In re Inc.

• Decision Date: 17 March 2011
• Docket Number: Adversary No. 07–80037.,Bankruptcy No. HG 05–00690.
• Citation: 444 B.R. 767
• Parties: In re TELESERVICES GROUP, INC., Debtor.Marcia R. Meoli, Trustee, Plaintiff,v.The Huntington National Bank, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Michigan

444 B.R. 767

In re TELESERVICES GROUP, INC., Debtor.Marcia R. Meoli, Trustee, Plaintiff,

v.The Huntington National Bank, Defendant.

Bankruptcy No. HG 05–00690.

Adversary No. 07–80037.

United States Bankruptcy Court, W.D. Michigan.

March 17, 2011.

Douglas A. Donnell, Esq., and John E. Anding, Esq., Grand Rapids, MI, for Plaintiff.Robert S. Hertzberg, Esq., Detroit, MI, Laurence Z. Shiekman, Esq., and Frank H. Griffin, IV, Esq., Philadelphia, PA, for Defendant.

OPINION RE: BIFURCATED ISSUES

JEFFREY R. HUGHES, Bankruptcy Judge.

Trustee Marcia Meoli has sued The Huntington National Bank (“Huntington”) to recover over $73 million ¹ in fraudulent transfers Huntington allegedly received either directly from Teleservices Group, Inc. (“Teleservices”) itself or indirectly through a related company, Cyberco Holdings, Inc.² This opinion addresses most, but not all, of the remaining factual and legal issues raised in this complicated case.³

JURISDICTION

The court has jurisdiction to hear this adversary proceeding. 28 U.S.C. §§ 1334 and 157(b)(1). See also W.D. Mich. LCivR 83.2. The issue raised is also a core matter. 28 U.S.C. § 157(b)(2)(H). Therefore, the findings of fact and conclusions of law set forth in this opinion ⁴ are appealable pursuant to 28 U.S.C. § 158.

ASSESSING HUNTINGTON'S GOOD FAITH

Although Huntington has raised a number of issues in this adversary proceeding, the mainstay of its defense has been that it received all of the transfers from Teleservices in good faith. Indeed, this case presents the odd situation of Huntington asserting its good faith under Section 548(c) ⁵ with respect to some of the transfers and its good faith under Section 550(b)(1) with respect to other transfers. Therefore, it is appropriate to offer even before a discussion of the underlying facts some insight as to the court's conclusions concerning this admittedly illusive concept.

Recent case law strongly favors an objective approach to assessing a transferee's good faith under either section. This court, though, has determined that testing either Section 548(c) or Section 550(b)(1) good faith is in fact subjective, with the focus being upon traditional notions of honesty and integrity. In many ways, this conclusion should seem obvious. If the person accepting the transfer is able to establish his innocence vis-a-vis the debtor's fraudulent motives, a trier of fact would be hard pressed to still decide that he had taken in bad faith. If, though, that same person had actually participated in the deception, then it would be just as easy to conclude that his involvement in the transaction had been dishonest—i.e., not in good faith.

However, a transferee's honesty with respect to the fraud being perpetrated encompasses more than just complicity, for the transferee's mere awareness of the debtor's fraudulent intent would also cause his taking to be in bad faith. But a transferee is no more likely to admit that he knew of the debtor's fraudulent purpose at the time of receipt than would the debtor himself admit that he had harbored such designs. Courts have for centuries used the so-called badges of fraud to assess a debtor's fraudulent intent. Should not, then, the same badges be relevant when the issue turns to determining whether the transferee himself was aware of any fraud?

Unfortunately, while the debtor's own fraud can be established simply through the existence of enough badges, a transferee's related good faith is also a function of his awareness of those badges. A question, then, inevitably arises as to what, if any, duty does the transferee have to investigate should some but not enough badges come to his attention at a particular point in time? Moreover, there is also the issue of retroactivity. If, for example, the transferee's investigation of a particular badge later leads him to the discovery of enough other badges to make him aware of the debtor's fraudulent intent, should the transfer previously received now be deemed to have been taken in bad faith? This latter question is especially important when the targeted transferee continued to receive transfers after the first suspicion arose, as is the case in this instance.

Questions like these have led this court to the further conclusion that a procedural component must be added to the good faith analysis whenever anything more than the simplest of fraudulent transfers is involved. That is, a court must in many cases assess not only whether the transferee conducted himself honestly and with integrity regarding the receipt of any particular transfer. The court must often assess as well whether the transferee conducted himself honestly and with integrity in addressing the receipt of a series of fraudulent transfers as a succession of badges evidencing that intent came to the transferee's attention.

And finally, this court recognizes that it is not the trustee who must prove the transferee's bad faith in accepting the transfer. Instead, it is the transferee who must establish that he had acted in good faith. Should, then, the transferee's response to suspicions at any time fall short of an honest effort, the transferee would necessarily lose the ability to claim good faith going forward. But it follows as well that such a lapse should not negate what had been up to that point a good faith effort to investigate the recipient's suspicions concerning transfers already received. In other words, the transferee should be able to keep whatever he has received up to the point in time when either (1) he became aware of (or turned a blind eye to) enough badges of fraud to no longer be in good faith, or (2) his attempts to ferret out additional badges no longer represented an honest effort on his part.

In sum, Huntington's success in professing its good faith under the facts presented will depend upon whether Huntington has convinced this court that it honestly remained unaware of Teleservices' fraud for more than a year notwithstanding its growing suspicions. The court will now address those facts.

FACTS

Huntington is a regional bank with its headquarters in Columbus, Ohio. Cyberco, which also went by CyberNET and CyberNET Group, had a short but tumultuous lending relationship with Huntington. It lasted only from September 2002 to October 2004.

Huntington administered the Cyberco loan through its West Michigan offices. Kelly Hutchings was the account officer and Cal Hekman her immediate boss. Both were members of the region's commercial lending group. John Irwin was the group's leader.

Irwin in turn reported to Jim Dunlap, Huntington's regional president. Other senior members of the West Michigan management team were John Kalb, the region's credit officer, Steve George, the region's special assets officer, and Larry Rodriguez, the region's security officer. And finally, there was Gail White. Although White was not in the commercial lending group, she became intimately involved in the loan because of suspicions she had about both Cyberco and the large transfers it was receiving from another member of the Cyberco family—Teleservices.

Kalb and George each had a counterpart in Columbus. Larry Hoover was the senior credit officer for all of Huntington's loans. Michael Cross oversaw all of the regional special asset groups. Hoover and Cross, as well as others in Columbus, expected Kalb in particular to keep them informed about Cyberco once it was placed on Huntington's criticized asset list.

The loan closed in September 2002. It was a typical commercial loan, with a revolving line of credit based upon Cyberco's receivables, a term note, and some letters of credit. Like many commercial loans, it was collateralized by all of Cyberco's assets, including Cyberco's substantial accounts receivable. Huntington had intended to monitor those receivables through a lockbox. However, what Huntington discovered about a year into the relationship was that Cyberco was instead receiving most of its cash through large and regular transfers from Teleservices. No one at Huntington recognized that name. Cyberco answered Huntington's inquiries by explaining, untruthfully as it turned out, that Teleservices was a related company and that it was merely collecting Cyberco's own receivables on Cyberco's behalf. In truth, the transferred funds were actually the proceeds of a fraud that Cyberco and Teleservices together were perpetrating on unsuspecting equipment finance companies.

The Teleservices funds were being deposited into Cyberco's Huntington accounts. Huntington swept those accounts every day and then replenished them as needed through the line of credit. As a consequence, millions of dollars more than what Huntington was actually owed flowed through its hands. These additional amounts, together with the paydown of Huntington's own loan, represent what the Teleservices trustee now seeks to recover.

It was White who inadvertently discovered the Teleservices transfers in the fall of 2003. Although Huntington did not learn of the lie until much later, the relationship was already strained enough at that time to convince Huntington that Cyberco should leave the bank. Here is a brief chronology of subsequent events:

January 2004—Cyberco was asked to find a new lender.

April 2004—Cyberco was given a second ninety-day extension to accomplish this exit strategy.

Summer 2004—Cyberco did not find a new lender but instead began paying down the Huntington loan with even more funds received from Teleservices.

Fall 2004—Huntington was repaid the remaining Cyberco balance with checks from Teleservices made payable directly to it.

This adversary proceeding, then, can be summarized in so many paragraphs. However, the details unfold like a tragic play, with Kalb, White, Rodriguez, and George each having a part.⁶ Through all of them is revealed both Huntington's good faith and its turning a blind eye. The story also shows how a seemingly insignificant decision can lead to enormous loss. But most of...