Chase & Sanborn Corp., In re, 86-5246

• Decision Date: 06 April 1987
• Docket Number: No. 86-5246,86-5246
• Citation: 813 F.2d 1177
• Parties: Bankr. L. Rep. P 71,753 In re CHASE & SANBORN CORPORATION f/k/a General Coffee Corporation, Debtor. Paul C. NORDBERG, Plaintiff-Appellant, v. Carolina SANCHEZ, City National Bank, and Luis Carlos Londono, Defendants- Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1177

813 F.2d 1177

Bankr. L. Rep. P 71,753

In re CHASE & SANBORN CORPORATION f/k/a General Coffee

Corporation, Debtor.

Paul C. NORDBERG, Plaintiff-Appellant, v. Carolina SANCHEZ, City National Bank, and Luis Carlos

Londono, Defendants- Appellees.

No. 86-5246.

United States Court of Appeals,

Eleventh Circuit.

April 6, 1987.

As Amended May 8, 1987.

Steven M. Kamp, Hornsby & Whisenand, Gary R. Jones, Miami, Fla., for plaintiff-appellant.

Robert A. Schatzman, Britton, Schantz & Schatzman, P.A., Phillip M. Hudson, III, Miami, Fla., Denise V. Powers, Haddad, Josephs & Jack, Coral Gables, Fla., for City Nat. Bank of Miami.

Frank D. Newman, Miami, Fla., for Luis Carlos Londono.

Appeal from the United States District Court for the Southern District of Florida.

Before KRAVITCH and HATCHETT, Circuit Judges, and MORGAN, Senior Circuit Judge.

KRAVITCH, Circuit Judge:

The creditor trustee of the estate of the bankrupt Chase & Sanborn Corporation appeals the dismissal of a claim filed pursuant to 11 U.S.C. Sec. 548 seeking the avoidance of an allegedly fraudulent transfer of $350,000 that was channeled through an account of the debtor corporation as part of a scheme to repay a personal debt of the corporation's sole owner. The trustee also challenges discovery and evidentiary rulings made by the bankruptcy court and affirmed by the district court. We conclude that the debtor corporation was a mere conduit for repayment of the owner's personal loan and, consequently, that the contested $350,000 was not the "property" of the debtor corporation. The transfer of the funds thus is not subject to avoidance. We further find that the discovery and evidentiary rulings, if error, do not warrant reversal. Accordingly, we affirm the judgment of the district court.

I. BACKGROUND

The creditor trustee's claims concern one of a series of related financial transactions accurately described by the bankruptcy court as "bewildering." The central character was Alberto Duque Rodriguez (Duque), a Colombian citizen living in Miami. Duque was the president and sole owner of a limited partnership, Domino Investments (Domino), which in turn owned all the stock of the debtor, Chase & Sanborn, also known as the General Coffee Corporation. Duque also was chairman of the board and the majority stockholder of defendant City National Bank (CNB).

In 1983, Duque and his companies encountered severe financial difficulties. On April 29 of that year, defendant Carlos Londono, a personal friend of Duque, borrowed $2 million from defendant CNB and immediately endorsed the check over to Duque. The purpose of the loan to Londono apparently was to enable Duque to obtain the money through an unsecured loan despite federal regulations preventing him, as an owner of the bank, from doing so. Duque sent the $2 million to a Colombian coffee company, where its trail ends.

The story resumed on May 9, when Duque personally borrowed $5 million from Arab National Bank. Some of this money would follow a circuitous route until it eventually would be used to repay Londono's loan from CNB. Initially, $660,000 of the $5 million was sent to Domino. At that point a critical snag arises in the story. The defendants contend, and the bankruptcy court found, that the $660,000 was transferred to General Corporation of Coffee, a separate, previously defunct entity whose account recently had been reopened solely for the purpose of laundering this money. The creditor trustee contends that Domino transferred the $660,000 to Chase & Sanborn via an account of its alter ego, General Coffee Corporation, which at one time was known as General Corporation of Coffee. The parties stipulated that the account was opened only days before the transfer took place and that it was closed only days afterward. The trustee claims, with considerable support in the record, that about $310,000 of this money was transferred to regular accounts of General Coffee Corporation, where it was used to pay salaries and lawyers.

The parties all agree that the remaining $350,000--the center of this entire controversy--was gratuitously transferred to defendant Carolina Sanchez, Duque's personal secretary, within two days after it arrived in the newly opened account. Sanchez immediately wired to Londono that $350,000, as well as another $1.65 million from Duque's Arab Bank loan that had been funneled to her by other means. Londono used this $2 million to repay his CNB loan.

The entire scheme took about three weeks from start to finish. Two days before Londono repaid CNB, Duque declared bankruptcy, as did Chase & Sanborn and other of Duque's corporate entities. Duque subsequently was charged with fraud; he has refused on fifth amendment grounds to testify in the bankruptcy proceedings. Duque is not a party in this action. Defendant Sanchez has not been located.

A Chapter 11 plan of reorganization was filed for Chase & Sanborn in June 1984, and was confirmed by the bankruptcy court in August 1984. In May 1985, the individual selected as creditor trustee filed this action along with more than sixty other such actions related to the Chase & Sanborn bankruptcy. The parties have stipulated that Chase & Sanborn was insolvent during the events at issue.

II.

The gravamen of the creditor trustee's claim ¹ is that the funds in controversy became the property of Chase & Sanborn upon their arrival in the account of General Corporation of Coffee, and thus that the gratuitous transfer of the $350,000 to defendant Sanchez is avoidable as either actual or constructive fraud. ² In denying the claim, the bankruptcy court concluded that the trustee had failed to establish that the funds were the property of the debtor. The court based this conclusion on its factual finding that the General Corporation of Coffee, into whose account the funds were entered, was an entity separate and distinct from Chase & Sanborn/General Coffee Corporation. This finding was affirmed by the district court.

The creditor trustee attacks the finding as clearly erroneous. We agree. Except for a single, unsupported remark at trial by counsel for defendant Londono, the record is devoid of any evidence to substantiate the finding. By contrast, the record contains uncontroverted evidence that the account was an operating account of the debtor corporation. The evidence demonstrated, for example, that "General Corporation of Coffee" was the name by which General Coffee Corporation previously was known. The account itself was used to pay a variety of Chase & Sanborn's expenses, including salary and legal expenses. The $350,000 transfer to Sanchez, moreover, was ordered by Chase & Sanborn's president in a letter on the corporation's stationery.

Despite our determination that the bankruptcy court was clearly erroneous in the factual finding that served as the basis for the court's decision, we affirm the dismissal of the action by the courts below. Although the debtor corporation had possession of the funds in controversy by virtue of the transfer to the account, the record demonstrates that the debtor corporation did not have sufficient control over the funds to warrant a finding that the funds were the debtor corporation's property. This conclusion is based upon our resolution of what appears to be an issue of first impression in this or any other court. No court, so far as we have discovered, previously has established a framework for determining when funds provided to a debtor by a third party become property of the debtor so that an allegedly fraudulent transfer of the funds to a noncreditor is subject to avoidance under 11 U.S.C. Sec. 548.

In support of the contention that the payment to Sanchez is avoidable as a fraudulent transfer of the debtor's property, the creditor trustee here relies exclusively on cases involving preferential transfers to creditors, see 11 U.S.C. Sec. 547, where the source of the payment was a party other than the debtor. The germinal case on this issue established the rule that a payment to a creditor generally is avoidable as a preference unless the defendants demonstrate that the other party "controlled the application of the funds" by providing the monies "only on condition that a particular creditor receive the proceeds." Smyth v. Kaufman, 114 F.2d 40, 42 (2d Cir.1940). Thus, where a debtor has paid existing debts, the funds used as payment are presumed to be the debtor's property absent some proof to the contrary offered by those defending the transfer. See, e.g., Larose v. Bourg, 45 B.R. 693, 697 (Bktrcy.M.D.La.1985) (funds transferred to debtor's bank account without restriction on use "became property of the Debtor, since the Debtor had legally unrestricted rights to use the funds as it saw fit"); cf. Brown v. First Nat'l Bank of Little Rock, Arkansas, 748 F.2d 490 (8th Cir.1984) (per curiam) (checks from comakers of loan made payable to debtor but handed directly to creditor bank not within control of debtor and thus not property of debtor's estate).

The rules established in the avoidable preference cases are applicable to a certain extent in the context of fraudulent transfers. The purpose of avoidance of both types of transfers is to prevent a debtor from diminishing, to the detriment of some or all creditors, funds that are generally available for distribution to creditors....