In re Ogden

• Decision Date: 30 December 2002
• Docket Number: No. 00-4055.,00-4055.
• Citation: 314 F.3d 1190
• Parties: In re Wayne R. OGDEN, Debtor. Steven R. Bailey, Trustee of the Estate of Wayne R. Ogden, Plaintiff-Appellee, v. Big Sky Motors, Ltd., a Utah Corporation, doing business as Big Sky Finance, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1190

314 F.3d 1190

In re Wayne R. OGDEN, Debtor Steven R. Bailey, Trustee of the Estate of Wayne R. Ogden, Plaintiff-Appellee, v. Big Sky Motors, Ltd., a Utah Corporation, doing business as Big Sky Finance, Defendant-Appellant.

No. 00-4055.

United States Court of Appeals, Tenth Circuit.

December 30, 2002.

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Noel S. Hyde, South Ogden, Utah, for Appellant.

Leslie J. Randolph, of McDowell & Gillman, P.C., Salt Lake City, Utah (Duane H. Gillman with her on the brief), for Appellee.

Before TACHA, Chief Judge, and HENRY and BRISCOE, Circuit Judges.

HENRY, Circuit Judge.

Big Sky Motors, Ltd., appeals a decision of the district court affirming a decision of the bankruptcy court. See Big Sky Motors, Ltd. v. Bailey, No. 299CV270B, 2000 WL 33672946 (Bankr.D. Utah Feb. 4, 2000). Big Sky advances two principal arguments: (1) that the trustee did not establish the elements necessary to avoid a transfer of the debtor's assets under 11 U.S.C. § 547; and (2) that, under 11 U.S.C. § 550, an escrow agency was the initial transferee of the disputed funds rather than a mere financial conduit of those funds. As a result of the escrow agency's alleged transferee status, Big Sky maintains that it should be allowed assert a good faith defense to the trustee's action.

We exercise jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 1291. We hold that the transaction in question was a preferential transfer under § 547 and that the escrow agency was a financial conduit rather than a transferee under § 550. Therefore, we affirm the district court's ruling.

I. BACKGROUND

Wayne R. Ogden was a real estate developer in Utah in the 1990s. By the beginning of 1997, Mr. Ogden had become the center of what has been described by one court as a Ponzi scheme, a "fraudulent arrangement that uses later-acquired funds to pay off previous investors." Bailey v. Hazen (In re Ogden), 243 B.R. 104, 109 n. 6 (B.A.P. 10th Cir.2000). In the events relevant to the present appeal, Mr. Ogden promised two investors — Douglas Durbano and Blake Hazen — that in only two weeks they would receive a $200,000 return on an initial $400,000 loan. Purportedly, the loan would be used to purchase real property. After surveying the property, Messrs. Durbano and Hazen found the proposed transaction worthwhile. Through companies they each owned (Big Sky and Bretwood Company, Inc.), Mr. Durbano and Mr. Hazen contributed $296,000 and $100,000, respectively.

On March 2, 1997, Big Sky gave the combined $396,000¹ in a check made payable to Avis & Archibald Title Insurance Agency, L.C., an escrow company based in Ogden, Utah. Jayson Cherry, an escrow officer with Avis & Archibald, handled the transaction. Accompanying documents included (1) a trust deed promissory note in the amount of $600,000 in favor of Big Sky, signed by Mr. Ogden on February 26, 1997; (2) a trust deed; and (3) escrow instructions.

The escrow instructions, dated February 26, 1997, directed Avis & Archibald to disburse the funds upon the completion of the following conditions: (1) the execution of the trust deed promissory note and deed of trust; (2) the recording of the deed of trust in a first lien position against the property; and (3) verbal authorization from Mr. Durbano. As to the third condition, the instructions provided:

[B]efore disbursing the funds, [Avis & Archibald] will need verbal authorization from myself that I have received satisfactory assurances that there is a prospective closing to take place on this property within the next two weeks. Until [Avis & Archibald has] received such authorization from me [Avis & Archibald] should not disburse any funds.

Aplt's App. at 177 (letter from Douglas Durbano to Jason Cherry, Escrow Officer, dated Feb. 26, 1997).

A few days after making the deposit, Big Sky, apparently through Mr. Durbano, requested a return of the funds. Although there is conflicting testimony about the reason for Mr. Durbano's request, Mr. Cherry issued a check for $396,000 from Avis & Archibald to Big Sky. Presumably after receiving further assurances, such as Mr. Ogden's execution of the accompanying trust documents, Mr. Durbano delivered another check in the amount of $396,000 from Big Sky made payable to the Avis & Archibald trust account, dated March 10, 1997. At the same time, Mr. Durbano delivered a letter indicating that the February 26, 1997 escrow instructions applied to this deposit as well. Mr. Cherry credited file number 10327, the "Property File" with the deposit.

On April 8, 1997, Mr. Ogden told Mr. Cherry that Mr. Durbano had changed the escrow instructions and had approved the release of the funds. In fact, Mr. Durbano had not done so. After making one unsuccessful attempt to contact Mr. Durbano to confirm the purported change in the escrow instructions, Mr. Cherry disbursed the $396,000 to Mr. Ogden. Mr. Cherry testified that he felt "a lot of pressure" from Mr. Ogden to release these funds. Aplt's App. at 118 (depo. of Jayson Cherry).

About two weeks later, Robin Archibald, one of the principals of Avis & Archibald, discussed the Property File with Mr. Cherry. Apparently, a man named Teak Jones had been attempting to complete a transaction with Mr. Ogden and other investors via Avis & Archibald and had discovered a problem with the Property File. See Aplt's App. at 123 (depo. of Jayson Cherry); Aple's Supp. Index at 230 (unsigned statement of Jayson Cherry). Upon realizing Mr. Ogden had lied about Mr. Durbano's having changed the escrow instructions to authorize the release of the $396,000, Mr. Cherry telephoned Mr. Ogden and threatened to report him to state authorities if Mr. Ogden did not replenish the account "within several days." Aplt's App. at 123-24 (depo. of Jayson Cherry). Mr. Cherry did not inform either Avis & Archibald's management or the investors of the erroneous disbursement.

In response to Mr. Cherry's demand for return of the funds, Mr. Ogden induced other investors to give him money. With these funds, Mr. Ogden intended to repay the $396,000 that he had received from the Property File. Between May 7 and May 14, 1997, Mr. Ogden obtained a total of $314,000 from four investors, who provided checks payable either to Mr. Ogden or to Avis & Archibald. The checks were deposited into the Property File. Additionally, Mr. Ogden convinced Mr. Cherry and his assistant to credit to the Property File with a $135,500 transfer initiated by Teak Jones. It is undisputed that Mr. Jones actually intended to deposit this money in his own account at Avis & Archibald.²

From the total of $449,500 that Mr. Ogden deposited in May 1997, Avis & Archibald returned $49,500 to Mr. Ogden and one of his investors. On May 23, 1997, Avis & Archibald returned $300,000 to Big Sky and $100,000 to Mr. Hazen.³ See Aplt's App. at 130 (Check Register for Avis & Archibald's Big Sky Account). Big Sky was unaware that any of the funds had ever been disbursed to Mr. Ogden. On June 13, 1997, Big Sky filed a civil action against Mr. Ogden for the remaining $200,000 of the $600,000 promissory note.

On June 16, 1997, Mr. Ogden's creditors filed an involuntary Chapter 7 bankruptcy petition against him. See 11 U.S.C. § 303(b). The bankruptcy court appointed Stephen R. Bailey as trustee to oversee the bankruptcy estate.

The trustee then filed adversary proceedings seeking to recover the $400,000 that Avis & Archibald had transferred to Big Sky and Mr. Hazen on May 23, 1997. The bankruptcy court granted the trustee's motion for summary judgment, ruling that the transfers were avoidable preferences under 11 U.S.C. § 547(b) and directing both Big Sky and Mr. Hazen to return the funds to the trustee. Big Sky appealed to the district court, while Mr. Hazen appealed to the Bankruptcy Appellate Panel for the Tenth Circuit (BAP).

In Big Sky's appeal, the district court affirmed the bankruptcy court, holding that Avis & Archibald was a commercial conduit under § 550(a)(1) and that the trustee could thus avoid the preferential transfer, regardless of Big Sky's good faith in accepting the funds from Avis & Archibald. See Big Sky Motors, Ltd., 2000 WL 33672946, at *10-11. In the case against Mr. Hazen, the BAP reached a contrary conclusion. The BAP held that Avis & Archibald was in a debtor/creditor relationship with Mr. Ogden and was an initial transferee under § 550(a)(1). See Hazen, 243 B.R. at 116-17. The BAP reversed the decision of the bankruptcy court and remanded for a determination of whether Mr. Hazen received the funds in good faith as a "subsequent immediate or mediate transferee" such that he could defend against the trustee's action under the terms of 11 U.S.C. § 550(b).

II. DISCUSSION

A. Standard of Review

We review de novo the bankruptcy court's grant of summary judgment to the trustee, affording no deference to the district court's decision. See General Elec. Capital Corp. v. Manager of Revenue & Exofficio Treasurer of the City of Denver (In re W. Pac. Airlines, Inc.), 273 F.3d 1288, 1291 (10th Cir.2001). In adversary proceedings, Fed.R.Civ.P. 56 applies. See Fed. R. Bank. P. 7056. Thus, summary judgment is warranted if "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. Under this standard, we view the evidence and draw reasonable inferences therefrom in the light most favorable to the nonmoving party. Simms v. Oklahoma ex rel. Dep't of Mental Health & Substance Abuse Servs., 165 F.3d 1321, 1326 (10th Cir.1999).

B. Sections 547 and 550

In order to resolve this case, we must apply two sections of the Bankruptcy Code, 11 U.S.C. § 547 and 11 U.S.C. § 550. Generally, § 547 allows a trustee to avoid a preferential transfer of assets by a debtor-transferor to a creditor-transferee if certain conditions are met. This section thus allows a trustee to require the transferee to return assets to the estate so that they may be more...