Opinion
Bankruptcy Case No. 13-70835-BEM Bankruptcy Case No. 17-05255 Civil Action File No. 1:19-cv-04365-SCJ
03-09-2021
IN RE: Ivan GOINS and Gabriella Elisabeth Gibbs, Debtors, Neil C. Gordon, Chapter 7 Trustee for the Estates of Ivan Goins and Gabriella Gibbs, Plaintiff-Appellant, v. McGhee Auto Sales, Incorporated, Defendant-Appellee.
Michael Patrick Allain, Jonathan A. Proctor, The Semrad Law Firm, Atlanta, GA, for Joint Debtor. Henry F. Sewell, Jr., Law Offices of Henry F. Sewell, Jr., LLC, Arnall Golden Gregory LLP, Neil C. Gordon, William D. Matthews, Arnall Golden Gregory LLP, Atlanta, GA, for Trustee Neil C. Gordon.
Michael Patrick Allain, Jonathan A. Proctor, The Semrad Law Firm, Atlanta, GA, for Joint Debtor.
Henry F. Sewell, Jr., Law Offices of Henry F. Sewell, Jr., LLC, Arnall Golden Gregory LLP, Neil C. Gordon, William D. Matthews, Arnall Golden Gregory LLP, Atlanta, GA, for Trustee Neil C. Gordon.
ORDER
HONORABLE STEVE C. JONES, UNITED STATES DISTRICT JUDGE
This matter comes before the Court on Plaintiff-Appellant's Bankruptcy Appeal. Plaintiff is the Trustee for the bankruptcy estate of Ivan Goins (deceased) and Gabriella Gibbs (hereinafter, "Debtors"). On October 9, 2019, this Court granted Plaintiff's motion for leave to appeal. Doc. No. [3]. The Clerk entered a bankruptcy briefing schedule. Plaintiff-Appellant filed its appellate brief on November 8, 2019 (Doc. No. [6]). Defendant-Appellee filed its response brief on December 6, 2019 (Doc. No. [8]), and Plaintiff-Appellant replied on December 20, 2019 (Doc. No. [11]). After due consideration, the Court enters the following Order.
I. BACKGROUND
A. Procedural History
Debtors filed for Chapter 13 bankruptcy on September 24, 2013. Doc. No. [2], p. 5. The Bankruptcy Court entered an order confirming their Chapter 13 plan on April 14, 2014. On October 6, 2014, Debtors were both injured in an automobile accident. Id. They received a recovery of $500,000, approximately $286,971.27 (hereinafter the "remaining settlement proceeds") of which was left after Debtors paid legal fees, expenses, and medical costs. Id. On December 11, 2015, the Chapter 13 Trustee filed a motion to dismiss for failure to make plan payments. Id. On April 13, 2016, the Bankruptcy Court entered an order converting the case to Chapter 7, and Plaintiff was appointed as the Chapter 7 Trustee. Id.
From around October 26, 2015 to February 27, 2016, Debtors used remaining settlement proceeds to make several automobile purchases from Defendant as gifts for their adult children. Id. at 7. Defendant received a total of $123,007.50 from Debtors postpetition without the Bankruptcy Court's approval. Id. Upon learning of the unauthorized purchases, Plaintiff made demands by certified mail to Defendant for the transferred amount. Id. Defendant responded on September 19, 2017, denying responsibility. Id.
Initially, the Bankruptcy Court granted summary judgement to Plaintiff. Doc. No. [5-8] (Initial Order Granting Summary Judgment to Plaintiff), p. 17. "Under 11 U.S.C. 541(a)(1), property of the estate includes ‘all legal or equitable interests of the debtor in property as of the commencement of the case,’ " as well as "all property of the kind specified in 541 ‘that the debtor acquires after the commencement of the case’ " but before the case is converted or closed. Id. at 9 (quoting 11 U.S.C. §§ 541, 1306 ). "Thus, the settlement proceeds became property of the estate and remained so until the case was converted, and the [t]ransfers constitute postpetition transfers of property of the estate." Id. Plaintiff was entitled to summary judgment because "there is no innocent transferee defense," and "this Court cannot create an exception for Defendant." Id. at 14–15.
In granting Defendant's Motion to Reconsider, however, the Bankruptcy Court relied on In re Harwell, 628 F.3d 1312 (11th Cir. 2010). See Doc. No. [7-32] (Order Granting Defendant's Motion for Reconsideration), p. 5. That case recognized a limited exception to the general rule that the first recipient of fraudulently transferred funds is the initial transferee and cannot avail themselves of a good faith defense. Id. at 1322. This "equitable exception" allows initial recipients who are but "mere conduits" with "no control over fraudulently-transferred funds" to avail themselves the good faith defense. Id. "The mere conduit or control test is a judicial creation that is not based in statutory language, but is an exception based on the bankruptcy courts' equitable powers." Id. (citing Nordberg v. Societe Generale (In re Chase Corp.), 848 F.2d 1196, 1199 (11th Cir. 1988) ).
Based on this "flexible test," the Bankruptcy Court held Debtors' personal injury firm "was a mere conduit rather than a transferee" meaning Debtors "may be the initial transferees," and Defendant a subsequent transferee. Id. It granted Defendant's motion for reconsideration, finding its original summary judgment order "was too limited, as the Court did not consider whether Debtors were the initial transferees of the Settlement Funds." Id.
B. Bankruptcy Appeal
In 2014, the Supreme Court issued an opinion which held bankruptcy courts do not have authority to contravene statutory text based on equitable considerations. See Law v. Siegel, 571 U.S. 415, 420–21, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). There, the Court was asked to recognize the "general, equitable power in bankruptcy courts to deny exemptions based on a debtor's bad-faith conduct." Id. at 425, 134 S.Ct. 1188. The Court refused, concluding that "the Bankruptcy Code admits no such power." Id. While bankruptcy courts have "statutory authority to ‘issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of’ the Bankruptcy Code" and "inherent power ... to sanction ‘abusive litigation practices,’ " they "may not contravene specific statutory provisions." Id. at 421, 134 S.Ct. 1188 (quoting 11 U.S.C. § 105(a) ; Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375–76, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) ). Thus, Siegel holds that bankruptcy courts do not have equitable power to contravene statutory language.
The Court notes that the Bankruptcy Court's Order Granting Defendant's Motion for Reconsideration does not discuss Siegel.
The Court notes that the Eleventh Circuit has since cited Siegel's holding as authoritative. See, e.g., Yerian v. Webber (In re Yerian), 927 F.3d 1223, 1226 (11th Cir. 2019) ("[A] ‘court may not refuse to honor the exemption absent a valid statutory basis for doing so.’ ") (quoting Siegel, 571 U.S. at 424, 134 S.Ct. 1188 ); McFarland v. Wallace (In re McFarland), 790 F.3d 1182, 1185 (11th Cir. 2015) ("[C]ourts may not refuse to honor an exemption—state or federal—‘absent a valid statutory basis for doing so.’ ") (quoting Siegel, 571 U.S. at 424, 134 S.Ct. 1188 ).
Plaintiff-Appellant argues that the Bankruptcy Court contravened statutory language in its Reconsideration Order, by "illogically [finding] that perhaps the Debtors were somehow not the transferors but rather were the initial transferees of their own money (the settlement proceeds from the personal injury litigation) ...." Doc. No. [6], p. 17. It argues that the Bankruptcy Court improperly relied on pre- Siegel precedent and incorrectly applied the mere conduit test, which "has nothing to do with the case at bar." Id. at 19. Alternatively, it argues the Bankruptcy Court's application of equitable considerations was improper in light of Siegel. Id. at 20.
Defendant-Appellee argues the Bankruptcy Court correctly determine that Debtors were the initial transferees of the funds paid to Defendant. Doc. No. [8], p. 13. It argues allowing the Estate's to recover against Defendant would result in a windfall to the Estate. Id. at 20.
Defendant-Appellee also argues that Debtor's actions trigger application of 11 U.S.C. 348(f)(2). The Court does not consider this argument, as it was not addressed in the order on appeal—the Bankruptcy Court's Reconsideration Order.
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II. LEGAL STANDARD FOR BANKRUPTCY APPEALS
The district court in a bankruptcy appeal functions as an appellate court reviewing a bankruptcy court's decision. Equitable Life Assurance Soc'y v. Sublett, 895 F.2d 1381, 1383–84 (11th Cir. 1990). This Court reviews the Bankruptcy Court's conclusions of law de novo , and its findings of fact for clear error. In re Club Assocs., 951 F.2d 1223, 1228 (11th Cir. 1992). The Eleventh Circuit law is also "clear that an appellate court reviews a bankruptcy court's grant of summary judgment de novo. " In re Optical Technologies, Inc., 246 F.3d 1332 (11th Cir. 2001) (citing In re Walker, 48 F.3d 1161, 1163 (11th Cir. 1995) )
III. ANALYSIS
The Court concludes that (1) Debtor's law firm was not an initial transferee under 11 U.S.C. § 550(a)(1), and thus the mere conduit exception for initial transferees need not and cannot apply to it, and (2) Debtors were not and cannot be the initial transferees of their own fraudulently-transferred funds.
The Court need not decide whether the In re Harwell mere conduit test is consistent with Siegel because the Bankruptcy Court erred in concluding it applied to this case at all. 11 U.S.C. § 549 is a strict liability statute which authorizes a trustee to recover unauthorized postpetition transfers from transferees. Section 550(a)(1) allows trustees to recover from an "initial transferee," regardless of whether that transferee took in good faith. 11 U.S.C. § 550(a)(1). However, the trustee may not recover from any subsequent transferee who takes "for value ... in good faith, and without knowledge of the voidability of the transfer avoided." 11 U.S.C. § 550(b)(1). In other words, subsequent transferees have a good faith defense, while initial transferees do not.
To the extent the mere conduit test allows courts to determine whether an initial transferee is strictly liable under § 550(a)(1), it does not apply to this case. The statutory term "initial transferee" in § 550(a) "means that the first recipient of the debtor's fraudulently-transferred funds is an ‘initial transferee.’ " In re Harwell, 628 F.3d 1312, 1322 (11th Cir. 2010) (emphasis added). The mere conduit exception to § 550(a)(1) states that
recipients of the debtor's fraudulently-transferred funds who seek to take advantage of equitable exceptions to § 550(a)(1)'s statutory language must establish (1) that they did not have control over the assets received, i.e., that they merely served as a conduit for the assets that were under the actual control of the debtor-transferor and (2) that they acted in good faith and as an innocent participant in the fraudulent transfer.
Id. at 1323. The Bankruptcy Court found that Debtor's personal injury firm was a mere conduit, given its lack of control over client funds under the Georgia Rules of Professional Conduct. It is true that the law firm was essentially a pass-through entity with no discretion as to how client funds in its possession are to be distributed. However, the law firm was never a recipient of the debtor's fraudulently-transferred funds. It did not receive the funds from Debtors. Nor was disbursement of the settlement to the law firm fraudulent. These facts are not contested. Thus, the law firm could not possibly be an initial transferee under § 550(a)(1), and the mere conduit exception to § 550(a)(1) also does not apply.
The Bankruptcy Court also erred in finding Debtors may be the initial transferees of their own funds. Again, an "initial transferee" is the first recipient of the debtor's fraudulently-transferred funds. In re Harwell, 628 F.3d at 1322. Debtors were not and cannot be the first recipients of their own funds. Thus, the Bankruptcy Court's Initial Order Granting Summary Judgment to Plaintiff was correct in concluding:
Defendant has failed to prove that it was an immediate or mediate transferee of the initial transferee, which is the threshold element of the affirmative defense under § 550(b). Instead, the evidence shows that Defendant was the initial transferee of the settlement proceeds at issue. Thus, even taking as true that Defendant took the Transfers for
value, in good faith, and without knowledge of their avoidability, Defendant cannot escape liability under § 550 based on an affirmative defense under § 550(b).
Doc. No. [5-8], p. 12.
IV. CONCLUSION
For the foregoing reasons, this Court REVERSES the Bankruptcy Court's Order Granting Defendant's Motion for Reconsideration. The Clerk is DIRECTED to REMAND this matter to the Bankruptcy Court for further proceedings consistent with this opinion.
IT IS SO ORDERED this 9th day of March, 2021.