Meoli v. Huntington Nat'l Bank (In re Teleservices Grp., Inc.)

• Decision Date: 30 March 2012
• Docket Number: Adversary No. 07–80037.,Bankruptcy No. HG 05–00690.
• Citation: 469 B.R. 713
• Parties: In re TELESERVICES GROUP, INC., Debtor. Marcia R. Meoli, Trustee, Plaintiff, v. The Huntington National Bank, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Michigan

469 B.R. 713

In re TELESERVICES GROUP, INC., Debtor.Marcia R. Meoli, Trustee, Plaintiff,

v.The Huntington National Bank, Defendant.

Bankruptcy No. HG 05–00690.

Adversary No. 07–80037.

United States Bankruptcy Court, W.D. Michigan.

March 30, 2012.

Douglas A. Donnell, Mark A. Kehoe, Mika Meyers Beckett & Jones, PLC, John E. Anding, Drew, Cooper & Anding, Grand Rapids, MI, Marcia R. Meoli, Hann Persinger PC, Holland, MI, Peter A. Teholiz, The Hubbard Law Firm, P.C., Lansing, MI, for Plaintiff.

James Moskal, Jeffrey O. Birkhold, Kevin M. Kileen, Matthew T. Nelson, Warner Borcross & Judd LLP, Grand Rapids, MI, for Defendant.

OPINION RE: TRUSTEE'S MAY 13, 2011 MOTION—SUMMARY JUDGMENT

JEFFREY R. HUGHES, Bankruptcy Judge.

Trustee Marcia Meoli has sued The Huntington National Bank (“Huntington”) to recover over $72 million dollars in transfersHuntington received either directly from Teleservices Group, Inc. (“Teleservices”) or indirectly through a related company, Cyberco Holdings, Inc. (“Cyberco”).¹ This opinion addresses Trustee's most recent motion for summary judgment in this complicated case.²

JURISDICTION/STANDARD FOR SUMMARY JUDGMENT

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,³ the Constitution prohibits this court from entering a final judgment notwithstanding. Therefore, the determinations set forth in this opinion will be incorporated into a report and recommendation that will be prepared for the district court's de novo review.

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.

FACTUAL BACKGROUND⁴

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 Cyberco's behalf. In truth, the transferred funds were actually the proceeds of a fraud that Watson, through Cyberco and Teleservices, was perpetrating on unsuspecting equipment finance companies.

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:

January 2004—Cyberco was asked to find a different bank.

April 2004—Cyberco was given a second ninety-day extension to accomplish this exit strategy.

Summer 2004—Cyberco did not find a new lender but instead began paying down the Huntington loan with even more funds received from Teleservices.

Fall 2004—Huntington was repaid in full through a combination of setoffs against Cyberco's bank accounts and several checks from Teleservices itself.

The Fraud

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.⁵ He would tell banks, leasing companies, and other similar institutions that Cyberco needed financing to acquire more servers and related computer hardware for its rapidly growing global business. However, none of the equipment that Cyberco was supposedly purchasing ever existed. Rather, Watson would represent that Teleservices was Cyberco's vendor for the desired items and, as a consequence, the finance companies would unwittingly forward the necessary funds to Teleservices' Silicon Valley account in California. Watson would then have Teleservices issue false invoices and other documents to evidence the supposed transactions. As for Cyberco, Watson packed its computer room with both real and fake servers. He would also swap serial numbers to further deceive his victims whenever a collateral audit was attempted.

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 Watson and his fellow cheats.⁶ As for Cyberco's Huntington accounts, they had been set up in conjunction with the line of credit to assist Cyberco in the management of its cash. By agreement, Huntington would “zero out” all accounts at the end of each day and either apply the net deposits to pay down the line of credit or advance upon the line of credit to cover any negative balance due.⁷

Trustee's Motion

Trustee has sued Huntington on the theory that it received fraudulent transfers from Teleservices that are avoidable under either Sections 548 or 544(b).⁸ Some of the targeted transfers were in the form of checks drawn on Teleservices' own Silicon Valley account and made payable directly to Huntington. However, a much larger portion of what Trustee seeks to recover relates to the regular deposits Teleservices was making into Cyberco's Huntington accounts.

Several previous motions and a twelve-day trial have already decided these critical issues:

• That the $7,395,283.04 in checks that Huntington received directly from Teleservices are avoidable as actually fraudulent transfers under Section 548(a)(1)(A) and that Huntington did not receive any of these checks either for value or in good faith under Section 548(c); and

• That to the extent the $65,356,244.36 ⁹ in deposits that Teleservices transferredinto Cyberco's Huntington accounts are avoidable: (1) Huntington has not established its Section 550(b)(1) good faith with respect to any of the deposits made after April 30, 2004; ¹⁰ and (2) Huntington had Section 550(b)(1) knowledge of their avoidability at an even earlier date.¹¹

Trustee's pending motion targets the remaining issues. Most are set forth in this court's May 24, 2011 order.¹² However, Huntington raised one new issue at the final pretrial conference held earlier this month.

Huntington's Position

Huntington is not contesting every issue identified in the May 24, 2011 Order. ¹³ Rather, Huntington concentrates what amounts to its final defense upon five key arguments: (1) Cyberco, not Teleservices, was the real owner of the Silicon Valley account; (2) Huntington in no event should be liable for anything more than the $16,967,390.65 ¹⁴ it actually used from the transfers to pay down Cyberco's debt; (3) there are judicial exceptions to the strict enforcement of Section 550(a); (4) variations in the state fraudulent transfer laws prevent at least the 2003 transfers from being recovered; and (5) Huntington should get credit for the avoidable transfers the Cyberco estate itself has recovered from the equipment finance companies. Trustee also raises the separate question of whether the estate is entitled to prejudgment interest.

OWNERSHIP OF THE SILICON VALLEY ACCOUNT

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.” ¹⁵ For example, Huntington has already argued without success that Cyberco and Teleservices should be regarded as a “singular fraudulent enterprise” for purposes of its Section 548(c) defense.¹⁶ Likewise, Huntington's failed attempt to substantively consolidate the two bankruptcy estates...