In re Personal and Business Ins. Agency

• Decision Date: 26 June 2003
• Docket Number: No. 02-1192.,02-1192.
• Citation: 334 F.3d 239
• Parties: In re: THE PERSONAL AND BUSINESS INSURANCE AGENCY, Debtor James K. McNamara, Esq., Trustee, Appellant v. PFS a/k/a Premium Financing Specialists
• Court: U.S. Court of Appeals — Third Circuit

334 F.3d 239

In re: THE PERSONAL AND BUSINESS INSURANCE AGENCY, Debtor James K. McNamara, Esq., Trustee, Appellant v. PFS a/k/a Premium Financing Specialists

No. 02-1192.

United States Court of Appeals, Third Circuit.

Argued February 24, 2003.

Filed: June 26, 2003.

Lawrence C. Bolla (Argued), Kenneth W. Wargo, Quinn, Buseck, Leemhuis, Toohey & Kroto, Inc., Erie, PA, for Appellants.

Richard A. Lanzillo (Argued), Mark G. Claypool, Knox McLauglin Gornall & Sennett, Erie, PA, for Appellee.

Before: BECKER, Chief Judge,^* SCIRICA, Circuit Judge^** and SHADUR,^*** District Judge.

OPINION OF THE COURT

BECKER, Circuit Judge.

This appeal from an order of the District Court affirming the Bankruptcy Court's dismissal of a fraudulent conveyance claim brought against Premium Finance Specialists ("PFS") on behalf of the debtor, The Personal & Business Insurance Agency ("PBI"), by the bankruptcy trustee, James K. McNamara (the "Trustee"), poses the question whether a court may consider post-bankruptcy petition events, in this case the appointment of the Trustee, in evaluating a claim brought under § 548 of the Bankruptcy Code.

PBI was used as a pawn in an illegal scheme perpetrated by its CEO and sole owner, Emil Kesselring, who caused PBI to make payments totaling $580,000 to PFS in putative repayment for loans that Kesselring had fraudulently obtained from PFS. The Trustee now seeks to recover those funds, arguing that the payments were a fraudulent conveyance under § 548 of the Code. The District Court determined that despite the fact that Kesselring's actions were adverse to PBI's interests, under the "sole actor exception" detailed in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 359-60 (3d Cir.2001), Kesselring's fraud must be imputed to PBI because he was its sole representative. On this basis, the District Court reasoned that PBI owed PFS a debt, that the payments made to PFS were made in partial satisfaction of that debt, and therefore that PBI received a reasonably equivalent value for these payments, meaning that the transfers to PFS were neither constructively nor actually fraudulent.

The Trustee responds that even if Kesselring's fraud was properly imputed to PBI pre-petition, it cannot be imputed to the Trustee, who is bringing this claim on behalf of innocent creditors. He asserts that we must consider his claim in light of a post-petition event, namely his appointment as Trustee in place of the "bad actor" Kesselring, in determining whether the transfers were fraudulent under § 548. The Trustee urges that when we take his appointment into account, the imputation of Kesselring's fraud to PBI would lead to an inequitable result — loss to innocent creditors. He cites persuasive caselaw which holds that the invocation of the doctrine of imputation against a trustee should not be allowed when a bad actor has been removed and the defense is serving only to bar the claims of an innocent successor.

We find nothing in the language of § 548 that prevents a court from considering post-petition events, and so we may consider PBI's claim in light of the appointment of the Trustee. Because we agree that imputing Kesselring's fraud (and his debt) to the Trustee would lead to an inequitable result, we conclude that Kesselring's fraudulent acts (and the debts he incurred) cannot be imputed to the Trustee, and therefore that the District Court erred in affirming the Bankruptcy Court's dismissal of the Trustee's fraudulent conveyance claim. We will therefore reverse the judgment of the District Court and remand the matter for further proceedings.

I.

The Debtor, PBI, was an insurance brokerage firm in the business of obtaining coverage for trucking companies and their cargo by placing such coverage with various insurers. Between March 1997 and November 1998, Kesselring, the sole owner and chief executive officer of PBI, took advantage of PBI's operating procedures to use the company in an illegal money-making scheme. As a standard part of its business, PBI would sometimes obtain for its clients financing for the insurance premium payments necessary to secure coverage. PFS was one of two financing companies that PBI used for this purpose. Usually, when a client requested financing, PBI would prepare an application and Kesselring would either sign the application on behalf of the client, or obtain the client's signature by delivering it a copy of the application. PBI would then send the application to PFS (or the other finance company) for approval. Upon such approval, PFS would arrange to bill the borrower. PFS would transmit the loan monies to PBI by wire transfer or check and, normally, PBI would then transfer the funds, less its commission, to the insurer.

Beginning in March 1997, Kesselring began to take advantage of this established procedure as a way to illegally obtain funds for himself. He prepared false applications for finance company loans in the name of actual PBI clients or fictitious entities, either forging the borrower's signature or signing as the borrower's agent/broker. He then submitted the applications to PFS and obtained the loan proceeds. Rather than paying for insurance coverage with these funds, however, Kesselring pocketed the money. To avoid detection, Kesselring caused PBI to make payments on the fraudulent loans using PBI funds. Kesselring made a total of $580,000 in such payments to PFS.

Kesselring's malfeasance was nonetheless uncovered and he was indicted by a grand jury for mail and wire fraud. In August 1999, PBI's Chapter 7 bankruptcy trustee, James McNamara, filed a complaint against PFS, seeking to recover the funds Kesselring had transferred to PFS pursuant to his illegal scheme. The Trustee then filed an amended complaint, alleging a claim for fraudulent conveyance under 11 U.S.C. § 548 and the Pennsylvania Uniform Fraudulent Conveyance Act, 12 Pa.C.S.A. § 5104 et seq., and a second amended complaint, which added a claim of preference. PFS filed an answer to the second amended complaint and then moved to dismiss the fraudulent conveyance count of the second amended complaint. The Bankruptcy Court granted this motion on October 24, 2000. The Trustee voluntarily dismissed the preference count of the second amended complaint, resulting in a dismissal of the action. The Trustee appealed the Bankruptcy Court's decision to the District Court, which affirmed, and he now appeals to this Court.

The District Court had jurisdiction pursuant to 28 U.S.C. § 158(a)(1), based on an appeal from the final order of the Bankruptcy Court. This Court has jurisdiction under 28 U.S.C. § 158(d) and 28 U.S.C. § 1291. Our review of an appeal from the grant of a motion to dismiss under Bankruptcy Rule 7012(b)(6), the equivalent of Fed.R.Civ.P. 12(b)(6), is plenary. Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir.1992). To affirm the dismissal of a complaint under rule 12(b)(6), we take all well-pleaded allegations as true and construe the complaint in the light most favorable to plaintiff. Estate of Bailey v. County, 768 F.2d 503, 506 (3d Cir. 1985).

II.

Under § 548 of the Bankruptcy Code, a conveyance is fraudulent, and therefore avoidable, if it involved either "actual" or "constructive" fraud.¹ Actual fraud occurs when the debtor makes the transfer with the intent to hinder, delay, or defraud creditors, and constructive fraud occurs when the debtor receives less than a reasonably equivalent value for a transfer and either is insolvent at the time of transfer, or becomes insolvent because of it. The Bankruptcy Court determined that the transfers in question in this case were neither actually nor constructively fraudulent because they were made in repayment of a debt owed to PFS. The District Court agreed and rejected the Trustee's argument that Kesselring's fraudulent conduct cannot be imputed to the corporation and that the debt was Kesselring's alone. In rejecting this argument, the District Court was guided by the analysis laid out in Waslow v. Grant Thornton L.L.P. (In re Jack Greenberg, Inc.), in which the Court held that:

"the fraud of an officer of a corporation is imputed to the corporation when the officer's fraudulent conduct was (1) in the course of his employment, and (2) for the benefit of the corporation. This is true even if the officer's conduct was unauthorized, effected for his own benefit but clothed with apparent authority of the corporation, or contrary to instructions. The underlying reason is that a corporation can speak and act only through its agents and so must be accountable for any acts committed by one of its agents within his actual or apparent scope of authority and while transacting corporate business."

212 B.R. 76, 83 (Bankr.E.D.Pa.1997) (quoting Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 884 (3d Cir.1975)).

The District Court correctly found that the first prong of this test was satisfied because Kesselring committed the fraud in the course of his employment; applying for loans from PFS was part of Kesselring's standard work at PBI. The second prong proved more difficult, however. Under what is known as the "adverse interest exception," "fraudulent conduct will not be imputed if the officer's interests were adverse to the corporation and `not for the benefit of the corporation.'" Lafferty, 267 F.3d at 359 (citations omitted). This exception applied to the situation at hand, as Kesselring's illegal actions redounded only to his own benefit, not to the corporation's. There is however, an exception to this exception, which states that:

[I]f an agent is the sole representative of a principal, then that agent's fraudulent conduct is imputable to the principal regardless of whether the agent's conduct was adverse to the principal's interests. The rationale for this rule is that the sole agent has no one to whom he can impart his knowledge, or from whom he can conceal it, and that the corporation must bear the responsibility for...