Stoebner v. Consumers Energy Co. (In re LGI Energy Solutions, Inc.), BAP Nos. 11–6045

• Decision Date: 08 December 2011
• Docket Number: 11–6051.,11–6048,11–6050,BAP Nos. 11–6045,11–6047,11–6046,11–6049
• Citation: 460 B.R. 720,55 Bankr.Ct.Dec. 235,66 Collier Bankr.Cas.2d 1329
• Parties: In re LGI ENERGY SOLUTIONS, INC.; LGI Data Solutions Company, LLC, Debtors.John R. Stoebner, Trustee, Plaintiff–Appellant v. Consumers Energy Company; Potomac Electric Power Company; Alabama Power Company; Atlantic City Electric Company; East Cedarbrook Plaza, LLC; Florida Power & Light Company; Gulf Power Company, Defendants–Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

460 B.R. 720

55 Bankr.Ct.Dec. 235

66 Collier Bankr.Cas.2d 1329

In re LGI ENERGY SOLUTIONS, INC.; LGI Data Solutions Company, LLC, Debtors.John R. Stoebner, Trustee, Plaintiff–Appellant

v.Consumers Energy Company; Potomac Electric Power Company; Alabama Power Company; Atlantic City Electric Company; East Cedarbrook Plaza, LLC; Florida Power & Light Company; Gulf Power Company, Defendants–Appellees.

BAP Nos. 11–6045

11–6046

11–6047

11–6048

11–6049

11–6050

11–6051.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: Oct. 31, 2011.Decided: Dec. 8, 2011.

Tyler D. Candee, John R. Stoebner, on brief, Minneapolis, MN, for Appellant.

William F. Mohrman, Minneapolis, MN, for Appellee.

Before FEDERMAN, VENTERS, and NAIL, Bankruptcy Judges.

FEDERMAN, Bankruptcy Judge.

The Plaintiff–Appellant in these related appeals is the Trustee in the Chapter 7 bankruptcy cases of LGI Energy Solutions, Inc., and LGI Data Solutions Company LLC, which were in the business of providing utility-management and billing services to restaurants and other customers. As such, they collected from their customers funds for payment of the customers' utility bills, and were in turn to pay those funds on to the utilities. Due to volume, they were also able to obtain discounts from some utilities, and were paid a percentage of such discounts in addition to a monthly fee. This consolidated appeal involves seven adversary proceedings by the Trustee to avoid payments made by Debtor LGI Energy to the Defendant utilities prior to the bankruptcy. The Trustee contends that such payments were preferential and/or fraudulent transfers under the Bankruptcy Code and applicable state law. The Bankruptcy Court granted summary judgment in favor of the Defendants, based on its conclusion that the payments they received for the utilities were not an asset of either Debtor. The Trustee appeals, and we reverse and remand.

FACTUAL BACKGROUND

The parties agree that all payments at issue came from an account at U.S. Bank ending in 3321 (“the 3321 Account”). That account was held in the name of “LGI Energy Solutions, Inc.,” without reference to its being held for any particular purpose or for the benefit of any other party. The Defendants contend in effect that the 3321 Account was a funnel through which the customers paid their utility bills, and that LGI Energy typically paid those bills within hours or at most two days after receipt of payment from its customers. Indeed, LGI Energy's agreements with at least some of its customers provided, in somewhat different variations, that LGI Energy was to acquire no ownership in the payments from the customers as they passed through LGI Energy.¹ For purposes of this appeal, the Trustee agrees that funds paid by customers to LGI Energy were required by agreement with the customers to be held pursuant to a trust or trust-like relationship, and that such funds were to only be used to pay that customer's bills.

However, in the period prior to its bankruptcy, the Trustee contends that Debtor LGI Energy did not treat its customers' funds consistent with its contractual obligations to them. According to the Trustee, the Debtors' principal was siphoning money out of the Debtors and then engineered a Ponzi and check kiting scheme to conceal the thefts and induce customers to keep advancing money. The Trustee contends that the Debtors also shuffled money around from account to account. Eventually, there was not enough money to pay the utilities. The Trustee asserts that LGI Energy was commingling the payments from the utility clients with other income from their servicing and leasing operations, and perhaps with loan funds from a bank.

More specifically, the Trustee's Complaints against the seven Defendants identified a total of 59 transfers made to the Defendants via check from the 3321 Account, which were negotiated between November 10, 2008 and November 26, 2008.² The last deposit into this account by any of the customers of these Defendants occurred on November 4, 2008. None of the checks at issue here was negotiated by the Defendant-payees before November 10, 2008. There appears to be no dispute that the balance of the 3321 Account was frequently reduced to zero or overdrawn between the dates of the deposits of the customers' alleged trust money and the dates when funds were transferred to the Defendants in payment of utility bills.

For example, according to the Trustee, the account balance at the end of November 4, 2008—after customer Buffets, Inc. deposited the amount of $208,567.28 for the payment of its utility bill—was just $1.22. Yet the utility bill for which Buffets had made its deposit on that day had not yet been paid at that point. According to the Trustee, Buffets' money obviously went somewhere else, and someone else's money was used to later pay Buffets' utility bill.

In the three weeks after November 4, 2008, the 3321 Account was almost perpetually overdrawn, including on the last business day, November 7, before the first of the checks to Defendants was negotiated. The Trustee asserts that, after November 4, 2008, every other deposit into the 3321 Account was from a source other than the customers at issue here. Some deposits were from a different customer not implicated in these adversary proceedings, and some were from other accounts belonging to the Debtors, and not from those customers. The Defendants do not dispute that funds were commingled and that the dollars used to pay their respective utility bills were not necessarily the same dollars paid by the customer whose bill was being paid. In other words, the Defendants concede that they cannot trace the money directly from the customer to the payment of that customer's utility bills. Rather, as discussed more fully below, the Defendants assert that, so long as they show that a customer's “trust” money went into the account, they need not trace those funds on to the Defendants.

The Bankruptcy Court essentially agreed. It held that in order for the Defendants to prevail based on the argument that funds paid to them were never property of the Debtors, the Defendants were not required to show that the funds they received were the funds paid by their utility users to LGI Energy. Such tracing might be required, the Court held, if the Debtor was still holding funds which competing parties contended were held in trust for them. However, the Court further held, no such tracing is required where the Debtor has already made payments which it was obligated to make, regardless whose money was used to make them.

As discussed more fully below, we hold that that ruling is inconsistent with Minnesota law and Eighth Circuit precedent. If a trust or agency relationship was intended to be created by the agreements between LGI Energy and its customers, then the Defendants were nevertheless required to prove that LGI Energy honored that relationship and treated the funds accordingly. In other words, they had to trace the money. For that reason, we reverse and remand for further findings.

STANDARD OF REVIEW

We review findings of fact for clear error, and legal conclusions de novo.³ The Bankruptcy Court's grant of summary judgment is reviewed de novo.⁴ Summary judgment is appropriate if, viewing the evidence in the light most favorable to the nonmoving party, there is no material factual dispute, and the movant is entitled to judgment as a matter of law.⁵ “To create a genuine issue of material fact—at trial or on appeal—a nonmoving party (or appellant) must set forth specific facts and present affirmative evidence showing there is a genuine issue of material fact precluding summary judgment.” ⁶

DISCUSSION

Property of the Debtor

Count I of the Trustee's Complaint sought to avoid the transfers as preferences under 11 U.S.C. § 547. Section 547(b) provides that a trustee “may avoid any transfer of an interest of the debtor in property ” to or for the benefit of a creditor, on account of an antecedent debt, while the debtor was insolvent, on or within 90 days before the filing of the petition, and that enables such creditor to receive more than such creditor would receive if the case were a case under chapter 7 and the transfer had not been made. ⁷ The theories relied on by the Trustee in the other counts of the Complaint, for avoidance of fraudulent transfers under 11 U.S.C. § 548 and Minnesota law, similarly require proof that the Debtor held an interest in the property transferred.⁸

Significantly, we note at this point that the Bankruptcy Code provides that preferences and fraudulent transfers may be recovered either from the recipient of the payment, or from the creditor (here, the customers) for whose benefit the payment was made.⁹ Consequently, the Trustee could have sued either the Defendants or the customers whose utility bills were paid.

The Bankruptcy Code does not define “interest of the debtor in property” before a bankruptcy is filed. However, in Begier v. Internal Revenue Service, the Supreme Court held that that term is “best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.” ¹⁰ Section 541 of the Bankruptcy Code provides, as relevant here, that the estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case....” ¹¹ While bankruptcy law determines whether an asset is property of the estate, the existence and extent of property is defined by state law.¹² Under Minnesota law, funds held in a bank account are presumed to belong to the account holder. ¹³ Courts have, however, held that in certain circumstances, such presumption can be rebutted, as will be shown.

In Begier, the Supreme Court held that taxes withheld from employee paychecks, commonly referred to as “trust fund taxes,” which were paid by the debtor to the IRS could not be the subject of a preference avoidance because they were...