JEFFREY R. HUGHES, Bankruptcy Judge.
Trustee Marcia Meoli has sued The Huntington National Bank ("Huntington") to recover over $72 million dollars in transfers
There is jurisdiction to hear this adversary proceeding. 28 U.S.C. §§ 1334 and 157(b)(1). See also W.D. Mich. L.Civ.R. 83.2. The issue raised is also a core matter. 28 U.S.C. § 157(b)(2)(H). However, for the reasons stated in a previous opinion,
Summary judgment is appropriate if there is no genuine issue of fact and the moving party is entitled to judgment as a matter of law. FED. R. BANKR.P. 7056 and FED.R.CIV.P. 56(a). The court, in considering such a motion, is to focus only upon material facts; that is, the court is to consider only those facts that are important vis-a-vis the applicable substantive law. However, in determining whether there is a genuine dispute, the court is also to draw all inferences from the record before it in the light most favorable to the non-moving party. But if that party could not prevail before a rational trier of fact under even these circumstances, summary judgment must be granted.
Huntington is a regional bank with its headquarters in Columbus, Ohio. Cyberco had a short but tumultuous relationship with Huntington. It lasted only from September 2002 to October 2004.
Cyberco's lending arrangement with Huntington was typical for a company its size. Included were a revolving line of credit, some term notes, and a few letters of credit. Cyberco's indebtedness to Huntington was originally about $9 million dollars. However, by the spring of 2004 it had grown to over $16 million dollars.
Like many commercial loans, Cyberco's obligation was collateralized by most of its assets, including Cyberco's substantial accounts receivable. Huntington had intended to monitor those receivables through a lockbox. However, what Huntington discovered about a year into the relationship was that Cyberco was instead receiving most of its cash through large and regular transfers from Teleservices. No one at Huntington recognized that name and, when asked, Barton Watson, Cyberco's CEO, answered Huntington's inquiries by falsely explaining that Teleservices was a related company and that it was merely collecting Cyberco's own receivables on
Huntington learned of the Teleservices transfers because Cyberco maintained its bank accounts at Huntington. Cyberco had deposited a $2.3 million dollar check from Teleservices that Teleservices' own bank, Silicon Valley, had returned for insufficient funds. While the check ultimately cleared, the incident prompted a meeting with Watson and it was at this meeting that Watson lied about Teleservices.
Watson was both intelligent and intimidating. He also was a crook. Local court records revealed that the National Association of Securities Dealers had permanently revoked his license because of questionable conduct. There were also civil judgments against him in Michigan for bank fraud and in California for an earlier fraud. One scam had even landed him in federal prison for three years.
Although Huntington did not learn of Watson's past until months later, the relationship was already sufficiently strained by the fall of 2003 to convince Huntington that Cyberco should leave the bank. Here is a brief chronology of subsequent events:
Cyberco held itself out as providing computer-related services and Cyberco still had some real customers in 2002 when Huntington became involved. However, by that time, Watson was resorting more and more to fraud to generate Cyberco's revenues. Indeed, by late 2004 virtually all of Cyberco's income was illegitimate.
Watson's scheme was simple.
Teleservices, of course, did not keep its ill-gotten gains. Rather, it funneled them back to Cyberco and Cyberco in turn would use its own accounts at Huntington to (1) pay the ever-growing number of leases and other obligations Cyberco had signed in connection with prior nonexistent purchases; and (2) pay Cyberco's other operating expenses, including the handsome salaries and expense accounts of
Trustee has sued Huntington on the theory that it received fraudulent transfers from Teleservices that are avoidable under either Sections 548 or 544(b).
Several previous motions and a twelve-day trial have already decided these critical issues:
Trustee's pending motion targets the remaining issues. Most are set forth in this court's May 24, 2011 order.
Huntington is not contesting every issue identified in the May 24, 2011 Order.
Huntington's insistence that Teleservices' Silicon Valley account actually belonged to Cyberco is only the most recent variation of an all too familiar theme—that Teleservices was "fake."
Nor has Huntington offered at this time anything else to make its argument more persuasive. There has never been any question that Teleservices was a shell corporation whose sole purpose was to perpetrate a fraud. And the court does not have to be reminded by Huntington yet again that Teleservices had no assets to speak of beyond some bank accounts nor directors, officers, or employees to act upon its behalf.
Indeed, it is only Huntington's attempt to switch scoundrels that distinguishes this motion from the rest. Huntington's past efforts have always pegged Watson as the "accomplished fraudster."
Yet Huntington prefers today to reverse these roles by having Cyberco be the master and Watson the tool. Huntington's new story is that Cyberco, not Watson, was in command and that it was Cyberco who "solely performed these actions."
If all the world's a stage, then Huntington certainly has reason to recast roles here. But Huntington had it right the first time—Watson was the real star of this production. Cyberco and Teleservices were just his props. Or, as Huntington itself has explained in the past "Watson. . .
But Watson is not on trial here. This court's task is instead to apply the fraudulent transfer laws within the legal framework that Watson created and within which all, including Huntington, operated as the fraud ran its course. Huntington, for obvious reasons, would like to replace this "reality" with a new one that better suits its defenses. However, as Huntington has acknowledged again and again during this litigation, it was Watson who was the fraudster, not Cyberco. And, in order to accomplish that deceit, Watson clearly needed two separate corporations, not just one.
Therefore, it is not by happenstance that Watson arranged for his attorneys to transform a Delaware shelf corporation into Teleservices.
It is also difficult to imagine how Watson could have misled Huntington as he did had Cyberco owned the Silicon Valley account instead. Remember, all of Cyberco's receivables were supposed to have been deposited by its customers into a Huntington lockbox. Watson's explanation for why that was not happening—that its receivables were being collected by a related company, Teleservices—was certainly plausible. As one of Huntington's employees testified, "[I]t appeared they were intercompany deposits and we see that sort of thing all the time."
Huntington argues at the very least that a genuine issue of fact exists concerning both Teleservices' corporate status and Cyberco's actual ownership of the Silicon Valley account because of what Teleservices itself filed in the underlying bankruptcy proceeding. By way of background, Dan Yeomans, operating through Management Services Realty, Inc., had been appointed as the receiver for both Cyberco and Teleservices at about the same time the FBI raided Cyberco's offices in late November 2004. Yeomans' tenure as Cyberco's receiver was brief because Cyberco was almost immediately placed into an involuntary Chapter 7 proceeding. However, two months passed before Yeomans himself filed a voluntary Chapter 7 petition on Teleservices' behalf. Yeomans also prepared Teleservices' bankruptcy schedules which, as Huntington points out, do not include the Silicon Valley account or anything else as being owned by Teleservices. Moreover, Huntington notes that Yeomans "took care to put quotation marks around the word `corporation' when describing Teleservices. . . ." Hunt. Br., DN 382 at 22.
What Huntington would like this court to infer from all of this is that Yeomans himself had concluded that Teleservices was fake and that Cyberco in fact owned the Silicon Valley account. However, Huntington has offered no affidavit from Yeomans that he actually reached either of these conclusions. Moreover, all agree that the Silicon Valley account was held in Teleservices' name, not Cyberco's. Why, then, did not the schedules at least acknowledge its existence? It is more likely that Yeomans simply was not aware of either the Silicon Valley account or the other two Teleservices accounts that he also did not list.
However, even had Yeomans been aware of the account at that time, the question remains as to why his conclusion concerning its ownership or, for that matter, Teleservices' corporate status, matters. Yeomans was certainly entitled to his opinion,
This court also recognizes, as perhaps Yeomans did, that Teleservices had no directors or officers to conduct its affairs. However, the same appears to be true for Cyberco. As Huntington itself pointed out in an earlier brief, "neither Cyberco nor Teleservices observed any formalities. Neither company held shareholder meetings or director meetings . . . Horton and Roepke [two coconspirators] . . . simply made up records reflecting action by the boards of directors as needed on an ad hoc basis."
Nor does this court give any weight to Cyberco having employees and Teleservices having none, for each had its own role in the overall scheme. Watson had no choice but to staff Cyberco with employees. The same is true for the offices it maintained, for Watson needed the illusion of a fully operational Cyberco to trick Huntington and the equipment finance companies into turning over the millions of dollars that they did. But Watson required not a single employee or an asset beyond a California bank account in order for Teleservices to play its part. Fictitious persons sufficed, as Watson so ably demonstrated.
In sum, this court rejects the spin Huntington now wants to give to what transpired. There is no question that Teleservices was the bare bones of what the law is willing to recognize as a separate and distinct legal entity. However, Teleservices was no more fake than Cyberco or, for that matter, Huntington itself, at least in the eyes of the law. Corporations by their very nature are figments of the imagination.
Huntington justifies its contention that the Silicon Valley account actually belonged to Cyberco in part with its suggestion that Teleservices was merely Cyberco's alter ego. This is not the first time that Huntington has made this argument either.
It is important to distinguish between alter ego as a legal doctrine and alter ego as simply a description. Webster's defines an alter ego as a second self.
Courts, therefore, frequently refer to an alter ego when asked to scrutinize close corporate relationships. However, the term's descriptive value should not be confused with its application as a remedy under the law, for the latter is a much narrower concept. In a sense, all closely held corporations are the alter egos of their shareholders. After all, a closely held corporation is nothing more than a device for an individual to conduct his affairs as if he were another. What makes this game of pretend so attractive is that the law allows him to play without personal risk by providing an absolute defense to the corporation's debt should the game go poorly.
Limiting liability in this fashion certainly serves the public interest. For example, protecting shareholders from the liabilities of their corporations encourages investment. However, like many good ideas, the corporate artifice is subject to abuse and it
Courts have traditionally responded to such situations by "piercing the corporate veil." In less colorful terms, this means that the protection afforded by the corporate form will be denied, thereby exposing the abusive shareholder to his corporation's debts. Likewise, courts have on occasion pierced the veil in reverse by allowing the shareholder's creditors to proceed against the corporation.
As for justification, it is simple—corporations are creatures of state or federal law. Therefore, it follows that the law can fashion the terms of their existence any way it pleases, including a disregard of the corporation's "separateness" altogether whenever there has been abuse. It is not surprising, then, that any discussion concerning the legal application of alter ego theory inevitably includes references to justice and equity as well.
The court has offered this brief explanation to show why Huntington's reliance upon this legal doctrine is misplaced. Huntington is not, for example, seeking to pierce Teleservices' veil so that it can recover against Cyberco as well. Huntington has always had a claim against Cyberco that it could enforce. Indeed, the dispute here is about Huntington improperly collecting that claim by accepting property that had been fraudulently transferred from another.
Nor is Huntington at this point arguing that the veil should be pierced in reverse— i.e., that Huntington should be allowed a claim against Teleservices on the theory that Teleservices, or better, Teleservices' bankruptcy trustee, should be precluded from denying Cyberco's separateness from it.
Wells v. Firestone Tire and Rubber Co.
It is in this context, then, that Wells must be read. Nor is anything in Wells unique. It recognized, as all courts do, that a corporation's separate identity is to be respected. However, it also recognized that Michigan courts have allowed the corporate veil to be pierced to protect the corporation's creditors just as other courts have. And finally, it acknowledged that the doctrine might also be invoked by the shareholder "where the equities are compelling" (i.e., reverse piercing). Wells, 421 Mich. at 651, 364 N.W.2d at 674.
But again, piercing Teleservices' veil in one direction or another to expand a creditor's reach is not what is at issue here. Nor, for that matter, has Huntington offered anything in the way of competing equities to warrant the extraordinary reconstruction of Cyberco and Teleservices that it seeks. As Wells itself confirms, alter ego theory and justice go hand in hand.
Id. at 650, 364 N.W.2d at 674.
Is, though, what Huntington requests just? Teleservices may not have had any legitimate purpose and it may not have had any assets to speak of apart from the Silicon Valley account. But Teleservices most certainly had creditors, for every equipment finance company that Watson tricked transferred its money to Teleservices, not Cyberco. As such, each of those companies has the legal right to demand from Teleservices the return of its money.
On the other hand, this court perceives no corresponding injustice befalling Huntington if Teleservices and Cyberco are left apart. While doing so certainly exposes Huntington to substantial liability under Section 550(a), Section 550(b)(1) in turn provided Huntington with an opportunity to avoid that liability altogether. Huntington has only itself to blame that it was unable to establish the good faith that the Section 550(b)(1) defense requires.
Huntington also relies upon Nordberg v. Sanchez (In re Chase & Sanborn Corp.)
Nordberg involved a Section 548 avoidance action as well. The challenged transfer there was a $350,000 check written by the debtor, Chase & Sanborn, to Carolina Sanchez, a secretary. However, that transfer was only part of a much larger series of transactions that the trial court had described as "bewildering." Nordberg, 813 F.2d at 1179. Briefly, Alberto Duque, who controlled Chase & Sanborn, had borrowed money from a friend, Londono, and had then borrowed money again to repay Londono. A portion of this second loan found its way through an account that belonged to Chase & Sanborn and it was that account upon which the $350,000 check had been written. The account had been inactive and Duque had reactivated it only in order to launder the source of the borrowed funds. Indeed, the money remained in the reopened account for only two days before Chase & Sanborn wrote the check and closed it once again. Id. at 1182. As for Sanchez, she likewise held the funds only briefly before sending them on to Londono, who then repaid City National, the bank from whom the original loan was made.
Nordberg focused on whether Chase & Sanborn had transferred anything to Sanchez in the first place. The reviewing panel disagreed with the trial court's finding that another entity was the source of the transfer, concluding instead that the $350,000 check had come from a Chase & Sanborn account.
The panel, in making its decision, believed that it was addressing an issue of first impression.
Id. at 1180.
However, one must ask whether Nordberg had to approach the problem the way it did. What clearly concerned the panel was the prospect of a windfall at some innocent's expense.
But there are other provisions in the Code that already protect against such outcomes. For example, if Londono and City National were in fact innocent, then one would assume that the Section 550(b)(1) defense would have protected them from any recovery even had the panel found the transfer itself avoidable under Section 548.
Granted, Sanchez, as the initial transferee, would not have had the same protection under Section 548(c) since her exchange with Chase & Sanborn had been gratuitous. However, Sanchez's good faith under that section is at least suspect, for Section 548(c) good faith is measured by the recipient's honesty.
The point is that the panel in Nordberg did not have to venture into the uncharted waters that it did to right the perceived wrong. It could have relied instead upon the established Section 548(c) and Section 550(b)(1) defenses, leaving untouched what the panel itself acknowledged had been up to then the accepted rule under both preference and fraudulent transfer law.
Id. at 1181.
Nordberg, 813 F.2d at 1181.
Of course, the problem with Nordberg's solution is that nothing in the two sections compared suggests the distinction made. To the contrary, both Section 547 and Section 548 use identical language— "transfer of an interest of the debtor in property"—to describe what is to be avoided as either a preference or a fraudulent transfer. Therefore, while the debtor's control over the interest in question is certainly relevant under either circumstance, there is nothing in these two sections to suggest that a greater degree of control is needed when the avoidance is to be made under Section 548. Moreover, other provisions—to wit, Sections 548(c) and 550(b)—already address the panel's concern of the estate receiving an undeserved windfall at an innocent's expense. Indeed, in creating these defenses, Congress gave the exchange of value a prominent role. In other words, with the exception of Section 550(b)(2) transferees, recipients of gratuitous transfers must account even when they have otherwise taken in good faith. Consequently, one must question a "between the lines" judicial interpretation of Section 548 that relieves these very same gratuitous recipients— i.e., Nordberg's noncreditors—of this explicit obligation to account. Nor is this court's skepticism diminished when it also takes into consideration that Nordberg's interpretation of Section 548 conflicts with identical language in the Code section immediately preceding it. As the Supreme Court itself has said: "A term appearing in a statutory text is generally read the same way each time it appears."
Nordberg also leaves unanswered the question of how innocent creditors, as opposed to innocent noncreditors, are to be treated under Section 548. Assume, for example, that Duque had also intended to use the $350,000 Sanchez received to pay her for some past due salary Chase & Sanborn owed. Sanchez would still have been accountable for a constructively fraudulent transfer since less than reasonable value had been exchanged. Cf. 11 U.S.C. § 548(a)(1)(B). On the other hand, Sanchez would not have had to account for the wages paid assuming that she was in fact a good faith recipient and the transfer
In sum, this court does not find Nordberg persuasive. Moreover, the case at hand is distinguishable. Nordberg is unusual because the principal of the debtor (i.e., Duque) not only was directing where the funds were to go; he was also the source of the funds being laundered.
And finally, even if Nordberg is on point, In re Hurtado,
Huntington also relies upon Semaan
However, Semaan is itself a case whose outcome was dictated by peculiar facts. Granted, that decision also involved a bank account held in the name of one person with actual ownership then being associated with another. However, the similarity ends there, for the issue in Semaan was over the proper application of an evidentiary rule as part of a state criminal proceeding. Specifically, the prosecution had frozen an account held in the name of Marie, the accused's sister-in-law, on the theory that the funds were traceable to him. There was a question, though, as to whether Marie even existed. She supposedly lived in Beirut. However, the only evidence of either her or her interest in the account was an affidavit signed by her supposed attorney.
The trial court, after an extensive hearing, concluded that the account belonged to the accused and, therefore, that the seizure was proper. 64 Cal.Rptr.3d 1, 163 P.3d at 952. However, the lower appellate court determined that California's rules of evidence created a presumption of ownership in Marie's favor. As such, it concluded that the trial court had erred because the prosecution had failed to rebut that presumption with clear and convincing evidence. Id.
The question, then, before the California Supreme Court was only whether the lower appellate court had properly applied that evidentiary rule. And that court in turn determined that the intermediate court had erred by using the wrong rule. It concluded that another evidentiary rule applied and that Marie, not the accused, had the burden of proving ownership under that different rule. Semaan, 64 Cal.Rptr.3d 1, 163 P.3d at 955. Indeed, it is even another rule of evidence that Huntington refers to in its brief as creating
Id. at 953-54.
This court, though, is not deciding rights to property seized as part of a criminal forfeiture in California. Rather, the issue here is a federal one—to wit, whether Trustee, as part of this bankruptcy proceeding, may recover from Huntington fraudulent transfers made by Teleservices from its Silicon Valley account. Moreover, this court has already applied evidentiary rules appropriate for this proceeding to evaluate facts that both sides have presented in exhaustive detail. Nor have burdens of going forward been ignored, as evidenced by Huntington's own failure to meet its burden with respect to Section 550(b)(1) good faith.
Even if, as this court has determined, all of the wires and checks from the Silicon Valley account are to be treated as avoidable transfers from Teleservices, Huntington contests Trustee's further contention that it should be accountable for the over $55 million that was deposited with Huntington but never used to pay down the Cyberco debt.
Huntington's status as both Cyberco's depository bank and its lender complicates analysis of this aspect of the case, for each relationship in its own right creates the prospect of a Section 550 recovery. Huntington would have it that no transfer occurred for purposes of Section 550(a) with respect to the funds deposited into Cyberco's accounts until Huntington actually exercised its creditor rights against those accounts by either setoff or the enforcement
There is, of course, no question that Huntington's setoff of Cyberco's accounts to repay what it was owed exhibited Huntington's dominion over that account. However, Huntington's rights arising from the account relationship itself also permits for the type of domination that Bonded Financial speaks of. As Huntington concedes, its status as Cyberco's depository bank under these accounts resulted in a debt being owed each time Cyberco deposited a transfer from Teleservices.
However, as obvious as the answers to these questions may seem, Bonded Financial and other courts have determined that the mere deposit of an avoided transfer into an account does not make the depository bank accountable as a subsequent transferee under Section 550(a)(2). This court, though, suggests that these cases have confused the bank's collection of the deposit with the deposit itself and that it is that confusion that has led these courts to conclude as they have. Therefore, it is helpful to consider separately these very different banking functions in order to appreciate why the former does not give rise
It is actually tempting to view the collecting bank as the "initial transferee" of the avoided transfer with its customer in turn being the "entity for whose benefit such transfer was made." 11 U.S.C. § 550(a)(1). Indeed, it was this very argument by the trustee in Bonded Financial that prompted the panel's declaration there that dominion, as opposed to receipt, should dictate who is to be liable as the initial transferee under that section.
Exchanging wealth in this fashion, though, is both inefficient and risky. Could not Teleservices and Cyberco have also worked out another arrangement whereby their two banks, Silicon Valley and Huntington, arranged for the exchange? And in turn could not Silicon Valley and Huntington have forgone the suitcases altogether and accomplished the same exchange of wealth between their two customers through a few accounting entries?
The point, of course, is that banks are not initial transferees when their involvement in a transfer is simply to facilitate the same. Therefore, it makes no difference in this instance whether Huntington accepted Teleservices' wires on Cyberco's behalf or whether Cyberco had had Huntington pick up suitcases of cash on its behalf instead. In either instance, Cyberco, not Huntington, would have been the one accountable to Trustee as the intended initial transferee of the now avoided transfer.
Bonded Financial's analysis is no different. It involved $200,000 that the defendant, European American Bank ("EAB"), had received from Bonded Financial Services, a debtor corporation controlled by Mike Ryan. Although EAB was the check's payee, EAB also had instructions to credit that amount to Ryan's account, which it did. The $200,000 then remained on deposit there until Ryan directed EAB ten days later to apply it against a debt that Ryan himself owed EAB.
Bonded Financial's trustee wanted EAB to be treated as the initial transferee. After all, it was the first to have received the check. The panel, though, rejected that argument, determining instead that "dominion over the money or other asset, the right to put money to one's own purpose" was the dispositive test. Bonded Financial, 838 F.2d at 893. And by that measure it was clear to the panel that Ryan, as opposed to EAB, was the initial transferee. While EAB may have received the check, EAB had no actual control over its disposition because of the directions it had concerning the check's deposit. As the panel famously put it, Ryan could have invested "the whole $200,000 in lottery tickets or uranium stocks." Id. at 894. Therefore, Ryan, not EAB, had to be the initial transferee.
Bonded Financial, 838 F.2d at 893.
However, this court disagrees with Bonded Financial's further conclusion that EAB did not become a subsequent transferee of the deposit under Section 550(a)(2) until it finally was directed by Ryan to exercise its setoff rights a week or so later. According to the panel, it was not until that point that EAB gained "dominion" over the funds. Id. at 894. But with all due respect, Bonded Financial overlooked the fact that actual ownership of the funds had already changed upon deposit. There is no question that Ryan continued to control the account into which the funds were credited in the sense that he could have at any time demanded EAB to pay him or whomever he chose what had previously been deposited. Indeed, Ryan's direction to EAB to setoff its indebtedness against the account exemplified this type of control. However, these rights arose only because Ryan was EAB's creditor, and an unsecured one at that. Again, as Huntington readily acknowledges, the relationship between a depositor and its bank is simply that of a creditor and debtor. Therefore, the agency that had existed between EAB and Ryan concerning the check's collection evaporated the moment EAB credited the amount collected to Ryan's account as instructed. In its place was a new relationship in which EAB now had unrestricted use of the funds. Or, to put it in Bonded Financial's own terms, "the right to put the money to one's own purposes"
To illustrate this point, consider again the hypothetical of Teleservices transacting business with suitcases of cash and assume that Huntington, having taken delivery of a suitcase on Cyberco's behalf, has now contacted Cyberco about picking it up. Had Cyberco done so, Huntington would have preserved its status as simply the facilitator of the intended transfer from Teleservices to Cyberco. However, if Cyberco had chosen instead to deposit that cash with Huntington, Huntington could have used the cash as it pleased, for the deposit agreement it had with Cyberco allowed it to do exactly that. The only caveat would have been Huntington's overall obligation to maintain sufficient liquidity
Banking, then, is at its simplest nothing more than borrowing from depositors at one rate and re-lending to others at a higher rate. Indeed, this court cannot find a better explanation of the kind of control a bank exercises over its customers' deposits than in New York Cnty. Nat'l Bank v. Massey, a case that Huntington itself repeatedly cites as dispositive.
192 U.S. 138, 145, 24 S.Ct. 199, 200-01, 48 L.Ed. 380 (1904) (citations omitted) (emphasis added).
In short, a bank can invest its customers deposits as it likes, restrained only by a hopefully watchful regulator's eye and its own self-restraint. Indeed, if recent events reflect the norm, it is not all that farfetched to imagine even "lottery tickets" and "uranium stocks" being included in a bank's investment portfolio.
This court suspects that Bonded Financial, like Nordberg, was afraid that innocent transferees would suffer at the expense of undeserving estates if it found that EAB had controlled its customer's account any earlier than it did. Indeed,
Hunt. Br., DN 382 at 1.
These concerns, though, are already addressed through Section 550(a)(2)'s protection of good faith transferees who take for value. For instance, had Bonded Financial instead treated the earlier deposit into EAB's account as the Section 550(a)(2) transfer, EAB would have still been exonerated under Section 550(b)(1) because of the panel's further conclusion that EAB had taken in good faith and without knowledge
Therefore, Bonded Financial's suggestion that something more is required of a depository bank to control the money in its customer's account is no more valid than Nordberg's conclusion that something more was required for Chase & Sanborn to have controlled the gratuitous transfer it had received. What is important in Bonded Financial was EAB's own good faith and lack of knowledge regarding the avoidability of the deposit. Unfortunately for Huntington, it was not able to establish the same good faith and lack of knowledge regarding the deposits Cyberco was making with it.
Huntington, in short, is that rare depository bank who cannot seek refuge behind Section 550(b)(1)'s protective shield.
Teleservices, 444 B.R. at 842 n. 260.
The same point can also be made with the suitcases of cash example previously used. Had, for instance, Teleservices chosen to transfer its wealth to Cyberco in that fashion and Huntington in turn placed the deposited suitcases in its vault, Huntington would have without question had to account for all that was there. A bank, though, does not make money by keeping cash in a safe. Huntington would have undoubtedly lent out whatever was received as was its right under the deposit relationship. But the decision to lend or not has no bearing upon the exposure Huntington confronts. Whether hoarded in a vault or out on loan, Huntington would have had to account under Section 550(a) for everything delivered. Likewise, Huntington's good faith could have exonerated it regardless of how it had chosen to exercise its control over the same. Indeed, it is ironic that Huntington would have been able to avoid Section 550(a) accountability altogether had only it met Section 550(b)(1)'s standards as well. However, with this realization must also come the recognition that Huntington's inability to avail itself of the Section 550(b)(1) defense makes Huntington accountable for all of the "suitcases" as opposed to just the ones it kept for itself.
This court recognizes that what Huntington did not pay itself by way of final setoff in all likelihood passed quickly from Huntington to Cyberco's own creditors and the co-conspirators. After all, Cyberco was always in need of cash. Indeed, large amounts of what was being transferred by Teleservices into Cyberco's accounts was then being used to make lease payments to previously bilked equipment finance companies. Otherwise, the scam would have collapsed.
Therefore, the court has considered whether some time element should be added to the concept of control so as to distinguish between money that only passes through an account from those instances where the bank actually had the opportunity
The court is also mindful that time is not included as a consideration in the widely accepted definition of what constitutes property when considering a trustee's avoidance powers. Again, the Supreme Court said in Begier:
496 U.S. at 58, 110 S.Ct. at 2263.
Property of the debtor for purposes of avoidance actions, then, is a function of only: (1) whether the party had control over the funds; and (2) whether the transfer then made diminished the estate. Time of control is simply not part of the equation.
Indeed, diminution of the estate is not even an issue when the liability of a transferee under Section 550 is being assessed. But then, this court sees no reason why it should be a factor given that diminution of the estate is relevant only with respect to the initial transfer and then only as to its avoidability. Moreover, as previously noted, Section 550 already protects subsequent transferees like Huntington through the Section 550(b)(1) defenses afforded to good faith recipients taking for value and without knowledge.
Huntington argues that the Sixth Circuit has adopted Bonded Financial and, as a consequence, this court has no choice other than to follow its rejection of depository banks as subsequent transferees. However, while there are certainly Sixth Circuit decisions that have cited Bonded Financial, none of them have reached that particular conclusion.
The Sixth Circuit next cited Bonded Financial in Baker & Getty Fin. Servs.
And it was only in this context that Baker & Getty cited Bonded Financial. The panel certainly recognized that "as a matter of raw power" Rice could have used the funds any way he pleased while he held them—he could have "taken the cash to a race track or a jewelry store."
Id. at 722.
Finally, there is In re Hurtado,
In sum, the Sixth Circuit has clearly embraced Bonded Financial's concept of establishing transferee liability under Section 550(a) based upon whether the defendant had control or not of the avoided transfer. However, none of the Sixth Circuit cases that have discussed Bonded Financial has adopted the further proposition that something more is required when the targeted defendant is someone other than the initial transferee of the transfer avoided. Therefore, this court is not constrained from rejecting that peculiar aspect of what is otherwise a well reasoned opinion by the Bonded Financial panel.
As already discussed, New York Cnty. Nat'l Bank v. Massey
Huntington, though, is too expansive in its interpretation. Massey is a claims allowance case. The appellant bank had setoff a deposit made by the debtors only days before the petition and then filed a claim for what remained due. The trustee in turn objected, contending that the claim should be disallowed in its entirety until the bank returned the obvious preference to the estate.
Courts that have struggled with reconciling the 2005 amendments to the Code can sympathize with Massey's predicament. At that point, the Bankruptcy Act of 1898 had only recently been enacted and, like the Bankruptcy Code that replaced it, the former Act was intended to update the bankruptcy laws. One of its new provisions was Section 60, which addressed preferences. Among other things, it made avoidable any transfer that enabled a creditor "to obtain a greater percentage of his debt than any other of such creditors of the same class."
Massey, 192 U.S. at 144, 24 S.Ct. at 200 (quoting The Bankruptcy Act of 1898 § 68, Ch. 541, 30 Stat. at 565).
The bankruptcy referee and the district court had allowed the bank's claim over the trustee's objection. The circuit court, though, sided with the trustee, concluding instead that the bank had to return the setoff because it had clearly improved the bank's position to the detriment of the estate's other claimants. Id. at 144-45, 24 S.Ct. at 200.
The Court, in reversing, was no less perplexed by the contradiction of the two provisions than were the lower courts. Nonetheless, the Court resolved it just the same. Its solution was to limit the types of transfers avoidable under former Section 60 to only those made "as a payment, pledge, mortgage, gift, or security." Id. at 146, 24 S.Ct. at 201. In other words, while the Court conceded that a setoff could be preferential,
The Court also explained why Congress might have made this exception. What it suggested was that a bank, in exercising a setoff, would not have improved its position in at least one sense.
Massey, 192 U.S. at 147, 24 S.Ct. at 201.
It is this quotation and, in particular, the second sentence, that Huntington relies upon in supporting its contention that no transfer takes place between a bank and its customer when funds are deposited into an account. However, as just shown, the Court never said that customer deposits were not transfers. Nor, for that matter, did it rule out the possibility of a setoff still being subject to avoidance as a fraudulent transfer. Rather, it focused only upon the avoidance of a bank setoff as a preference. And even there, the Court had to have concluded that another transfer had already taken place before the challenged setoff was taken. Otherwise, there was no need for the Court to have included its observations about the debtor-creditor relationship between a bank and its depositor and the unrestricted control a bank exercises once a deposit is made. Put simply, had the preceding deposit not been a transfer, the bank in Massey would have had nothing to setoff.
Pre-Code courts later cited Massey as controlling on this issue. For example, in
188 F. 285, 288 (6th Cir.1911) (emphasis added).
The Code, though, has since addressed preferential setoffs by adding Section 553(b).
Most of the other cases Huntington cites as authority besides Bonded Financial and Massey for its "deposits aren't transfers" theory are easily distinguishable. For instance, Andreini & Co. v. Pony Express Delivery Servs.,
Broadview Lumber involved the question of whether two banks with whom avoidable transfers had been deposited were liable as subsequent transferees. The court concluded that they were not because neither had the requisite control over the funds deposited.
Id. at 964.
However, as already shown, banks that accept deposits from their customers do have use or control of the deposited funds. The deposit creates only "an ordinary debt, not a privilege or right of a fiduciary character." Massey, 192 U.S. at 145, 24 S.Ct. at 200-01 (citation omitted). As for the money deposited, it without question becomes "part of the general fund of the bank . . . to be lent to customers, and parted with at the will of the bank." Id. In turn, the depositor retains only the right to have the debt created "repaid in whole or in part by honoring checks drawn against the deposits." Id. Although Massey made these observations over a century ago, it had no doubt about the nature of the bank/depositor relationship then and there is no reason to believe that the Court would speak with any less certitude now.
Therefore, for the reasons given, this court determines that there is no genuine issue of fact regarding Huntington's Section 550(a)(2) liability to the Teleservices estate as the immediate transferee of the numerous fraudulent transfers Teleservices made to Cyberco, the initial transferee. Granted, the funds Cyberco deposited with Huntington became part of a sophisticated cash management system whereby Cyberco, with Huntington's assistance, could minimize its borrowing costs under the line of credit. However, as Huntington itself agrees, "these cash management services simply created a glorified bank account under which Cyberco's deposited funds were always available to it automatically under the contracts." Hunt. Br., DN 382 at 63. It follows, then, that whatever Cyberco deposited in this "glorified" account came under Huntington's immediate control because of the debtor-creditor relationship created. Consequently, summary judgment is appropriate with respect to this aspect of Trustee's motion since Huntington has already failed in its attempted
Huntington next argues that this court has the ability to reduce its Section 550 exposure even if it had been the technical recipient of all the deposited wires. According to Huntington, its liability should be limited to only the setoffs taken to reduce Cyberco's debt because "Huntington returned all but its loan repayments to Cyberco and Cyberco's creditors."
Both of these cases involved compelling facts. In First Financial, the trustee was attempting to recover from Shults, a subsequent transferee, monies that he had held for only a few months in a segregated account. Indeed, when Shults returned what he had received to the initial transferee, he included interest. The court there recognized that the trustee's pursuit of Shults as a Section 550(a)(2) transferee was "an entirely valid and reasonable legal position."
371 B.R. at 919.
Sawran also involved a court stepping in to prevent the estate from realizing what it believed would be a windfall at the subsequent transferees' expense. In that instance, the trustee had avoided a preferential transfer from the debtor to her father. The father, though, had in turn transferred what he had received to the debtor's other siblings with instructions that they use it to cover the debtor's expenses. The siblings then used the money as instructed, although some still remained when the debtor filed her petition.
But as well meaning as the courts in First Financial and Sawran may have been, the soundness of their decisions is nonetheless suspect. For example, it has been well settled for some time that a bankruptcy court's equitable powers under Section 105 cannot be used to deviate from outcomes otherwise mandated by the Code. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 969, 99 L.Ed.2d 169 (1988) ("[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of Bankruptcy Code."). See also Mitan v. Duval (In re Mitan), 573 F.3d 237, 243 (6th Cir.2009); Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 96-97 (2nd Cir.2010); HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355, 362 (1st Cir.2004). The Court has been equally clear that courts are to enforce Congress' enactments as written even if their literal interpretation seems harsh. Lamie v. U.S. Trustee, 540 U.S. 526, 538, 124 S.Ct. 1023, 1032, 157 L.Ed.2d 1024 (2004). See also Massey, 192 U.S. at 146, 24 S.Ct. 199 ("We are to interpret statutes, not to make them.").
Having, though, offered this criticism, the court submits that Section 550(a) itself permits the discretion that both First Financial and Sawran were looking for to remedy the injustices they perceived. Under that section, the trustee has a choice. If the defendant is still in possession of the avoided transfer—say, a Ferrari—then the trustee has the absolute right to demand its return. Moreover, it makes no difference whether the defendant was the initial transferee or a subsequent one. The Ferrari's return is obligatory unless the defendant qualifies for one of the Section 550(b) defenses.
On the other hand, recovering the Ferrari's value is not so absolute. Rather, that option is available only "if the court so orders." 11 U.S.C. § 550(a). In other words, while a trustee may certainly ask to be awarded a money judgment in lieu of the property's actual return, it is ultimately up to the court to decide whether the requested relief is warranted—e.g., where the transferee had destroyed the property or where the property was no longer within the court's jurisdiction.
However, the court sees no reason why this same discretion cannot be used to the transferee's advantage. Suppose, for example, that A, the Ferrari's initial transferee, had in turn given it to the trustee's best friend. Under that circumstance, the trustee might still prefer a money judgment from A. Could not, though, A respond by asking the court to refuse the trustee's demand and have him get the Ferrari back from his friend instead? And if that is so, could not the First Financial and Sawran courts have also used their
In sum, Section 550(a) itself provides sufficient discretion to address situations where compelling facts make the application of avoidance law so difficult. However, neither that section nor these two cases suggests that the discretion given is to deviate too far from the expected norm. Remember, the emphasis in First Financial, Sawran, and for that matter, Nordberg, was upon the same good faith that both Sections 548(c) and 550(b)(1) already require for a successful defense. In fact, the transferees' good faith in First Financial and Sawran was exemplary given that Shults returned the transfer untouched and with interest and the siblings used what they had received to protect their profligate sister from herself. These defendants' shortcoming was only that they had not given the requisite value as well.
However, Huntington presents exactly the opposite situation. Unlike Shults and the siblings, it had in fact exchanged value for the transfers received.
Consider, then, the suitcases of cash example one more time. Had Huntington actually kept each suitcase received, it would have had to return every single one for each represented a fraudulent depletion of the Teleservices estate. And the same would have been true had Huntington instead kept only a few suitcases to pay down Cyberco's debt and returned the rest to Cyberco and its creditors. The Teleservices estate would have been no less depleted. Nor would Huntington have been in any better position to explain its lack of good faith.
Put simply, Huntington's fate has rested all along on the availability of the defense Section 550(b)(1) itself offers. While Section 550(a) may give some opportunity for courts to expand that defense when only the exchange of value is lacking, this court sees no justification for exercising that discretion here when the problem instead is Huntington's failure to establish its own good faith. Section 550(b)(1) itself has given Huntington a fair chance to avoid having to account for the many fraudulent wires that it received as a subsequent transferee and it deserves no more chance than that under these circumstances.
Kingsley
Wetzel, the transferee in Kingsley, claimed that he, like the siblings in Sawran, should get credit for the amounts that he had then repaid to debtors or their creditors under the arrangement made. The trustee, though, argued that the circumstances were different because the defendants in Sawran were innocent whereas Wetzel clearly was aware of the debtors' fraudulent scheme.
The court agreed with trustee that Wetzel "admittedly participated in a scheme to hinder creditors of the Debtors" and that, as a consequence, "the equitable considerations. . . are absent here." Kingsley, 2007 WL 1491188 at *4. However, it continued to have the same concern as in Sawran about Section 550 being misused to create a windfall for the estate instead of being used to simply accomplish a more equitable distribution among creditors.
Id.
And the court ultimately concluded that Section 550's purposes had already been met with "Defendant's prepetition repayments to the Debtors and Debtors' creditors." Id. Consequently, it did not hold Wetzel accountable for most of the $4,516 he had received notwithstanding his complicity in the fraud.
The Sixth Circuit addressed the same type of scheme in Hurtado.
It is equally fair to say that the Eleventh Circuit in Kingsley was just as dubious about letting Wetzel off scot-free. What troubled that panel was the bankruptcy court's reliance upon equity while also recognizing Wetzel's unclean hands.
Bakst v. Wetzel (In re Kingsley), 518 F.3d 874, 878 (11th Cir.2008) (citations omitted). Nonetheless, the panel affirmed. But it did so only because of its concession that the bankruptcy court had acted within its authority and had done so without clearly abusing its discretion. Id.
There is also reason to question what appears to be Kingsley's premise—that Section 550 and the avoidance laws it supports are morally indifferent, with their purpose instead being only "to prevent the depletion of the estate" and "to promote an equitable distribution of the debtor's assets." Kingsley, 2007 WL 1491188 at *4. Indeed, Kingsley's premise goes beyond the understandable concern of estates' realizing windfalls through double recoveries to also rewarding the debtor's accomplice whenever the fraud succeeds. The question, of course, is whether the drafters, in enacting Section 550, really intended the courts to turn their backs on such behavior altogether.
Other courts besides Kingsley have included a similar moral indifference in evaluating other aspects of the Code's treatment of fraudulent transfers. For example, the court in Bayou Group observed that Section 548(c) bad faith was "somewhat different" from an ordinary person's association of the term with "dishonesty" and "deceit."
However, this court in another opinion explained at length why neither the Code nor the case law supports Bayou Group's conclusion.
By no means, though, is this court rejecting Kingsley out of hand. It disagrees with only Kingsley's rationale and Kingsley's seemingly inflexible rule that a bad faith recipient of a voidable transfer is relieved from liability so long as whatever he received ended up in some way or another back with the debtor or his creditors. For example, had Wetzel returned the money after having had his own second thoughts as opposed to having successfully pulled off the fraud as he did, Kingsley's exoneration of Wetzel would have been much more understandable.
But even if one agrees with Kingsley, one must still ask whether even that court's much lower standard for assessing a Section 550 recipient's accountability had been met. As the court in Kingsley observed, one of the purposes of a trustee's avoidance powers is "to promote an equitable distribution of the debtor's assets." Kingsley, 2007 WL 1491188 at *4. But was Wetzel's payment of the creditors the debtors preferred over the creditor they wanted to defraud really an equitable distribution?
Of course, Meoli, as Teleservices' trustee, could have in theory restored some equilibrium to this imbalance by pursuing preferences in her own right. In other words, she could have conceivably claimed that the payments being made by Cyberco on account of the leases and other obligations were also payments on account of antecedent debt owed to Teleservices and, as such, preferential. However, that relief would have applied to only the relatively few payments made by Cyberco after October 22, 2004 (i.e., Teleservices' preference period for non-insider transferees). Moreover, there would have been the issue of whether even these payments were preferential since Section 547 requires the transfers to have been made from the debtor's property and these payments had come from Cyberco, not Teleservices.
The point is that the credit Huntington seeks does not even meet the equitable standards that Kingsley itself set as determinative of when a bad faith recipient of
Nor will this court overlook Huntington's own role in Watson's continued bilking of equipment finance companies for the roughly eight months that followed Rodriguez's April 2004 discovery of Watson's criminal past. Up until then, Huntington's receipt of the suspicious wires from Teleservices was in good faith.
As critical as these findings were to denying Huntington's claimed defenses under Section 548(c) and 550(b)(1), they are just as important to the overall question of equity now that Huntington reinserts that issue into the equation by citing Kingsley. And what the court now concludes is that if Rodriguez had not failed in informing Kalb of Watson's criminal past (1) not only would Huntington likely have put a stop to Teleservices' transfers of stolen money into its accounts, but (2) that its decision to no longer accept those transfers would have just as likely put an end to Watson's entire scheme. Therefore, Huntington must bear at least some responsibility for the millions of dollars that continued to be stolen from equipment finance companies from that point on.
In sum, this court has its doubts about Kingsley's unwillingness to include honesty and integrity in assessing whether an active participant to creditor fraud should have to account or not under Section 550. However, even if Kingsley's less demanding expectations were to be accepted, this court is still satisfied that the circumstances here, when considered as a whole, do not warrant Huntington being given any better defense than what Section 550(b)(1) already provides.
Trustee's complaint, as now amended,
Trustee cannot avoid these transfers under Section 548 because of the one year limitation then imposed under that section. 11 U.S.C. § 548(a)(1).
Huntington has questioned in its most recent brief
Boston Trading
Boston Trading is a difficult case to understand because the panel had to explain why the trial court had erred in
Again, the receiver's first theory had BTG as the creditor being defrauded by the new owners' payments to Burnazos. But in casting BTG as the owners' creditor, the receiver focused only upon the owners' churning of the accounts and the debt to BTG that their dishonesty had created. "In effect, the Receiver argues that Shaw and Kepreos [the owners] took the $473,000 from BTG by fraud (or other dishonest means) and paid it to Burnazos who had full knowledge of their dishonesty." Id. at 1510. Churning the accounts, though, had nothing to do with any intent on the part of the owners to defraud BTG through their payments to Burnazos. Therefore, the panel found the receiver's theory flawed. Id. at 1510-11.
It was also this flaw that prompted the panel to make the statement Huntington cites in its brief.
Boston Trading, 835 F.2d at 1510 (emphasis added).
The panel said that the receiver should have instead sued Burnazos for restitution on the theory that he had received the challenged payments fully aware that BTG's owner had made them in violation of the fiduciary obligations they owed to it. Id. at 1511.
This, then, was the first reason why the panel had rejected the receiver's theory that the owners themselves had made the fraudulent transfers. Another was that the targeted transfers under that theory were payments on account of a debt to Burnazos that the two owners had legitimately incurred as part of BTG's sale. These transfers, then, seemed more in the nature of preferences and, as the panel observed, Massachusetts and most other courts have held that preferences are not fraudulent conveyances. Id. The panel also offered its own explanation for why the two should not be equated.
Id. (emphasis in original).
Huntington would like to distill from all this its own dictum that "transfers intended to pay creditors are not fraudulent under state law, even if the funds transferred
Consider, then, a constructively fraudulent transfer instead of a preference. Would anyone ever say that an insolvent debtor's transfer on account of antecedent debt, while certainly not constructively fraudulent, might not still be actually fraudulent if enough other badges of fraud were otherwise present?
In fact, these questions are merely rhetorical because the Supreme Court has already said that a "transaction may be invalid as a preference
Van Iderstine v. Nat'l Disc. Co., 227 U.S. 575, 582, 33 S.Ct. 343, 345, 57 L.Ed. 652 (1913).
However, having made this observation, Van Iderstine, like Dean, also recognized that preferences and actually fraudulent transfers are not mutually exclusive—that a debtor can put his property beyond the reach of his creditors just as easily by favoring some creditors and not others.
Indeed, while Huntington cites two other cases, Sharp International
Id. at 478.
Therefore, for all of these reasons, the court rejects Huntington's contention that recipients of transfers on account of antecedent debt are subject to recovery only to the extent that the transfers are avoidable under Section 547 or comparable state preference laws.
835 F.2d at 1514.
In reaching that conclusion, the panel found in Caplin v. Marine Midland Grace Trust Co. of NY,
However, Trustee's pursuit of Huntington is not based upon either receivership law or the former Bankruptcy Act. Rather, Trustee's power to both avoid and recover the transfers received by Huntington derives from the authority the Code itself gives through Sections 544(b), 548, and 550. Therefore, while standing was an issue in Caplin and Boston Trading, it is not an issue here.
And the Bankruptcy Code likewise addresses Boston Trading's and Caplin's other two concerns. In particular, the automatic stay imposed by Section 362 prevents Teleservices' creditors (i.e., the victimized equipment finance companies) from proceeding with their own fraudulent transfer actions against Huntington. See Meoli v. Huntington Nat'l Bank (In re Teleservices Group, Inc.), 463 B.R. 28 (Bankr.W.D.Mich.2012). That same stay also eliminates the problem Boston Trading and Caplin foresaw of the trustee/receiver going head to head with individual creditors' own avoidance claims. Id.
Therefore, this court does not find Boston Trading or, for that matter, Sharp International or B.E.L.T., dispositive. Trustee without question has the authority as the representative of the Teleservices bankruptcy estate to seek the avoidance of the fraudulent transfers that Huntington received both directly from Teleservices and indirectly as a subsequent transferee under Section 550(a)(2). Moreover, even if the law were to immunize recipients of preferences from also being challenged as recipients of actually fraudulent transfers, Huntington would not be entitled to that defense in this instance because none of
Huntington also raises other arguments that are unique to Section 544(b) avoidance actions. Huntington first focuses on Section 544(b) itself. That section provides, in relevant part:
11 U.S.C. § 544(b)(1) (emphasis added).
There must, then, be at least one current creditor of the estate who was also a creditor at the time of the challenged transfer in order for a trustee to exercise his avoidance powers under this section. However, Trustee has identified only a single Teleservices creditor, Orlan Capital Bank, as meeting this requirement. Huntington points out as well that Orlan's claim is at most the $3,580,715.10 it was tricked into paying to Teleservices as part of Watson's scam. What Huntington contends is that this is also the maximum amount that Trustee can avoid under Section 544(b) because it is all that Orlan would have been able to recover had Orlan itself attempted to avoid the transfer under MUFTA.
Huntington's argument has merit if only the Michigan statute is considered. Unlike Section 548, which has the trustee effectively representing all creditors, MUFTA allows each creditor to proceed individually. Accordingly, transfers found to be fraudulent under its provisions are to be avoided only "to the extent necessary to satisfy the creditor's claim." MICH. COMP. LAWS § 566.37(1)(a).
However, as compelling as Huntington's argument may first seem, it is Section 544(b), not MUFTA, that controls. As for that section, it requires only that the targeted transfer be "avoidable," which would certainly be the case if Orlan had substituted for Trustee with respect to any of the transfers made in 2003. Of course, Trustee would still have a problem if Section 544(b) also required her to look to state law for a remedy. But the Bankruptcy Code designates Section 550, not state law, as providing the remedies for avoided Section 544(b) transfers and that section clearly permits recovery of the entire transfer avoided as opposed to what might otherwise be available as the remedy were state law to apply. Cf. Suhar v. Burns (In re Burns), 322 F.3d 421, 427 (6th Cir.2003) ("[A]voidance and recovery are distinct concepts and processes.").
Huntington also cites an unpublished Michigan Court of Appeals opinion for the proposition that MUFTA does not apply to funds obtained by fraud or theft. See Alliance Bancorp. v. Select Mortg., L.L.C., No. 274853, 2008 WL 724092 (Mich. Ct.App. Mar. 18, 2008). Alliance Bancorp involved a debtor who had amassed his fortune through fraud. At issue was whether the debtor had also violated MUFTA when he later transferred a large amount of that wealth to others. The panel concluded that he had not because the debtor had no legal interest in what had been transferred. Id. at *2.
In reaching its conclusion, the panel relied upon the Sixth Circuit's decision in In re Newpower
This court certainly recognizes the deference it is to give to a state court's interpretation of its own laws. However, in this instance, that interpretation is set forth in an unpublished opinion which has no binding effect. Cf. MCR 7.215(C)(1). Moreover, Alliance Bancorp is not a decision by Michigan's highest court and this court is persuaded for the reasons given that Michigan's Supreme Court would not adopt Alliance Bancorp were it to be presented with the same issue. Cf. Kochins v. Linden-Alimak, Inc., 799 F.2d 1128, 1140 (6th Cir.1986) (court holding that an intermediate state court's decision on point is controlling regarding an interpretation of that state's law "unless it [the federal court] is convinced by other persuasive data that the highest court of the estate would decide otherwise." (citation omitted)).
Huntington's final argument concerning Trustee's Section 544(b) claim relates to the security interest that attached to the same Huntington accounts into which the 2003 (and, for that matter, the 2004) transfers from Teleservices to Cyberco were being deposited. It makes this argument because MUFTA excludes from its scope "the transfer of any asset that `is encumbered by a valid lien.'"
However, Cyberco was not a creditor of Teleservices nor, for that matter, did it hold a lien in the Silicon Valley account. As for Huntington, it was the subsequent, not the initial transferee, of all of these transfers. Therefore, while its lien certainly
Trustee also includes in her motion the request that the estate be awarded prejudgment interest should summary judgment be granted in the estate's favor. Although not altogether clear, it appears that Trustee would prefer that interest be added from the date each transfer occurred as opposed to from the date Trustee filed her complaint. As authority, Trustee points to the court's ability under Section 550(a) to award "value" in lieu of ordering the return of the avoided transfer itself. See, e.g., CNB Int'l, Inc. v. Kelleher (In re CNB Int'l, Inc.), 393 B.R. 306, 335-36 (Bankr.W.D.N.Y.2008). However, Trustee also acknowledges that (1) any award under Section 550(a) is left to the sound discretion of the trial court; and (2) whatever is awarded should be compensatory, not punitive. Br. in Supp. of Trustee's Am. Mo. for Summary Judgment, 36-37, Jan. 21, 2005 (DN 269).
With this in mind, the court concludes that Huntington is also liable for prejudgment interest, but only with respect to those transfers received by Huntington on or after April 30, 2004, the date when Huntington could no longer establish its good faith. Trustees frequently request this court to award the value of the avoided transfer instead of ordering the property's return. And perhaps this court would add interest to every such request were it required to award value whenever asked. However, as Section 550(a) makes clear, value is to be awarded only when the court so orders.
The problem, of course, is that there is no apparent justification for awarding interest if the court orders the return of the property instead. One can certainly understand why a trustee would prefer receiving the value of an avoided transfer of inventory over having to recover and liquidate the inventory himself. However, if that inventory is still sitting on the transferee's loading dock, is not its return the proper remedy? Moreover, even were the court inclined to award value, common sense says that there should be an adjustment downward to reflect the estate's savings in freight and selling costs, not an adjustment upward for interest earned on something yet to be converted into money.
Granted, the trustee might still argue that the transferee's resistance had delayed the property's liquidation. But even here it is seldom the transferee's fault that an avoidance is being sought. After all, it was the debtor who made that transfer. Indeed, in most instances, it is only the debtor's insolvency that has raised questions about an otherwise valid transaction. Why, then, should the transferee have to compensate the estate for the time spent trying to keep something that under any other circumstance would have continued to be his?
Nor does this court see any reason to come to a different conclusion because money, not physical property, is involved. Again, Watson could have made each of the transfers Trustee now seeks to avoid and recover with suitcases of cash rather than by wire. It is equally conceivable that Huntington could have put all of those suitcases in a corner of its vault for safekeeping. But if that had occurred, the appropriate remedy under Section 550
In sum, awarding value under Section 550(a) is only one component of an overall statutory scheme where another component is the return of the avoided transfer itself and another is no recovery at all.
Using, then, the discretion that Section 550(a) provides, the court concludes that Trustee is entitled to prejudgment interest, but only with respect to the transfers for which Huntington has not established its good faith. As already discussed, an unsuspecting recipient of an avoidable transfer should be immune from any claim that the debtor's decision to make that transfer delayed administration of that asset. But in this instance, the court has found that Huntington had turned a blind eye to the deposits being made by the summer of 2004 and that it had not otherwise met its burden of establishing its good faith from April 30, 2004 on.
Huntington's final argument relates to the recovery of preferences by Thomas
Ordinarily, what a trustee avoids and recovers in one estate is irrelevant to a trustee's administration in another. However, in this instance, most, if not all, of what Richardson has recovered as avoidable preferences
Huntington's argument has merit. Assume for a moment that Cyberco had used one of the hypothetical suitcases of cash to prefer a creditor. If, upon avoidance, that creditor still had the suitcase, it is likely that its return to the Cyberco estate would be ordered. But would not the Cyberco trustee in turn have the same responsibility to account to the Teleservices estate for that same suitcase? After all, it was Teleservices' suitcase in the first place and Cyberco gained control of it only because Cyberco itself was the beneficiary of a fraudulent transfer. And if that is to be the outcome, then Huntington should certainly no longer have to account for that same suitcase.
Indeed, this argument is just a variation of the one Huntington has made in the Cyberco bankruptcy case in responding to Richardson's attempts there to recover from it as preferences the same suitcases, if you will, that Meoli is attempting to recover here. Huntington's legitimate complaint, which is now set forth as a motion for summary judgment, is that it should not have to account twice to two different estates for the same transfer. Nor does this court believe that Huntington should be so exposed for reasons that it will soon give in a bench opinion granting Huntington's motion.
Suffice it to say here that Section 550 does not offer any explicit mechanism to prevent two estates from doubling up against the same transferee. But once again the court finds an answer in the overall discretion that Section 550(a) provides. In this instance, Huntington has clearly received as a Section 550(a)(2) transferee some fraudulent transfers from Teleservices to Cyberco that Cyberco in turn has just as clearly used to prefer Huntington as a Section 550(a)(1) transferee. If these transfers were both accomplished with the same suitcase of cash and Huntington still had that suitcase, the fair resolution of Huntington's dilemma would be for one court to order the suitcase's return to the Teleservices estate and the other court to deny Cyberco estate's competing request for value in lieu thereof. After all, the Cyberco estate, as an initial transferee, would have had to account to the Teleservices trustee in any event had that estate recovered it from Huntington as a preference first.
Turning now to the instant problem, Meoli is in effect asking this court to award the Teleservices estate the value of fraudulently transferred "suitcases" that Huntington no longer holds but that the Cyberco estate has now recovered from others. It does not seem unreasonable, then, for Huntington to demand that Meoli first attempt to get these suitcases back from Cyberco. And likewise, it would not be unreasonable for this court to refuse to award the Teleservices estate the value of those suitcases were Meoli to leave that avenue of recovery untouched.
The court finds that, with the exception of Huntington's request for credit on account of the recovered Cyberco preferences, there remains no genuine issue of fact and that Trustee prevails as a matter of law with respect to its motion for summary judgment. In particular, the court makes all of the following determinations in Trustee's favor:
The court will issue a separate order consistent with this opinion.
See Hunt. Br., DN 382 at 11 (citations and footnotes omitted).
Huntington has also offered a number of examples of how the cash management system operated on a given day. Id. at 11-14.
Huntington has presumably ignored these issues because of its position that there were really never any transfers from Teleservices to Cyberco in the first place. However, this court's rejection once again of Huntington's attempt to treat Cyberco and Teleservices as one continues to make these issues relevant. Therefore, this court now determines that there is no genuine question of fact regarding either Teleservices' fraudulent intent or Cyberco's lack of a statutory defense. Cf. FED. R. BANKR.P. 7056 and FED. R. CIV. P. 56(g). Specifically, the court concludes that (1) Teleservices actually intended to defraud its creditors (i.e., the duped equipment finance companies) each time it wire transferred funds to Cyberco's Huntington accounts, 11 U.S.C. § 548(a)(1) and MICH. COMP. LAWS § 566.34; (2) Cyberco did not receive any of these transfers in good faith, 11 U.S.C. § 548(c) and MICH. COMP. LAWS § 566.38(2)(b); and (3) Cyberco did not give value for any of these transfers, as Huntington agrees that none of the transfers were on account of a debt Teleservices owed to Cyberco. Hunt. Br., DN 382 at 27. It further follows that if Cyberco did not give value in exchange, the transfers it received from the insolvent Teleservices were constructively fraudulent as well. 11 U.S.C. § 548(a)(2) and MICH. COMP. LAWS § 566.35.
There may also be some lingering differences between Trustee and Huntington regarding the exact dates of some of the transfers in 2003 and perhaps even in 2004. However, nothing included in the record suggests that any difference would be more than a few days or that a variation that small would affect any of these conclusions.
Huntington had also raised alter ego as part of its separate effort to substantively consolidate the Cyberco and Teleservices bankruptcy estates. However, it never was addressed because the court determined that Huntington lacked standing. In re Cyberco Holdings, Inc., 431 B.R. 404, 432 (Bankr.W.D.Mich. 2010).
However, Fisher did not want to miss a valuable business opportunity. Therefore, he arranged for his girlfriend to purchase, with National City's consent, the FDP inventory for its liquidation value of $3,800. The girlfriend, Rhonda Brennan, then sold to Globe what it needed for almost $100,000.
Apparently, FDP was never placed in a bankruptcy proceeding. However, Fisher himself sought Chapter 7 relief and it was his trustee who attempted to set aside the transfer of inventory from FDP to Brennan as fraudulent to Fisher's own creditors. The bankruptcy court found for the trustee. Among the issues Brennan appealed was the bankruptcy court's determination that the inventory effectively belonged to Fisher on the basis that Fisher was FDP's alter ego.
Although the Sixth Circuit affirmed, its reasoning is not clear. What seemed to impress the panel the most was the fact that Fisher had repeatedly disregarded the corporate form by co-mingling his money with that of FDP's and by then paying his own expenses from the co-mingled funds. The panel also noted that Fisher had not identified FDP as a separate entity when speaking of its financial difficulties, but rather had referred to himself as having those problems. Id. at 506-07.
As for its legal analysis, the panel observed that "veil piercing and alter ego concepts are distinct" with the former making "A vicariously liable for B's debts" and the latter making A directly liable because "A and B are the same entity." Id. at 506 (citation omitted). Whether this is truly a distinction is debatable. See supra n. 41. However, even if one accepts the distinction made, the question remains as to how the panel was able to apply a concept that still addressed only the question of liability to conclude that FDP's property was actually owned by Fisher for purposes of Section 548. The panel's conclusion also raises a whole host of related issues. For example, FDP was apparently as insolvent as Fisher. What, then, became of those creditors? Were they too allowed to make claims against Fisher's estate because of the same alter ego theory or were they simply left out of the equation?
This court suggests that both the panel and the bankruptcy court were able to achieve the desired result of making FDP's assets Fisher's by in fact applying the concept of substantive consolidation—i.e., rearranging both the assets and the liabilities of a nonbankrupt entity as if they were the debtor's for purposes of bankruptcy administration. As this court discussed in Cyberco, 431 B.R. 404, the alter ego often appears in discussions concerning whether substantive consolidation is appropriate or not. But if that was the theory, Fisher is easily distinguishable because the trustee in Fisher clearly had standing to consolidate FDP into Fisher's estate whereas Huntington did not have similar standing here. Cyberco, 431 B.R. at 404.
Moreover, the Ohio law Fisher cites as support contains the same caveat as all other cases that rely upon alter ego theory to fashion a remedy—that the doctrine is to be applied only "where the ends of justice require it." Fisher, 296 Fed.Appx. at 506. While applying the alter ego doctrine in that instance may have been just, its application in this instance clearly is not.
Begier v. IRS, 496 U.S. 53, 59, 110 S.Ct. 2258, 2263, 110 L.Ed.2d 46 (1990) (footnote omitted).
George Montross, the debtor in Walsh, had used the accounts of Townsquare, a partnership in which Montross was one of several general partners, to launder money that Montross had obtained from activities totally unrelated to Townsquare's legitimate activities. Montross's bankruptcy trustee had sought the recovery of the deposits into those accounts from Townsquare on the theory that Townsquare, as the owner of the account, was the transferee of avoidable transfers under Section 550(a). However, the trial court determined and the Ninth Circuit BAP in turn affirmed that Townsquare was not a transferee because it lacked the requisite control, citing Nordberg in support. Id. at 949.
Walsh, though, is a very different case from the one at hand. For instance, none of Townsquare's other general partners had signatory rights to the accounts in question nor were they aware that Montross was depositing into these accounts funds other than the rents being legitimately earned by the partnership. As the BAP put it, Montross intended the money deposited to remain his own and in fact carried out that intent "by transferring funds in and out of the account without Townsquare's control or knowledge." Id. at 949.
Montross, then, is not so much a validation of the "enhanced control" rule espoused by Nordberg when gratuitous recipients of fraudulent transfers are targeted as it is a reaffirmation of Bonded Financial's well accepted dominion and control test that the BAP also cited. Walsh, 209 B.R. at 948. In other words, the BAP rejected the trustee's contention that Townsquare ever had the ability to invest in Bonded Financial's proverbial "lottery tickets" or "uranium stocks" because no one at Townsquare other than Montross himself knew that the funds passing in and out of the accounts even existed.
This case would be more akin to Nordberg and Montross had Watson been simply laundering his own money through the Silicon Valley account. However, he was not. Watson was instead using Teleservices as an accomplice, if you will, to pull off the fraudulent scheme he had devised to trick the equipment finance companies to part with millions of dollars for Cyberco's purchase of nonexistent computer equipment. Moreover, Teleservices, in its capacity as a legal entity under the laws of Delaware, was without question both (1) aware of the funds being deposited into the Silicon Valley account; and (2) capable of diverting the monies it was receiving from the victimized equipment leasing companies as it pleased. It was Watson's choice, not duty, to have Teleservices channel its booty to Cyberco.
The Interamericas companies began experiencing financial difficulties during which Pimienta and his confidantes removed funds belonging to IFS and the other Interamericas entities and then lent those monies to insiders. Thereafter, the entire enterprise collapsed. IFS, though, was the only one to file for Chapter 7 relief.
The IFS trustee sought to avoid approximately $3 million in transfers under Section 544(b) and its incorporation of Texas's fraudulent transfer laws. The defendants had appealed the trial court's determination that IFS had transferred to these defendants' money because the trustee had conceded at trial that IFS did not legally own the accounts from which the targeted funds had been transferred. However, the Fifth Circuit affirmed, determining that IFS nonetheless had sufficient control over the accounts to establish the requisite ownership interest. Id. at 264.
On its face, then, IFS Financial seems to support Huntington's position that control takes precedence over legal ownership when fraudulent transfers are at issue. However, there are reasons to distinguish IFS Financial from the case at hand. The most obvious is that the panel was interpreting only Texas' fraudulent transfer laws. Moreover, the issue before it was one of first impression as the available case law was "scant." Id. at 262.
The panel also seems to have accepted the same implicit substantive consolidation of all of the entities there as the Sixth Circuit did in Fisher (supra n.45). However, in both Fisher and IFS Financial, it was the trustee who was advocating the consolidations whereas it is Huntington who advocates consolidation here. Of course, the problem is that this court has already determined that Huntington has no standing to consolidate the Cyberco and Teleservices' estates. Cyberco, 431 B.R. at 432.
A third reason for distinguishing IFS Financial is that it was the IFS trustee himself who was seeking the de facto consolidation. Nor was there any apparent objection by an affected creditor other than the insider defendants. But in this instance it is Huntington who is asking that the two separate entities be treated as one. Moreover, the trustees of both estates have vigorously opposed the same because, unlike the situation in IFS Financial, the consolidation that Huntington seeks does not work to either of those estates' or their creditors' advantage.
However, what distinguishes this case most from IFS Financial is its recognition that each case ultimately must turn on its own peculiar facts. IFS Financial, 669 F.3d at 264. Therefore, this court can certainly understand how IFS Financial reached the conclusion it did under the circumstances there. Nonetheless, the court remains satisfied that the facts here—i.e., a fraudulent scheme where millions of dollars were being stolen by one corporation and then fraudulently transferred to another—do not warrant the realignment of ownership that Huntington advocates, especially when that realignment would be to the detriment of Teleservices' defrauded creditors.
Hunt. Br., DN 382 at 33.
However, for the reasons given in this opinion, the court has concluded that Huntington's liability under Section 550(a)(2) can be decided simply based upon its relationship to Cyberco as its depository bank. Therefore, the court has not addressed Huntington's much different arguments regarding any Section 550(a)(2) exposure that might have arisen because of the attachment of its lien.
Huntington has also suggested that transfers from Teleservices into the payroll account Cyberco maintained at Huntington should be treated differently from the wire transfers into one or another of Cyberco's general accounts there. However, Huntington has not supported that suggestion with any good reason. Nor is this court aware of a special feature— e.g., a depositor's privilege or a trust beneficiary's right—that would distinguish the payroll account from the others. Cf. id. Rather, it would appear that the payroll account involved the same debtor-creditor relationship as did Cyberco's other accounts with Huntington and, as such, Huntington would have had the same control over deposits made into it as deposits made into any of the rest of Cyberco's accounts.
And finally, Huntington suggested at one point that the wire transfers, once deposited in Cyberco's Huntington accounts, had a diminished value from Huntington's perspective because of the restrictions imposed by the account relationship. However, as Massey shows, that relationship imposed no restriction upon Huntington's control of what had been deposited.
The comparable section under the former Act was Section 57g. The Bankruptcy Act of 1898 § 57g, Ch. 541, 30 Stat. 544, 560 (1898) (repealed) (hereinafter "the Bankruptcy Act of 1898").
11 U.S.C. § 553(b)(1).
The court mentions this here because it has considered whether it should use its Section 550(a) discretion to correct what in its opinion is an injustice upon Huntington. However, as tempting as the thought may be, this court recognizes that its differences with Nordic Village is with respect to the interpretation of the law and that it must defer to the superior court in such matters. Therefore, if Huntington is to be relieved of this portion of its Section 550(a) liability to the Teleservices' estate, it is the Sixth Circuit that it must convince.
Huntington's argument might have some appeal were it the more recently bilked equipment finance companies making this argument instead. Indeed, the Supreme Court, in adjudging the relative rights of the victims to the original Ponzi scheme, spoke of how equity could override otherwise plausible legal constructs. See Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924). At issue there was the bankruptcy trustee's attempt to recover as preferential payments Mr. Ponzi had made to some nervous investors who had fortuitously demanded the return of their investments before the scheme collapsed. These investors had claimed as their defense that they were simply recovering what they themselves had previously invested. The Court, though, rejected the argument because of the investors' inability to trace. And in doing so, the Court also found inapplicable a venerable tracing rule, finding instead that all of the defrauded investors, no matter what their circumstance, had been transformed by that point into nothing more than creditors of the bankruptcy estate. It said:
265 U.S. at 13, 44 S.Ct. at 427.
It may be at some later point in the administration of the Teleservices bankruptcy case that this court will apply these same equitable principles as it sorts out the claims made by the equipment finance companies against the Trustee's recoveries on the estate's behalf. However, for the reasons already stated in this opinion and numerous other previous opinions, this court sees no merit to the egalitarianism that Huntington demands to be imposed here, especially when the outcome sought takes money away from what could be repaid to the equipment finance companies and puts it into the pocket of someone who has not established its good faith.
N.L.R.B. v. Martin Arsham Sewing Co., 873 F.2d 884, 887 (6th Cir.1989).
Jackson permitted an adjustment in that instance because of its conclusion that Section 544(b) required it to apply New Hampshire fraudulent transfer law, including the equitable adjustment provision. Id. at 26-28. However, for the reasons just given, this court disagrees with Jackson on this point. Section 550(a), not state law, dictates what the trustee may recover with respect to an avoided Section 544(b) transfer. But, with this said, the discretion given to the court under Section 550(a) to award value offers the same opportunity for adjustment when only a money judgment is sought. See supra First Financial and Sawran. Indeed, it is likely as not that Congress was attempting to mimic the equitable adjustment provisions of comparable state fraudulent transfer laws when it left awards of value under Section 550(a) to the court's discretion.
