In re Circuit Alliance, Inc.
| Citation | 228 BR 225 |
| Decision Date | 24 December 1998 |
| Docket Number | Bankruptcy No. BKY 96-30351,Adversary No. 97-3130. |
| Parties | In re CIRCUIT ALLIANCE, INC., Debtor. Brian F. Leonard, Trustee, Plaintiff, v. First Commercial Mortgage Company, Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
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Gregory J. Wald, St Paul, MN, Owen H. Prague, Woodland Hills, CA, for Defendant.
Brian F. Leonard, Mpls., MN, for Plaintiff.
ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
This adversary proceeding came on before the Court on the parties' cross-motions for summary judgment. The Plaintiff appeared personally, on behalf of the Debtor's bankruptcy estate. The Defendant appeared by its attorney, Gregory J. Wald (Owen H. Prague, on the brief). Upon the moving and responsive documents and the arguments of counsel, the Court makes the following order.
The Debtor was a company based in Minneapolis, Minnesota that manufactured circuit boards for computers. It filed for relief under Chapter 11 on January 23, 1996. The case was converted to one under Chapter 7 on March 11, 1997. The Plaintiff is the Trustee of the Debtor's bankruptcy estate.
The Defendant is a home mortgage lender based in Little Rock, Arkansas. Between late February and early May, 1995, the Defendant received payment of a total of $3,359.80, and applied it to the residential mortgage loan account of one of its borrowers. The funds to make these payments originated from the Debtor's corporate revenues, and were initially drawn off the Debtor's business checking account.
Alleging that the payment of the funds was a fraudulent transfer within the meaning of 11 U.S.C. § 548(a)(2), the Plaintiff commenced this adversary proceeding. He seeks to avoid the transfer effected by the payments. The Plaintiff alleges that the Defendant was an "initial transferee" of the funds within the contemplation of 11 U.S.C. § 550(a)(1), and that therefore he may recover the transfer from the Defendant. To effectuate the avoidance, he seeks a money judgment against the Defendant.
The Defendant answered the Plaintiff's complaint. It denies most of the Plaintiff's fact allegations, raises several general equitable defenses, and specifically pleads that it was a good faith transferee within the scope of 11 U.S.C. § 550(b).
The Plaintiff filed his motion for summary judgment first. He notes that the basic aspects of the transfers at issue are undisputed, and he brings forth evidence of the Debtor's financial condition at the time of the transfers. These points, he argues, make out his prima facie case for avoidance under the governing law. Then he argues that the Defendant must be characterized as the "initial transferee" of the transfers as a matter of law, and hence is liable to the estate under § 550(a)(1).
In its responsive motion, the Defendant points to various statements in deposition testimony and affidavits in the record, and notes that they are uncontroverted. These points, the Defendant argues, establish that it was no more than a mediate or immediate transferee that took the transfers unwittingly and without knowledge of their possible voidability. Thus, the Defendant argues, it is entitled to summary judgment on its affirmative defense.
The basic transactional facts, and some going to the affirmative defense, are uncontroverted. Other facts require some analysis and discussion for their status to be ascertained. The former are as follows:
1. Before the Debtor's bankruptcy filing, one Christopher Casey was its managing agent. Michael Hullermann was an employee of the Debtor at the same time.
2. In early 1995, Casey and Hullermann entered a written contract, entitled "Lease Option and Purchase Agreement," under which Casey was to purchase Hullermann's house.
3. At the time, the Defendant held a mortgage against Hullermann's house, to secure a debt from Hullermann and another individual. The regular monthly payment obligation on this debt was $807.64, subject to a late payment penalty of $32.31.
4. On January 26, 1995, Hullermann filed for bankruptcy relief under Chapter 7 in this Court. Terri Melcher, Esq. was his counsel of record for the case.
5. Casey apparently took possession of Hullermann's house at some point in early 1995. Under the terms of the Lease Option and Purchase Agreement, he was then to make monthly mortgage payments to the Defendant as due, until he and Hullermann closed on the sale.
6. Casey failed to make payments to the Defendant for several months after Hullermann's bankruptcy filing.
7. Representing the Defendant, Owen Prague, Esq. wrote to Melcher to demand that Hullermann cure his default in payment, and to request that he reaffirm the debt secured by the mortgage.
8. By that point, Hullermann had moved to Wisconsin. To ensure that Casey followed through on his payment obligations pending the closing of the sale, Hullermann instructed Melcher to receive payment for the mortgage obligation from Casey, to deposit it in her law firm's trust account, and to forward payment to the Defendant via checks drawn on the trust account.
9. Between late February and early May, 1995, Casey caused to have four checks drawn on the Debtor's corporate business account, each in the amount of $839.95 and each payable to Melcher, and forwarded them to her.
10. Melcher deposited each such check in her firm's trust account. Via checks drawn on the trust account, Melcher paid a total of $3,359.80 to the Defendant on Hullermann's mortgage loan account.1
11. The Defendant negotiated all of the checks from Melcher's trust account; they were honored to the extent of $3,359.80.
12. In receiving the Debtor's checks from Casey, depositing them, and issuing checks to the Defendant, Melcher was acting as counsel to Hullermann and following the instructions of her client. Had he instructed her to direct payment elsewhere, she could and would have done so. She could not have acted contrary to his instructions without violating her legal and ethical duty to him.
13. Throughout this time, no employee or agent of the Defendant was aware of the existence of the Lease Option and Purchase Agreement or its terms, or of any agreement between Casey and Hullermann at all. Nor was any such person aware that the funds from which the four monthly payments were made had originally come out of the Debtor's business account.
Both parties have moved for summary judgment, the Plaintiff on his main claim and the Defendant on its affirmative defense. The governing rule is FED. R. BANKR. P. 7056.2 To trigger the evaluation of the legal merits of claims and defenses under this rule, a movant must first demonstrate that there is "no genuine issue as to any . . . fact" material to those claims or defenses. Then, even if the movant has so established the facts, it must show its entitlement to relief under the law. Guinness Import Co. v. Mark VII Distributors, Inc., 153 F.3d 607, 610-611 (8th Cir.1998); Osborn v. E.F. Hutton & Co., 853 F.2d 616, 618 (8th Cir.1988).
Counsel here did not stipulate to any of the facts, each side bringing forth its own battery of evidence and largely ignoring the other side's evidence. This lack of coordination did not make the evaluation of the record any too easy. Ultimately, though, the conclusion can be made: there is no triable fact issue as to either the Plaintiff's prima facie case for avoidance and imposition of liability on the Defendant, or as to the Defendant's affirmative defense. This adversary proceeding, then, is amenable to summary judgment in its entirety.
As noted earlier, the Plaintiff invokes 11 U.S.C. § 548(a)(2)3 as the source of his power to avoid the transfers of the Debtor's funds that ultimately reposed with the Defendant. The Plaintiff produced evidence to support findings that the Debtor received no value from the transfer of its funds to the Defendant4, and that the Debtor was insolvent during the year before its bankruptcy filing.5 The Defendant did not produce evidence to counter the Plaintiff's evidence on these elements. The Defendant's California counsel raised several evidentiary objections, but these were obscure or nonmeritorious.6
In sum, it is clear that Casey was using the Debtor's corporate checking account as if it were his own property, or at least as if it were a free-flowing source of credit, gift, or undocumented compensation to him. However, he was not authorized by the Debtor to directly extract its revenues for payment on his personal obligations. When a trustee establishes that a pre-petition transfer of a debtor's property was made on account of a third party's debt or obligation, the burden shifts to the defendant-recipient to demonstrate that the debtor still received some other benefit out of the transaction. That other benefit must have been tangible, of concrete economic value, and reasonably equivalent to what the debtor gave up. In re Bargfrede, 117 F.3d 1078,1080 (8th Cir.1997); In re Minnesota Utility Contracting, Inc., 110 B.R. 414, 419-420 (D.Minn. 1990); In re Jolly's, Inc., 188 B.R. 832, 842 (Bankr.D.Minn.1995); In re Young, 148 B.R. 886, 893-894 (Bankr.D.Minn.1992), aff'd, 152 B.R. 939, 949 (D.Minn.1993), rev'd on other grounds, 82 F.3d 1407 (8th Cir.1996), vacated sub nom. Christians v. Crystal Evangelical Free Church, ___ U.S. ___, 117 S.Ct. 2502, 138 L.Ed.2d 1007 (1997), on remand, 141 F.3d 854 (8th Cir.1998), cert. denied sub nom. Christians v. Crystal Evangelical Free Church, ___ U.S. ___, 119 S.Ct. 43, 142 L.Ed.2d 34 (1998).
The Defendant has not carried this burden; it has not produced any evidence going to the point at all. The Plaintiff thus has established that, as a matter of uncontroverted fact, and pursuant to the...
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