Cynthia L. Cohen, Modern Financial Plans & Services, Inc. v. Robert P. Abele

PRIOR HISTORY: [**1] Appeal from the United States Bankruptcy Court for the District of Arizona. Bk. No. B-97-11212-PHX-RTB, Adv. No. 98-00112. Honorable Redfield T. Baum, Bankruptcy Judge, Presiding.

DISPOSITION: REVERSED and REMANDED.

COUNSEL: Stanley M. Hammerman, HAMMERMAN & HULTGREN, Phoenix, AZ, for Modern Financial Plans & Services, Inc., Appellant.

Terry A. Dake, Phoenix, AZ, for Robert P. Abele, Trustee, Appellee.

JUDGES: Before: RUSSELL, MEYERS, and PERRIS, Bankruptcy Judges.

OPINIONBY: RUSSELL

OPINION:

[*1] OPINION

RUSSELL, Bankruptcy Judge:

A creditor received a cashier's check [*2] from a chapter 7 n1 debtor in settlement of various disputes between them. The debtor's wife subsequently filed the within chapter 7 case. The trustee in this case filed a § 548 complaint against the creditor to recover the proceeds of the cashier's check as a fraudulent transfer from the debtor/wife to the creditor, contending, inter alia, that the creditor was an "initial transferee" of the monies within the meaning of § 550(a)(1). The bankruptcy court held that the creditor was an "initial transferee" and ordered the creditor to pay the trustee the amount of the cashier's check plus interest and costs. The creditor appeals. We [**2] REVERSE and REMAND.

n1 Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.

I. FACTS

Jeffrey Cohen purchased a mobile home in 1990 for approximately $ 90,000. Appellant Modern Financial Plans & Services, Inc. ("Modern") n2 financed approximately one-third of the purchase price and retained a security interest in the mobile home. Jeffrey sold the mobile home to a third party in 1991 after defaulting under the terms of the financing contract with Modern.

n2 Jeffrey Cohen originally contracted with OnBank, formerly known as Onondaga Savings Bank, which subsequently assigned the financing contract to appellant.

Jeffrey filed a chapter 7 petition in July 1996. His Summary of Schedules reflected [**3] monthly income and expenses of $ 800.00 and $ 920.00, respectively. Schedule "I" stated that he was married, and Schedule "H" reflected a "Cynthia" or "Cindy" Cohen as a co-debtor on four obligations.

Modern filed a § 523(a)(6) complaint against Jeffrey in October 1996, alleging that he wilfully and maliciously injured Modern's property by converting the proceeds of the sale of its collateral (i.e., the mobile home) for his own use. Modern also filed an action in the State of New York against Jeffrey and the third party purchaser of the mobile home. Modern and Jeffrey subsequently agreed to settle their disputes pursuant to a settlement stipulation under which Jeffrey agreed to pay Modern $ 21,000 in exchange for Modern's release of its lien against the mobile home, dismissal of its § 523 complaint against him with prejudice, and dismissal of the New York action against Jeffrey and the third party purchaser with prejudice.

Jeffrey paid Modern the $ 21,000 settlement amount, through his bankruptcy counsel, by way of a Bank of America cashier's check payable to Modern's counsel in Jeffrey's bankruptcy case. The cashier's check clearly designated Jeffrey on its face as the "purchaser. [**4] " The bankruptcy court dismissed the § 523 complaint with prejudice in April 1997 pursuant to the settlement stipulation. Modern released its lien on the mobile home and dismissed the New York action against Jeffrey and the third party purchaser with prejudice.

Jeffrey's wife, Cynthia Cohen ("Cynthia" or the "debtor"), filed a chapter 7 case in June 1997. Appellee Robert P. Abele, the chapter 7 trustee ("trustee") for Cynthia's estate, filed a complaint against Modern under § 548 in February 1998, alleging that Cynthia, not Jeffrey, made the $ 21,000 payment to Modern to settle the § 523 complaint against Jeffrey in his bankruptcy case, that Cynthia had no liability to Modern, and that the transfer was therefore voidable because it took place less than one year prior to the debtor's (i.e., Cynthia's) bankruptcy filing and she was insolvent at the time of the transfer.

Modern filed a Motion to Dismiss or for Summary Judgment (the "Summary Judgment Motion"), contending that the trustee was precluded from recovering the $ 21,000 payment received by Modern from Jeffrey [*3] because it was clear from the face of the cashier's check and the accompanying transmittal letter from Jeffrey's [**5] bankruptcy counsel that the funds were paid and transferred to Modern by Jeffrey and not Cynthia. Modern asserted that it had no reason to know that the source of the settlement funds belonged to anyone other than Jeffrey until it was informed of the trustee's claim for avoidance of the $ 21,000 transfer as a fraudulent conveyance by Cynthia. Modern further asserted that neither it nor its counsel were even aware of Cynthia's existence. It also pointed out that the trustee's counsel's letter informing Modern of the § 548 complaint acknowledged that the cashier's check identified Jeffrey as the purchaser.

Modern therefore argued that it was entitled to the protections afforded a subsequent "good faith" transferee of the monies within the meaning of § 550(b)(2). It also argued that the trustee should seek to avoid the initial transfer of the funds from the debtor to Jeffrey rather than Modern, observing that Jeffrey greatly benefitted from the use of the monies, whereas Modern received the funds from Jeffrey in good faith in satisfaction of his existing debt and gave up valuable consideration in exchange for the payment. Modern's president and counsel filed supporting affidavits regarding [**6] their lack of knowledge of Cynthia's existence, of the potential avoidability of the transfer, or of any reason to believe that Jeffrey paid the settlement from any source other than his own funds.

The trustee filed an opposition to the Summary Judgment Motion and a cross-motion for summary judgment. The trustee asserted that although the cashier's check designated Jeffrey as the purchaser, the source documentation obtained from the Bank of America undisputedly showed that the cashier's check was purchased by Cynthia from her account at that bank. The trustee contended that Jeffrey had claimed no interest in the account in his own bankruptcy case, and that Cynthia claimed that the account was her sole and separate property and that Jeffrey had made no contributions to it. n3 Relying on In re Video Depot, Ltd., 127 F.3d 1195 (9th Cir. 1997), the trustee argued that Jeffrey was no more than a "courier" for the delivery of the cashier's check from Cynthia to Modern and that Modern was accordingly the "initial transferee" of the funds under § 550(a)(1).

n3 The record reflects that the trustee did not submit any affidavits or other testimony of any type to support these contentions.

[**7]

Modern argued in response that the operative facts of Video Depot were distinguishable and the case was therefore inapplicable. It asserted that Jeffrey was not simply a courier because he had dominion and control over the funds as the designated purchaser of the check and because he chose to settle the adversary proceeding with Modern despite being under no obligation to do so. Modern claimed that it had no knowledge of Cynthia, her purported separate bank account, her bankruptcy filing, the contents of her schedules, or any other information that would put Modern on notice of her existence or of the potential avoidability of her transfer of the monies to Jeffrey.

Modern further argued that Cynthia effectively made a gift of the cashier's check to Jeffrey, transferred ownership of the funds and the right to control and enforce the cashier's check to him when she purchased the check and instructed the bank to designate him as the purchaser, and thus made Jeffrey the initial transferee of the funds and the purchaser of the cashier's check. Modern reiterated that it was therefore a subsequent good faith transferee entitled to the protections of § 550(b)(2) rather than the initial [**8] transferee.

The trustee's reply asserted that no evidence had been presented to prove that Cynthia intended the $ 21,000.00 to be a gift to Jeffrey. The trustee further contended [*4] that Modern had a duty as the initial transferee to inquire about the source of the funds because Jeffrey's schedules showed monthly income of only $ 800.00 and monthly expenses totaling $ 920.00. n4

n4 Again, the record reflects that no affidavits were filed by Jeffrey or anyone else concerning the source or ownership of the funds in question.

The bankruptcy court held a hearing on the Summary Judgment Motion in June 1998. At the hearing, the court struggled with the issue of Modern's duty to inquire about the source of the funds used to purchase the cashier's check given the check's clear designation of Jeffrey as the "purchaser," and expressed doubt as to whether Modern could have obtained knowledge that the funds came from Cynthia's bank account. The court nonetheless held that Modern was the initial transferee under § 550(a), [**9] denied the Summary Judgment Motion, and granted the trustee's cross-motion for summary judgment. The court subsequently entered a judgment ordering Modern to pay the trustee $ 21,000.00 plus interest and costs. Modern appeals.

II. STANDARD OF REVIEW

The Panel reviews an order granting summary judgment de novo. In re Bullion Reserve of North America ("BRNA"), 922 F.2d 544, 546 (9th Cir. 1991). Viewing the evidence in the light most favorable to the nonmoving party, the BAP must determine whether genuine issues of material fact exist and whether the bankruptcy court correctly applied the relevant substantive law. Id. at 546.

III. ISSUE

Whether Modern was the "initial transferee" under § 550(a).

IV. DISCUSSION

Modern argues that the bankruptcy court based its holding that Modern was the initial transferee on an erroneous application of In re Video Depot, Inc., 127 F.3d 1195 (9th Cir. 1997), and contends that Jeffrey Cohen was the initial transferee of the $ 21,000 cashier's check. We agree.

Under § 548, n5 a trustee may avoid any transfer of an interest of a debtor in property that was made within one year of the filing of the [**10] debtor's bankruptcy petition. A trustee may thereafter recover an avoided transfer from an "initial transferee" or from an "immediate or mediate" transferee under § § 550(a)(1) and (2) n6. A trustee's right to recover from an "initial transferee" is absolute. BRNA, 922 F.2d at 547. Section 550(b), n7 however, [*5] "prohibits recovery from 'immediate and mediate' transferees who take for value, in good faith, and without knowledge" of the voidability of the transfer avoided. 11 U.S.C. § § 550(b)(1); BRNA, 922 F.2d at 547.

n5 § 548 provides in pertinent part:

(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily --

. . . .

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation[.]

11 U.S.C. § 548 (amended 1998). The Code sections quoted in this Opinion include all amendments as enacted through 1998. Any changes between the Code sections as they existed in 1997, when this bankruptcy case was filed, and the date of this Opinion are not material to the resolution of this appeal. [**11]

n6 § 550(a) states in pertinent part:

(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under . . . section 548, . . . 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 of the entity for whose benefit such transfer was made; or

(2) any immediate or mediate transferee of such initial transferee. <

4. Cynthia L. Cohen, Modern Financial Plans& Services, Inc. v. Robert P. Abele