Opinion
Bky. No. 09–15404 ELF Adv. No. 11–512
11-24-2015
In re : Universal Marketing, Inc., Debtor.Charles R. Goldstein, Chapter 7 Trustee for the Estate of Universal Marketing, Inc., Plaintiff, v. Wilmington Savings Fund Society, FSB, Defendant.
Aris J. Karalis, Robert W. Seitzer, Maschmeyer Karalis P.C., Philadelphia, PA, for Debtor.
Aris J. Karalis, Robert W. Seitzer, Maschmeyer Karalis P.C., Philadelphia, PA, for Debtor.
OPINION
ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE
I. INTRODUCTION
II. FACTS
A. General Structure of the Universal Network
B. The Formation of the UDI–WSFS Relationship
C. The Lending Relationship
1. the Business Loan Agreement
2. the Note
3. the Guaranty
D. The Banking Relationship (Cash Management Services Agreement)
E. The Demise of the UDI–WSFS Relationship
1. WSFS' suspicions arise
2. WSFS' discovery of and response to the “Red Notice”
3. effect of the PND
III. PROCEDURAL HISTORY
A. Main Case
B. Adversary Proceeding
IV. SUMMARY JUDGMENT STANDARD
V. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S CONTRACT CLAIMS (COUNTS ONE AND TWO)
A. Threshold Issue: the Relationship between the Loan and the CMA
1. contract interpretation
2. integration
3. the Loan and the CMA each were only partially integrated
B. Trustee's Claim for Breach of Express Contract Provisions (COUNT TWO)
1. WSFS Non–Performance under the CMA was excused by UDI's material breach of the Loan
2. WSFS did not commit a breach of contract by failing to give prior notice before exercising its remedies under the Loan Documents
C. Implied Covenant of Good Faith and Fair Dealing (COUNT ONE)
VI. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S CLAIM UNDER 6 Del. C. § 4A (COUNT THREE)
A. 6 Del. C. Article 4A–305
B. The CMA
C. Discussion
VII. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S FRAUDULENT TRANSFER CLAIMS (COUNTS SIX AND SEVEN)
A. The Trustee's Claims Are Based Solely on Constructive Fraud
B. Summary of the Parties' Positions
C. Constructive Fraud: Applicable Legal Principles
1. 11 U.S.C. § 548
2. 11 U.S.C. § 544(b) and 6 Del. C. §§ 1304, 1305
D. WSFS Was Not an “Initial Transferee” of the UMI Transfers
1. the Bonded Financial Services and Incomnet Tests
2. WSFS was not the initial transferee because it lacked dominion and control over the UDI accounts
E. WSFS Is Not Liable as a Subsequent Transferee of the UMI–UDI Transfer
VIII. WSFS IS NOT ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S SETOFF CLAIM UNDER 11 U.S.C. § 553(b) (COUNT EIGHT)
A. The Trustee's § 553(b) Claim is Dependent on the Nunc Pro Tunc Extension of Substantive Consolidation to WSFS
B. Substantive Consolidation: General Legal Principles
C. Owens Corning Does Not Bar, As a Matter of Law, the Nunc Pro Tunc Extension of Substantive Consolidation to WSFS
D. The Setoff Claim is Not Ripe for Summary Judgment
IX. MANNER OF DISPOSITION OF THE MOTIONS
A. Jurisdictional Overview
B. All of the Claims to be Dismissed are Either Non–Core or Stern Claims
C. The Limited Nature of this Court's Order Resolving the Cross–Motions
X. CONCLUSION
I. INTRODUCTION
In July 2009, Universal Marketing, Inc. (“the Debtor” or “UMI”) was one (1) of more than seventy (70) entities in a vertically integrated business (“the Universal Network”). The Universal Network operated approximately thirty-six (36) gas stations in the Northeast and Mid–Atlantic regions of the United States and also distributed gasoline to unaffiliated gas stations.
On July 23, 2009, UMI commenced this chapter 11 bankruptcy case. UMI was the only Universal Network entity that filed a bankruptcy petition. The reorganization phase of the case was short-lived; the case was converted to chapter 7 on August 18, 2009.
Eight (8) months after the conversion of the case, on April 19, 2010, Charles R. Goldstein, the chapter 7 trustee (“the Trustee”) filed a motion seeking substantive consolidation of UMI's estate with the estates of certain other Universal Network entities, including Universal Delaware, Inc. (“UDI”). Wilmington Savings Fund Society (“WSFS”), a bank that provided both commercial credit and cash management services to UDI, contested the Trustee's motion for substantive consolidation.
On August 4, 2010, with the consent of all parties, the court entered an order resolving the substantive consolidation issue. The August 4, 2010 Order largely granted the substantive consolidation relief sought by the Trustee. However, the substantive consolidation order excepted WSFS from certain aspects of the Order, in ways to be discussed in more detail below.
* * * * * *
In this adversary proceeding, the Trustee seeks to recover money from WSFS based on a variety of claims which may be grouped into three (3) legal categories.
First, the Trustee raises what the parties have referred to as “common law” claims, seeking to impose liability for breach of contract. The Trustee asserts that a “post no debits” policy WSFS implemented as to UDI's bank accounts for a few days in July 2009 breached the UDI–WSFS contract and triggered a “chain-reaction liquidity crisis” throughout the entire Universal Network that “singlehandedly sentenced [the] Universal [Network] ... to [its] financial death.”
Second, based largely on the same events giving rise to his common law claims, the Trustee asserts a statutory claim under 6 Del. C. § 4A.
Third, the Trustee asserts traditional bankruptcy transfer avoidance legal theories (preference, fraudulent transfers) under 11 U.S.C. §§ 544, 547, 548, 550, 553(b), analysis of which is more complex due to the substantive consolidation issues also present in the proceeding.
In response, WSFS maintains that the Trustee's common law claims are based on a gross exaggeration or mischaracterization of the undisputed facts. WSFS contends, quite simply, that it did nothing more than exercise ordinary and proper, garden-variety contractual remedies against UDI after UDI breached its contractual duties to WSFS in various ways (including fraudulently inducing WSFS to enter into the banking and lending relationship with UDI in the first place). WSFS also asserts that no avoidable transfers occurred.
* * * * * *
Presently before the court are the parties' cross-motions for partial summary judgment on the issue of liability.
As explained in Part IX.B., infra, all of the claims at issue are either (1) non-core claims, which require transmission of proposed findings of fact and conclusions of law to the district court absent consent of the parties, see 28 U.S.C. § 157(c)(1), or (2) core claims, for which the bankruptcy court lacks constitutional authority to enter a final judgment (again, absent consent of the parties), see Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In both its Answer to the Second Amended Complaint and its main brief on summary judgment, WSFS unequivocally declined to consent to the entry of a final judgment by the bankruptcy court. Cf. Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) (parties may consent to entry of judgment by bankruptcy court). Therefore, I cannot enter a final judgment for either party in this adversary proceeding.
For the reasons stated below, I conclude that WSFS is entitled to summary judgment on all but one (1) of the Trustee's claims, there being one (1) claim in which there are disputed issues of material fact, and that the Trustee is not entitled to summary judgment on any of his claims. In light of the court's constitutional inability to enter a final order, I will enter an order that dismisses the Trustee's claims (save one) for purposes of trial of this adversary proceeding in the bankruptcy court. At the conclusion of the proceedings in this court, I will issue a comprehensive Report and Recommendation to the district court for the entry of an appropriate order with respect to all claims as to which the bankruptcy court lacks authority to enter a final judgment.
II. FACTS
A. General Structure of the Universal Network
The Universal Network was a vertically integrated business involved in the purchase of gasoline and its resale to both Universal entities and to unrelated, third-party businesses. Generally, each of the Universal Network gas stations was owned or leased by a single purpose entity (“SPE”). Within the Universal Network, UMI served as the entity that purchased gasoline from major oil companies and then resold the gasoline to the SPE's and the unrelated third parties. UDI, acted as the management company for UMI and the SPE's. Daniel Singh (f/k/a Daminder Batra) (“Singh”) was the principal of UDI and many, if not all, of the other Universal Network entities.
In 2009, UMI and UDI each had separate banking relationships—UMI with TD Bank and UDI with WSFS. Other Universal Network entities had banking relationships with other institutions, such as Wachovia Bank, Citizens Bank, The Bancorp Bank and PNC Bank, N.A.
The cash needs of the various entities were met by numerous inter-company money transfers, often in the magnitude of hundreds of thousands of dollars on a daily basis.
By July 2009, the banking relationships that UMI and UDI had with TD Bank and WSFS, respectively, soured. That month, within a few days of each other, TD Bank locked down UMI's bank accounts and WSFS took similar action against UDI (restricting temporarily, in a manner described in more detail below, outgoing transfers from UDI's accounts).
The dispute before me centers on UDI's and WSFS' lending and cash management relationships.
B. The Formation of the UDI–WSFS Relationship
UDI and WSFS first connected in November 2008, when Singh inquired about WSFS' loan and banking services. (Ex. W–29, WSFS 02026). Following several meetings between Singh and various WSFS representatives, WSFS made a presentation to Singh for cash management services. (Ex. W–30, WSFS 02019). In exchange, Singh provided the “company's financials.” (Id.). William Foley (“Foley”), WSFS' Vice President and Relationship Manager, considered the financial reports “quite strong.” (Id.). Singh ultimately requested a $5 million line of credit.
On January 26, 2009, Foley submitted a Credit Memorandum to WSFS' Senior Loan Committee (“the Credit Memorandum”). (Ex. W–31). The Credit Memorandum sought approval for a $5 million working capital line of credit to be used for UDI's “general working capital needs,” as well as a credit facility and a cash management offering for the prospect of yielding annual account analysis fees of $134 million. (Ex. W–31, WSFS 00527). The terms included “principal due on demand,” a “blanket UCC on all business assets” and an “unlimited guarantee of Daniel Singh.” (Id.). At that time, WSFS did not require financials for UMI because UDI was creditworthy, had a strong balance sheet and was profitable. (Ex. W–28, Foley 2004 Exam. at 56). Nor did the request involve financing for UMI because WSFS understood UMI had its own separate banking relationship. According to Foley, “It was a separate business.” (Id.).
In March 2009, UDI and WSFS executed several agreements to formalize two (2) relationships: (1) a lending relationship, designed to provide UDI with working capital for its business operations; and (2) a banking services relationship, in which WSFS provided a variety of cash management services to UDI.
C. The Lending Relationship
On March 19, 2009, UDI and WSFS entered into a line of credit loan transaction (“the Loan”). The Loan was memorialized by various documents, including a Business Loan Agreement (“BLA”), Promissory Note (“the Note”), Security Agreement, Guaranty (“the Guaranty”), Confession of Judgment, and an Assignment of Leases and Rents. (See Ex. W–14). The Note defined these documents collectively as “the Loan Documents.” (Ex. W–14, WSFS 00276, Note ¶ 3 (hanging paragraph)).
1. the Business Loan Agreement
The BLA obligated WSFS to make available to UDI a commercial line of credit in the principal sum of $5 million. (Ex. W–14, WSFS 0259, BLA ¶ 1.1). UDI agreed to repay the Loan which was evidenced by the Note. (Id. ¶ 1.2).
The BLA includes several representations that UDI made to induce WSFS to extend the Loan. Among those relevant to the pending motions were:
• There were no actions, suits or proceedings pending or threatened which would have a material adverse effect on UDI's ability to perform its obligations under the Loan Documents. (Id., WSFS 00260, BLA ¶ 3.1(c)).
• UDI disclosed “in writing all facts that could have a material adverse effect on the business or financial condition of [UDI] or any collateral for the Loan.” (Id., WSFS 00261, BLA ¶ 3.1(e)).
• UDI's and Singh's financial statements were true and correct and presented fairly, accurately and completely, the financial position of UDI and Singh. (Id. ¶ 3.1(f)).
• UDI's assets were held free of other encumbrances and UDI was not obligated to another creditor under a guaranty agreement. (Id. ¶ 3.1(g)).
• UDI would maintain its primary depository account and cash management relationship with WSFS for the term of the Loan. (Id., WSFS 00264, BLA ¶ 4.1(k)).
• all representations and warranties of UDI and Singh (as guarantor) were true in all material respects. (Id., WSFS 00260, ¶ 2.2(b)).
The BLA enumerated several events of default:
• Any material false or misleading statement, certificate, representation or warranty by UDI to WSFS. (Id., WSFS 00267, BLA ¶ 5.1(h)).
• Failure to make timely any payment required under the Loan. (Id., WSFS 00266, BLA ¶ 5.1(a)).
• Any event of default under the Promissory Note or any of the Loan Documents. (Id. ¶ 5.1(b)).
• The prospects of the repayment of the Loan becoming materially jeopardized or impaired in the reasonable judgment of WSFS. (Id., WSFS 00267, BLA ¶ 5.1(i)).
• UDI's use of the Loan proceeds for something other than the permitted uses. (Id. ¶ 5.1(l)).
The BLA expressly provided that WSFS “shall have no obligation to provide notice of an Event of Default.” (Id. ¶ 5.1 (hanging paragraph)).
The BLA provided various remedies to WSFS in the event of a default:
• acceleration of the balance of the Loan, without any further demand or notice. (Id. ¶ 5.2(a)).
• increase of the interest rate to an applicable default rate, without notice. (Id.¶ 5.2(b)).
• any remedy available under applicable law. (Id., SFS 00268, BLA ¶ 5.2(c)).
2. the Note
The Note provided for a $5 million revolving credit facility, with a term commencing on March 19, 2009, with monthly installments of interest on the principal balance, due on the 19th of each month. (Ex. W–14, WSFS 00274–00275, Note Preamble & ¶ 2(b)). The Note provided for its term to end upon demand by WSFS, in its discretion, at any time, and yearly extensions of the facility, the first extension falling on June 30, 2009, just slightly more than three (3) months after the inception of the Loan. (Id. ¶ 2(a)). The Note also required UDI to reduce the principal balance to zero ($0.00) once per year upon request of WSFS, beginning after June 30, 2009, and to maintain a zero balance for thirty (30) days before UDI could once again draw down on the facility. (Id., WSFS 00276, Note ¶ 2(I)).
Paragraph 6 of the Note specified both monetary and non-monetary Events of Default, including:
• UDI's failure to make any interest or principal payment when due (id., WSFS 00278, Note ¶ 6(a), (b));
• UDI's failure to maintain its primary deposit account and cash management relationship with WSFS as required by the Loan Agreement (id. ¶ 6(d)); and
• the occurrence of any other default or Event to Default under the Note or the Loan Documents (id. ¶ 6(e)).
Paragraph 7 of the Note provided certain remedies to WSFS in the Event of Default, including the right to accelerate the Loan without presentation, demand, or protest. (Id. ¶ 7(a)). Like the BLA, the Note imposed no obligation on WSFS to provide notice of an Event of Default. (Id. ¶ 6 (hanging paragraph)). UDI expressly waived any notices (including presentment for payment, dishonor, and protest) under the Note. (Id., WSFS 00279, Note ¶ 9(a)).
3. the Guaranty
Under the Guaranty, Singh served as an absolute and unconditional guarantor of the Loan. Upon default, the Guaranty allowed WSFS to proceed against Singh initially and directly without having to proceed against any other property first. (Id., WSFS 00303, Guaranty Agreement ¶ 2).
The Guaranty enumerated several events of default, including:
if any information contained in any financial statement, application, report, schedule, report, or other document given by [Singh or UDI] in connection with the Loan ... is not in all material respects true or accurate or if [Singh or UDI] omitted to state any material fact or any fact necessary to make such information not misleading.”
(Id.¶ 7(b)).
In the event of default, the Guaranty granted WSFS the right to accelerate the indebtedness, whether due or not, and required Singh to pay the Loan on demand with immediately available funds. (Id. ¶ 7(hanging paragraph)).
D. The Banking Relationship (Cash Management Services Agreement)
On March 13, 2009, UDI and WSFS entered into a Cash Management Services Agreement (“the CMA”), which required WSFS to provide certain financial services to UDI. (See Ex. W–38). Generally, the relationship provided that WSFS would: maintain multiple deposit accounts for UDI; utilize automatic clearing houses; sweep funds into a single account on an automated basis; and permit the transfer of funds in and out of the accounts via use of the internet.
The CMA consisted of several documents for each of the selected services, including “riders.” Certain of these documents will be described in more detail in connection with the Trustee's contract claim and his statutory claim under 6 Del. C. § 4A. See Parts V.B. and VI.B., infra.
E. The Demise of the UDI–WSFS Relationship
1. WSFS' suspicions arise
In May 2009, less than two (2) months after formalizing its relationship with UDI, WSFS developed concerns about its new customer. Its suspicions arose after a flurry of Automated Clearing House (“ACH”) activity and a $1 million dollar transfer occurred on May 1, 2009. (Ex. W–19, Foley Dep. at 35–38; Ex. W–20, WSFS 02568). Also, UDI quickly drew down the entire $5 million credit line, necessitating a conversation between Foley and Singh later that month. (Ex. W–28, Foley Dep. at 97). Singh explained the full usage of the line was for capital expenditures. (Id.). This was not an intended use of the line, however, because it was set up for short-term working capital. (Id.).
The next month (June 2009), UDI sought to borrow an additional, $2.1 million from WSFS, increasing the credit line to $7.1 million. Foley, as UDI's customer representative and relationship manager, prepared a credit memo to present UDI's new request to WSFS's Loan Committee. (See Ex. W–40). Glenn Kocher, Chair of the Loan Committee and Chief Credit Officer, was uncomfortable with the request. (Ex. W–37, Kocher Dep. at 45). He initially understood UDI to be a “healthy company,” (Id. at 72), but given UDI's misuse of the credit line at such a rapid pace, he questioned the accuracy of UDI's initial financial statements. Kocher deferred the request so that Foley could look beyond UDI's financials to develop a more complete picture of all of Singh's companies. (Ex. W–37, Kocher Dep. at 45; Ex. W–28, Foley Dep. at 105–7). Accordingly, in conjunction with its additional borrowing request, UDI provided to WSFS certain financial documentation, including a 2007 corporate tax return for UMI and a “review” level financial statement for years-ending December 31, 2006 through December 31, 2008. (Ex. W–28, Foley Dep. at 103, 106–7; Ex. W–44, WSFS 00541).
Based on its concerns, WSFS did not act on the request for additional credit. It also deferred a decision on extending the existing credit facility under ¶ 2(a) of the Note by pushing out its internal review date for ninety (90) days, from June 30, 2009 to September 30, 2009. (Ex. W–44, WSFS 00541).
2. WSFS' discovery of and response to the “Red Notice”
A dramatic turn of events took place a few weeks later. On the evening of Tuesday, July 14, 2009, WSFS learned that Singh might have another identity. While certain facts are in dispute as to exactly how WSFS became aware of this information, it is clear from the record that WSFS learned that Singh might also be known as “Daminder Batra,” an individual wanted for fraud and money laundering in India. (Ex. W–45, Conway Dep. at 15–16). Upon learning of this possibility, WSFS management searched the internet and viewed an INTERPOL web site where Singh's face was posted as a “wanted” person. (Id. at 21). The “INTERPOL Notice” listed the “Categories of Offences” as “Counterfeiting/Forgery Conspiracy, Fraud, Fraud Conspiracy,” with the “Arrest Warrant Issued by /India, Allahabad/India, Mumbai/India,” and instructed in all capitals and bold typeface: “IF YOU HAVE ANY INFORMATION CONTACT YOUR NATIONAL OR LOCAL POLICE.” (Ex. W–46, WSFS 01523). Throughout the litigation, the parties have referred to this notice as “the Red Notice.”
The next day (Wednesday, July 15, 2009), the Red Notice was brought to the attention of WSFS' security department. Foley confirmed to the security department that the face of “Batra” on the Red Notice was Singh. (Ex. W–19, Foley Dep. at 42). That evening, following several emails and meetings, WSFS management resolved they still needed to authenticate the Red Notice, but in an abundance of caution, placed a “post no debits” (“PND”) restriction on the UDI accounts, effective the next business day, July 16, 2009. (Ex. W–2, WSFS 006171). The PND was put in place to stop automated debiting and allow WSFS time to review UDI's account and ensure there were sufficient funds for outgoing transfers. (Ex. W–7, Brogan Dep. at 78–79, 81–82).
The next morning (Thursday, July 16, 2009), while WSFS continued its investigation, the PND went into effect on a prospective basis. The PND did not prevent transactions already in the system from settling on an automated basis. (Ex. W–7, Brogan Dep. at 78). Consequently, two (2) transfer orders sent to TD Bank (for the benefit of UMI) consisting of six (6) transfers totaling $2,490,150.00 on July 15, 2009 (“the First TD Bank Transfer Order”), and another six (6) transfers totaling $2,689,525.00 on July 16, 2009 (“the Second TD Bank Transfer Order”), settled on July 15 and 16, 2009, respectively. (Ex. W–23, TD 09888–09889, TD 09892; Ex. W–7, Brogan Dep. at 71–72, 75, 78; Ex. W–8, Roberts Report at 21; Ex. W–11). WSFS quickly requested a reversal of the First TD Bank Transfer Order, which was successful. (Exs. Tr.–41, 42). TD Bank reversed the transaction and returned the funds to WSFS on July 17, 2009. (Ex. W–23, TD 09924). TD Bank refused WSFS's request to reverse the Second TD Bank Transfer Order for lack of sufficient funds. (Ex. W–105, WSFS 00587; Ex. W–8, Roberts Report at 24; Ex. W–23 at TD 09919–09920).
By the end of day on July 16, 2009, after having spoken to two (2) FBI agents, WSFS confirmed that the Red Notice was authentic and there was an actual arrest warrant in India for Singh. (Ex. W–4, WSFS 03844; Ex.W–50, Kearney Dep. at 14–15 (confirming Red Notice was on a valid web site); Ex. Tr.–M, Foley Dep. at 91). WSFS also determined that UDI's primary operating account was expected to have approximately $5.8 million in it by the close of business that day. (Ex. W–4, WSFS 03844). Accordingly, WSFS decided to transfer $5 million of those funds and credit them to a general ledger suspense account to insure there were funds available to pay off the Loan. (Ex. Tr.–65, WSFS 02456; Ex. W–4, WSFS 03844).
WSFS put a few other precautionary processes in motion that day. It immediately implemented: UDI's “line sweep” be turned off, all “money room deposits” be accepted, Foley's authorization be obtained for cash orders through the “money room vault,” and any communication with Singh should be with Foley. (Exs. Tr.–66, WSFS 05877; Tr.–67, WSFS 05879; Tr.–69, WSFS 05881; Tr.–70, WSFS 05882). Essentially, WSFS wanted to assure that all deposits were accepted and made Foley the point of contact and responsible for determining which debits the bank would permit.
Thursday, July 16, 2009, concluded with Mark Turner, President of WSFS, sending an email (at 8:45 pm) reiterating his message that UDI should be given the benefit of the doubt; that the goal was to protect the bank's interest while treating UDI with respect and the presumption that it was a misunderstanding. (Ex. W–4, WSFS 03844). At this point, no one from WSFS had contacted UDI to discuss WSFS' concerns or suspicions about Singh's identity or to explain the internal actions WSFS had taken pertaining to the UDI accounts. (Ex. W–4, WSFS 03844; Tr.–170).
The next morning (Friday, July 17, 2009), WSFS retained Garvan McDaniel as counsel to handle the UDI matter. (Ex. W–52, McDaniel Dep. at 21–22). Thereafter, McDaniel called UDI's attorney, Kevin Ryan, and advised Ryan (or one of his colleagues) about:
(1) the Red Notice (which he later emailed to Ryan around noon);
(2) Singh's alias;
(3) the PND restriction;
(4) the need for the parties to work together and ensure there were sufficient collected funds in the account before attempting to make withdrawals or outgoing transfers;
(5) WSFS' placement of $5 million on deposit in a suspense account; and
(6) WSFS's right to demand payment of the Loan.
(Ex. W–9, Ryan Dep. at 34–36; 121; Ex. W–52, McDaniel Dep. at 24, 37–39; Ex. W–54, WSFS 000494; Ex. W–55, WSFS 000495).
That afternoon, Ryan asked McDaniel for UDI to have “access to the funds in excess of what [WSFS] needed to offset [the] loan.” (Ex. W–56, WSFS 06756). The two (2) attorneys also scheduled a conference call the following Monday morning. (Ex. W–9, Ryan Dep. at 125). Meanwhile, the PND restriction remained in place.
On Monday morning (July 20, 2009), McDaniel advised Ryan that WSFS removed the PND restriction from all accounts, and online banking capabilities for ACH and wire transfers had been reinstated. (Ex. W–67, WSFS 000457). That afternoon, WSFS applied the $5 million that had been previously moved to the general ledger account on July 16th, to formally repay the Loan (“the Setoff”). (Ex. W–60, WSFS 00922; Ex. Tr.–L, Foley Dep. at 198).
3. effect of the PND
On July 15 and 16, 2009, while the PND was in effect, UDI received over $11.6 million dollars in transfers from UMI and UEI (“the UMI–UDI Transfers”). In turn, between July 15 to July 22, 2009, UDI transferred over $11 million out of its WSFS accounts to pay a variety of parties including UMI and UEI (“the Outgoing Transfers”). (Ex. W–8, Roberts Report at 4, 2324). The $11 million in Outgoing Transfers does not include the $5 million transferred to WSFS to repay the Loan.
On July 23, 2009, three (3) days after WSFS transferred the $5 million to satisfy the Loan, UMI filed its chapter 11 bankruptcy petition.
III. PROCEDURAL HISTORY
A. Main Case
As stated above, on July 23, 2009, UMI commenced this chapter 11 bankruptcy case. The case was converted to chapter 7 on August 18, 2009. On September 24, 2009, the U.S. Trustee filed a report giving notice that Goldstein had been elected as chapter 7 trustee.
On April 19, 2010, the Trustee filed a motion requesting that substantive consolidation of the UMI bankruptcy estate with some, but not all, of the non-debtor Universal Network affiliates (“the Substantive Consolidation Motion”). (Bky. No. 09–15404, Doc. # 316). UDI was one of the entities to be included in the substantive consolidation.
The Trustee's request was based largely on his view that:
• inter-company transfers “of an incredible magnitude” occurred daily without the maintenance of “formal records;”
• the assets within the Universal Network (largely in the form of cash) “were effectively commingled” that the reconstruction and reconciliation of the accounting records among the separate entities “would be an astronomically expensive, if not impossible, task;” and,
• certain large creditors “appear to have relied upon the overall financial position of the Universal Network as a whole, as opposed to any one of its discreet member entities.”
(Memorandum in Support of Trustee's Motion for Substantive Consolidation at 4–5, 13, 17) (Bky. No. 09–15404, Doc. # 317); see generally In re Owens Corning, 419 F.3d 195 (3d Cir.2005) (controlling case stating legal standards for substantive consolidation).
The Trustee and TD Bank entered into a settlement resolving several issues between them. Pursuant to that agreement, TD Bank supported the Trustee's request for substantive consolidation. (Bky. No. 09–15404, Doc. # 366). On June 8, 2010, WSFS filed a lengthy objection to the Substantive Consolidation Motion. (Bky. No. 09–15404, Doc. # 364).
The parties reached a global settlement of the Substantive Consolidation Motion and two (2) other pending motions. That settlement was approved by court order dated August 4, 2010. (Bky. No. 09–15404, Doc. # 410).
The August 4, 2010 Order provided for the substantive consolidation of the UMI bankruptcy estate nunc pro tunc with five (5) other Universal entities, including UDI (collectively, “the Affiliates”).
Most relevant to this adversary proceeding, the August 4, 2010 Order included a significant qualification. The Order provided that the substantive consolidation of UMI and UDI would not “impact any rights concerning WSFS.” (Id. ¶ 7). WSFS was excepted from the effects of the substantive consolidation order. Instead, as to WSFS, the parties agreed that the Affiliates, including UDI, would be deemed to have filed a bankruptcy as of August 4, 2010 and that the UDI and UMI estates would be treated as being jointly administered, not substantively consolidated. Significantly, the parties also agreed that the Trustee retained the right to seek to extend the effect of the substantive consolidation to WSFS nunc pro tunc to the date of UMI's bankruptcy filing, July 23, 2009, with WSFS reserving all of its rights to challenge the request for such relief. (Id. ¶ 7.a.).
B. Adversary Proceeding
IV. SUMMARY JUDGMENT STANDARD
Fed. R. Civ. P. 56(a), applicable in this adversary proceeding by virtue of Fed. R. Bankr. P. 7056, provides that summary judgment must be granted to a moving party when, drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. E.g., Tri–M Group, LLC v. Sharp, 638 F.3d 406, 415 (3d Cir.2011); In re Bath, 442 B.R. 377, 387 (Bankr.E.D.Pa.2010). Summary judgment is appropriate if there are no disputed issues of material fact and the undisputed facts would require a directed verdict in favor of the movant. See Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.1993).
On a motion for summary judgment, the court's role is not to weigh the evidence, but to determine whether there is a disputed, material fact for resolution at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact is one in which sufficient evidence exists that would permit a reasonable fact finder to return a verdict for the non-moving party. Id. at 248, 106 S.Ct. 2505. However, if it appears that the evidence “is so one-sided that one party must prevail as a matter of law,” the court shall enter judgment accordingly in that party's favor. Id. at 252, 106 S.Ct. 2505.
Proper resolution of a motion for summary judgment also requires consideration of the parties' respective burdens.
If the moving party bears the burden of proof, the movant must “support its motion with credible evidence ... that would entitle it to a directed verdict if not controverted at trial.” Fitzpatrick, 2 F.3d at 1115 (citation omitted). The evidence must establish “all the essential elements of its case on which it bears the burden of proof at trial, [such that] no reasonable jury could find for the non-moving party.” Id. (citation omitted); see also Bath, 442 B.R. at 387. If the movant (with the burden of proof at trial) meets this initial burden, the responding party may not rest on the pleadings, but must designate specific factual averments through the use of affidavits or other permissible evidentiary material which demonstrate a genuine issue of material fact to be resolved at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson, 477 U.S. at 247–50, 106 S.Ct. 2505.
If the moving party does not bear the burden of proof at trial, the movant may establish it is entitled to judgment either by demonstrating that the undisputed facts negate an element of the plaintiff's claim or that the plaintiff lacks evidence to support an essential element of his claim. In re Polichuk, 506 B.R. 405, 422 (Bankr.E.D.Pa.2014) (citing Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1366 (3d Cir.1996) and Quaker State Minit–Lube, Inc. v. Fireman's Fund Ins. Co., 868 F.Supp. 1278, 1287 n. 5 (D.Utah 1994)).
V. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S CONTRACT CLAIMS (COUNTS ONE AND TWO)
In Counts One and Two of the Second Amended Complaint, the Trustee asserts two (2) distinct breach of contract claims pertaining to the Loan and the CMA: (1) breach of express contractual provisions and (2) breach of the implied covenant of good faith and fair dealing.
A. Threshold Issue: the Relationship between the Loan and the CMA
Prior to evaluating whether there was a breach of contract under either theory, I must consider the relationship between the Loan and the CMA. The Trustee contends that the Loan and CMA are separate contracts. (Trustee Reply Memorandum Support of Summary Judgment at 3; Adv. No. 11–512, Doc. # 213) (“Tr.Reply”). WSFS disagrees, arguing that the Loan and CMA were part of a larger integrated business lending transaction that requires the documents to be interpreted as a single agreement in order to give effect to the parties' intent.
The distinction is important. If the Loan and the CMA are part of a single contractual relationship, WSFS' argument that UDI's alleged material breach of the Loan excuses performance under the CMA gains traction.
1. contract interpretation
2. integration
567Where one party to a contract seeks to vary the terms of a written contract, the parol evidence rule is implicated. The parol evidence rule states “where parties have reduced their ultimate agreement to writing, the writing cannot thereafter be varied or contradicted.” McGrew v. Vanguard Corp., 1979 WL 4635, at *3 (Del.Ch. Sept. 25, 1979); accord Taylor v. Jones, 2002 WL 31926612, at *3 (Del.Ch. Dec. 17, 2002). The application of the parol evidence rule operates to exclude “an antecedent or contemporaneous oral understanding to vary or contradict the terms of a written contract.” Brandywine Shoppe, Inc. v. State Farm Fire & Casualty Co., 307 A.2d 806, 809 (Del.Super.Ct.1973).
8Related to the parole evidence rule is the concept of contract integration. A distinction exists between contracts that are totally integrated and those only partially integrated:
Where the writing is intended to be final and complete, it is characterized as a total integration and may be neither contradicted nor supplemented by evidence of prior agreements. But where a writing is intended to be final but is in fact incomplete it is said to consist of a partial integration and although such a writing may not be contradicted by evidence of prior agreements, it may be supplemented by additional consistent evidence.
McGrew, 1979 WL 4635, at *3 (footnote omitted).
In determining whether the contract is fully or partially integrated, courts consider several factors, including whether the contact contains a merger or integration clause, the length and detail of the contract, the formality of the setting, and whether the contract is a form. See 6–25 Peter Linzer, Corbin on Contacts § 25.7 (Joseph M. Perillo, ed.) (Matthew Bender 2015) (“Corbin”); see also Hynansky v. Vietri, 2003 WL 21976031, at *3 (Del.Ch. Aug. 7, 2003); Taylor, 2002 WL 31926612, at *3.
Once it has been established that a contract is not fully integrated, the court may consider extrinsic or parol evidence regarding whether the parties intended to include other terms or agreements in the contract to supplement (but not vary or contradict) the written terms of the contract. Corbin § 25.7; see also Brandywine Shoppe, 307 A.2d at 809.
In this proceeding, I must apply these principles to determine whether the Loan and the CMA were each fully integrated, independent contracts or whether each was only partially integrated and supplemented by the provisions of the other.
3. the Loan and CMA each were only partially integrated
B. Trustee's Claim for Breach of Express Contract Provisions (Count Two)
11Three (3) elements are required to establish breach of contract under Delaware law: (1) the existence of a contract whether express or implied; (2) the breach of an obligation imposed by that contract; and (3) the resultant damage to the plaintiff. VLIW Technology, LLC v. Hewlett–Packard Co., 840 A.2d 606, 612 (Del.2003); eCOMMERCE Indus., Inc. v. MWA Intelligence, Inc., 2013 WL 5621678, *13 (Del.Ch. Sept. 30, 2013); In re Mobilactive Media, LLC, 2013 WL 297950, at *14 (Del.Ch. Jan. 25, 2013). The plaintiff has the burden to establish these elements by a preponderance of the evidence. Mobilactive Media, 2013 WL 297950, at *14; LaPoint v. AmerisourceBergen Corp., 2007 WL 2565709, at *9 (Del.Ch. Sept. 4, 2007).
1. WSFS Non–Performance under the CMA was excused by UDI's material breach of the Loan
a.
12The Trustee's first argument under Count Two is that WSFS breached the CMA through the implementation of the PND and other actions that restricted UDI's use of services that were provided under the CMA. The Trustee also makes the related argument that WSFS committed a breach of its express contractual duties by failing to perform all of its obligations under the CMA without prior notice. In response, WSFS asserts that it was excused from fully performing under the CMA due to UDI's material breach of its obligations under the Loan Documents.
b.
The BLA identifies fourteen (14) “Events of Default.” (Ex. W–14, WSFS 00266–00267, BLA ¶ 5.1(a)-(n)). WSFS has established on this record that at least two (2) events of default under the BLA occurred before it exercised its loan default remedies.
One event of default occurred under Paragraph 5.1(h) of the BLA, which states that the following constitutes an event of default: “[UDI] makes any material false or misleading statement, certificate, representation or warranty to [WSFS].”
Among the representations and warranties that UDI made to WSFS in the BLA were that:
• the financial statements that UDI and Singh delivered to UDI were true and correct and presented their financial position fairly accurately and completely;
• UDI had disclosed in writing all facts that could have a material adverse effect on its business and financial condition or any loan collateral; and
• UDI was not obligated under any guaranty other than a guaranty in favor of WSFS.
(Id., WSFS 00261, BLA ¶ 3.1(e), (f), (g)).
WSFS has produced evidence, unrebutted by the Trustee, that UDI made the following misrepresentations to WSFS:
c.
The next question is whether UDI's default under the Loan Documents, on account of the material misrepresentations regarding UDI and Singh's financial condition and the failure to disclose the Red Notice and the pending criminal charges in India against Singh, were material breaches that excused further strict contractual performance by WSFS. I conclude they were.
1415The determination whether a breach is sufficient to excuse further performance under a contract is one of degree. Preferred Inv. Servs., Inc. v. T & H Bail Bonds, Inc., 2013 WL 3934992, at *11 (Del.Ch. July 24, 2013). A material breach is action or inaction that goes to the root or “essence of the agreement between the parties, or ... which touches the fundamental purpose of the contract and defeats the object of the parties in entering into the contract.” Id. It must be “of sufficient importance to justify by the non-breaching party.” Biolife Solutions, 838 A.2d at 278.
16“A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so.” Restatement § 162(2); accord Alabi v. DHL Airways, Inc., 583 A.2d 1358, 1362 (Del.Super.Ct.1990). Further, a party may assert that its nonperformance is excused by the other party's material breaches, even if it was not aware of those breaches at the time it terminated or modified its performance under the parties' contract. See, e.g., Eastern Elec. & Heating, Inc. v. Pike Creek Professional Ctr., 1987 WL 9610, at *5 (Del.Super.Ct. Apr. 7, 1987); see also Schiavello v. Delmarva Sys. Corp., 61 F.Supp.2d 110, 114 (D.Del.1999) (after-acquired evidence of resume fraud is complete defense to breach of contract claim); Davenport Group MG, L.P. v. Strategic Inv. Partners, 685 A.2d 715, 724 (Del.Ch.1996) (later-discovered information of wrongdoing is defense to wrongful discharge suit).
2. WSFS did not commit a breach of contract by failing to give prior notice before exercising its remedies under the Loan Documents
C. Implied Covenant of Good Faith and Fair Dealing (Count One)
252627The implied covenant of good faith and fair dealing requires contracting parties to “ ‘refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits' of the bargain.” Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del.2005) (emphasis added) (quoting Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del.Ch.1985)); accord Nemec v. Shrader, 991 A.2d 1120, 1126 (Del.2010). Breaching the covenant may create liability for parties whose “conduct frustrates the ‘overarching purpose’ of the contract by taking advantage of their position to control implementation of the agreement's terms.” Dunlap, 878 A.2d at 442 (citing Breakaway Solutions, Inc. v. Morgan Stanley & Co. Inc., 2004 WL 1949300 *12 (Del.Ch. Aug. 27, 2004)). The doctrine may be used to imply contract terms, “whether employed to analyze unanticipated developments or to fill gaps in the contract's provisions.” Dunlap, 878 A.2d at 441 (footnote omitted).
2829The Delaware Supreme Court has emphasized the limited nature of the implied covenant of good faith and fair dealing. A contracting party's reliance on the express terms of an agreement does not amount to bad faith merely because such reliance “simply limits advantages to another party.” Nemec, 991 A.2d at 1128. Therefore, applying the implied covenant to find that a party breached its obligations by the manner in which it employed an express contractual right is a “cautious enterprise.” Id. at 1125 (citing Dunlap, 878 A.2d at 441). This is necessarily so because a plaintiff “generally cannot base a claim for breach of the implied covenant on conduct authorized by the agreement.” Id. at 1125–26.
30Application of the implied covenant involves a “rare and fact-intensive exercise,” Dunlap, 878 A.2d at 442 (quoting Cincinnati SMSA Ltd. Partnership v. Cincinnati Bell Cellular Systems Co., 708 A.2d 989, 992 (Del.1998)), to be employed “[o]nly when it is clear from the writing that the contracting parties ‘would have agreed to proscribe the act later complained of ... had they thought to negotiate with respect to that matter,’ ” Dunlap, 878 A.2d at 442 (quoting Katz v. Oak Industries, Inc., 508 A.2d 873, 880 (Del.Ch.1986)).
31Stated slightly differently, and consistent with the contractual foundation of a claim for breach of an implied contractual duty,
Delaware's implied duty of good faith and fair dealing is not an equitable remedy for rebalancing economic interests after [subsequent] events ... adversely affected one party to a contract. Rather the covenant is a limited and extraordinary legal remedy.
eCOMMERCE Indus., 2013 WL 5621678, at *33 (citing Nemec, 991 A.2d at 1128).
3233A claim arising from a breach of the implied covenant is itself contractual in nature. NAMA Holdings, LLC v. Related WMC LLC, 2014 WL 6436647, at *16 (Del.Ch. Nov. 17, 2014) (internal quotations and citations omitted). Thus, the elements of the claim are the same as those for an ordinary breach of contract claim, the only difference being that contractual obligation breached is implied, not express. See NAMA Holdings, 2014 WL 6436647 at *16 (quoting Fitzgerald v. Can tor, 1998 WL 842316, at *1 (Del.Ch. Nov. 10, 1998)). The implied covenant is not met by “[g]eneral allegations of bad faith conduct.” Kuroda v. SPJS Holdings, LLC, 971 A.2d 872, 888 (Del.Ch.2009). Instead, Delaware courts require the plaintiff to identify a specific implied obligation and to demonstrate that the breach of that obligation “denied the plaintiff the fruits of the contract.” Id.
34As explained in Part V.B. above, following a material breach by UDI, WSFS exercised its default remedies under the Loan. Based on the implied covenant of good faith and fair dealing, the Trustee argues that the manner in which WSFS implemented its default remedies was unreasonable and in bad faith. He contends that WSFS breached the implied duty of good faith and fair dealing by placing the administrative freeze on UDI's accounts, sequestering $5 million to an internal account for the purpose of setting off the Loan, and failing to give notice to UDI of the administrative freeze and the sequestration of funds.
The Trustee's contention, that WSFS' conduct was arbitrary and unreasonable, is not supported by the undisputed facts in the record.
VII. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S CLAIM UNDER 6 Del. C. § 4A (COUNT THREE)
A. 6 Del. C. § 4A–305
Article 4A governs electronic funds transfers, specifically payment orders. See 6 Del. C. §§ 4A–101, et. seq. Generally, a payment order is “an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary.” § 4A–103(a)(1).
Article 4A defines several of the relevant terms used to describe a payment order. A sender is “the person giving the instruction to the receiving bank.” § 4A–103(a)(5). The receiving bank is “the bank to which the sender's instruction is addressed.” § 4A–103(a)(4). A beneficiary bank is “the bank identified in a payment order in which an account of the beneficiary is to be credited pursuant to the order or which otherwise is to make payment to the beneficiary if the order does not provide for payment to an account.” § 4A–103(a)(3). A beneficiary is “the person to be paid by the beneficiary's bank.” § 4A–103(a)(2).
35In essence, a payment order can be broken down into a chain of transactions that may either be “accepted” or “rejected” at any point in the chain. For instance, a receiving bank may either accept or reject a payment order that the sender transmits. “[A] receiving bank ... accepts a payment order when it executes the order.” § 4A–209(a). A rejection occurs when the receiving bank issues a notice to the sender either orally, electronically, or in writing that indicates that the receiving bank “is rejecting the order or will not execute or pay the order.” § 4A–210(a). Once a payment order is accepted it may not then be later rejected and vice versa. See Banque Worms v. BankAmerica Int'l, 77 N.Y.2d 362, 568 N.Y.S.2d 541, 570 N.E.2d 189, 195 (1991) (“Payments made by electronic funds transfers in compliance with the provisions of article 4A are to be the equivalent of cash payments, irrevocable except to the extent provided for in article 4A”).
A payment order is executed by a receiving bank when “it issues a payment order intended to carry out the payment order received by [that] bank.” 1–2 Benjamin Geva, The Law of Electronic Funds Transfers § 2.03[2] (Matthew Bender 2015) (quoting U.C.C. § 4A–301(a)).
Section 4A–305 governs a receiving bank's liability for late or improper execution or failure to execute payment order. It provides:
(a) If a funds transfer is completed but execution of a payment order by the receiving bank in breach of Section 4A–302 results in delay in payment to the beneficiary, the bank is obliged to pay interest to either the originator or the beneficiary of the funds transfer for the period of delay caused by the improper execution. Except as provided in subsection (c), additional damages are not recoverable.
(b) If execution of a payment order by a receiving bank in breach of Section 4A–302 results in (i) noncompletion of the funds transfer, (ii) failure to use an intermediary bank designated by the originator, or (iii) issuance of a payment order that does not comply with the terms of the payment order of the originator, the bank is liable to the originator for its expenses in the funds transfer and for incidental expenses and interest losses, to the extent not covered by subsection (a), resulting from the improper execution. Except as provided in subsection (c), additional damages are not recoverable.
(c) In addition to the amounts payable under subsections (a) and (b), damages, including consequential damages, are recoverable to the extent provided in an express written agreement of the receiving bank.
B. The CMA
One of the documents executed by the parties as part of the CMA was the Funds Transfer Services Rider (“the FTS Rider”). (Ex. W–38, WSFS 01535–01545). Section 2 of the FTS Rider listed eight (8) services regarding payment orders to be paid through the cash management system. All of the services were worded in terms of “may” as opposed to shall. For instance, in the execution of payment orders, WSFS may execute each order received by it in the name of UDI as sender, provided that UDI had sufficient available funds on deposit in an account. (See Id., WSFS 01535, FTS Rider ¶ 2.1). The FTS Rider also provided that WSFS may reject any order that does not comply with the Services Agreement or funds transfer rules and security procedures. (Id., WSFS 01535–01536, FTS Rider ¶ 2.2).
The FTS Rider described the notice required if a payment order was not executed. If WSFS rejected or failed to execute an order of UDI, then WSFS was obligated to give notice to UDI by no later than the close of business on the execution date of the order. (Id.).
Section 3 of the FTS Rider defined the fees, compensation, and costs associated for the services. The FTS Rider allowed WSFS to directly debit any of UDI's accounts without prior notice for any fees, charge-backs, return fees for checks, drafts, payment orders or other payments owing to WSFS. (Id., WSFS 01537–01538, FTS Rider ¶ 3.1).
WSFS was required to pay UDI if it rejected or failed to execute an order if, on the execution date of the order, there was a sufficient available balance in UDI's account to pay for the order. (Id., WSFS 01538, FTS Rider ¶ 3.3). WSFS also was required to compensate UDI for the use of funds at the rate specified in ¶ 3.1.
C. Discussion
VII. WSFS IS ENTITLED TO SUMMARY JUDGMENT ON THE TRUSTEE'S FRAUDULENT TRANSFER CLAIMS (COUNTS SIX AND SEVEN)
A. The Trustee's Claims Are Based Solely on Constructive Fraud
B. Summary of the Parties' Positions
The transfers at issue are the following: (1) the initial UMI–UDI Transfers and (2) the Setoff (i.e., UDI's involuntary transfer to WSFS that paid off the Loan). Collectively, I will refer them as the “Transfers.”
The Trustee offers two (2) legal theories that the Transfers were constructively fraudulent.
First, the Trustee argues that the UMI–UDI Transfers went directly to WSFS. The Trustee contends that WSFS was the “initial transferee” because it exercised dominion and control over UDI's depository accounts by placing the PND restriction on UDI's accounts before taking the funds for its own benefit—even though the UMI–UDI Transfers were deposited initially into UDI's account before WSFS moved the money to the general ledger account and subsequently satisfied the Loan. (Tr. Mem. at 78). The Trustee further emphasizes that WSFS controlled the disposition of other monies in the UDI Accounts, including reversing and returning items previously attempted to be paid out by UDI (i.e., the Second TD Bank Transfer). (Tr. Mem. at 79). Under this initial transferee theory, the Trustee asserts that he may recover the Transfers because there was no consideration for the Transfers. There was no consideration because UMI owed no money to WSFS and WSFS provided no value to UMI (which was insolvent at the time) in return for the $5 million that it received.
The Trustee's alternative legal theory is that he may recover the Transfers from WSFS as a subsequent transferee. The basis for this position is quite conventional. He contends that UMI did not receive reasonably equivalent value for the transfers it made to UDI.
WSFS disputes every aspect of the Trustee's theory. As a threshold issue, WSFS argues that the Trustee has not identified the Transfers with specificity. Next, WSFS contends that not only was UDI the initial transferee, but also there was value supporting both the inbound transfers from UMI to UDI and the subsequent outbound transfers from UDI to WSFS (the consideration in the second transfer being repayment of an antecedent debt). Finally, WSFS contends that the Transfers made in satisfaction of UDI's outstanding debt (i.e., the Loan) were in good faith and without knowledge of their avoidability. See 11 U.S.C. § 550(b)(1).
C. Constructive Fraud: Applicable Legal Principles
1. 11 U.S.C. § 548
For a constructive fraud claim, 11 U.S.C. § 548(a) provides:
(a)(1) The trustee may avoid any transfer ... of an interest of the debtor in property ... that was made ... within 2 years 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;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
36In most proceedings, this constructive fraudulent transfer statutory verbiage can be distilled down to four (4) elements:
(1) the debtor had an interest in the property;
(2) the interest was transferred within two years of the filing of his bankruptcy petition;
(3) the debtor received less than equivalent value in exchange for the transfer; and
(4) either:
(I) the debtor was insolvent at the time of the transfer; or
(ii) became insolvent as a result thereof; or
(iii) intended to incur, or believed that he would incur, debts that would be beyond his ability to pay them as they became matured.
See, e.g., In re Dawley, 2005 WL 2077074, at *14 (Bankr.E.D.Pa. Aug. 10, 2005).
37The party challenging the transfer bears the burden of proving all of the elements of a constructive fraudulent transfer claim. See, e.g., In re Fruehauf Trailer Corp., 444 F.3d 203, 211 (3d Cir.2006); In re Plassein Int'l Corp., 405 B.R. 402, 411 (Bankr.D.Del.2009), aff'd, 428 B.R. 64 (D.Del.2010).
38Frequently in § 548(a)(1)(B) litigation, the most heavily litigated issue is the third element: whether the debtor received reasonably equivalent value in the transaction. In this Circuit, courts employ a two (2) step process in determining whether a debtor received reasonably equivalent value in the form of indirect economic benefits in a particular transaction:
(1) whether any value is received, and
(2) whether that value was reasonably equivalent to the transfer made.
3940In re R.M.L., 92 F.3d 139, 152 (3d Cir.1996); Plassein Int'l Corp., 405 B.R. at 411; see also In re Fid. Bond & Mortg. Co., 340 B.R. 266, 287 (Bankr.E.D.Pa.2006), aff'd, 371 B.R. 708 (E.D.Pa.2007). Because the purpose of the fraudulent transfer statute is to protect creditors, the court determines whether value was received from the vantage of the creditor. Fid. Bond & Mortg., 340 B.R. at 286. The inquiry is “what did the debtor give up and what did it receive that could benefit creditors.” Id. (citing In re Joy Recovery Tech. Corp., 286 B.R. 54, 75 (Bankr.N.D.Ill.2002)).
4142In this determination, “value ... include[s] any benefit ... whether direct or indirect.” Fruehauf Trailer Corp., 444 F.3d at 212 (citation omitted); Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646–47 (3d Cir.1991); In re Vaso Active Pharm., Inc., 2012 WL 4793241 (Bankr.D.Del., Oct. 9, 2012). The “touchstone” in the determination is whether the parties exchanged comparable “realizable commercial value.” Mellon Bank, 945 F.2d at 647. Thus, if a debtor's “realizable going concern value after the transaction is equal to or exceeds its going concern value before the transaction, reasonably equivalent value has been received.” Id.
4344In the reasonably equivalent value inquiry, courts look to the totality of the circumstances, considering such factors as “(1) whether the transaction was at arm's length, (2) whether the transferee acted in good faith, and (3) the degree of difference between the fair market value of the assets transferred and the price paid.” Plassein Int'l Corp., 405 B.R. at 411; accord Fid. Bond & Mortg., 340 B.R. at 287 (citing R.M.L., 92 F.3d at 145, 153). If a court concludes that the benefits the debtor received “are minimal and certainly not equivalent to the value of a substantial outlay of assets,” a plaintiff need not prove the exact value conferred because the “amount” of value is then irrelevant. Fruehauf Trailer Corp., 444 F.3d at 214.
2. 11 U.S.C. § 544(b) and 6 Del. C. §§ 1304, 1305
11 U.S.C. § 544(b)(1) provides that “the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502....” Section 544(b) allows the Trustee to step into the shoes of an actual creditor who existed at the commencement of the bankruptcy case, and avoid the fraudulent transfers pursuant to state law.
The Trustee invokes 6 Del. C. §§ 1304 and 1305 of the Delaware fraudulent transfer statute as applicable state law under § 544(b).
6 Del. C. § 1304 provides:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
* * *
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
a. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
b. Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.
6 Del. C. § 1305 provides:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
(b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time and the insider had reasonable cause to believe that the debtor was insolvent.
45In order to prevail under the Delaware constructive fraud transfer provisions, the Trustee must establish that:
(1) the debtor made a transfer;
(2) for less than reasonably equivalent value; and
(3) the debtor was, or was rendered, insolvent thereby.
In re Delta Petroleum Corp., 2015 WL 1577990, *18 (Bankr.D.Del. Apr. 2, 2015) (citing Brandt v. Trivest II, Inc. (In re Plassein Int'l Corp.), 2008 WL 1990315, *5 (Bankr.D.Del. May 5, 2008)).
D. WSFS Was Not an “Initial Transferee” of the UMI Transfers
The Trustee's lead theory hinges on the notion that WSFS was the initial transferee (i.e., the direct recipient) of the UMI–UDI Transfers.
Significantly, the concept of an “initial transferee” does not derive from the avoidance sections of the Bankruptcy Code. Rather, it is derived from 11 U.S.C. § 550, the Code provision that addresses a trustee's ability to recover property after establishing that a transfer is avoidable. Section 550 of the Code provides, in pertinent part:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, 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 or the entity for whose benefit such transfer was made; or
(2) an immediate or mediate transferee of such initial transferee.
Section 550(a) does not define the term “initial transferee,” however. In the absence of a clear statutory definition, courts have developed standards for determining whether a party is an “initial transferee.”
1. The Bonded Financial Services and Incomnet Tests
Most courts, including a number of circuit courts of appeal, have concluded that mere initial receipt of a transfer does not always equate to initial transferee status. See 4 Norton Bankr.L. & Prac.3d § 70:2 (West 2015).
In Bonded Fin . Servs. v. Europe a n Am. Bank., 838 F.2d 890, 893 (7th Cir.1988) (emphasis added), the court explained:
Although the Bankruptcy Code does not define “transferee,” and there is no legislative history on the point, we think the minimum requirement of status as a “transferee” is
dominion over the money or other asset, the right to put the money to one's own purposes.
2. WSFS was not the initial transferee because it lacked dominion or control over the UDI accounts
46Based on my review of the record, I agree with WSFS and conclude that the undisputed facts establish that WSFS lacked dominion or control over the UDI accounts sufficient to establish that WSFS was an initial transferee under § 550(a). Contrary to the picture drawn by the Trustee, the measures taken by WSFS between July 16 through July 19, 2009 did not absolutely restrict all outgoing transfers from UDI's account.
Most significantly, there is no evidence of any legal title change to the funds in UDI's accounts. Nor is there any indication that UDI was utterly helpless and without access to funds. As detailed in Part V.B., supra, for the few days the PND was in effect, WSFS continued to honor requests for transfers and otherwise made funds available to UDI. The PND merely suspended the funding of outgoing transfers with provisional or advance credit without review.
Therefore, I conclude that WSFS did not have the requisite dominion or control over UDI's accounts to render it an “initial transferee” of the UMI–UDI Transfers. WSFS was a subsequent transferee.
E. WSFS Is Not Liable as a Subsequent Transferee of the UMI–UDI Transfer
47Having determined that WSFS was a subsequent transferee of the UMI–UDI Transfers, I now must evaluate the corollary issue: whether, as a result of the Setoff, WSFS was the recipient of a fraudulent transfer as a subsequent transferee.
In this scenario, the Trustee must establish that UMI did not receive reasonably equivalent value for the transfers UMI made to UDI and that WSFS is liable as a subsequent transferee. See 11 U.S.C. §§ 548(a)(1)(B) and 550(a)(2). For the following reasons, I find the Trustee has not met his burden his burden of proof.