In re Orange County Sanitation, Inc.

• Decision Date: 16 September 1997
• Docket Number: Bankruptcy No. 95-30396,95-30397,Adversary No. 96-7093.
• Citation: 221 BR 323
• Parties: In re ORANGE COUNTY SANITATION, INC., Debtor. In re ROUND LAKE SANITATION CORP., Debtor. Thomas GENOVA, Chapter 7 Trustee, Plaintiff, v. Michael R. GOTTLIEB, Esq., Kostelantz & Fink, LLP, Greenberg & Gaiman, LLP, Internal Revenue Service, United States of America, Ruderman, Brown & Brandes, New York State Department of Taxation and Finance, Robert Gottlieb, CPA, David Gold, Esq., and Frank Labuda, Esq., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

221 B.R. 323 (1997)

In re ORANGE COUNTY SANITATION, INC., Debtor In re ROUND LAKE SANITATION CORP., Debtor Thomas GENOVA, Chapter 7 Trustee, Plaintiff, v. Michael R. GOTTLIEB, Esq., Kostelantz & Fink, LLP, Greenberg & Gaiman, LLP, Internal Revenue Service, United States of America, Ruderman, Brown & Brandes, New York State Department of Taxation and Finance, Robert Gottlieb, CPA, David Gold, Esq., and Frank Labuda, Esq., Defendants.

Bankruptcy Nos. 95-30396, 95-30397, Adversary No. 96-7093.

United States Bankruptcy Court, S.D. New York.

September 16, 1997.

COPYRIGHT MATERIAL OMITTED

Thomas Genova, Genova & Malin, Wappingers Falls, NY, for Plaintiff-Trustee/Movant.

Edward Scarvalone, Assistant United States Attorney, New York City, for Defendant-IRS/Cross-Movant.

DECISION ON MOTION AND CROSS MOTION FOR SUMMARY JUDGMENT PURSUANT TO 11 U.S.C. §§ 549 AND 550

JEREMIAH E. BERK, Bankruptcy Judge.

I. INTRODUCTION

On February 27, 1995, involuntary Chapter 7 petitions were filed against Orange County Sanitation, Inc. and Round Lake Sanitation Corp. ("Debtors", or after consolidation, "Debtor"). On May 18, 1995, the cases were converted to Chapter 11 and on April 9, 1996 the cases were converted back to Chapter 7. The two Chapter 7 cases were substantively consolidated on September 17, 1996. On September 4, 1996, the Chapter 7 Trustee, Thomas Genova, ("Trustee") commenced the instant adversary proceeding, pursuant to §§ 549 and 550 of the Bankruptcy Code, seeking to recover funds transferred post-petition to various parties, including the Internal Revenue Service ("IRS").

The Trustee filed a motion for summary judgment on February 11, 1997. The IRS filed a cross-motion for summary judgment on July 15, 1997. Hearings on both motions were held on August 5 and August 26, 1997. For the reasons stated, I am satisfied that no factual issues exist and that summary judgment should be denied to the Trustee and granted in favor of the IRS.¹

II. FACTS

In November 1994, the corporate officers and shareholders of the Debtor corporations, Louis Mongelli, Robert Mongelli, Joseph A. Mongelli, (collectively, the "Mongellis"), negotiated an offer-in compromise with the IRS in settlement of their personal tax liabilities. The IRS agreed to accept $2,365,532, plus certain accruals, in partial payment of the Mongellis' personal income tax obligations. (IRS' LBR 7056-1 Stmt. at ¶ 1-2.)

Prior to the filing of the corporate involuntary bankruptcy petitions, and pursuant to a criminal plea agreement between the Mongellis and the U.S.A., the two corporations entered into an agreement to sell all of their assets to Browning-Ferris Industries of New York, Inc. (Trustee's LBR 7056-1 Stmt. at ¶ 3-5; Tabak Decl. at ¶ 4.) On June 30, 1995, a portion of the sale proceeds was remitted to Michael R. Gottlieb, Esq. ("Gottlieb"), the Debtors' court-approved bankruptcy attorney. On that date, Gottlieb deposited $871,615.29 into his attorney escrow account. (Trustee's LBR 7056-1 Stmt. at ¶ 5.)

By ordinary check drawn on his attorney's escrow account on August 16, 1995, Gottlieb transferred $106,286.15 to the IRS. This transfer, made post-petition and without court approval, is the subject of these motions. The check, payable to the order of the IRS, bore the notation "For Round Lake Sanitation", and was forwarded to Kevin Flynn, Esq. ("Flynn"), attorney for the Mongellis. (Trustee's LBR 7056-1 Stmt. at ¶ 6-7; IRS' LBR 7056-1 Stmt. at ¶ 6.)

Before making the transfer, Gottlieb misinformed Leon Greenberg, Esq. ("Greenberg"), an unretained attorney for the corporate Debtors, that the bankruptcy cases had been dismissed.² (IRS' Decl., Ex. D at 6.) Greenberg then informed Flynn that the Debtors' bankruptcy cases were dismissed. Thereafter, Flynn sent the check to the IRS with a transmittal letter confirming a previous telephone conversation between Flynn and an IRS representative. (IRS' LBR 7056-1 Stmt. at ¶ 4.) The letter stated that the check was to be used as partial payment of the offer-in-compromise for the Mongellis' personal tax liability. (IRS' LBR 7056-1 Stmt. at ¶ 3; Trustee's S.J. Motion, Ex. B.) Upon receipt of the check, the IRS released the federal tax liens it held on the Mongellis' property. (IRS' LBR 7056-1 Stmt. at ¶ 20.)

The Chapter 7 Trustee commenced this adversary proceeding pursuant to §§ 549 and 550 of the Bankruptcy Code seeking to recover from the IRS the $106,286.15 transfer, as well as other post-petition transfers of estate funds made by Gottlieb to others. The Trustee then filed his motion for summary judgment and the United States Attorney, representing the IRS, filed its cross-motion for summary judgment.

III. DISCUSSION

Fed.R.Bankr.P. 7056 applies Fed.R.Civ.P. 56 to summary judgment motions in adversary proceedings. The court shall grant a motion for summary judgment if the movant establishes that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law. The moving party has the burden to establish that no relevant facts are in dispute. Donahue v. Windsor Locks Bd. of Fire Commissioners, 834 F.2d 54, 57 (2d Cir.1987). "A court must resolve all ambiguities and draw all reasonable inferences against the moving party." Id.

Under section 549 of the Bankruptcy Code, a Trustee "may avoid a transfer of property of the estate . . . that occurs after the commencement of the case and that is not authorized. . . ." 11 U.S.C. § 549(a)(1997). Here, the transfer of estate funds to the IRS is potentially voidable because it occurred after commencement of the bankruptcy case and was unauthorized.

Section 550(a) of the Bankruptcy Code provides that to the extent a transfer is avoided under Bankruptcy Code § 549, "the Trustee may recover . . . 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." 11 U.S.C. § 550(a)(1997). Since the check was delivered for and used to pay the personal tax liabilities of the Mongellis, it is clear that the IRS is not "the entity for whose benefit the transfer was made." 11 U.S.C. § 550(a)(1). While a Trustee may recover from an initial transferee or the subsequent transferee, a subsequent transferee is not liable if it took "for value, . . . in good faith, and without knowledge of the voidability of the transfer avoided." 11 U.S.C. § 550(b).

1. Initial Transferee

An initial transferee is one who receives property and exercises control or dominion over it. Bonded Fin'l Servs. v. European American Bank, 838 F.2d 890, 893 (7th Cir.1988); Robinson v. Home Sav. of Am. (In re Concord Senior Hous. Found.), 94 B.R. 180, 182-83 (Bankr.C.D.Cal.1988).³ A party that merely facilitates the transfer from the debtor to a third party acts as a conduit and is not a transferee. Security First National Bank v. Brunson (In re Coutee), 984 F.2d 138, 141 (5th Cir.1993).

The requisite dominion or control is present when a corporate officer or shareholder causes the corporation to make payments on his personal debts or for his personal benefit. Grogan v. Internal Revenue Service (In re Malcolm Crane, Inc.), No. 93-42396, Slip op. at 5 (Bankr.E.D.Mich. Jan. 8, 1997). When a corporate officer receives a check drawn on a corporate account and uses it to pay personal debts, the corporate officer, and not the payee on the check, is the initial transferee. Id. at 6-7.

In In re Nordic Village, Inc., Josef Lah, an officer and shareholder of a debtor corporation, drew a corporate check to a bank and the bank, in turn, issued several cashier's checks therefrom. Internal Revenue Serv. v. Nordic Village, Inc. (In re Nordic Village, Inc.), 915 F.2d 1049, 1050 (6th Cir.1990), rev'd on other grounds, 503 U.S. 30, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992). One of those checks, bearing the crossed-out but legible notation "REMITTER: SWISS HAUS, INC.", was delivered to the IRS, with instructions to credit the check against Lah's personal tax liabilities. The IRS followed that instruction. The court explained:

If Lah is viewed as acting for the debtor, then the IRS is the "initial transferee." If Lah is viewed as having taken money illegally from the debtor, he is the "initial transferee" and the delivery of the cashier\'s check to the IRS makes the IRS an "immediate transferee" of Lah, the "initial transferee."

Id. at 1055.

In our case, Gottlieb drew a check on his attorney escrow account payable to the IRS with the notation thereon "For Round Lake Sanitation", and forwarded it to Flynn. Flynn then forwarded the check to the IRS with a transmittal letter indicating that the check was to be applied in partial satisfaction of the Mongellis' offer-in-compromise. The Trustee believes that "both Michael Gottlieb and Kevin Flynn acted merely as a conduit for the transfer of the funds" and thus concludes that the IRS is the initial transferee. (Trustee's Memo. of Law at 7.) The IRS argues that the Mongellis were the initial transferees because they "took control of Round Lake Sanitation's funds and effectively transferred the money to themselves in order to make a payment on their personal tax liabilities." (IRS' Memo. of Law at 14.)

In determining whether a person has the requisite dominion or control over property sufficient to qualify as the initial transferee, "`courts should step back and evaluate a transaction in its entirety.'" Danning v. Miller (In re Bullion Reserve of North America), 922 F.2d 544, 549 (9th Cir.1991)(quoting, Nordberg v. Societe Generale (In re Chase and Sanborn Corp.), 848 F.2d 1196, 1199 (11th Cir.1988)). The uncontroverted documents submitted on these motions establish that either Gottlieb or the Mongellis were the initial transferees. The Debtors, Gottlieb's corporate clients, owed no tax to the IRS at the time he caused their funds to be delivered to the Mongellis' attorney in the form of a check payable to the IRS.⁴ The Mongellis, by...