Harbour, In re

• Decision Date: 06 May 1988
• Docket Number: Nos. 87-3610,87-3611,s. 87-3610
• Citation: 845 F.2d 1254
• Parties: , 18 Collier Bankr.Cas.2d 1214, Bankr. L. Rep. P 72,308 In re Billy H. HARBOUR, Debtor. Donald W. HUFFMAN, Trustee, Plaintiff-Appellant, v. COMMERCE SECURITY CORPORATION; Vivian S. Brandon, Defendants-Appellees, v. James M. BRANDON; Mary Eddy, Third Party Defendants. In re Billy H. HARBOUR, Debtor. Donald W. HUFFMAN, Trustee, Plaintiff-Appellee, v. COMMERCE SECURITY CORPORATION; Vivian S. Brandon, Defendants-Appellants, v. James M. BRANDON; Mary Eddy, Third Party Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1254

845 F.2d 1254

92 A.L.R.Fed. 621, 18 Collier Bankr.Cas.2d 1214,

Bankr. L. Rep. P 72,308

In re Billy H. HARBOUR, Debtor.

Donald W. HUFFMAN, Trustee, Plaintiff-Appellant, v. COMMERCE SECURITY CORPORATION; Vivian S. Brandon, Defendants-Appellees, v. James M. BRANDON; Mary Eddy, Third Party Defendants.

In re Billy H. HARBOUR, Debtor.

Donald W. HUFFMAN, Trustee, Plaintiff-Appellee, v. COMMERCE SECURITY CORPORATION; Vivian S. Brandon, Defendants-Appellants, v. James M. BRANDON; Mary Eddy, Third Party Defendants.

Nos. 87-3610, 87-3611.

United States Court of Appeals Fourth Circuit.

Argued March 7, 1988.

Decided May 6, 1988.

Carr L. Kinder, Jr. (Bird, Kinder & Huffman, Roanoke, Va., on brief), for plaintiff-appellant.

John E. Falcone (W. Alan Smith, Jr., Smith, Angel & Falcone, P.C., Lynchburg, Va., on brief), for defendants-appellees.

Before RUSSELL and PHILLIPS, Circuit Judges, and HAYNSWORTH, Senior Circuit Judge.

DONALD RUSSELL, Circuit Judge:

Billy H. Harbour (Harbour), the debtor, and James Brandon were business associates and friends prior to certain of Harbour's creditors filing an involuntary petition for bankruptcy against Harbour on February 11, 1982. The bankruptcy began in Chapter 11 but was ultimately converted to a Chapter 7 proceeding on September 13, 1983.

This appeal involves an action by the trustee in bankruptcy, Donald W. Huffman, to recover certain funds transferred by Harbour to Vivian Brandon or Commerce Security Corporation (CSC), the defendants, prior to Harbour's declaration of bankruptcy. Vivian Brandon controls CSC, a real estate holding company. Vivian Brandon is also James Brandon's mother.

Counts I-IV of the bankruptcy trustee's amended complaint involve $179,450.00 which Harbour moved in a series of transactions to Vivian Brandon or CSC, and then to James Brandon. Vivian Brandon never held these funds for longer than a day but was simply an intermediary for passage of this money from Harbour to her son. Harbour never received any consideration from Vivian Brandon or CSC in exchange for these transfers, and these defendants offered no legitimate business reason for Harbour's transferring funds to James Brandon by first going through his mother.

Vivian Brandon was a teacher at a business secretarial school for over twenty three years. She testified that she had been acquainted with Harbour for approximately nineteen years and had seen him "almost daily" during significant portions of that time. Vivian Brandon also testified that she had "no idea" why Harbour chose to transfer money to James Brandon through her, nor did she ever ask. She claimed that she agreed to process the funds because Harbour asked her to do so, and that she trusted Harbour because he was like a member of her family. There is no dispute that Vivian Brandon received no portion of the funds transferred. The bankruptcy court granted judgment in favor of Vivian Brandon and CSC with regard to the $179,450.00 involved in Counts I-IV of the amended complaint and refused to allow the trustee to recover these funds.

Count VI of the trustee's amended complaint involves another series of payments by Harbour to Vivian Brandon. She did not send these payments on to her son but kept them. They totaled $11,250.00. The bankruptcy court found that Harbour received no consideration from Vivian Brandon for any of these payments other than one for $1,000.00, and so entered judgment in favor of the trustee for $10,250.00 on Count VI.

Finally, Count VII of the amended complaint involves a wire transfer of $38,340.00 from CSC to James Brandon. Although Vivian Brandon admitted that this transaction "would have to have been" a transfer of Harbour's money to her son, the bankruptcy court found that the trustee failed to produce sufficient evidence that Harbour did not receive adequate consideration from CSC for the money. The bankruptcy court therefore granted judgment in favor of the defendants on Count VII and refused to allow the trustee to recover these funds. The district court, which found that Vivian Brandon was an "innocent dupe" of her son and Billy Harbour, affirmed the bankruptcy court's judgment with respect to each count of the amended complaint listed above.

Analysis

The most important question in this case involves the trustee's attempt to recover the $179,450.00 put in issue by Counts I-IV of the amended complaint. Section 544(b) of the Bankruptcy Code, the so-called "strong arm" clause, grants to the trustee in bankruptcy the same right to avoid transfers as an unsecured creditor under applicable state law. 11 U.S.C. Sec. 544(b) (1982). The applicable state law in this case is Va. Code Ann. Sec. 55-81 (1986), which provides:

Every gift, conveyance, assignment, transfer or charge which is not upon consideration deemed valuable in law, ... shall be void as to creditors whose debts shall have been contracted at the time it was made....

Since the defendants, Vivian Brandon and CSC, concede that Harbour received no consideration for his transfers of $179,450.00 to them, there is no question that these transfers are voidable by the trustee.

Having determined that these transfers are voidable, we next decide: voidable as to which parties? For the answer we look to section 550 of the Bankruptcy Code, since "[s]ection 550 prescribes the liability of a transferee of an avoided transfer, and enunciates the separation between the concepts of avoiding a transfer and recovering from the transferee." H.R.Rep. No. 595, 95th Cong., 1st Sess. 375 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 90 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5876, 6331. Section 550 provides, in pertinent part:

(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 [11 U.S.C.], the trustee may recover for the benefit of the estate, the property transferred, or, if the court properly 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; ...

11 U.S.C. Sec. 550 (1982 & Supp. IV 1986) (emphasis added).

The trustee here concedes that the defendants were not the entities for whose benefit Harbour's transfers were made, since the defendants received no portion of the $179,450.00. The defendants simply held each of the transfers for a short period and then sent them on to James Brandon. Instead, the trustee contends that he may recover from the defendants as the "initial transferees" of the funds.

There is no dispute that the defendants were in actual fact the initial recipients of the debtor's transfers. If section 550(a)(1) is read literally, therefore, the defendants are liable and no further analysis is necessary. At least one court has held that section 550(a)(1) is to be applied literally. Mixon v. Mid-Continent Systems, Inc. (In Re Big Three Transportation, Inc.), 41 B.R. 16, 20-21 (Bankr.W.D.Ark.1983).

A purely literal reading of section 550(a)(1), however, appears to be an interpretation that is too narrow to fit all circumstances. Several lower courts have so held. The seminal case in this regard is Gropper v. Unitrac, S.A. (In Re Fabric Buys of Jericho, Inc.), 33 B.R. 334 (Bankr.S.D.N.Y.1983). Fabric Buys involved a payment by a debtor prior to bankruptcy to one of his creditors in settlement of a lawsuit brought by the creditor for goods sold and delivered. The debtor transferred the funds to the creditor's attorney. The attorney deposited the payment in his client escrow account, and within approximately two weeks forwarded it to the creditor.

The trustee, seeking to avoid this payment as preferential, sought to recover it from the creditor's attorney as the "initial transferee" under section 550(a)(1). The court, however, held for the attorney and expressly rejected the trustee's contention that the court should read the phrase "initial transferee" literally. The court described the law firm as a "mere conduit" for the funds, and stated: "That such amount was funneled through the escrow account does not make Unitrac's [the creditor's] lawyer an initial transferee." Id., 33 B.R. at 337.

As a separate and distinct ground for its decision in Fabric Buys the court cited its equitable power to prevent an unjust result:

In some circumstances, a literal application of section 550(a) would permit the Trustee to recover from a party who is innocent of wrongdoing and deserves protection. In such circumstances the bankruptcy court should exercise its discretion to use its equitable powers under section 105(a) and 28 U.S.C. Sec. 1481 to prevent an inequitable result. ¹

Id., quoting 4 Collier on Bankruptcy p 550.02, at 550- (15th ed. 1983).

Other courts have followed the lead of Fabric Buys. ² In Metsch v. First Alabama Bank of Mobile (In Re Colombian Coffee Co., Inc.), 59 B.R. 643 (Bankr.S.D.Fla.1986), aff'd, 75 B.R. 177 (S.D.Fla.1987), the Bankruptcy Court held that a bank which received transfers for deposit in a customer's account was not an "initial transferee" but a mere "commercial conduit" of the funds, and recovery of the deposit by the bankruptcy trustee was not allowed. In Metsch v. City National Bank of Miami (In Re Colombian Coffee Co., Inc.), 64 B.R. 585 (Bankr.S.D.Fla.1986), the pertinent facts were essentially parallel to those in the first Colombian Coffee case cited above, but in this case the debtor controlled and dominated the defendant bank. Nonetheless, the court held that the bank was a mere "commercial conduit" and again refused recovery to the trustee. Id., 64 B.R. at 586. Both of the Colombian Coffee cases also relied on the bankruptcy court's equitable powers as an alternative ground for their decisions.

Salomon v. Nedlloyd, Inc. (In Re Black & Geddes, Inc.), 59 B.R. 873 (Bankr.S.D.N.Y.1986), involved the bankruptcy trustee of a freight forwarder trying to recover an amount paid to a steamship agent...