India for Singh. (Ex. W-4, WSFS 03844; Ex.W-50, Kearney Dep. at 14-15 (confirming Red Notice was on a valid web site); Ex. Tr.-M, Foley Dep. at 91). WSFS also determined that UDI's primary operating account was expected to have approximately $5.8 million in it by the close of business that day. (Ex. W-4, WSFS 03844). Accordingly, WSFS decided to transfer $5 million of those funds and credit them to a general ledger suspense account to insure there were funds available to pay off the Loan. (Ex. Tr.-65, WSFS 02456; Ex. W-4, WSFS 03844).
WSFS put a few other precautionary processes in motion that day. It immediately implemented: UDI's "line sweep" be turned off, all "money room deposits" be accepted, Foley's authorization be obtained for cash orders through the "money room vault," and any communication with Singh should be with Foley. (Exs. Tr.-66, WSFS 05877; Tr.-67, WSFS 05879; Tr.-69, WSFS 05881; Tr.-70, WSFS 05882). Essentially, WSFS wanted to assure that all deposits were accepted and made Foley the point of contact and responsible for determining which debits the bank would permit.
Thursday, July 16, 2009, concluded with Mark Turner, President of WSFS, sending an email (at 8:45 pm) reiterating his message that UDI should be given the benefit of the doubt; that the goal was to protect the bank's interest while treating UDI with respect and the presumption that it was a misunderstanding. (Ex. W-4, WSFS 03844). At this point, no one from WSFS had contacted UDI to discuss WSFS' concerns or suspicions about Singh's identity or to explain the internal actions WSFS had taken pertaining to the
The next morning (Friday, July 17, 2009), WSFS retained Garvan McDaniel as counsel to handle the UDI matter. (Ex. W-52, McDaniel Dep. at 21-22). Thereafter, McDaniel called UDI's attorney, Kevin Ryan, and advised Ryan (or one of his colleagues) about:
(Ex. W-9, Ryan Dep. at 34-36; 121; Ex. W-52, McDaniel Dep. at 24, 37-39; Ex. W-54, WSFS 000494; Ex. W-55, WSFS 000495).
That afternoon, Ryan asked McDaniel for UDI to have "access to the funds in excess of what [WSFS] needed to offset [the] loan." (Ex. W-56, WSFS 06756). The two (2) attorneys also scheduled a conference call the following Monday morning. (Ex. W-9, Ryan Dep. at 125). Meanwhile, the PND restriction remained in place.
On Monday morning (July 20, 2009), McDaniel advised Ryan that WSFS removed the PND restriction from all accounts, and online banking capabilities for ACH and wire transfers had been reinstated. (Ex. W-67, WSFS 000457). That afternoon, WSFS applied the $5 million that had been previously moved to the general ledger account on July 16th, to formally repay the Loan ("the Setoff"). (Ex. W-60, WSFS 00922; Ex. Tr.-L, Foley Dep. at 198).
On July 15 and 16, 2009, while the PND was in effect, UDI received over $11.6 million dollars in transfers from UMI and UEI ("the UMI-UDI Transfers").
On July 23, 2009, three (3) days after WSFS transferred the $5 million to satisfy the Loan, UMI filed its chapter 11 bankruptcy petition.
As stated above, on July 23, 2009, UMI commenced this chapter 11 bankruptcy case. The case was converted to chapter 7 on August 18, 2009. On September 24, 2009, the U.S. Trustee filed a report giving notice that Goldstein had been elected as chapter 7 trustee.
On April 19, 2010, the Trustee filed a motion requesting that substantive consolidation of the UMI bankruptcy estate with some, but not all, of the non-debtor Universal Network affiliates ("the Substantive Consolidation Motion"). (Bky. No. 09-15404, Doc. # 316). UDI was one of the entities to be included in the substantive consolidation.
The Trustee's request was based largely on his view that:
(Memorandum in Support of Trustee's Motion for Substantive Consolidation at 4-5, 13, 17) (Bky. No. 09-15404, Doc. # 317); see generally In re Owens Corning, 419 F.3d 195 (3d Cir.2005) (controlling case stating legal standards for substantive consolidation).
The Trustee and TD Bank entered into a settlement resolving several issues between them. Pursuant to that agreement, TD Bank supported the Trustee's request for substantive consolidation. (Bky. No. 09-15404, Doc. # 366). On June 8, 2010, WSFS filed a lengthy objection to the Substantive Consolidation Motion. (Bky. No. 09-15404, Doc. # 364).
The parties reached a global settlement of the Substantive Consolidation Motion and two (2) other pending motions. That settlement was approved by court order dated August 4, 2010. (Bky. No. 09-15404, Doc. # 410).
Most relevant to this adversary proceeding, the August 4, 2010 Order included a significant qualification. The Order provided that the substantive consolidation of UMI and UDI would
On July 18, 2011, the Trustee initiated this adversary proceeding by filing a complaint. (Adv. No. 11-512, Doc. # 1). On January 13, 2012, the Trustee filed an amended complaint. (Id., Doc. #'s 30, 35). WSFS sought dismissal of the initial complaint and, later, the amended complaint pursuant to Fed.R.Civ.P. 12(b)(6)) (incorporated by Fed. R. Bankr.P. 7012).
On December 6, 2013, the Trustee filed a motion seeking leave to file a second amended complaint. (Id., Doc. # 129). WSFS objected. By Order dated January 15, 2014, I granted the motion. (Id., Doc. # 161). The Trustee filed his second amended complaint ("the Second Amended Complaint") on January 24, 2014. (Id., Doc. # 170). WSFS filed its Answer on February 19, 2014. (Id., Doc. # 176).
Six (6) of the original ten (10) claims pleaded in the Amended Complaint survived WSFS' Motion to Dismiss Case, in whole or in part. Those surviving claims are:
On May 30, 2014, the Trustee filed a motion for partial summary judgment, seeking summary judgment as to liability only with respect to Counts One, Two, Three, Six and Seven. (Id., Doc. # 193). The Trustee supported his motion with evidentiary matter and a memorandum of law. On July 31, 2014, WSFS filed its response to the Trustee's Motion and its own motion for summary judgment with accompanying evidentiary matter and a memorandum of law. (Id., Doc. # 206). Each side then filed reply memoranda, the last of which was filed on September 11, 2014. (Id., Doc. #'s 213, 216).
Fed. R. Civ. P. 56(a), applicable in this adversary proceeding by virtue of Fed. R. Bankr. P. 7056, provides that summary judgment must be granted to a moving party when, drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. E.g., Tri-M Group, LLC v. Sharp, 638 F.3d 406, 415 (3d Cir.2011); In re Bath, 442 B.R. 377, 387 (Bankr.E.D.Pa.2010). Summary judgment is appropriate if there are no disputed issues of material fact and the undisputed facts would require a directed verdict in favor of the movant. See Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.1993).
On a motion for summary judgment, the court's role is not to weigh the evidence, but to determine whether there is a disputed, material fact for resolution at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact is one in which sufficient evidence exists that would permit a reasonable fact finder to return a verdict for the non-moving party. Id. at 248, 106 S.Ct. 2505. However, if it appears that the evidence "is so one-sided that one party must prevail as a matter of law," the court shall enter judgment accordingly in that party's favor. Id. at 252, 106 S.Ct. 2505.
Proper resolution of a motion for summary judgment also requires consideration of the parties' respective burdens.
If the moving party bears the burden of proof, the movant must "support its motion with credible evidence ... that would entitle it to a directed verdict if not controverted at trial." Fitzpatrick, 2 F.3d at 1115 (citation omitted). The evidence
If the moving party does not bear the burden of proof at trial, the movant may establish it is entitled to judgment either by demonstrating that the undisputed facts negate an element of the plaintiff's claim or that the plaintiff lacks evidence to support an essential element of his claim. In re Polichuk, 506 B.R. 405, 422 (Bankr. E.D.Pa.2014) (citing Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1366 (3d Cir.1996) and Quaker State Minit-Lube, Inc. v. Fireman's Fund Ins. Co., 868 F.Supp. 1278, 1287 n. 5 (D.Utah 1994)).
In this adversary proceeding, with respect to certain claims, WSFS contends that the Trustee's evidence is insufficient to permit this dispute to proceed to trial. Thus, WSFS' burden on summary judgment "may be discharged by `showing' — that is, pointing out to the [trial] court — that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
In Counts One and Two of the Second Amended Complaint, the Trustee asserts two (2) distinct breach of contract claims pertaining to the Loan and the CMA: (1) breach of express contractual provisions and (2) breach of the implied covenant of good faith and fair dealing.
Prior to evaluating whether there was a breach of contract under either theory, I must consider the relationship between the Loan and the CMA. The Trustee contends that the Loan and CMA are separate contracts. (Trustee Reply Memorandum Support of Summary Judgment at 3; Adv. No. 11-512, Doc. # 213) ("Tr.Reply"). WSFS disagrees, arguing that the Loan and CMA were part of a larger integrated business lending transaction that requires the documents to be interpreted as a single agreement in order to give effect to the parties' intent.
It is a well settled under Delaware contract law,
Schwartz v. Centennial Ins. Co., 1980 WL 77940, at *5 (Del.Ch. Jan. 16, 1980) (citations omitted); accord Northwestern Nat'l Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del.1996); Tenneco Auto. Inc. v. El Paso Corp., 2002 WL 453930, at *1 (Del.Ch. Mar. 20, 2002).
A further axiom of contact interpretation is that related agreements are to be read together as one contract. Ashall Homes Ltd. v. ROK Entm't Grp. Inc., 992 A.2d 1239, 1251 (Del.Ch.2010); accord In re Northwestern Corp., 313 B.R. 595, 601 (Bankr.D.Del.2004) ("all related documents and instruments in a single transaction together are harmonized to the extent possible"). "[T]he principle that all writings which are part of the same transaction are interpreted together also applies when incorporation by reference of another writing may be inferred from the context surrounding the execution of the writings in question." Williston on Contracts § 30:26 (4th ed. (rev.) 2007) ("Williston"); accord CA, Inc. v. Ingres Corp., 2009 WL 4575009, at *47 (Del.Ch. Dec. 7, 2009); Simon v. Navellier Series Fund, 2000 WL 1597890, at *7 (Del.Ch. Oct. 19, 2000).
Where one party to a contract seeks to vary the terms of a written contract, the parol evidence rule is implicated. The parol evidence rule states "where parties have reduced their ultimate agreement to writing, the writing cannot thereafter be varied or contradicted." McGrew v. Vanguard Corp., 1979 WL 4635, at *3 (Del.Ch. Sept. 25, 1979); accord Taylor v. Jones, 2002 WL 31926612, at *3 (Del.Ch. Dec. 17, 2002). The application of the parol evidence rule operates to exclude "an antecedent or contemporaneous oral understanding to vary or contradict the terms of a written contract." Brandywine Shoppe, Inc. v. State Farm Fire & Casualty Co., 307 A.2d 806, 809 (Del.Super.Ct.1973).
Related to the parole evidence rule is the concept of contract integration. A distinction exists between contracts that are totally integrated and those only partially integrated:
McGrew, 1979 WL 4635, at *3 (footnote omitted).
In determining whether the contract is fully or partially integrated, courts consider several factors, including whether the contact contains a merger or integration clause, the length and detail of the contract, the formality of the setting, and whether the contract is a form. See 6-25 Peter Linzer, Corbin on Contacts § 25.7 (Joseph M. Perillo, ed.) (Matthew Bender 2015) ("Corbin"); see also Hynansky v. Vietri, 2003 WL 21976031, at *3 (Del.Ch. Aug. 7, 2003); Taylor, 2002 WL 31926612, at *3.
Once it has been established that a contract is not fully integrated, the court may consider extrinsic or parol evidence regarding whether the parties intended to include other terms or agreements in the contract to supplement (but not vary or contradict) the written terms of the contract. Corbin § 25.7; see also Brandywine Shoppe, 307 A.2d at 809.
In this proceeding, I must apply these principles to determine whether the Loan and the CMA were each fully integrated, independent contracts or whether each was only partially integrated and supplemented by the provisions of the other.
The inclusion of an integration clause
The Note expressly incorporates the BLA, (Note, Preamble) and refers to the BLA and the other Loan Documents as one collective transaction or one interrelated instrument. (Ex. W14, WSFS 00276, Note ¶ 3(a)). More to the point, the Note specifically provides that UDI must maintain its primary deposit account and cash management relationship with WSFS and the failure to do so constituted an event of default. (Id., WSFS 00278, Note ¶ 6(d); see also id., WSFS 00264, BLA ¶ 4.1(k)). This requirement merged the lending and banking relationships.
It is therefore readily apparent that the CMA was only one (1) part of the larger transaction which included WSFS' agreement to lend UDI $5 million for working capital. The Trustee has offered no extrinsic evidence to dispute that the Loan and CMA were two (2) parts of a single package.
These undisputed facts establish that the Loan and CMA both were only partially
Three (3) elements are required to establish breach of contract under Delaware law: (1) the existence of a contract whether express or implied; (2) the breach of an obligation imposed by that contract; and (3) the resultant damage to the plaintiff. VLIW Technology, LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del.2003); eCOMMERCE Indus., Inc. v. MWA Intelligence, Inc., 2013 WL 5621678, *13 (Del. Ch. Sept. 30, 2013); In re Mobilactive Media, LLC, 2013 WL 297950, at *14 (Del. Ch. Jan. 25, 2013). The plaintiff has the burden to establish these elements by a preponderance of the evidence. Mobilactive Media, 2013 WL 297950, at *14; LaPoint v. AmerisourceBergen Corp., 2007 WL 2565709, at *9 (Del.Ch. Sept. 4, 2007).
The Trustee's first argument under Count Two is that WSFS breached the CMA through the implementation of the PND and other actions that restricted UDI's use of services that were provided under the CMA. The Trustee also makes the related argument that WSFS committed a breach of its express contractual duties by failing to perform all of its obligations under the CMA without prior notice. In response, WSFS asserts that it was excused from fully performing under the CMA due to UDI's material breach of its obligations under the Loan Documents.
WSFS is correct on the law. "A party is excused from performance under a contract if the other party is in material breach thereof." BioLife Solutions, Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch.2003) (citing Moore Bus. Forms v. Cordant Holdings Corp., 1998 WL 71836, at *8 & n. 35 (Del.Ch. Feb. 6, 1998, revised Mar. 5, 1998)); accord Daystar Const. Mgmt., Inc. v. Mitchell, 2006 WL 2053649, at *7 (Del.Super. July 12, 2006).
Based on this legal principle, if UDI materially defaulted under the Loan, it is appropriate to treat the default provisions of the Loan as either terminating WSFS' ongoing obligations under the CMA or at least modifying those obligations to relieve WSFS of the obligation to perform those CMA obligations that were inconsistent with or that would undermine the efficacy of its loan default remedies. As stated earlier, the CMA and the Loan were two (2) parts of a single, integrated transaction. It would be illogical to construe the transaction documents as permitting WSFS to declare a default under the Loan Documents and exercise its default and collection remedies only to have the exercise of those remedies trigger a breach of its obligations under the CMA. See GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012) ("The meaning inferred from a particular provision cannot control the meaning of the entire agreement if such an
Consequently, the merits of the Trustee's breach of contract claim boils down to two (2) questions:
Based on the undisputed facts, the answer to both questions is "yes." The summary judgment record establishes as a matter of law that UDI was in material breach of the Loan Documents at the time WSFS took action after discovering the existence of the Red Notice. Therefore, WSFS was authorized to accelerate the Loan and was not required to strictly perform all of its obligations under the CMA and did not breach its contractual duties to UDI.
The BLA identifies fourteen (14) "Events of Default." (Ex. W-14, WSFS 00266-00267, BLA ¶ 5.1(a)-(n)). WSFS has established on this record that at least two (2) events of default under the BLA occurred before it exercised its loan default remedies.
One event of default occurred under Paragraph 5.1(h) of the BLA, which states that the following constitutes an event of default: "[UDI] makes any material false or misleading statement, certificate, representation or warranty to [WSFS]."
Among the representations and warranties that UDI made to WSFS in the BLA were that:
(Id., WSFS 00261, BLA ¶ 3.1(e), (f), (g)).
WSFS has produced evidence, unrebutted by the Trustee, that UDI made the following misrepresentations to WSFS:
Another event of default occurred under Paragraph 5.1(b) of the BLA, which states that the following constitutes an event of
Paragraph 7 of the Guaranty provided that an event of default occurs if any information given by Singh or UDI in connection with the Loan is not accurate in all material respects or if either Singh or UDI "omitted to state any material fact or any fact necessary to make such information not misleading." In the Certificate of Guaranty Singh submitted to WSFS, Singh falsely certified that "[t]here is no suit, action, or proceeding pending, or threatened against or affecting the Guarantor before or by any court, administrative agency, [or] other governmental authority." (Ex. W-14, WSFS 00332, Certificate of Guarantor ¶ 3).
Singh's failure to disclose the existence of the litigation against him in India and the Red Notice (in the name of his undisclosed alias, Batra) constituted an event of default under the Guaranty and therefore under Paragraph 5.1(b) of the BLA.
The next question is whether UDI's default under the Loan Documents, on account of the material misrepresentations regarding UDI and Singh's financial condition and the failure to disclose the Red Notice and the pending criminal charges in India against Singh, were material breaches that excused further strict contractual performance by WSFS. I conclude they were.
The determination whether a breach is sufficient to excuse further performance under a contract is one of degree. Preferred Inv. Servs., Inc. v. T & H Bail Bonds, Inc., 2013 WL 3934992, at *11 (Del.Ch. July 24, 2013). A material breach is action or inaction that goes to the root or "essence of the agreement between the parties, or ... which touches the fundamental purpose of the contract and defeats the object of the parties in entering into the contract." Id. It must be "of sufficient importance to justify by the non-breaching party." Biolife Solutions, 838 A.2d at 278.
"A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so." Restatement § 162(2); accord Alabi v. DHL Airways, Inc., 583 A.2d 1358, 1362 (Del.Super.Ct.1990). Further, a party may assert that its nonperformance is excused by the other party's material breaches,
The determination of materiality is usually a question of fact. Norfolk S. Ry. Co. v. Basell USA Inc., 512 F.3d 86, 92 (3d Cir.2008) (citing Saienni v. G & C Capital Group, Inc., 1997 WL 363919, at *3 (Del.Super.Ct. May 1, 1997)); 23 Williston § 63:3. However, the materiality determination does not always preclude summary judgment. "[I]f the issue is disputed... [but] there is only one reasonable conclusion, a court must address what is ordinarily a factual question as a question of law." 23 Williston § 63:3; accord Norfolk,
Here, consistent with its usual underwriting practices, before it entered into the lending relationship with UDI, WSFS required that UDI and Singh provide financial statements and related financial information. (Ex. W-19, Foley Dep. at 6-9). WSFS analyzed this information in the form of a credit memo presented to its Senior Loan Committee, which assessed UDI's financial strength and the risk of extending credit. Based upon the information and risk analysis contained in that memo, WSFS granted UDI the Loan. (See Ex. W-37, Kocher Dep. at 18-19).
The Credit Memo referred specifically to UDI's cash position of $2.1 million as "sufficient." (Ex. W-31, WSFS 00530). As for Singh, UDI representatives required his guaranty before the Credit Memo was submitted to the Senior Loan Committee. (See W-37; Kocher Dep. at 20). At the Senior Loan Committee level, the Credit Memo separately analyzed the financial status of Singh, its guarantor. (Ex. W-31, WSFS 00532).
This record establishes, as a matter of law, that the misrepresentations in UDI's financial disclosures substantially contributed to WSFS' extension of credit under the Loan. Alabi, 583 A.2d at 1363 ("A misrepresentation induces a party's manifestation of assent if it substantially contributes to his decision to manifest his assent." (citation omitted)); see also Kirchner v. Stief, 2001 WL 1555313, at *3 (Del.C.P.2001) ("It is assumed, in absence of facts showing the contrary, that the recipient attached importance to the truth of the misrepresentation ..." (quoting Alabi, 583 A.2d at 1363)). In fact, the BLA itself states that the financial and related covenants induced WSFS to make the Loan to UDI.
Similarly, as a matter of law, Singh's nondisclosure of the pending proceedings against him in India, was a material breach of his contractual disclosure obligations under the Guaranty. The record demonstrates that WSFS made the Loan largely on the strength of its confidence in UDI's ability to generate sufficient cash flow. (See Ex. W-31, Credit Mem.; Ex. W-37, Kocher Dep. at 28). UDI's financial strength, in turn, was based on its success as a functioning cog in the Universal Network. The Credit Memo confirms that WSFS was well aware that Singh was the principal of all of the key Universal Network entities. In these circumstances, it is obvious that WSFS' decision to grant the loan necessarily depended on its confidence in Singh as the principal of UDI and the other Universal Network entities. See Ronald J. Mann, Article: The Role of Secured Credit in Small-Business Lending, 86 Geo. L.J. 1, at *6, 23-24 (Oct.1997) (discussing lenders' uniform practice of securing personal guarantee and describing guarantee as "a major force" in small business lending where "the most important effect of the guaranty is not the direct
In short, WSFS having established that UDI was in material breach of the Loan at the time that WSFS discovered the existence of the Red Notice, the Trustee cannot succeed on his claim for express breach of WSFS' contractual obligations under the CMA.
The Trustee also argues that WSFS committed a breach of contract by failing to give UDI prior notice before it exercised its Loan default remedies. The argument is without merit.
The express terms of the BLA provided WSFS with the right to accelerate the Loan without a declaration of default and without notice to UDI. (Ex. W-14, WSFS 00267, BLA ¶ 5.2(a), (b)). The Trustee seeks to vitiate the effect of this express contractual provision, arguing that the notice provisions in the Loan Documents are ambiguous because some of the remedial provisions require that notice be given to UDI while others are silent on the subject. (Tr. Reply Mem. at 5). Based on this purported ambiguity, the Trustee invokes the doctrine of contra proferentum and asks the court to construe the notice provisions against the drafter of the contract. He requests the court to read into the provisions of the Loan Documents that lack an express prior notice requirement, a duty to provide prior notice before exercising default remedies. (Id. at 5-6).
As a general rule, contract terms should be given their plain and ordinary meaning. E.g., AT & T Corp. v. Lillis, 953 A.2d 241, 252 (Del.2008); 11 Williston § 32.3. A contract term or provision is ambiguous only "[w]hen the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings." GMG Capital Invs., 36 A.3d at 780 (quoting Eagle Indus. v. DeVilbiss Health Care, 702 A.2d 1228, 1232 (Del.1997)); accord
In the event of an ambiguity, sometimes courts will "adopt the meaning that is less favorable in its legal effect to the party who chose the words ... [a] technique known ... as `contra proferentem.'" 5-24 Corbin § 24.27; accord 11 Williston § 32:12. Under Delaware law, courts may apply this principle if alternative formulations indicate that the ambiguous provision could easily have been made clear by the drafting party. Twin City Fire Ins. Co. v. Delaware Racing Ass'n, 840 A.2d 624, 630 (Del.2003) (citing Kaiser Alum. Corp. v. Matheson, 681 A.2d 392, 399 (Del.1996)).
In his submission, the Trustee did not go through the Loan Documents and identify those remedies that require prior notice and flesh out the ambiguity he claims exists. Presumably, he is referring to ¶ 6(a) and (b) of the Note, which require fifteen (15) days prior notice before WSFS declares certain monetary defaults. Interestingly, the very next subparagraph of the Note, ¶ 6(c), authorizes WSFS to declare a default without notice in the event of a materially adverse change in UDI's financial condition or with respect to the collateral of the Loan. In any event, there is no ambiguity in the provisions of the Loan Documents.
The Trustee's argument fails because there is no contractual ambiguity on the subject of prior notice.
The BLA expressly states that WSFS may accelerate the Loan without a declaration of default and exercise its default remedies without notice to UDI. (Ex. W-14, WSFS 00267, BLA ¶ 5.2(a), (b)). The existence of a generally applicable provision, stating that notice is not required for declaration of a default and the exercise of a party's remedies, with another provision imposing a notice requirement before a default may be declared based on a certain, specific ground, does not create an ambiguity. As the Restatement points out, the specific may control over the general, but only in the context in which it is found in a contract; it does not replace or supersede the general contract provision:
See Restatement § 203, cmt. e.
Here, there is neither an internal conflict within the BLA nor a direct conflict between the BLA and another one of the Loan Documents. WSFS declared a default and exercised its default remedies based on a non-monetary default for which there is no express contractual duty to give prior notice. The fact that there are other events of default as to which there is a duty to give notice does not create an ambiguity or vitiate WSFS' express right to act without notice following a non-monetary default.
Accordingly, the Trustee has not identified any specific contract provision mandating prior notice with which WSFS failed to comply.
The implied covenant of good faith and fair dealing requires contracting parties to "`refrain from
The Delaware Supreme Court has emphasized the limited nature of the implied covenant of good faith and fair dealing. A contracting party's reliance on the express terms of an agreement does not amount to bad faith merely because such reliance "simply limits advantages to another party." Nemec, 991 A.2d at 1128. Therefore, applying the implied covenant to find that a party breached its obligations by the manner in which it employed an express contractual right is a "cautious enterprise." Id. at 1125 (citing Dunlap, 878 A.2d at 441). This is necessarily so because a plaintiff "generally cannot base a claim for breach of the implied covenant on conduct authorized by the agreement." Id. at 1125-26.
Application of the implied covenant involves a "rare and fact-intensive exercise," Dunlap, 878 A.2d at 442 (quoting Cincinnati SMSA Ltd. Partnership v. Cincinnati Bell Cellular Systems Co., 708 A.2d 989, 992 (Del.1998)), to be employed "[o]nly when it is clear from the writing that the contracting parties `would have agreed to proscribe the act later complained of ... had they thought to negotiate with respect to that matter,'" Dunlap, 878 A.2d at 442 (quoting Katz v. Oak Industries, Inc., 508 A.2d 873, 880 (Del.Ch. 1986)).
Stated slightly differently, and consistent with the contractual foundation of a claim for breach of an implied contractual duty,
eCOMMERCE Indus., 2013 WL 5621678, at *33 (citing Nemec, 991 A.2d at 1128).
A claim arising from a breach of the implied covenant is itself contractual in nature. NAMA Holdings, LLC v. Related WMC LLC, 2014 WL 6436647, at *16 (Del.Ch. Nov. 17, 2014) (internal quotations and citations omitted). Thus, the elements of the claim are the same as those for an ordinary breach of contract claim, the only difference being that contractual obligation breached is implied, not express. See NAMA Holdings, 2014 WL 6436647 at *16 (quoting Fitzgerald v. Cantor,
As explained in Part V.B. above, following a material breach by UDI, WSFS exercised its default remedies under the Loan. Based on the implied covenant of good faith and fair dealing, the Trustee argues that the manner in which WSFS implemented its default remedies was unreasonable and in bad faith. He contends that WSFS breached the implied duty of good faith and fair dealing by placing the administrative freeze on UDI's accounts, sequestering $5 million to an internal account for the purpose of setting off the Loan, and failing to give notice to UDI of the administrative freeze and the sequestration of funds.
The Trustee's contention, that WSFS' conduct was arbitrary and unreasonable, is not supported by the undisputed facts in the record.
For the few days the PND was in effect, WSFS continued to honor requests for transfers and otherwise made funds available to UDI.
Thus, there is no evidence that UDI lacked all access to its funds. Rather, from July 15 to July 22, 2009, UDI transferred over $11 million from its accounts (
Thus, the uncontroverted facts demonstrate that UDI's accounts were not entirely frozen and that millions of dollars flowed through them while the PND restriction was in place. WSFS continued
As for the Trustee's claim that WSFS' actions without prior notice was a distinct breach of its contractual obligations, the Loan Documents imposed no duty on WSFS to give such notice. Nor did WSFS keep UDI in the dark about the limitations imposed on the CMA for very long. On July 17, 2009 — one day after the PND went into effect — WSFS gave notice to UDI (through its counsel) that it had: (a) put the PND in place, (b) segregated the $5 million, and (c) intended to set off the $5 million against the Loan.
Aside from the Trustee's over-spin of the factual history,
In short, WSFS did not overreact; its response to the disturbing information it received about the principal of its customer was not disproportionate. WSFS' conduct was a measured response to its reasonable suspicion that UDI materially defaulted under the Loan Agreement because the principal of a borrower that was transferring large sums of cash on a daily basis was an international fugitive operating under an assumed name. WSFS administered the PND in a manner that was restrictive enough to protect its interests and no more. The undisputed facts depict bank conduct that is far below the "arbitrary" or "unreasonable" standard required in a claim for breach
Article 4A governs electronic funds transfers, specifically payment orders. See 6 Del. C. §§ 4A-101, et. seq. Generally, a payment order is "an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary." § 4A-103(a)(1).
Article 4A defines several of the relevant terms used to describe a payment order. A sender is "the person giving the instruction to the receiving bank." § 4A-103(a)(5). The receiving bank is "the bank to which the sender's instruction is addressed." § 4A-103(a)(4). A beneficiary bank is "the bank identified in a payment order in which an account of the beneficiary is to be credited pursuant to the order or which otherwise is to make payment to the beneficiary if the order does not provide for payment to an account." § 4A-103(a)(3). A beneficiary is "the person to be paid by the beneficiary's bank." § 4A-103(a)(2).
In essence, a payment order can be broken down into a chain of transactions that may either be "accepted" or "rejected" at any point in the chain. For instance, a receiving bank may either accept or reject a payment order that the sender transmits. "[A] receiving bank ... accepts a payment order when it executes the order." § 4A-209(a). A rejection occurs when the receiving bank issues a notice to the sender either orally, electronically, or in writing that indicates that the receiving bank "is rejecting the order or will not execute or pay the order." § 4A-210(a). Once a payment order is accepted it may not then be later rejected and vice versa. See Banque Worms v. BankAmerica Int'l, 77 N.Y.2d 362, 568 N.Y.S.2d 541, 570 N.E.2d 189, 195 (1991) ("Payments made by electronic funds transfers in compliance with the provisions of article 4A are to be the equivalent of cash payments, irrevocable except to the extent provided for in article 4A").
A payment order is executed by a receiving bank when "it issues a payment order intended to carry out the payment order received by [that] bank." 1-2 Benjamin Geva, The Law of Electronic Funds Transfers § 2.03[2] (Matthew Bender 2015) (quoting U.C.C. § 4A-301(a)).
Section 4A-305 governs a receiving bank's liability for late or improper execution or failure to execute payment order. It provides:
One of the documents executed by the parties as part of the CMA was the Funds Transfer Services Rider ("the FTS Rider"). (Ex. W-38, WSFS 01535-01545). Section 2 of the FTS Rider listed eight (8) services regarding payment orders to be paid through the cash management system. All of the services were worded in terms of "may" as opposed to shall. For instance, in the execution of payment orders, WSFS may execute each order received by it in the name of UDI as sender, provided that UDI had sufficient available funds on deposit in an account. (See Id., WSFS 01535, FTS Rider ¶ 2.1). The FTS Rider also provided that WSFS may reject any order that does not comply with the Services Agreement or funds transfer rules and security procedures. (Id., WSFS 01535-01536, FTS Rider ¶ 2.2).
The FTS Rider described the notice required if a payment order was not executed. If WSFS rejected or failed to execute an order of UDI, then WSFS was obligated to give notice to UDI by no later than the close of business on the execution date of the order. (Id.).
Section 3 of the FTS Rider defined the fees, compensation, and costs associated for the services. The FTS Rider allowed WSFS to directly debit any of UDI's accounts without prior notice for any fees, charge-backs, return fees for checks, drafts, payment orders or other payments owing to WSFS. (Id., WSFS 01537-01538, FTS Rider ¶ 3.1).
WSFS was required to pay UDI if it rejected or failed to execute an order if, on the execution date of the order, there was a sufficient available balance in UDI's account to pay for the order. (Id., WSFS 01538, FTS Rider ¶ 3.3). WSFS also was required to compensate UDI for the use of funds at the rate specified in ¶ 3.1.
In Count Three, the Trustee claims that WSFS intentionally failed to execute the First and Second TD Bank Transfer Orders with the intent of taking the funds for its own benefit, (Second Am. Compl. ¶¶ 115, 118), giving rise to a claim under 6 Del. C. § 4A-305.
The undisputed facts establish that WSFS executed the First and Second TD Bank Transfer Orders. TD Bank, the beneficiary bank in this transaction, accepted the orders and credited UMI's account at TD Bank. The funds transfer was completed.
It is also undisputed that WSFS requested TD Bank to return the First and Second TD Bank Transfer Orders. TD Bank honored WSFS' request that the First TD Bank Transfer Order be reversed, but refused the request as to the Second Transfer Order.
The Trustee's claim fails because once a payment order is accepted it may not be rejected. By definition, neither Transfer Order was rejected.
Article 4A allows recovery under certain narrow circumstances. This fact situation before me does not fit the provisions of the statute. Further, a review of the case law, reveals no decision on point to support the Trustee's legal theory. Therefore, the Trustee may not recover under Article 4A for a post-completion revocation of a completed payment order.
To the extent the Trustee complains about the revocation of the Second TD Bank Transfer Order, there is no remedy under Article 4A. I do not decide whether another provision of the U.C.C. provides a remedy or whether the transaction might state a cause of action under another area of state law. The Trustee has not raised an alternative cause of action.
Summary judgment should be entered in favor of WSFS and against the Trustee on Count Three of the Second Amended Complaint.
In Count Six and Seven, the Trustee asserts claims for fraudulent transfers pursuant to 11-56-U.S.C. §§ 544 and 548. Although the Trustee recites the "actual intent" provisions of 6 Del. C. §§ 1304(a)(1) (for purposes of § 544) and 11 U.S.C. § 548(a)(1)(A),
The transfers at issue are the following: (1) the initial UMI-UDI Transfers and (2) the Setoff (i.e., UDI's involuntary transfer to WSFS that paid off the Loan). Collectively, I will refer them as the "Transfers."
The Trustee offers two (2) legal theories that the Transfers were constructively fraudulent.
First, the Trustee argues that the UMI-UDI Transfers went directly to WSFS. The Trustee contends that WSFS was the "initial transferee" because it exercised dominion and control over UDI's depository accounts by placing the PND restriction on UDI's accounts before taking the funds for its own benefit — even though the UMI-UDI Transfers were deposited initially into UDI's account before WSFS moved the money to the general ledger account and subsequently satisfied the Loan. (Tr. Mem. at 78). The Trustee further emphasizes that WSFS controlled the disposition of other monies in the UDI Accounts, including reversing and returning items previously attempted to be paid out by UDI (i.e., the Second TD Bank Transfer). (Tr. Mem. at 79). Under this initial transferee theory, the Trustee asserts that he may recover the Transfers because there was no consideration for the Transfers. There was no consideration because UMI owed no money to WSFS and WSFS provided no value to UMI (which was insolvent at the time) in return for the $5 million that it received.
The Trustee's alternative legal theory is that he may recover the Transfers from WSFS as a subsequent transferee. The basis for this position is quite conventional. He contends that UMI did not receive reasonably equivalent value for the transfers it made to UDI.
WSFS disputes every aspect of the Trustee's theory. As a threshold issue, WSFS argues that the Trustee has not identified the Transfers with specificity. Next, WSFS contends that not only was UDI the initial transferee, but also there was value supporting both the inbound transfers from UMI to UDI and the subsequent outbound transfers from UDI to WSFS (the consideration in the second transfer being repayment of an antecedent debt). Finally, WSFS contends that the Transfers made in satisfaction of UDI's outstanding debt (i.e., the Loan) were in good faith and without knowledge of their avoidability. See 11 U.S.C. § 550(b)(1).
For a constructive fraud claim, 11 U.S.C. § 548(a) provides:
In most proceedings, this constructive fraudulent transfer statutory verbiage can be distilled down to four (4) elements:
See, e.g., In re Dawley, 2005 WL 2077074, at *14 (Bankr.E.D.Pa. Aug. 10, 2005).
The party challenging the transfer bears the burden of proving all of the elements of a constructive fraudulent transfer claim. See, e.g., In re Fruehauf Trailer Corp., 444 F.3d 203, 211 (3d Cir. 2006); In re Plassein Int'l Corp., 405 B.R. 402, 411 (Bankr.D.Del.2009), aff'd, 428 B.R. 64 (D.Del.2010).
Frequently in § 548(a)(1)(B) litigation, the most heavily litigated issue is the third element: whether the debtor received reasonably equivalent value in the transaction. In this Circuit, courts employ a two (2) step process in determining whether a debtor received reasonably equivalent value in the form of indirect economic benefits in a particular transaction:
In re R.M.L., 92 F.3d 139, 152 (3d Cir.1996); Plassein Int'l Corp., 405 B.R. at 411; see also In re Fid. Bond & Mortg. Co., 340 B.R. 266, 287 (Bankr. E.D.Pa.2006), aff'd, 371 B.R. 708 (E.D.Pa. 2007). Because the purpose of the fraudulent transfer statute is to protect creditors, the court determines whether value was received from the vantage of the creditor. Fid. Bond & Mortg., 340 B.R. at 286. The inquiry is "what did the debtor give up and what did it receive that could benefit creditors." Id. (citing In re Joy Recovery Tech. Corp., 286 B.R. 54, 75 (Bankr.N.D.Ill. 2002)).
In this determination, "value... include[s] any benefit ... whether direct or indirect." Fruehauf Trailer Corp., 444 F.3d at 212 (citation omitted); Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646-47 (3d Cir.1991); In re Vaso Active Pharm., Inc., 2012 WL 4793241 (Bankr.D.Del., Oct. 9, 2012). The "touchstone" in the determination is whether the parties exchanged comparable "realizable commercial value." Mellon Bank, 945 F.2d at 647. Thus, if a debtor's "realizable going concern value after the
In the reasonably equivalent value inquiry, courts look to the totality of the circumstances, considering such factors as "(1) whether the transaction was at arm's length, (2) whether the transferee acted in good faith, and (3) the degree of difference between the fair market value of the assets transferred and the price paid." Plassein Int'l Corp., 405 B.R. at 411; accord Fid. Bond & Mortg., 340 B.R. at 287 (citing R.M.L., 92 F.3d at 145, 153). If a court concludes that the benefits the debtor received "are minimal and certainly not equivalent to the value of a substantial outlay of assets," a plaintiff need not prove the exact value conferred because the "amount" of value is then irrelevant. Fruehauf Trailer Corp., 444 F.3d at 214.
11 U.S.C. § 544(b)(1) provides that "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502...." Section 544(b) allows the Trustee to step into the shoes of an actual creditor who existed at the commencement of the bankruptcy case, and avoid the fraudulent transfers pursuant to state law.
The Trustee invokes 6 Del. C. §§ 1304 and 1305 of the Delaware fraudulent transfer statute as applicable state law under § 544(b).
6 Del. C. § 1304 provides:
6 Del. C. § 1305 provides:
In order to prevail under the Delaware constructive fraud transfer provisions, the Trustee must establish that:
In re Delta Petroleum Corp., 2015 WL 1577990, *18 (Bankr.D.Del. Apr. 2, 2015) (citing Brandt v. Trivest II, Inc. (In re Plassein Int'l Corp.), 2008 WL 1990315, *5 (Bankr.D.Del. May 5, 2008)).
The Trustee's lead theory hinges on the notion that WSFS was the initial transferee (i.e., the direct recipient) of the UMI-UDI Transfers.
Significantly, the concept of an "initial transferee" does not derive from the avoidance sections of the Bankruptcy Code. Rather, it is derived from 11 U.S.C. § 550, the Code provision that addresses a trustee's ability to recover property after establishing that a transfer is avoidable. Section 550 of the Code provides, in pertinent part:
11 U.S.C. § 550(a).
Section 550(a) does not define the term "initial transferee," however. In the absence of a clear statutory definition, courts have developed standards for determining whether a party is an "initial transferee."
Most courts, including a number of circuit courts of appeal, have concluded that mere initial receipt of a transfer does not always equate to initial transferee status. See 4 Norton Bankr.L. & Prac.3d § 70:2 (West 2015).
In Bonded Fin. Servs. v. European Am. Bank., 838 F.2d 890, 893 (7th Cir.1988) (emphasis added), the court explained:
The standard articulated in Bonded is known as the "dominion-and-control test," and has been widely adopted. See In re Hurtado, 342 F.3d 528, 533 (6th Cir.2003) (following In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52, 57 (2d Cir.1997)).
In In re Incomnet, Inc., 463 F.3d 1064 (9th Cir.2006), the Ninth Circuit articulated a distinction between "dominion" and "control." The focus of the dominion standard is "whether an entity had legal authority
The Incomnet court described the two (2) tests as "similar, [but] not indistinguishable." Id. at 1071. The dominion test focuses on legal title and the transferee's right to use the funds as it sees fit; the control test "takes a more gestalt view of the entire transaction to determine who... controlled the funds in question." Id.
After articulating the distinction between "dominion" and "control," the Incomnet court clarified that, in prior cases, the Ninth Circuit had adopted the dominion test to the exclusion of the control test. Id. at 1071 (citing In re Cohen, 300 F.3d 1097, 1102 n. 2 (9th Cir.2002)); see also In re Mortgage Store, Inc., 773 F.3d 990, 996 (9th Cir.2014) (reaffirming the "dominion" test articulated by Incomnet).
The Third Circuit has not adopted any specific test. The parties differ as to the proper test the court should employ to evaluate this issue.
The Trustee argues that this court should employ the combined "dominion and control test," set forth in Bonded Financial and focus on the transferee's relationship to the property. (Tr. Mem. at 74 (citing Perrino v. Salem, Inc., 243 B.R. 550, 561 (D.Me.1999)). In other words, in the case of funds held in an account, the Trustee urges the court to determine the terms under which the funds are held and to ascertain the debtor's interest in said funds. "Funds may not be the property of the party in whose account such funds reside, if such depositor's use of those funds is so restricted that he cannot control their use or disposition." (Tr. Mem. at 74-75 (citing In re Bank of New Eng., 165 B.R. 972, 977 (Bankr.D.Mass.1994))).
WSFS views both the facts and the law differently. WSFS recommends application of the "dominion" test, as set forth by Incomnet. WSFS argues that it never exercised dominion over the transfers from UMI (and, thus, cannot be an initial transferee) because it had no legal right to use those funds. WSFS describes the PND restriction as merely "a privileged cautionary measure [that] limited [WSFS'] discretionary provision of credit to UDI under the Cash Management Services Agreement." (WSFS Mem. at 119; Doc. # 206). Citing to Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133
Based on my review of the record, I agree with WSFS and conclude that the undisputed facts establish that WSFS lacked dominion or control over the UDI accounts sufficient to establish that WSFS was an initial transferee under § 550(a). Contrary to the picture drawn by the Trustee, the measures taken by WSFS between July 16 through July 19, 2009 did not absolutely restrict all outgoing transfers from UDI's account.
Most significantly, there is no evidence of any legal title change to the funds in UDI's accounts. Nor is there any indication that UDI was utterly helpless and without access to funds. As detailed in Part V.B., supra, for the few days the PND was in effect, WSFS continued to honor requests for transfers and otherwise made funds available to UDI. The PND merely suspended the funding of outgoing transfers with provisional or advance credit without review.
Therefore, I conclude that WSFS did not have the requisite dominion or control over UDI's accounts to render it an "initial transferee" of the UMI-UDI Transfers. WSFS was a subsequent transferee.
Having determined that WSFS was a subsequent transferee of the UMI-UDI Transfers, I now must evaluate the corollary issue: whether, as a result of the Setoff, WSFS was the recipient of a fraudulent transfer as a subsequent transferee.
In this scenario, the Trustee must establish that UMI did not receive reasonably equivalent value
The Trustee argues that UMI received no value for the transfers they made to UDI because UMI provided goods and services to UDI — i.e., there was no reason for UMI to transfer money to UDI. (Tr. at 68, n.27; Tr. Reply at 30-31). The Trustee posits that the funds should have flowed the other direction, i.e., from UDI to UMI. (Tr. Mem. at 68, n.27). As WSFS points out, however, it was the Trustee's burden to produce evidence demonstrating the lack of reasonably equivalent value. The Trustee has failed to submit any evidence other than his supposition that UDI did not provide value to UMI.
Moreover, in pressing for summary judgment, WSFS has not relied solely on the shortfall in the Trustee's case. WSFS
The Trustee has not quantified the inadequacy of any value UDI received from UMI, as is his burden. The only evidence in the summary judgment record is that the UMI-UDI Transfers were supported by some value. Thus, the Trustee lacks evidentiary support for a necessary element of his claim. In these circumstances, WSFS is entitled to summary judgment on this claim. See Polichuk, 506 B.R. at 423 ("the appropriate time for demonstrating that there is evidence that supports every element of ... the Trustee's claims (in response to the contention that no such evidence exists) is now, at summary judgment") (internal quotations omitted).
In Count Eight, the Trustee invokes 11 U.S.C. §§ 553(b) and 550 and seeks to avoid WSFS' $5 million Setoff against UDI's bank accounts.
Section § 553(b) provides:
11 U.S.C. § 553(b).
Section 553 allows a trustee to avoid the amount of its improvement in position within 90 days of the petition date. The mechanics of determining whether a creditor improved its position by setoff during the 90 day period is as follows:
In re Aspen Data Graphics, Inc., 109 B.R. 677, 684 (Bankr.E.D.Pa.1990) (citations omitted).
Ninety (90) days prior to the setoff, the Trustee contends that there was an "insufficiency" in excess of $5.75 million. (Second Am. Compl. ¶ 218). On the day that WSFS setoff the Loan, there was no insufficiency; the setoff paid off the indebtedness.
The Trustee's § 553(b) claim is dependent upon achieving substantive consolidation of UDI's estate with the existing bankruptcy estate
If August 4, 2010 is employed as the petition date, the Trustee's claim is doomed because WSFS' July 2009 setoff occurred far outside the ninety (90) day look back period of 11 U.S.C. § 553(b)(1)(A). Hence, in this adversary proceeding, the Trustee invokes the right reserved in the August 4, 2010 substantive consolidation order to seek extension of substantive consolidation to WSFS effective July 23, 2009 (the date UMI filed its bankruptcy petition). If UDI is treated as having filed a bankruptcy petition on July 23, 2009, the Trustee can satisfy the temporal ninety (90) day requirement in § 553(b).
In their memoranda, the parties sparred on the threshold issue whether, as a matter of law, the Trustee may even seek substantive consolidation as to WSFS.
WSFS argues that the Trustee may not wield substantive consolidation offensively, i.e., as a stratagem to create a § 553(b) claim against WSFS. (WSFS Mem. at 88). WSFS relies on Owens Corning, 419 F.3d 195 (3d Cir.2005), and asserts that substantive consolidation cannot be used to create causes of action to the detriment of creditors or to alter creditors' rights. WSFS also makes a more fact-specific based argument that it is being "singled out" by the Trustee and that such use of substantive consolidation is inappropriate and impermissible.
The Trustee responds that he is not singling out WSFS. The Trustee states that one aspect of the goal of substantive consolidation is to allow the estate to bring actions on behalf of the consolidated estates in order to bring assets back into the estate and for the benefit all creditors. The Trustee asserts that, from the outset, he sought substantive consolidation to create avoidance actions and raise an estate with the consolidated entities and that he merely deferred resolution of the issue as to WSFS.
On this threshold issue, the Trustee is correct.
Substantive consolidation is an equitable remedy. "It treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities (save for inter-entity liabilities, which are erased)." Owens Corning, 419 F.3d at 205 (quoting In re Genesis Health Ventures, Inc., 402 F.3d 416,
Owens Corning created a black letter law test for substantive consolidation in which the proponent must prove: "(i) prepetition [the entities to be consolidated] disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors." Id. at 211 (footnotes omitted).
The black letter law test is stated in general terms, leaving much to the exercise of the bankruptcy court's discretion. The Owens court sought to guide the bankruptcy court by stating the following limiting principles to be considered when a party seeks substantive consolidation:
Owens Corning, 419 F.3d at 211.
It is the fifth legal principle quoted above that is the foundation of WSFS' argument that extending substantive consolidation to it, at this time, is inappropriate. Respectfully, I disagree that the fifth legal principle controls the outcome here.
WSFS argues that I should consider the propriety of extending the substantive consolidation from the vantage point of July 18, 2011, the date the Trustee filed this adversary proceeding. Certainly, as of that date, WSFS can make a strong case that the Trustee's request for substantive consolidation appears inconsistent with Owens Corning. It has the appearance of a litigation tool targeting a single creditor, rather than as a remedy designed to do equity among numerous parties. However, this argument fails to take into account the prior procedural history of this case.
The Trustee's original motion for substantive consolidation encompassed WSFS. In the consolidation motion, the Trustee represented that a significant magnitude of inter-company transfers among the Affiliates occurred on a daily basis; assets of the companies were commingled; business records could not be reconciled without substantial expense; and certain large creditors relied upon the overall financial position of UMI effectively as a single entity. The factual circumstances alleged by the Trustee provided a facially plausible justification for substantive consolidation under Owens Corning.
Further, from the outset, the Trustee sought nunc pro tunc consolidation as a
Against this backdrop, no creditor objected to the Trustee's substantive consolidation request except WSFS. The Trustee and WSFS then struck the bargain described earlier in this Opinion, in which substantive consolidation was effected (except for WSFS), UDI was deemed a jointly administered chapter 7 debtor as to WSFS as of August 4, 2010, and the parties reserved all of their respective rights to seek or contest further substantive consolidation.
In effect, the parties' agreed to defer the substantive consolidation dispute through a "standstill agreement." To give effect to the parties' agreement, it is necessary to treat this litigation as resuming the dispute when they declared a truce in August 2010. It follows that the issue should be considered as if no substantive consolidation had occurred as to any of the non-UMI entities. Thus, if the Trustee can make out the case now that would have allowed him to obtain substantive consolidation over WSFS' objection as to all creditors (in 2010), he should be permitted to do so. To conclude otherwise would mean that, by obtaining substantive consolidation except as to WSFS in 2010, the Trustee did not preserve, but rather effectively waived, his right to later seek extension of substantive consolidation retroactive to July 23, 2009 as to WSFS. The parties' agreement, as incorporated in the August 4, 2010 substantive consolidation order, is to the contrary.
In these circumstances, the parties' agreement and fairness dictate that I now consider the extension of nunc pro tunc substantive consolidation to WSFS from the pre-substantive consolidation temporal
In sum, based on the particular circumstances of this case, I conclude that: (1) the Trustee's request for nunc pro tunc extension of substantive consolidation as to WSFS should be considered on its merits, and (2) therefore, the Trustee's setoff claim is not barred as a matter of law for failure to satisfy the ninety (90) day look back requirement of 11 U.S.C. § 553(b)(1)(A).
Other than debating the issue whether an attempted "offensive" use of substantive consolidation to create an avoidance claim against a single creditor barred its applicability in this case as a matter of law (thereby defeating the Trustee's § 553(b) setoff claim), neither party discussed or marshaled the evidence generated in discovery on the questions whether the Trustee has or lacks evidence to support (1) substantive consolidation under Owens Corning and (2) the elements of a setoff claim under § 553(b) — in particular, whether the "insufficiency" decreased during the ninety (90) day period prior to the bankruptcy filing. In these circumstances, summary judgment on the Trustee's setoff claim should not be granted because there are disputed issues of material fact.
For the reasons explained below, I cannot enter a final, dispositive order granting summary judgment to WSFS on Counts One, Two, Three, Six and Seven.
As stated in numerous reported opinions, bankruptcy subject matter jurisdiction is conferred by 28 U.S.C. § 1334(a) and (b) potentially extends to four (4) types of title 11 matters:
See, e.g., In re Combustion Engineering, Inc., 391 F.3d 190, 225-26 (3d Cir.2004). This jurisdiction is vested in the district court, but the district court has the authority to refer bankruptcy cases and proceedings to the bankruptcy court. 28 U.S.C. § 157(a). In this district, the district court has done so. See Standing Orders of the District Court dated July 25, 1984 and November 8, 1990.
According to the text of the Judicial Code, all bankruptcy matters, other than the bankruptcy case itself, may be classified into two (2) categories:
See 28 U.S.C. § 157(b), (c); In re Mullarkey, 536 F.3d 215, 221 (3d Cir.2008).
The core/non-core distinction is significant because "[a] correct determination of whether a matter is core or non-core establishes the bankruptcy judge's level of authority." In re Seven Fields Dev. Corp., 505 F.3d 237, 254 (3d Cir.2007). The bankruptcy court has the statutory authority
In 2011, the Supreme Court's decision in Stern v. Marshall, created a third category of matters in the universe governing the division of authority between the district court and the bankruptcy court. In Stern, the Supreme Court held that Article III of the U.S. Constitution prohibits bankruptcy courts from issuing final orders in certain matters Congress classified as core in 28 U.S.C. § 157(b). Such claims (commonly referred to as "Stern" claims) are now treated in most, if not all, respects as non-core. See Wellness Int'l Network, ___ U.S. ___, 135 S.Ct. 1932, 191 L.Ed.2d 911.
Thus, to determine the scope of its decision-making authority, the bankruptcy court must now undertake a two-step process. First, as it did prior to Stern, it must ascertain whether 28 U.S.C. § 157(b) designates a particular claim as core or non-core. Second, if the court determines the claim to be core (statutorily speaking), the court then must consider whether the claim is a Stern claim.
In this case, the Trustee has asserted that all of his claims are core. (Second Am. Compl. ¶ 3, Adv. No. 11-512, Doc. # 170). WSFS disputes this. (Answer to Second Am. Compl. ¶ 3, Adv. No. 11-512, Doc. # 176).
The concept of a core proceeding is anchored in two (2) of the jurisdictional bases stated in 28 U.S.C. § 1334(b) for the exercise of bankruptcy jurisdiction. "[C]ore proceedings consist of two subsets: those that `arise under' and those that `arise in' the bankruptcy case." Porter, 295 B.R. at 535. At bottom, "[c]ore proceedings represent those disputes that are so intertwined with the bankruptcy process that Congress has the power, under Article I of the Constitution, to direct a non-tenured judicial officer (i.e., bankruptcy judge) to render a final determination of their merits. Id.
The Court of Appeals has provided guidance for the determination whether a claim is core or non-core.
In re Guild and Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir.1996) (quoting In re Wood, 825 F.2d 90, 97 (5th Cir.1987)); accord In re Exide Technologies, 544 F.3d 196, 206 (3d Cir.2008); Halper, 164 F.3d at 836. Of course, as part of the process of applying these principles, the bankruptcy court must consult the illustrative examples of core proceedings set forth in 28 U.S.C. § 157(b). See Exide Technologies, 544 F.3d at 206.
No extended discussion is necessary to explain why the Trustee's first three (3) claims are non-core. These claims — (a) in
The remaining two (2) claims subject to dismissal (Counts Six and Seven) are fraudulent transfer claims. Congress has classified such claims as core proceedings. See 28 U.S.C. § 157(b)(2)(H). However, it also is necessary to evaluate whether they are Stern claims.
The reported opinions discussing whether a bankruptcy court has the constitutional authority to enter a final judgment in a fraudulent transfer action brought pursuant to 11 U.S.C. § 544 or 548 are legion. See Construction and Application of United States Supreme Court Decision in Stern v. Marshall, 77 A.L.R. Fed. 2d 23, §§ 23-24 (West 2015). I will not burden this Opinion with a lengthy analysis of the issue. Suffice it to say that I agree with the court's reasoning in In re Int'l Auction & Appraisal Servs. LLC, 493 B.R. 460, 464-65 (Bankr.M.D.Pa.2013). In Int'l Auction, the court held that the Supreme Court's rationale in Stern, when combined with the Court's prior holding that the right to recover fraudulent transfers is a "private right," not a "public right," see Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), compels the conclusion that the bankruptcy court lacks the authority to enter a final judgment in such matters.
In this bankruptcy case, where WSFS has not filed a proof of claim, and therefore resolution of the Trustee's fraudulent transfer claims can have no impact on the court's core function of allowing and disallowing claims against the bankruptcy estate, see Stern, 131 S.Ct. at 2616-17, this court lacks the authority to enter a final order with respect to those claims.
Having determined that WSFS' summary judgment motion should be granted, but that the bankruptcy court may not enter a final order dismissing Counts One, Two, Three, Six and Seven, what is the appropriate disposition of WSFS' motion?
The issue is complicated by the fact that one (1) claim — Count Eight (11 U.S.C. § 553) — has survived summary judgment. Had I concluded that WSFS was entitled to summary judgment on all of the Trustee's claims, I simply could have issued a report and recommendation to the district court for appropriate disposition of all of the Trustee's claims. However, because the district court referred this adversary proceeding to this court and the proceeding has not concluded, it would be premature for the bankruptcy court to issue a report and recommendation to the district recommending dismissal of some, but not all, of the Trustee's claims. Doing so would be the functional equivalent of permitting an interlocutory appeal of an order dismissing some, but not all, of a plaintiff's claims, in a proceeding in which the bankruptcy court has the authority to enter a final judgment. By analogy, that would run afoul of the strong policy against piecemeal appeals. See generally In re G-I Holdings, Inc., 2005 WL 3370020, at *5 (D.N.J. Dec. 9, 2005); see also Gold v. Johns-Manville Sales Corp., 723 F.2d 1068, 1072 (3d Cir.1983) (discussing sparing use of collateral order doctrine).
My solution to the problem is to issue an order that dismisses the Trustee's claims
For the reasons set forth above, I will deny the Trustee's motion for summary judgment and grant WSFS' motion for summary judgment in part by dismissing for purposes of trial in the bankruptcy court Counts One, Two, Three, Six and Seven. Count Eight survives summary judgment and will proceed toward trial.
An appropriate order follows.
It is hereby
(Declaration of Jashveer Singh; Bky. No. 09-15404, Doc. #319) (emphasis added). This affidavit was filed in April 2010 in connection with a contested matter in the main bankruptcy case.
(Id., WSFS 01533).
In discovery, WSFS produced a seven (7) page General Terms and Conditions Attachment. It provided that either party could terminate its obligations under the CMA on thirty (30) days notice. (Id., WSFS 01296, CMA Attachment ¶ 8(a)). But it also allowed WSFS to terminate the CMA immediately with or without prior notice in twelve (12) enumerated situations, including:
These provisions are important insofar as the Trustee's claims are based, in part, on the lack of prior notice before WSFS exercised certain default remedies.
Significantly, however, the existence and authenticity of the General Terms and Conditions Attachment is in dispute. WSFS did not produce the General Terms and Conditions Attachment until the last day of discovery, alleging that it found the document belatedly on an internal computer drive. The Trustee considers these circumstances suspicious and disputes the authenticity of the document.
I have not relied on the General Terms and Conditions Attachment in ruling on the pending motions.
(Id. at 48-49).
(Ex. W-44, WSFS 00541).
INTERPOL, http://www.interpol.int/INTERPOL-expertise/Notices (last visited November 10, 2015) (emphasis added).
As further explained in the U.S. Attorneys' Manual, a Red Notice "is the closest instrument to an international arrest warrant in use today." Office of he United States Attorneys, http://www.justice.gov/usam/criminal-resource-manual-611-interpol-red-notices (last visited November 10, 2015).
(WSFS Memorandum of Law at 35-36 ("WSFS Mem.") (citing Ex. W-7, Brogan Dep. at 78-82).
(Trustee's Memorandum of Law in Support of Motion for Summary Judgment at ¶¶ 68-70).
(Id. at ¶¶ 78-80).
(Ex. W-8, Roberts Report at 4).
Polichuk, 506 B.R. at 405 (quoting 11-56 Moore's Federal Practice — Civil § 56.40[1](b)[iv] (LexisNexis 2013)) (emphasis omitted).
In his Reply brief, the Trustee put forward a variation on that argument. He asserted, for the first time, that WSFS' exercise of its loan default remedies in a manner that breached its CMA obligations were taken in breach of WSFS' prior notice obligation
In a slight variation, the Eleventh Circuit applies the "conduit or control" test as an "equitable exception" to the literal or rigid interpretation of the statutory term "initial transferee," most commonly thought of as the first recipient of fraudulently-transferred funds. In re Harwell, 628 F.3d 1312, 1322 (11th Cir.2010). In Harwell, the circuit court added "good faith" as an element of the equitable exception:
Id.
The Trustee's deposition testimony provides little support to WSFS. The testimony merely reflects the state of affairs existing
The June 14, 2012 order's dismissal of Counts Four and Nine also was for purposes of trial in the bankruptcy court, not the entry of a final order or judgment of dismissal. Consequently, the comprehensive Report and Recommendation that I will transmit to the bankruptcy court at the conclusion of this adversary proceeding also will recommend that the district court enter an appropriate order with respect to those claims.
