Montoya v. Goldstein (In re Chuza Oil Co.)

• Decision Date: 12 February 2021
• Docket Number: Adv. No. 20-1007-t,No. 18-11836-t7,18-11836-t7
• Parties: In re: CHUZA OIL COMPANY, Debtor. PHILLIP J. MONTOYA, Chapter 7 Trustee of the Bankruptcy Estate of Chuza Oil Company, Plaintiff, v. AUDREY GOLDSTEIN, Defendant.
• Court: U.S. Bankruptcy Court — District of New Mexico

In re: CHUZA OIL COMPANY, Debtor.PHILLIP J. MONTOYA,Chapter 7 Trustee of the Bankruptcy Estate of Chuza Oil Company, Plaintiff, v. AUDREY GOLDSTEIN, Defendant.

No. 18-11836-t7

Adv. No. 20-1007-t

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

February 12, 2021

OPINION

The chapter 7 trustee brought a $20,650 fraudulent transfer claim against Audrey Goldstein, a former employee of Debtor. Ms. Goldstein is the daughter of Debtor's owner and former president, Bobby Goldstein. After trial, the Court finds that Ms. Goldstein never got any of the money. Instead, she received three checks payable to her, endorsed them, and deposited them into her father's bank account or the account of one of his other businesses. As she was not a transferee of the money, the Court will enter judgment in her favor.

A. Facts.¹

The Court FINDS:

On July 25, 2018, creditors filed an involuntary chapter 7 bankruptcy petition against Debtor, commencing this case. Philip Montoya was appointed chapter 7 trustee. Robert Goldstein ("Bobby") is Debtor's owner and former president. Audrey Goldstein ("Audrey") is Bobby's daughter.

In May and June 2016, Debtor was a struggling business, operating under a confirmed chapter 11 plan of reorganization. Although Debtor had some income from oil sales, it was not enough to pay operating expenses. Bobby and his company Bobby Goldstein Productions, Inc. ("BGPI") transferred a substantial amount of money to Debtor to keep it afloat.² From time to time, if there was enough money in Debtor's accounts, Debtor would pay back some of the money to Bobby and/or BGPI.³

The trustee's claim against Audrey is based on three of Debtor's checks, payable to her, totaling $20,650. The checks were signed by Bobby on behalf of Debtor and were issued in May-June 2016.⁴ At the time, Audrey was 17 years old and worked as a "runner" for Debtor. Per her father's instructions, Audrey took the checks to Plains Capital Bank (where Bobby and BGPI hadaccounts), endorsed them, and deposited them into his account or a BGPI account.⁵ Bobby testified that this procedure allowed him to avoid a "3-day hold" that would have been imposed if he had been the payee on the checks. Audrey did not use, obtain, control, or benefit from the money.

The trustee's complaint was based on Debtor's bank records, which showed only that the checks were payable to Audrey and were presented for payment. The complaint included the following allegations:

18. On or about May 26, 2016, the Debtor transferred $650.00 to the Defendant by check number 1122 made from Debtor's business checking account at Green Bank, N.A (the "May 26 Transfer").

. . .

20. On or about June 21, 2016, the Debtor transferred $10,000.00 to the Defendant by check number 1183 made from Debtor's business checking account at Green Bank, N.A. (the "June 21 Transfer")

. . .

22. On or about June 22, 2016, the Debtor transferred $10,000.00 to the Defendant by check number 1186 made from Debtor's business checking account at Green Bank, N.A. (the "June 22 Transfer").

Audrey admitted these allegations in her answer, filed March 6, 2020. She did not assert the "conduit" defense (discussed below).

Based on Debtor's bank records and Audrey's answer to the complaint, the chapter 7 trustee had no reason to question whether Audrey got the $20,650. That changed, however, on July 3, 2020, when Audrey amended her answer to a trustee interrogatory to the following:

Interrogatory No. 5: Please state in detail the complete factual and legal basis for your affirmative defense that the Defendant received the Transfers for substantialnew value, as stated in paragraph 56 of the Answer to Complaint . . . .

Amended Answer: . . . . Bobby Goldstein . . . can testify that the check for $650 which he signed was to reimburse him for costs incurred for Chuza, as noted on the check. He can testify that Audrey Goldstein received none of the money and he can testify that the two $10,000 transfers were not for Audrey but were written to her in order to deposit them into his accounts, where she deposited them. Documents are the three checks, the Deposit Tickets for Audrey's deposit of $10,000 into Bobby Goldstein's account on June 21, 2016 and her deposit of $10,000 into Bobby Goldstein Productions Inc. account at Plains Capital Bank on June 22, 2016.

The amended interrogatory response alerted the trustee that the $20,650 went to Bobby, not Audrey, and that Audrey was a mere conduit. Unfortunately, Audrey never sought to amend her answer to assert the conduit defense before trial. Indeed, instead of amending her answer, Audrey agreed to a "Stipulated Order Establishing Facts for Trial" (the "Stipulated Facts") that included the three "transferred" allegations quoted above.

At trial, Audrey's counsel argued and litigated the conduit defense, i.e., that Audrey was not the "initial transferee" under § 550⁶ because she never had control over or any interest in the $20,650. The trustee's counsel timely objected to Audrey raising the conduit defense, citing her answer to the complaint and the Stipulated Facts. In response, Audrey's counsel moved to amend her answer to include the conduit defense. The trustee's counsel objected and the Court took the dispute under advisement.

B. § 550.

§ 550 provides in relevant part:

(a) Except as otherwise provided in this section, to the extent that a transfer is avoid[able] . . . . 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[.]

"Initial transferee" is not defined in the Bankruptcy Code. However, it is widely accepted that a "mere conduit" or agent who lacks dominion, control, or a beneficial interest in the transferred property is not an "initial transferee" within the meaning of § 550(a)(1). 5 Collier on Bankruptcy ¶ 550.02[4][a] states:

many courts have found that a party acting merely as a conduit who facilitates the transfer from the debtor to a third party is not a 'transferee' and, therefore, not the initial transferee. Rather, these courts have held that the minimum requirement of status as a 'transferee' is dominion over money or other assets for one's own purposes.

The "mere conduit" defense, also known as the "dominion or control test," was articulated by the Seventh Circuit in Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 893 (7th Cir. 1988). In Bonded the debtor sent a $200,000 check to its bank with instructions to deposit the money into "Ryan's" account. 838 F.2d at 891. The bank did so. Ten days later, Ryan—who had borrowed $650,000 from the bank—instructed the bank to debit his account by $200,000 and reduce his loan balance accordingly. Id. The case trustee brought a $200,000 fraudulent transfer claim against the bank, arguing that it was the initial transferee of the money. Id. The court ruled against the trustee, stating that the bank "held the check only for the purpose of fulfilling an instruction to make the funds available to" Ryan. Id. Ryan, as the person "for whose benefit the transfer was made," was the initial transferee. Id. at 893, 895. "As the bank saw the transaction. . . it was Ryan's agent for the purpose of collecting a check from [the debtor's] bank. . . . [It] had no dominion over the $200,000 until . . . Ryan instructed the bank to debit the account to reduce the loan; in the interim, so far as the bank was concerned, Ryan was free to invest the whole $200,000 in lottery tickets or uranium stocks." Id. at 893-94.

The Bonded court stated further:

We are aware that some courts say that an agent . . . is an 'initial transferee' but thatcourts may excuse the transferee from repaying using equitable powers.⁷ This is misleading. 'Transferee' is not a self-defining term; it must mean something different from 'possessor' or 'holder' or agent'. To treat 'transferee' as 'anyone who touches the money' and then to escape the absurd results that follow is to introduce useless steps; we slice these off with Occam's Razor and leave a more functional rule.

. . . .

[T]his appeal to 'equity' -to deny recovery against an 'initial transferee' within the statute—is different in source and in scope from the way in which we have employed considerations of policy to define 'transferee' under § 550(a)(1).

Id. at 894-95 (citations omitted). Thus, "[w]hen A gives a check to B as agent for C, then C is the 'initial transferee'; the agent may be disregarded." Id. at 893.

The Tenth Circuit has adopted Bonded's conduit/dominion or control defense. See Malloy v. Citizens Bank of Sapulpa, 33 F.3d 42, 43-44 (10th Cir. 1994) (quoting Bonded and adopting the conduit defense); see also Rupp v. Markgraf, 95 F.3d 936, 938-39 (10th Cir. 1996) (noting that, in Bonded, "the Seventh Circuit enunciated what is commonly referred to as the 'conduit' theory for determining whether an intermediary . . . is an 'initial transferee' for purposes of § 550" and that approach was adopted by the Tenth Circuit in Malloy).

C. Audrey was not an "Initial Transferee."

Here, the evidence is clear and uncontradicted that Audrey was a mere conduit fortransferring the $20,650 from Debtor to Bobby or BGPI. Bobby or BGPI, rather than Audrey, was the initial transferee.

This should have been an easy win for Audrey. The result is clouded, however, by the admissions in Audrey's answer, the Stipulated Facts, and Audrey's failure to assert the conduit defense before trial.

D. Rule 15(b)(1).

Audrey's conduit defense is nowhere to be found in her answer. It should have been front and center—it is her only defense. See Fed. R. Civ. P. (8)(c)(1) (requiring a party to affirmatively state any avoidance or affirmative defense in responding to a pleading).⁸ Yet from the date of the answer to the morning of trial, the conduit defense was never asserted in any pleading. The failure to plead the defense is inexplicable.

On the...