In re Harwell
| Decision Date | 31 August 2009 |
| Docket Number | No. 8:09-cv-703-T-30.,8:09-cv-703-T-30. |
| Citation | 414 B.R. 770 |
| Parties | In re Billy Jason HARWELL, Debtor. Lynn H. Martinez, Chapter 7 Trustee, Appellant, v. Steven D. Hutton and Steven D. Hutton, P.L., Appellees. |
| Court | U.S. District Court — Middle District of Florida |
Lindsay Patrick Lopez, Lori Virginia Vaughan, Trenam Kemker, Tampa, FL, for appellant.
Michael P. Brundage, Hill Ward Henderson, Tampa, FL, for appellee.
THIS CAUSE comes before the Court on appeal from the Bankruptcy Court's granting of summary final judgment in favor of Steven D. Hutton and his law firm, Steven D. Hutton, P.L. (hereinafter referred to as "Hutton" or "Defendants"), as to the Trustee's causes of action for fraudulent transfer, aiding and abetting fraudulent transfer, and civil conspiracy to commit fraudulent transfer.
The facts of this case are undisputed. The Bankruptcy Court's summary judgment concerned questions of law which this Court reviews de novo. Gray v. Manklow (In re Optical Techs., Inc.), 246 F.3d 1332 (11th Cir.2001). The main issue before the Court is whether Hutton and his law firm are "initial transferees" under Sections 548 and 550 of the Bankruptcy Code. 11 U.S.C. §§ 548 and 550. Two other issues are whether Defendants have liability for aiding and abetting a fraudulent transfer or for civil conspiracy to commit a fraudulent transfer. The Bankruptcy Court ruled Defendants were not "initial transferees" and, further, were not liable under either of the other theories. Because this Court agrees, the Bankruptcy Court's summary judgment will be affirmed.
On July 12, 2005, Thomas Clay Hill (hereinafter referred to as "Hill") obtained a judgment against Billy Jason Harwell (hereinafter referred to as "Debtor") in the amount of $1,396,076.53. When the Hill judgment was entered, Debtor was a ten percent (10%) shareholder in Center for Endoscopy, Inc. ("CFE") and a twenty-five percent (25%) shareholder in Sarasota Endo Investors, LLC ("SEI"). Hutton represented Debtor in connection with a dispute over Debtor's ownership interest in SEI and CFE.
On July 27, 2005, Hill began proceedings to domesticate his judgment in Florida. Debtor hired Hutton to defend him with respect to the domestication proceedings.
On August 11, 2005, Debtor entered into a settlement agreement with SEI and CFE which provided that Debtor would receive:
(a) $100,000 in cash from CFE within 20 days of the settlement agreement in exchange for his interest in CFE;
(b) $400,000 in cash from SEI within 30 days of the settlement agreement in exchange for his interest in SEI; and
(c) $46,837.00 promissory note from SEI to satisfy obligations owed to the Debtor and as a return of capital.
On August 26, 2005, Debtor answered post-judgment interrogatories from Hill, but did not disclose the settlement or information about the funds he would receive from it. Notably, Hutton played no part in answering the interrogatories. On September 1, 2005, the first $100,000 payment was made from CFE directly to Hutton's trust account. That same day, at Debtor's direction and with knowledge of Hill's judgment and attempts to collect, Hutton distributed the funds in five checks as follows:
No. Amount Payee
944 $35,000.00 Debtor
945 $25,000.00 Debtor
946 $ 5,000.00 Christine A. Harwell, Debtor's wife
947 $25,000.00 ASC Partners
948 $10,000.00 Steven D. Hutton, P.L. Trust Account
On September 6, 2005, Hutton wrote a letter to counsel for SEI directing him to make the payment on the promissory note in the amount of $46,837.00 to Debtor's wife, Christine Harwell. On September 9, 2005, SEI remitted its settlement payment of $400,000 directly to Hutton's trust account. That same day, and at Debtor's direction, Hutton distributed the $400,000 in the form of seventeen checks as follows:
No. Amount Payee
962 $75,000.00 Debtor
963 $33,700.00 Christine A. Harwell, Debtor's wife
964 $12,500.00 Performance Trailers
965 $17,000.00 VRS Inc
966 $20,000.00 Ken Johnson
967 $21,000.00 Commerce Bank
968 $10,500.00 Superior Trailers
969 $ 9,500.00 Beneficial Finance
970 $15,000.00 Stinar, Zendejas LLC
971 $50,000.00 Debtor
972 $ 6,000.00 MBNA
973 $ 4,600.00 CitiFinancial
974 $50,000.00 ASC Partners
975 $15,917.00 Delbert Myers
976 $12,847.00 Michael Miniat
977 $27,000.00 Vintage Motors
978 $19,436.00 Billy C. Harwell, Debtor's father
After the checks were written, but before they cleared, Hill obtained a turnover order from the state court requiring Debtor to turn over any payments received from SEI. The order required Debtor to deliver to Hill any funds received after July 12, 2005, that were still within Debtor's control.
On September 19, 2005, Hutton was served with a writ of garnishment for any amounts held in trust for Debtor. In response, Hutton stopped payment on the two checks issued to Debtor totaling $125,000, but not other checks that had not yet cleared. Hutton, as garnishee, and Debtor moved to quash the writ of garnishment based on a defective domestication. On September 28, 2005, the Florida state court quashed the writ of garnishment. Immediately after the hearing, Hutton, having no knowledge of the Colorado turnover order, issued a check for the remaining $125,000 to the Bank of Commerce. Hutton personally delivered the check to the Bank of Commerce and obtained seven cashier's checks payable as follows:
No. Amount Payee
6988 $15,000.00 Robert Duitch, the Debtor's bankruptcy
attorney
6989 $ 7,500.00 American Express
6990 $30,000.00 Billy C. Harwell, Debtor's father
6991 $30,062.96 Christine A. Harwell, Debtor's wife
6992 $ 9,500.00 IRS
6993 $30,000.00 Montana Tractor, Inc
6994 $ 3,000.00 J. Lichlyter
Hutton acknowledged that he obtained the cashier's checks to make sure the money was out of his trust account in case Hill served him with another writ of garnishment.
On October 10, 2005, Debtor filed for Chapter 11 bankruptcy. Post-petition, Hutton assisted Debtor in converting one of the cashier's checks ($30,000) into a check payable to Debtor.
Congress has empowered a bankruptcy trustee to recover assets that a debtor has transferred to another either to hide the assets or in preference over other creditors. Under 11 U.S.C. § 548, a trustee may avoid certain transfers of assets made by a debtor within one year2 before the date of the filing of the petition. It provides in pertinent part:
(a) (1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.
11 U.S.C. § 550 allows a trustee to recover for the benefit of the estate a transfer that has been avoided under § 548. It states 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, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court 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; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (footnote omitted) (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in
good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
What appears to be a seemingly simple concept in our Bankruptcy Code has developed into "a somewhat murky area of our jurisprudence."3 The difficulty is in determining who or what is an "initial transferee." Appellant takes the position that an initial transferee is the first person or entity that receives the funds, whether as an agent or otherwise, unless excused from that characterization because it would be inequitable to hold such person or entity liable. Further, Appellant argues that, because it is an exception based in equity, the entity asserting it must have acted in good faith.
The Bankruptcy Code does not define the term. Circuit Courts have used different tests to define it in resolving particular factual disputes, but the words used can be slippery. The Fourth Circuit agrees with Appellant. See In re Harbour, 845 F.2d 1254 (4th Cir.1988). It uses the "mere conduit test" to excuse a good faith recipient of an otherwise avoidable transfer who acts as a mere intermediary and who cannot exercise dominion or control over the transferred property. It sees this analysis as an equitable exception to transferee liability:
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In re Harwell
...transferee" of the money within the meaning of the Bankruptcy Code. The district court affirmed. Martinez v. Hutton (In re Harwell), 414 B.R. 770 (M.D.Fla.2009).III. STANDARD OF REVIEW "In bankruptcy appeals, this Court independently examines the factual and legal findings of the bankruptcy......
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Hutton v. Martinez (In re Harwell), CASE NO: 8:12-CV-482-JSM
...MOODY, JR. UNITED STATES DISTRICT JUDGECOPIES FURNISHED TO:Bankruptcy Judge Mark WilliamsonCounsel/Parties of Record 1. In re Harwell, 414 B.R. 770, 785 (M.D. Fla. 2009). 2. In re Harwell, 628 F. 3d 1312 (11th Cir. 2010). 3.Since this incident occurred in Florida, Mr. Hutton is subject to t......