Whitlock v. Lowe (In re Deberry)

• Decision Date: 23 December 2019
• Docket Number: No. 18-50335,18-50335
• Citation: 945 F.3d 943
• Parties: In the MATTER OF: Curtis Harold DEBERRY, Debtor, Cheri Ann Whitlock, Appellant, v. John Patrick Lowe, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

945 F.3d 943

In the MATTER OF: Curtis Harold DEBERRY, Debtor,Cheri Ann Whitlock, Appellant,

v.John Patrick Lowe, Appellee.

No. 18-50335

United States Court of Appeals, Fifth Circuit.

Filed December 23, 2019

Dean William Greer, Attorney, Law Offices of Dean W. Greer, San Antonio, TX, for Appellant.

Leslie Sara Hyman, Esq., Elliott S. Cappuccio, Pulman, Cappuccio, Pullen, Benson & Jones, L.L.P., San Antonio, TX, for Appellee.

Before CLEMENT, DUNCAN, and OLDHAM, Circuit Judges.

ANDREW S. OLDHAM, Circuit Judge:

The Bankruptcy Code empowers a trustee to "avoid" certain pre-petition transactions and "recover" funds rightfully owed to the bankruptcy estate. The question presented is whether the trustee can double -recover funds that were already returned. The district and bankruptcy courts below said yes, disagreeing with every other court that has considered the question. We vacate and remand.

I.

Curtis DeBerry owned a produce-distribution business in San Antonio. He filed a Chapter 7 bankruptcy petition in February 2014. He committed bankruptcy fraud, so the district court sentenced him to 24 months in prison. Ours is not the criminal case, however. This is an adversary proceeding filed by the trustee of his bankruptcy estate, Appellee John Patrick Lowe ("the Trustee").

A.

A few months before Mr. DeBerry filed for bankruptcy, his wife, Kathy DeBerry (née Whitlock), opened a joint bank account at Wells Fargo with her sister-in-law, Appellant Cheri Whitlock. Mrs. DeBerry allegedly wanted to use the account to transfer money to her children, who were away at school. It's unclear why she needed a joint bank account with Ms. Whitlock to do that.

On August 26, 2013, Ms. Whitlock went with Mrs. DeBerry to open the account at a Wells Fargo branch. Mrs. DeBerry gave her a cashier's check for $275,000 withdrawn from the DeBerrys' joint account. Ms. Whitlock endorsed the check, and they deposited it in the new Wells Fargo account.

Three days later, Mrs. DeBerry removed herself from the Wells Fargo account, leaving it solely in Ms. Whitlock's name. Ms. Whitlock signed the form that made her the sole accountholder, but she attested that Mrs. DeBerry showed her only the signature pages when asking her for a signature. She did not know Mrs. DeBerry was removing herself from the account, and she "would have never signed a document permitting that to happen."

Ms. Whitlock explained that her sister-in-law was "always busy with work." "I didn't work at the time," Ms. Whitlock testified, "[s]o, she would ask me can you go sign this paper [at the bank] and I'd say, yeah, I'll pop in." She "never questioned why Kathy wasn't signing the[ ] documents" herself. "I was doing a favor for my sister-in-law and never asked," Ms. Whitlock testified.

The money didn't stay in the Wells Fargo account for long. Starting about a month after the sisters-in-law opened the account, the $275,000 was transferred out. On September 23, Ms. Whitlock wired $33,500 to The International CC, LLC, with a notation for Chantel DeBerry (the DeBerrys' daughter). Ms. Whitlock said the transfer paid for Chantel's culinary school. That same day, Ms. Whitlock authorized an automatic transfer of $9,200 to Marla Bainbridge. Ms. Whitlock does not know who Marla Bainbridge is. Ms. Whitlock did not fill out the information on either of these transfer request forms—she testified she only signed them at Mrs. DeBerry's request.

On October 7, Ms. Whitlock signed the two wire transfers at the heart of this case. The first transferred $32,000 from the Wells Fargo account to Kathy DeBerry's personal bank account, which was in her name only. The second transferred $200,000 to an account owned by Mr. DeBerry's LLC, "MBC."¹ Ms. Whitlock testified that she signed the October 7 wire transfers, like the others, at Mrs. DeBerry's request and that she neither filled out the forms nor asked about their destinations or purposes.

Ms. Whitlock testified: "It never occurred to me to review the transfer request or the reasons why the transfers were being made.... Because the monies belonged to Kathy [DeBerry], I did not question what she wanted to do with [them]."

B.

The Trustee filed an adversary proceeding against Ms. Whitlock (and others) to avoid and recover the $275,000 as a fraudulent transfer. He settled with Chantel DeBerry, so the $33,500 transferred on September 23 is no longer at issue. That leaves $241,500. The Trustee argues Ms. Whitlock is liable for all $241,500 under 11 U.S.C. § 550, which allows a bankruptcy trustee to recover fraudulently transferred funds from transferees. Ms. Whitlock denies liability based on two arguments. First, she contends she is not a "transferee" because the money really belonged to the DeBerrys all along; she was a "mere conduit." Second, she contends the $232,000 she transferred to MBC and Kathy DeBerry on October 7 were already returned to the debtor, so the Trustee cannot "recover" them again.

1.

To unwind a fraudulent transfer, the trustee must first "avoid" it. See In re Picard , 917 F.3d 85, 97 (2d Cir. 2019). The bankruptcy court concluded the DeBerrys' $275,000 transfer to Ms. Whitlock evidenced many of the "badges of fraud" that allow an inference of fraudulent intent by the transferor under both federal bankruptcy law and Texas law. See Soza v. Hill (In re Soza) , 542 F.3d 1060, 1067 (5th Cir. 2008). For example, the transfer was not supported by any consideration from Ms. Whitlock, Ms. Whitlock is a family member of the debtor, Mr. DeBerry retained some practical control over the funds, and Mr. DeBerry was "under great financial stress" at the time of the transfer. Based on these findings, the bankruptcy court concluded the Trustee could avoid the transfer. Ms. Whitlock concedes that the transfer is avoidable.

2.

"In fraudulent transfer actions, there is a distinction between avoiding the transaction and actually recovering the property or the value thereof." IBT Int'l, Inc. v. Northern (In re Int'l Admin. Servs., Inc. ), 408 F.3d 689, 703 (11th Cir. 2005) ; see also Picard, 917 F.3d at 97 ; Acequia, Inc. v. Clinton (In re Acequia, Inc. ), 34 F.3d 800, 809 (9th Cir. 1994). A bankruptcy trustee can recover from certain transferees. See 11 U.S.C. § 550(a). To recover, the bankruptcy trustee must show the alleged transferee had dominion and control over the transferred funds. See Sec. First Nat'l Bank v. Brunson (In re Coutee ), 984 F.2d 138, 141 (5th Cir. 1993) (per curiam).

The bankruptcy court held Ms. Whitlock had dominion and control over the funds in the Wells Fargo account. The original $275,000 cashier's check was made out to her, and she endorsed and deposited it. She became the "sole owner" of the Wells Fargo account once Kathy DeBerry was removed as an accountholder. And she executed each of the transfers to others. She may have followed Mrs. DeBerry's instructions, but there is no evidence she was legally obligated to do so. So the bankruptcy court held Ms. Whitlock was an "initial transferee" of an avoidable transfer subject to recovery under 11 U.S.C. § 550(a)(1).

3.

The final question before the bankruptcy court was whether recovery from Ms. Whitlock would give the Trustee an impermissible double recovery in violation of the "single-satisfaction rule." According to the Bankruptcy Code, "[t]he trustee is entitled to only a single satisfaction" for avoidable transactions that are subject to recovery under 11 U.S.C. § 550(a). See id. § 550(d). Splitting from every other court to consider the question, the bankruptcy court took the view that the single-satisfaction rule does not apply to funds that were returned prior to the petition date. So it entered judgment for the Trustee, holding Ms. Whitlock liable for the entire $241,500—including the $232,000 she transferred to Mrs. DeBerry and MBC on October 7, 2013.

Ms. Whitlock appealed to this Court. We review the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. First Nat'l Bank v. Crescent Elec. Supply Co. (In re Renaissance Hosp. Grand Prairie Inc. ), 713 F.3d 285, 294 (5th Cir. 2013).

II.

Ms. Whitlock raises two arguments on appeal. First, she says she is not a "transferee" under § 550(a). Second, even if she is a "transferee," Ms. Whitlock argues the Trustee cannot recover from her under § 550(d). We don't need to reach her first argument because her second is correct.

A.

Section 550(a) says the bankruptcy trustee can "recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property." The courts below held the Trustee can use 11 U.S.C. § 550(a) to "recover" property from a transferee even if she transferred it back to the debtor before bankruptcy. Not so.

In matters of statutory interpretation, text is always the alpha. Here, it's also the omega. Section 550(a) permits the trustee to "recover" the property. To "recover" means "[t]o get back or regain in full or in equivalence." Recover , BLACK'S LAW DICTIONARY (11th ed. 2019); see also WEBSTER'S NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE 2080 (2d ed. 1941) [hereinafter WEBSTER'S SECOND ] (defining "recover" as "[t]o get or obtain again; to get renewed possession of"). Obtaining a duplicate of something is not getting it back; it's getting a windfall. Property that has already been returned cannot be "recovered" in any meaningful sense. And that principle defeats the Trustee's claims against Ms. Whitlock. Once the fraudulently transferred property has been returned, the bankruptcy trustee cannot "recover" it again using § 550(a).

B.

One way or another, every other court to consider the issue has agreed with our reading of the plain text. Many courts get there by way of § 550(d)'s single-satisfaction rule, reasoning the trustee is limited "to a single recovery for his ... fraudulent transfer claim to ensure the bankruptcy estate is put back in its pre-transfer position but receives no windfall through the avoidance provisions." Kapila v. SunTrust...