In re Hurtado
| Decision Date | 28 August 2003 |
| Docket Number | No. 02-1187.,02-1187. |
| Citation | 342 F.3d 528 |
| Parties | In re Jon Rey HURTADO and Denise Hurtado, Debtors. Charles J. Taunt, Plaintiff-Appellee, v. Barbara Hurtado, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Mark H. Shapiro, STEINBERG & SHAPIRO, Southfield, Michigan, for Appellant.
Joseph J. Bernardi, KASIBORSKI, RONAYNE & FLASKA, Detroit, Michigan, for Appellee.
ON BRIEF:
Mark H. Shapiro, STEINBERG & SHAPIRO, Southfield, Michigan, for Appellant.
Joseph J. Bernardi, KASIBORSKI, RONAYNE & FLASKA, Detroit, Michigan, for Appellee.
Before DAUGHTREY, MOORE, and SUTTON, Circuit Judges.
The defendant Barbara Hurtado appeals the district court's decision granting summary judgment against her, in favor of the Trustee Charles Taunt. Barbara Hurtado ("Hurtado"), the mother of debtor Jon Rey Hurtado, was the recipient of a fraudulent conveyance made by her son and her daughter-in-law, debtor Denice Hurtado. The Hurtados eventually filed for Chapter 7 bankruptcy protection in 1998.
On appeal, Barbara Hurtado claims that she was not an "initial transferee" from whom the Trustee could recover a fraudulent conveyance under 11 U.S.C. § 550, because she only distributed the funds according to the desires of the debtors. She therefore claims to be a "mere conduit" for the funds, lacking the requisite legal dominion over the funds sufficient to be considered an initial transferee.
The bankruptcy court agreed with Barbara Hurtado and rendered summary judgment in her favor. The district court reversed and granted summary judgment in favor of the Trustee. We AFFIRM the district court's judgment.
Jon Rey Hurtado (sometimes referred to as Jon Rey) and Denice Hurtado, who are married, are the debtors in this case. They filed for Chapter 7 bankruptcy protection on September 9, 1998. Their debts were discharged on December 15, 1998. The plaintiff in this case is Charles J. Taunt, the Trustee in the underlying bankruptcy proceeding. The defendant, Barbara Hurtado, is the mother of debtor Jon Rey Hurtado.
In the early 1990s, the two debtors incurred significant financial obligations to various creditors. The creditors included Comerica Bank, which obtained a judgment on June 12, 1992, against the debtors in the amount of $87,752.77, and the IRS, which was owed roughly $110,000 for taxes evidently dating back to 1990. Smaller debts were owed to the state of Michigan, Michigan National Bank, and Cigna Bank.
During the time in which the debtors were incurring these debts, they received two significant blocks of income. In September 1992, the debtors sold their house and received proceeds of $83,247.93. In August 1995, the debtors settled a lawsuit against Blue Cross and Blue Shield ("BCBS") for $130,795.00. Instead of going to the debtors' creditors or into the debtors' accounts, however, the funds went immediately to Hurtado's mother, defendant Barbara Hurtado.
Barbara Hurtado deposited the checks into her savings account at TNC Credit Union. Barbara Hurtado and her husband Daniel were the only signatories on the account and had exclusive control of the funds therein.
Although the funds stayed in Barbara Hurtado's account, she spent them only at the direction of the debtors. The debtors used the funds to pay living expenses, which amounted to $4,000 a month, and to pay certain specific creditors. When the debtors needed to pay some particular living expense, they would instruct Barbara Hurtado to write a check on their behalf. Throughout the period of this arrangement, Barbara Hurtado kept the debtors' money separate from her own and never spent any portion of it on herself. The funds from the sale of the debtors' house and the settled lawsuit against BCBS were depleted by mid-1996, two years before the debtors declared bankruptcy. Barbara Hurtado had held funds for the debtors for over three years. No consideration was given in exchange for her aid.
Although Barbara Hurtado characterizes the funds as always belonging to the debtors (and herself as a mere agent at their direction), there was, of course, a reason why the debtors insisted on having Barbara Hurtado take legal control of the money. With Barbara Hurtado legally in control of the funds, the creditors had no access to them. The funds were not, for example, listed as the debtors' assets on the 433-A form filed with the IRS by the debtors in February 1996.
There is no question that the transfer of funds was done deliberately to circumvent the creditors' rights. Jon Hurtado baldly admitted this in deposition. When asked why he gave the funds to his mother to place in her account rather than his own, Jon Hurtado responded, J.A. at 120 (Dep. Test. of Jon Hurtado). Barbara Hurtado also knew that the money was being used to pay certain creditors, for she was the individual writing checks to them.
The Trustee filed a complaint to avoid and recover the transfer of conveyances and to revoke the debtors' discharge in May 1999. The complaint was filed against the debtors as well as Barbara Hurtado. The debtors were later dismissed from the action by the bankruptcy court, and that decision was not appealed.
The bankruptcy court granted Barbara Hurtado's motion for summary judgment and denied the Trustee's summary-judgment motion, on the ground that Hurtado was not liable under 11 U.S.C. § 550. The bankruptcy court reasoned that Barbara Hurtado never had sufficient control over the money for liability to attach; instead, she was a mere conduit of the funds. The district court reversed, finding that Hurtado was liable as an initial transferee under 11 U.S.C. § 550. The district court issued a limited remand in the case for consideration of whether the statute of limitations barred the Trustee from recovering the portion of the funds that came from the 1992 sale of the debtors' home. On remand, the Trustee quickly conceded the issue. The bankruptcy court then entered a final judgment in favor of the Trustee on November 9, 2001, in the amount of the 1995 BCBS proceeds, and the district court affirmed. Hurtado appealed to this court, raising solely the question of whether she is liable under 11 U.S.C. § 550 with regard to the BCBS proceeds.
Brady-Morris v. Schilling (In re Kenneth Allen Knight Trust), 303 F.3d 671, 676 (6th Cir.2002).
Two provisions of the bankruptcy code are of particular importance in this case, 11 U.S.C. § 544 and 11 U.S.C. § 550. The former allows a Trustee to avoid certain types of fraudulent transfers; the latter empowers the Trustee to recover the property transferred.
The parties do not dispute that there has been a fraudulent transfer under 11 U.S.C. § 544 in this case. Section 544 "allows the trustee to step into the shoes of a creditor in order to nullify transfers voidable under state fraudulent conveyance acts for the benefit of all creditors." Corzin v. Fordu (In re Fordu), 201 F.3d 693, 697 n. 3 (6th Cir.1999) (quotation omitted); see also Mason v. Young (In re Young), 238 B.R. 112, 114 (6th Cir.BAP 1999).
At the time of the transfer, there were two provisions of Michigan law that potentially rendered the transfer fraudulent, namely MICH. COMP. LAWS § 566.14 and § 566.17. Section 566.14 deems fraudulent any conveyance made by an insolvent debtor without a fair consideration; Section 566.17 deems fraudulent any conveyance made "with actual intent ... to hinder, delay, or defraud" any of a debtor's present or future creditors. MICH. COMP. LAWS § 566.14, § 566.17 (1998).1
The debtors do not dispute that their conveyance of the BCBS funds to Barbara Hurtado was fraudulent under Michigan law. There is no doubt either that the conveyance was made to hinder the debtors' creditors or that the debtors were insolvent and did not receive any reasonably equivalent value in exchange for the transfer to Barbara Hurtado. Because the conveyance was fraudulent under Michigan law, 11 U.S.C. § 544 vests the Trustee with the right to avoid the transfer.
The disputed issue in this case is whether the Trustee can recover the improper transfer under 11 U.S.C. § 550. Although related conceptually, these two issues must be kept analytically separate. See Suhar v. Burns (In re Burns), 322 F.3d 421, 427 (6th Cir.2003) (). Section 550 provides as follows:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from —
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (a)(2) of this section from —
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good...
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