Covey v. Casey's Gen. Stores, Inc. (In re Duckworth)

Decision Date24 September 2012
Docket NumberAdv. No. 11-8104,Case No. 10-83603
PartiesIn re: DAVID L. DUCKWORTH, Debtor. CHARLES E. COVEY, Trustee, Plaintiff, v. CASEY'S GENERAL STORES, INC., Defendant.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Central District of Illinois

CHARLES E. COVEY, Trustee, Plaintiff,

Case No. 10-83603
Adv. No. 11-8104


Date: September 24, 2012

Thomas L. Perkins
United States Chief Bankruptcy Judge


This matter is before the Court on cross motions for summary judgment filed by Charles E. Covey, Trustee (TRUSTEE), as Plaintiff, and Casey's General Stores, Inc. (CASEY'S), as Defendant, on the TRUSTEE'S complaint to recover payments totaling $1,215.68, as unauthorized postpetition transfers under section 549 of the Bankruptcy Code.

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The facts are not controverted. The Debtor, a self-employed grain farmer, filed a Chapter 7 petition on November 23, 2010. According to the schedules of assets and liabilities which were filed on November 29, 2010, the Debtor held no interest in any incorporated or unincorporated business, partnership or joint venture. He reported cash on hand and in a checking account in the total amount of $400. He scheduled crops worth $363,158 and farm equipment valued at $323,000.

State Bank of Toulon (SBT) is scheduled as a secured creditor on Schedule D filed by the Debtor, which lists debts owed to SBT totaling $2,340,249 secured by collateral valued at $686,158. The Debtor also scheduled several landlords as secured creditors, holding rights in crops. In its motion for relief from stay, SBT alleges that as of the filing date it was owed $2,329,226 and that the Debtor had no equity in the collateral, which included farm equipment and farm products (crops), and the proceeds therefrom. Michlig AgriCenter, Inc., also asserted crop liens. The first meeting of creditors was held on December 29, 2010. At that meeting, the Debtor falsely denied that he was the principal of Power Trading, LLC, and that he had a bank account in that name.

On August 10, 2011, the Debtor pled guilty to money laundering and bankruptcy fraud, admitting that, beginning in February 2009, he sold grain out of trust, contracting to sell corn under the names of Lighthouse Farms, Inc., and Midwest Farms, LLC, having established those entities for the purpose of selling the grain free of the lien of secured creditors. The Debtor acknowledged that he established bank accounts in the names of each of those entities, depositing the grain proceeds into those accounts, without SBT's

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knowledge or consent. On November 7, 2010, the Debtor formed Power Trading as an Indiana limited liability company. On November 12, 2010, the Debtor withdrew funds totaling $97,000 from the Lighthouse Farms and Midwest Farms accounts. On November 22, 2010, just one day prior to filing his bankruptcy petition, the Debtor deposited $95,000 into an account he had opened days earlier in the name of Power Trading. On January 24, 2011, the Debtor established a second account in the name of Power Trading, funding the account with withdrawals totaling $24,000 from the existing account in the name of Power Trading.

After those facts came to light, the TRUSTEE filed an adversary proceeding to deny the Debtor's discharge and for a money judgment for the value of the assets not disclosed. The TRUSTEE and the Debtor entered into a stipulated judgment for denial of the Debtor's discharge and awarding judgment in the TRUSTEE'S favor for $99,816.25 plus costs of $250.1 In that judgment, the Debtor admitted the underlying elements of sections 727(a)(2), (a)(3), (a)(4), (a)(5) and (a)(6), and agreed that, on the date of bankruptcy, he "owned" $94,900 in an account in the name of Power Trading, LLC.2

The TRUSTEE brought a separate adversary proceeding against numerous defendants, including SBT and other creditors claiming liens against the Debtor's property, seeking to avoid the lien of SBT and each of the landlord's liens on crops.3 In

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that adversary, this Court has determined that SBT had a valid, unavoidable lien on crops that secured a promissory note dated December 15, 2008, in the principal amount of $1,100,000. In re Duckworth, 2012 WL 986766 (Bankr.C.D.Ill. 2012). The TRUSTEE has appealed that decision, but until and unless it is vacated or reversed, it stands as the law of the case. Metro Container Corp. v. Teamsters Local Union No. 676, 1987 WL 15225 at *5 (E.D.Pa. 1987).

The TRUSTEE brought this adversary against CASEY'S, seeking to avoid the seventy (70) payments it received from the accounts in the name of Power Trading as unauthorized postpetition transfers pursuant to section 549 and to recover the value of those transfers under section 550(a)(1). Attached to the complaint is a copy of the checking account statements for the two accounts of Power Trading reflecting the $95,000 deposit made on November 22, 2010. Those statements reflect that between November 23, 2010, and March 18, 2011, four hundred and sixty (460) transactions were debited to the accounts, expending virtually the entire initial deposit of $95,000. Seventy (70) of those transactions were for purchases made at several CASEY'S locations.4 The amounts of the CASEY'S purchases range from a low of $1.38 to a high of $79.96. Fifty-eight (58) of the purchases were for less than $30.00. CASEY'S answered the complaint, denying that any of the funds it received were transfers of property of the bankruptcy estate. Both the TRUSTEE and CASEY'S filed motions for summary judgment which are presently before the Court.

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Under Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings in bankruptcy by Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the material facts are not in dispute, the sole issue is whether the moving party is entitled to a judgment as a matter of law. ANR Advance Transp. Co. v. Int'l Broth. of Teamsters, Local 710, 153 F.3d 774, 777 (7th Cir. 1998).

Section 549 authorizes a trustee to avoid an unauthorized, postpetition transfer of property of the estate. 11 U.S.C. § 549(a). An action to avoid a transfer has four elements: (1) property was transferred; (2) the property was property of the bankruptcy estate; (3) the transfer occurred after the commencement of the case; and (4) the transfer was not authorized by the bankruptcy court or the Bankruptcy Code. In re Blair, 330 B.R. 206 (Bankr.N.D.Ill. 2005). Once the trustee establishes that a postpetition transfer of estate property occurred, the burden shifts to the defendant to prove the validity of the transfer. Fed. R. Bankr. P. 6001; In re Rood, 459 B.R. 581, 606 (Bankr.D.Md. 2011). Section 550 of the Bankruptcy Code governs the liability of transferees of transfers avoided pursuant to section 549. Under section 550(a)(1), an avoided transfer can be recovered from the "initial transferee." Under section 550(a)(2), the transfer is also recoverable from an "immediate or mediate" transferee of the initial transferee. Under that

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provision, however, a subsequent transferee who takes a transfer for value, in good faith, and without knowledge of its voidability, is shielded from liability.

In his motion for summary judgment, the TRUSTEE asserts that Lighthouse Farms, Inc., Midwest Farms, LLC, and Power Trading, LLC, were alter ego entities of the Debtor whose separate status should be disregarded as a matter of Illinois law. If those separate entities are disregarded and their assets treated as if owned by the Debtor, he argues, then the funds in Power Trading's accounts were property of the Debtor's bankruptcy estate at the time he filed and thereafter. In support of the motion, the TRUSTEE presents a portion of the Debtor's deposition, a copy of his plea agreement and a transcript of his criminal guilty plea hearing in federal district court. In his deposition, the Debtor admitted that he had full dominion and control over the funds transferred to the Power Trading accounts and that the funds were spent on his personal living expenses. The TRUSTEE also submits a letter written by Michael Clark, as Trustee of TDA Concepts, a member of Power Trading, LLC, stating that Power Trading was not a business entity and that it was created for the "purpose of providing asset privacy and protection" of the personal property owned by the Debtor. In addition, the TRUSTEE submits various documents papering the trail of the grain proceeds from the elevator through the bank accounts held by the nondebtor entities to CASEY'S.

CASEY'S also filed a motion for summary judgment. Disputing the TRUSTEE'S alter ego theory, CASEY'S contends that Power Trading was the initial transferee of the funds from the Debtor, and that as a subsequent transferee, it took the funds in good faith and without knowledge of the avoidability of the transfers, and is protected under

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section 550(b)(1). The TRUSTEE does not dispute that each transaction represents an ordinary retail sale of consumer goods. Nor does the TRUSTEE dispute CASEY'S...

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