In re Mainely Payroll, Inc.

• Decision Date: 04 May 1999
• Docket Number: 96-10542,96-10543,Adversary No. 98-1049.,Bankruptcy No. 96-10533
• Parties: In re MAINELY PAYROLL, INC., Clifford J. Levesque, and Dorothy Levesque, Debtors. P.J. Perrino, Jr., Trustee, Plaintiff, v. Salem, Inc., et al., Defendants.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Maine

233 B.R. 591 (1999)

In re MAINELY PAYROLL, INC., Clifford J. Levesque, and Dorothy Levesque, Debtors.

P.J. Perrino, Jr., Trustee, Plaintiff, v. Salem, Inc., et al., Defendants.

Bankruptcy Nos. 96-10533, 96-10542, 96-10543, Adversary No. 98-1049.

United States Bankruptcy Court, D. Maine.

May 4, 1999.

COPYRIGHT MATERIAL OMITTED

Rufus E. Brown, Portland, Maine, for plaintiff.

Louis H. Kornreich, James R. Wholly, Bangor, Maine, for Salem, Inc., defendant.

Memorandum of Decision

JAMES B. HAINES, Jr., Chief Judge.

Submitted for decision on a stipulated record is the trustee's action to recover a fraudulent transfer from Salem, Inc. Because I conclude that Salem is an "immediate or mediate transferee" of the initial transferee and because Salem took the property it received for value, in good faith, and without knowledge that the transfer was voidable, judgment will enter in its favor.¹

Background

A. Procedural Background

The trustee filed his complaint against Salem on May 21, 1998. By compromise or dismissal, he has disposed of claims against all defendants other than Salem.² Invoking Code § 548 and § 550, the trustee seeks to recover $31,084.06.

B. Facts

Rather than spinning my own factual narrative, I will set forth the parties' concise stipulation verbatim:

1. Mainely Payroll, Inc. ("MPI") was a payroll service located in Augusta, Maine, servicing businesses located in the Greater Augusta area before it ceased operations on or about May 6, 1996.

2. Clifford Levesque ("Levesque") was a stockholder, director, and the president of MPI. He controlled and managed MPI exclusively by himself.

3. MPI\'s normal method of doing business was to calculate a client\'s payroll expenses from information supplied by the client and then collect from its clients the funds necessary to cover such expenses.

4. MPI would deposit the funds collected from its clients into a bank account maintained by MPI first at Casco Northern Bank, which later merged into Key Bank, and then in 1996 at Fleet Bank of Maine (the "MPI payroll account"). The MPI payroll account maintained at Fleet was Account No. XXXXXXXXXX.

5. The MPI payroll account was maintained separately from the company\'s operating account, but it was not segregated by client. All client funds were commingled with each other and drawn upon by MPI in the course of its payroll business operations. From the MPI payroll account, MPI would write payroll checks for its payroll clients and promised to accumulate and then deposit with the appropriate government agencies amounts withheld for state and federal taxes and unemployment insurance.

6. Beginning in the Fall of 1993 until shortly before the filing of bankruptcy, Levesque used the MPI payroll account as if it were his personal banking account. He gave no regard to the separate legal status of MPI as a corporation except to use the corporation to obtain payroll deposits from MPI customers. He used MPI\'s client deposits for his own needs when desired. He never treated the sums taken from the payroll client account as a loan. No note was executed, no promise to repay was given, no interest was recorded. He simply disregarded the corporate entity and treated the client fund account as if he owned it.

7. Salem is a Connecticut corporation with a principal place of business at Naugatuck, Connecticut, doing business as an automobile dealership.

8. On or about March 25, 1996, at its place of business in Naugatuck, Connecticut, Salem sold a 1996 Chevrolet Tahoe to Bond Brook Motors, an automobile dealership located in Augusta, Maine, in which Levesque\'s son, Michael Levesque was a principal. A true copy of the invoice for the sale is attached hereto as Exhibit A.

9. The invoice was paid for with a cashier\'s check in the amount of $31,084.06 drawn on Fleet dated March 25, 1996, showing Bond Brook Motors as the Remitter. A true copy of the cashier\'s check is attached hereto as Exhibit B.

10. The cashier\'s check was delivered to Salem on or about March 26, 1996, at which time the 1996 Chevrolet Tahoe was picked up from Salem.

11. The cashier\'s check was paid for by a charge to the MPI payroll account upon instructions from Levesque on or about March 25, 1996. A true copy of the Debit Memo evidencing the charge is attached hereto as Exhibit C.

12. Salem accepted the cashier\'s check in payment of the sale of the 1996 Chevrolet Tahoe to Bond Brook Motors for value, in good faith, without knowledge of the voidability of the transfer.

13. Salem had no business relationship with Levesque, Michael Levesque or MPI. Neither MPI nor Levesque received any value in exchange for the payment of Salem\'s invoice.

14. Levesque was not an owner, officer or principal of Bond Brook Motors.

15. In March, 1996 both MPI and Levesque were insolvent.

16. On or about May 23, 1996, both MPI and Levesque filed petitions for bankruptcy under Chapter 7 of the Bankruptcy Code.

17. On December 10, 1997, Clifford Levesque and Michael Levesque pleaded guilty to federal criminal charges arising out of their involvement with MPI based on facts outlined in a Prosecution Version that each stipulated to and both are now serving federal prison sentences. A true copy of the Prosecution Version for Clifford Levesque is attached hereto as Exhibit D and the Prosecution Version for Michael Levesque is attached hereto as Exhibit E. The parties do not stipulate to the truth of the matters asserted in either Prosecution Version.

(Stipulation, Court Doc. No. 12.) (Exhibits excluded.)

Of course, I may appropriately find facts based on reasonable inferences drawn from the stipulated record. See, e.g., Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107-08 (1st Cir.1997). The stipulation establishes all the material facts except a very few. The balance, recited in the course of the following discussion, are products of elementary inference.

Discussion

A. The Crux of the Controversy

The trustee asserts that Salem received $31,084.06 of MPI's money, while MPI was insolvent, in a transaction that bestowed no benefit whatsoever on MPI. Per Codeprescribed priorities, he argues that the funds should be returned to the bankruptcy estate to be divvied among MPI's creditors. Section 548(a) provides the substantive underpinning for the trustee's theory:

(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.

§ 548(a)(1).³

The stipulation establishes all elements of a voidable, fraudulent transfer.⁴ MPI's property ($31,084.06),⁵ was transferred to Salem, within one year of MPI's voluntary petition, while MPI was insolvent, and MPI received less than reasonably equivalent value (nothing) in return.

The extent of a fraudulent transfer recipient's liability, and whether defenses are available to it, are set forth in § 550. Insofar as pertinent, it states:

(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section . . . 548 . . . 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 (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.

§ 550(a)-(b).⁶

Having taken possession of the cashier's check and negotiated it, Salem is a "transferee" of MPI's money. The only question relates to Salem's status as either the "initial transferee" of the money, § 550(a)(1), or an "immediate or mediate transferee of the initial transferee." § 550(a)(2).

If Salem were the "initial transferee" of MPI's money, its liability would be strict. As to the initial transferee, it makes no difference whether it gave value, acted in good faith, or was ignorant of the transfer's voidable character. See Christy v. Alexander & Alexander of New York Inc. (In re Finley), 130 F.3d 52, 57 (2d Cir.1997); Rupp v. Markgraf, 95 F.3d 936, 938 (10th Cir.1996); O'Donnell v. Royal Bus. Group, Inc. (In re Oxford Homes, Inc.), 180 B.R. 1, 12 (Bankr.D.Me.1995). Neither innocence in action nor unfairness in result is a defense.⁷ However, as the trustee concedes, if Salem were not the initial transferee it could invoke § 550(b)'s defenses (i.e., value, good faith and ignorance of avoidability) to defeat recovery. See generally 3 Hon. William L. Norton, Jr., et al., Norton Bankruptcy Law and Practice 2d § 60:5 (1997 & Supp.1999).

Salem contends that Bond Brook Motors, the entity listed as remitter on the cashier's check and the party to whom Salem sold the vehicle, is MPI's initial transferee. The trustee contends that Bond Brook was not MPI's initial transferee; he asserts that Salem was.⁸

B. Identifying the Initial Transferee

The constituents of a transfer subject to avoidance under the Code and the characteristics of an initial transferee are determined by federal law. See ...