Opinion
NOT FOR PUBLICATION
ORDER ON DEFENDANT CITIBANK, N.A.'S MOTION FOR PARTIAL SUMMARY JUDGMENT
PETER W. BOWIE, Judge United States Bankruptcy Court.
Trustee sued Defendants to recover as fraudulent conveyances payments which Debtor had made on various credit card accounts. Defendant Citibank, N.A., moved for partial summary judgment that: $516,079 which was paid on a credit card account opened, at least in part, in Debtor's name, was for reasonably equivalent value, because Debtor was contractually obligated to make the payments; and $22,740 paid on an individual card was for reasonably equivalent value because it was reimbursement of equipment purchased for the Debtor. As to the $516,079, Defendant has failed to provide evidence that Debtor was obligated to make the payments. However, as to the $22,740 payment on the individual card, Defendant has demonstrated that under the law of the Ninth Circuit, Debtor received reasonably equivalent value. Accordingly, the motion for partial summary judgment is denied in part and granted in part.
BACKGROUND
Creative Capital Leasing Group, LLC (Debtor or Company) was in the business of managing and leasing real estate and heavy equipment. From 1999 forward, David Winick was the sole named member and principal of Debtor. David's brother Michael Winick also had some involvement in the business.
In the complaint, the Trustee alleges that Debtor made payments to Defendant on several credit cards and lines of credit issued to Debtor, David and other family members, though Debtor had no legal obligation to do so. The Trustee seeks to recover those Payments as fraudulent conveyances and/or preferences.
In the Motion, Defendant focuses on two of the credit card accounts:
-5082 2900 5074 3597 (formerly account number 5588 3280 0161 3904) (each referred to as the "-3597 Account"); and
-4147 1110 3595 7332 issued to Michael Winick individually (the "-7332 Account").
As to the -3597 Account, which Defendant calls the "Company Card, " Defendant argues that the card was applied for by, and issued to Debtor and that under the terms of the credit agreement, Debtor was contractually obligated to make the payments ($516,079).
As to the -7332 Account, Defendant contends that the $22,740 payment was a reimbursement to Michael Winick for equipment he had purchased for the Debtor. In both cases, argues Defendant, Debtor had a legal obligation to make the payments, and hence they were made for reasonably equivalent value.
-3597 Account Payments
It is undisputed that Debtor made payments totalling $516,079 on the -3597 Account. Defendant's legal argument as to this account is sound - if Debtor was contractually obligated to make the payments, then the payments satisfied that obligation and were thus made for reasonably equivalent value. The problem is that Defendant has provided no competent evidence that Debtor was actually contractually obligated to make the payments.
In support of its motion Defendant filed the declaration of Christy G. Bennett, "an authorized representative and employee of Citibank, N.A...." With respect to the -3597 Account Ms. Bennett declared:
Citibank's records reflect that on or about March 13, 2 001, a Citi Platinum Select Aadvantage Business Card credit card account ending in 3 597 (the "Company-Account") was opened in the names of applicants Creative Capital (the "Company") and David W. Winick ("Dwinick").
Citibank has not been able to locate the application for the Company Account because it was opened more than seven years ago.... Attached as Exhibit A is a true and correct exemplar of the terms and conditions governing the Company Account (the "Card Agreement") at or about the time it was opened. The Card Agreement required, among other things, that the Company pay all amounts charged on the Company Account.
From the opening of the Company Account in March 2 001 until the Company Account was closed, various authorized sub-accounts beginning with the account number "5588" were issued at the Company's request and, as a result, transactions on the 5588 sub-accounts are included with and reflected on the Company Account, which the Company was legally obligated to pay.
Credit card charges, payments, and other debts on the Company Account (including all sub-accounts) are reflected in monthly statements for the Company Account (the "Company Account Statements"). From September 15, 2003 to August 22, 2007, Citibank received a total of 48 payments on the Company Account in the amount of $516,079. Citibank has produced the Company Account Statements from 2003 to 2007.
In a supplemental affidavit she clarified:
Citibank does not retain card agreements governing its credit card accounts at an account level. Card Agreements are instead retained by portfolio and the governing card is (sic) agreement is determined by the date the account was opened and by portfolio.
The Company Account was in the Citi Platinum Select AAdvantage Business Card portfolio, as is reflected on the Company Account statements.
The card agreement that was in effect in March 2 001 for the Company Account and for the Citi Platinum Select AAdvantage Business Card portfolio was attached to my original affidavit as Exhibit A and is once again attached hereto as Exhibit A (the "Card Agreement").
Other than the Card Agreement attached hereto as Exhibit A, there was no other card agreement in effect for the Company Account or the Citi Platinum Select AAdvantage Business Card portfolio at the time the Company Account was opened.
Based upon the Card Agreement and Ms. Bennett's affidavits, Defendant contends that it has established Debtor's contractual liability to make the payments. The Court is not persuaded.
Federal Rule of Evidence 803(6) governs the admissibility of business records. That Rule provides that such a record is admissible if:
(A) the record was made at or near the time by-or from information transmitted by-someone with knowledge;
(B) the record was kept in the course of a regularly conducted activity of a business, organization, occupation, or calling, whether or not for profit;
(C) making the record was a regular practice of that activity;
(D) all these conditions are shown by the testimony of the custodian or another qualified witness, or by a certification that complies with Rule 902(11) or (12) or with a statute permitting certification; and
(E) neither the source of information nor the method or circumstances of preparation indicate a lack of trustworthiness.
Federal Rule of Evidence 9 02 sets forth certain documents which are self-authenticating, and lists certain records of regularly conducted activity as such items, stating that the following is required:
(11) Certified Domestic Records of a Regularly Conducted Activity. The original or a copy of a domestic record that meets the requirements of Rule 803(6)(A)-(C), as shown by a certification of the custodian or another qualified person that complies with a federal statute or a rule prescribed by the Supreme Court. Before the trial or hearing, the proponent must give an adverse party reasonable written notice of the intent to offer the record-and must make the record and certification available for inspection-so that the party has a fair opportunity to challenge them.
Prior to the hearing, the Trustee challenged Ms. Bennett's qualification as custodian on the ground that she was not with Citibank at the time the Company Card was applied for and issued. The Court is satisfied that a custodian need not have been with the company at the time the record was created. Were that the case, custodians would have to be at least as long-lived as corporations and willing to work at least as long as the employer retains and relies upon its records.
The problem here is not Ms. Bennett's ability to proffer the documents, but rather that the proffered documents establish, on their own, nothing.
Rules 803 and 902 allow documents to be admitted into evidence under certain circumstances, including that a custodian testifies that the documents were found in the records under ordinary circumstances. The document is then part of the evidence. With respect to the -3597 Account, the only documentary evidence provided was the Card Agreement which, on its face, does not establish that Debtor was obligated to make payments on -3 597 Account. Not only is the Card Agreement not signed by anyone on behalf of the Debtor, it does not even reference the Debtor. It is rather an "exemplar" of what a corporate credit card agreement would have looked like.
Defendant cites In re Move, 2011 WL 4809322 (Bankr.S.D.Tex. 2010) for the proposition that "exemplars are competent summary judgement evidence." However, that begs the question "of what?" In Move, the Master Agreement involved merely "evidences that transfers of the Installment Contracts was something that would not happen (if it was ever consummated) until there was further documentation." Id. at 5. Similarly, the exemplar attached to the Bennett declaration merely sets out the terms a company may have entered into with Defendant. The exemplar on its own establishes no such agreement as between the Company and Defendant. Unlike Move, the exemplar in this case does not even name the account holder.
In an effort to connect the general Card Agreement to the Debtor, Ms. Bennett declared "Citibank's records reflect that on or about March 13, 2 001, a Citi Platinum Select Aadvantage Business Card credit card account ending in 3597 (the "Company Account") was opened in the names of applicants Creative Capital (the "Company") and David W. Winick ("Dwinick")." However, she did not produce those records. Further, she could not have first-hand knowledge of the March 13, 2001 transaction as she was not with Defendant at the time.
Ms. Bennett also declared that "Exhibit A is a true and correct exemplar of the terms and conditions governing the Company Account (the "Card Agreement") at or about the time it was opened." However, with no evidence that Debtor applied for or was issued such an account, the terms of the exemplar are meaningless in this case.
Similarly, she declared "various authorized sub-accounts beginning with the account number "5588" were issued at the Company's request and, as a result, transactions on the 5588 sub-accounts are included with and reflected on the Company Account, which the Company was legally obligated to pay." However, she does not declare that she has first-hand knowledge of the Debtor's requests, and provides no records that so reflect.
In her supplemental affidavit, Ms. Bennett explains that Citibank does not retain card agreements governing its credit card accounts at an account level, but rather Card Agreements are instead retained by portfolio and the governing card agreement is determined by the date the account was opened and by portfolio. That may well be accurate. However, we still have no evidence that the Debtor ever applied for or obtained the credit account.
In short, the document attached to the Bennett affidavit does not establish a contractual liability on the part of the Debtor to make the payments on the -3597 Account. Ms. Bennett has not provided admissible first-hand testimony that the Debtor was liable or otherwise bound by the terms of the Credit Agreement. Therefore, as to the -3 597 Account, Defendant's motion is denied. -7332 Account
As to the -7332 Account, Defendant contends that the $22,740 payment made by Debtor was a reimbursement to Michael Winick for equipment purchased for the Debtor. Defendant argues that Debtor had a legal obligation to make the payment, and hence it was made for reasonably equivalent value. It does appear from Michael's deposition transcript and the card statements that Michael purchased equipment for the Debtor. As Defendant explains:
MWinick had an individual credit card account with Citibank.... On August 8, 2005 Mwinick purchased equipment for the Company from W.J. Strickier Signs, Inc. For $22,740 using the MWinick 7332 Account. On August 30, 2005, the Company paid $22,740 to Citibank on the MWinick 7332 Account, which is reflected on the September 2005 MWincik 7332 Account statement.
Motion at 3:20-26. However, there is no evidence that Debtor was contractually or legally required to reimburse Michael for the purchased equipment.
Defendant relies upon In re The SDR Capital Management, Inc., 2008 WL 8188356 (Bankr.N.D.Cal. 2008), for the proposition that Debtor was required to reimburse Michael for the purchase of the equipment. However, that case was based upon § 317(d) of the California Corporations Code which required reimbursement under the particular facts of that case. As the court explained:
Under [section 317(d)], a corporation must reimburse a person who is made a party to a "proceeding" growing out of the person's actions as an "agent" of the corporation if the agent prevails "on the merits."
Id. at 4. In this case there was no "proceeding" in which Michael could "prevail on the merits." Section 317(d) does not apply to our facts, so neither does SDR Capital.
Defendant also relies upon Corporations Code § 315(d), which merely provides that "a corporation may advance money to a director or officer of the corporation ... for an expense reasonably anticipated...." (emphasis added). There is no requirement of advancement or reimbursement in that section.
Defendant also cites to Labor Code § 2802 which provides:
An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer ....
However, Defendant has provided no evidence that Michael was an employee of the Debtor, that he had any duties to the Debtor, nor that Debtor directed him to purchase the equipment. None of the statutes cited by Defendant establish that Debtor had a statutory obligation to make the Payment.
Defendant's next effort is to establish that Debtor had a contractual obligation to make the payment, relying on In re Jeffery Bigelow Design Group, incorporated, 956 F.2d 479 (4. Cir. 1992). This, too is unavailing. In Jeffery Bigelow, as in this case, a corporation made payments on a line of credit in favor of its shareholder. However, in that case the corporation had a separate, but identical obligation running in favor of the shareholder. As the court explained:
Circuit 2004)., the debtor business applied for a secured loan from Frontier Bank. Frontier said "no, " based on the business' creditworthiness. However, the Bank said it would make the loan to the business' shareholders (who were also its officer and/or directors). The Bank took promissory notes from the shareholders, and also received a security interest in the business' inventory and assets, although there was no supporting promissory note or other obligation running from the business to the Bank. And, in sharp contract to Biqelow, there was no corresponding liability running from the business to the shareholders, either. The loan proceeds were deposited directly into the debtor's operating account, and were used up by the time the debtor closed its business. The Bank thereafter collected funds from the liquidation of the inventory and other assets pledged by the business. So, to summarize, the loan proceeds were deposited directly into the debtor's account, but the debtors had no contractual liability with anyone to repay those funds - not to the Bank and not to the shareholders who personally borrowed the funds and who gave the Bank promissory notes for repayment. Then, the debtor's assets were liquidated and the proceeds went to the Bank, even though the Bank held no promise from the debtor to repay the funds, whether to the Bank or anyone else - again, in contract to Biqelow.
Although [Shareholder] was the maker of the line of credit, only the debtor received the draws and all payments were made directly from the debtor to [Bank]. [T]he debtor executed a note for $1,000,000 to [Shareholder] with substantially the same terms as the line of credit between [Bank and Shareholder]. As the debtor directly repaid [Bank], its liability on the note to [Shareholder] likewise decreased....
Technically, a tripartite relationship exists, where [Shareholder] is a creditor of the debtor and
[Bank] is a creditor of [Shareholder]. The debtor, in making its payments, in effect skips its true creditor and sends the money to [Bank], to whom it has no direct obligation.
Id. at 481. Under this set of facts, the court held that the debtor received reasonably equivalent value for the payments. Id. at 485. In the case at hand, Defendant has provided no evidence of any debt running from Debtor to Michael which would be reduced by the payment by Debtor on Michael's credit card account. Further, there is no evidence of any contractual agreement requiring Debtor to make such payments.
However, while the Biaelow case is unavailing, there is another Ninth Circuit case which, while perhaps an outlier in constructive fraudulent conveyance jurisprudence, seems to dictate the outcome here. In In re Northern Merchandise, Inc.. 371 F.3d 1056 (9
The bankruptcy trustee brought an adversary proceeding against the Bank to recover the funds collected from the debtor's assets on the theory that the debtor did not receive reasonably equivalent value for the security interest it gave the Bank without any corresponding obligation running from the debtors to the Bank. Both the bankruptcy court and the Ninth Circuit Bankruptcy Appellate Panel agreed with the trustee and found the transfer to be constructively fraudulent under 11 U.S.C. § 548. A panel of the Ninth Circuit reversed.
The Ninth Circuit recognized that in Biqelow, because of the debtor's obligation to its shareholders evidenced by a promissory note, when the debtor directly repaid the bank, the liability of the shareholders on their note to the bank decreased in a corresponding amount, as did the liability of the debtor on its note to the shareholders. Then the court stated:
As Jeffrey Bigelow illustrates, the primary focus of section 548 is on the net effect of the transaction on the debtor's estate and the funds available to the unsecured creditors.
371 F.3d at 1059. The court then reviewed the trustee's position:
Trustee contends that Debtor's grant of the security interest to Frontier resulted in a $150,000 loss to Debtor's estate and thus the funds available to the unsecured creditors. Trustee reasons that because the transfer of $150,000 from shareholders to Debtor was technically (emphasis added) a capital contribution, rather than a loan, Debtor was under no legal obligation to grant a security interest to Frontier.
Id. Without discussing at all the trustee's assertion of a capital contribution, the court stated:
We reject this formalistic view. Although Debtor was not a party to the October loan, it clearly received a benefit from that loan.
Id. That was sufficient for the panel, although the result appears inconsistent with the policy underlying § 548. First, Frontier negotiated for and received promissory notes from the debtor's shareholders, but not the debtor. Frontier had the full panoply of its contractual rights on those notes as against the shareholders. Frontier elected to not make the loan directly to the debtor, although it presumably asked for, and received the naked security interest in assets of the debtor, unaccompanied by any underlying obligation of the debtor to pay the Bank anything.
When the Bank collected proceeds of the liquidation of debtor's assets, it thereby used the debtor's assets to satisfy in part the shareholder's obligations to the bank, reducing their liability correspondingly. In effect, by allowing that to occur, the court elevated the priority of the shareholders ahead of unsecured creditors, contrary to the priority of creditors scheme embodied in the Bankruptcy Code, and 11 U.S.C. § 507, in particular. Interest holders such as shareholders generally get what is left of an estate after all creditors get paid. Here, funds that could have gone to creditors, instead were paid to reduce the liability of shareholders, at the expense of the creditors.
Which leaves the remaining point; the unaddressed argument concerning the loan funds constituting a capital contribution by the shareholders. We only know that the debtor was not a party to the loan, and acknowledged no obligation to either the Bank or the shareholders for receipt of the loan proceeds. There is nothing in the appellate decision to show how debtors showed the loan funds on its books. However, it is not at all uncommon for a business, especially with a weak balance sheet, to purposely seek capital contributions from its shareholders, partners or members. That is because capital contributions make the business appear stronger on its balance sheet. The capital contributions are not debts or liabilities of a debtor, and are shown on the equity side. In addition, the willingness of shareholders or other interest holders to make capital contributions can be encouraging to prospective lenders or investors because of their equity position in the business. So, shareholders may intentionally borrow money to make a capital infusion into a business. Here, we know Frontier refused to make the loan on the debtor's creditworthiness, but made the loan to the shareholders. The shareholders agreed the funds would be deposited in the business' account, but the shareholders did not ask the business to promise to repay those funds, either to the shareholders themselves or directly to the Bank.
For all the foregoing reasons, the Court has concerns about the rationale and the results in the Northern Merchandise decision. All of that said, however, it appears to remain the law of the Ninth Circuit, which this Court is bound to follow. The facts of this portion of this case are simpler that Northern Merchandise. There is no dispute that Michael Winick used the credit card in his name to purchase equipment to be used by Creative Capital. Creative Capital paid the bill when it was received approximately three weeks later, in the identical amount. Under the rationale of Northern Merchandise, and regardless of whether Creative Capital had any obligation to reimburse Michael for the purchase, the debtor received the benefit of the acquisition in the full amount of payment. Part of the rationale adopted in Northern Merchandise, borrowed from another court, states succinctly:
"If the consideration given to the third person has ultimately landed in the debtor's hands, and if the giving of consideration to the third person otherwise confers an economic benefit upon the debtor, then the debtor's net worth has been preserved, and [the statute] has been satisfied - provided, of course, that the value of the benefit received by the debtor approximates the value of the property or obligation he has given up."
CONCLUSION
For the foregoing reasons, the Court denies Defendant's motion for partial summary judgment with respect to the payments on the - 3597 Account, but grants the motion with respect to the payment on the - 73 32 Account.
Counsel for Defendant shall prepare and lodge, or obtain approval as to form, an order consistent with the foregoing, within fourteen (14) days of the date of entry of this Order.
IT IS SO ORDERED.