Opinion
Case No. 17-61506 Adv. P. No. 18-06025
2020-01-31
IN RE: RUNNYMEDE CAPITAL MANAGEMENT, INC., Debtor. W. Stephen Scott, Trustee, Plaintiff, v. Suntrust Bank, N.A., Defendant.
Karen M. Crowley, John M. Ryan, Nathaniel Y. Scott, Crowley Liberatore Ryan & Brogan, PC, Norfolk, VA, for Plaintiff. Timothy S. Baird, Peter J Barrett, Kutak Rock LLP, Richmond, VA, for Defendant.
Karen M. Crowley, John M. Ryan, Nathaniel Y. Scott, Crowley Liberatore Ryan & Brogan, PC, Norfolk, VA, for Plaintiff.
Timothy S. Baird, Peter J Barrett, Kutak Rock LLP, Richmond, VA, for Defendant.
ORDER
Rebecca B. Connelly, UNITED STATES BANKRUPTCY JUDGE
W. Stephen Scott (the "Trustee"), chapter 7 trustee for Runnymede Capital Management, Inc. ("Runnymede") filed a complaint against SunTrust Bank, N.A. ("SunTrust"), to avoid and recover certain transfers. ECF Doc. No. 1. The Trustee pleads under sections 544 and 550 of the Bankruptcy Code and under section 55-80 and 55-81 of the Code of Virginia. This means the Trustee seeks to avoid and recover transfers made to SunTrust that were, according to the Trustee, constructively fraudulent or actually fraudulent.
SunTrust moved to dismiss the complaint as failing to state a claim on which relief can be granted and for failing to plead fraud with specificity pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), respectively. ECF Doc. No. 9. The Court disagreed and ruled that the Trustee's complaint as drafted sufficiently stated a legal cause of action. See ECF Doc. Nos. 17, 18. The Court denied the motion to dismiss which permitted the Trustee and SunTrust to engage in discovery in preparation for trial.
Now SunTrust moves for partial summary judgment. SunTrust requests this Court rule that as a matter of law the Trustee cannot prevail under his cause of action as to parts of the complaint. The Trustee responded and SunTrust replied. After that the Court held a hearing at which counsel for SunTrust and counsel for the Trustee presented arguments in support of their respective positions.
SunTrust's Motion for Partial Summary Judgment and Subsequent Consent Order
In its motion, SunTrust requests that this Court grant summary judgment in SunTrust's favor with respect to two items. First, SunTrust argues that as a matter of law SunTrust was not an initial transferee as to transfers from the Runnymede account to three other deposit accounts with SunTrust in the names of Victor M. Dandridge, III ("Dandridge"), Timberlake Lighting, Inc. ("Timberlake"), and Wycliffe Capital Management, Inc. ("Wycliffe"). SunTrust has labeled the transfers at issue from the Runnymede account into these three other SunTrust accounts the "Runnymede Book Transfers." SunTrust pleads the Court should rule as a matter of law that the Trustee cannot prevail, and therefore should not be permitted to proceed to trial, for at least one of the same grounds it claimed the case should be dismissed: the Runnymede Book Transfers are not "transfers" as that term is defined under the Bankruptcy Code. SunTrust argues because the Trustee cannot show any actual "transfer" occurred, he cannot avoid the transactions. Even if the Runnymede Book Transfers are transfers, SunTrust argues that, as a matter of law, SunTrust is not the "initial transferee" of the Runnymede Book Transfers. SunTrust thus requests this Court grant partial summary judgment in favor of SunTrust, with a finding that the Runnymede Book Transfers are not avoidable and recoverable from SunTrust as an initial transferee.
Section 101(54) of the Bankruptcy Code defines a "transfer" to include "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with–(i) property; or (ii) an interest in property." 11 U.S.C. § 101(54)(D).
Second, SunTrust pleads for partial summary judgment that is it not the subsequent transferee as to "payments received by SunTrust or SunTrust Mortgage after 2011: (1) all loan payments received after December 31, 2013, (2) all Timberlake Acquisition Loan Payments received after December 31, 2012, (3) all HSBC Mortgage Loan Payments and (4) all overdrafts resolved by the midnight deadline." See ECF Doc. No. 57. Following the December 18, 2019 hearing, counsel for the Trustee and counsel for SunTrust submitted a consent order, which this Court entered on January 27, 2020. See ECF Doc. No. 85. The order granted partial summary judgment in favor of SunTrust and dismissed the Trustee's claims as to (1) the HSBC Mortgage Loan Payments, (2) all payments made to SunTrust from Timberlake's Bank of America account after May 1, 2013, and (3) all payments from Dandridge's Bank of America account after December 17, 2013. The Court now addresses the remaining issues under the motion for partial summary judgment.
Summary Judgment
Federal Rule of Bankruptcy Procedure 7056, which incorporates Federal Rule of Civil Procedure 56, provides a mechanism for summary judgment in adversary proceedings. Summary judgment is proper when the moving party can show by a preponderance of the evidence that there is "no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Bankr. P. 7056. A "material fact" is any one which may "affect the outcome of the case," and a "genuine issue" exists as to any material fact "when the evidence would allow any reasonable juror to return a verdict for the nonmoving party." News & Observer Publ'g Co. v. Raleigh-Durham Airport Auth. , 597 F.3d 570, 576 (4th Cir. 2010) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ). In analyzing motions for summary judgment, courts should accept as true the evidence of the nonmoving party and should construe any reasonable inferences in favor of the nonmovant. Id. In the absence of a genuine issue of a material fact, a court should grant summary judgment against a party who "has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
I. Were there "transfers"?
The Trustee alleges Dandridge removed funds from Runnymede over a period of many years. According to SunTrust, because Dandridge accomplished the transactions to move funds out of Runnymede, and because through his efforts, funds went from Runnymede to Dandridge and two of his closely held entities (Wycliffe and Timberlake), the funds were not really transferred. Instead the funds were deposited from one account to another account by the party who had authority over these accounts. Put differently, Dandridge could move money from Runnymede to his own accounts or his other business accounts as if he was depositing the money to accounts for Runnymede. This Court disagrees. The Trustee describes how Dandridge moved the funds from Runnymede's account to Dandridge's account, and Wycliffe's and Timberlake's accounts, so that Dandridge and his entities could obtain loans from SunTrust. SunTrust required bank accounts at SunTrust as a condition for these loans. SunTrust does not deny the loans nor that it required Dandridge, Wycliffe, and Timberlake to deposit funds with it in order to obtain the loans. The Trustee describes the transactions as absolute, not temporary or subject to reversal. SunTrust does not deny the outcome: the funds went from Runnymede to Dandridge, Wycliffe, and Timberlake, never in the other direction, and never for the benefit of Runnymede or held in the name of Runnymede. The Trustee describes transfers made for particular purposes, not made as repositories for Runnymede. SunTrust does not deny the Trustee's description of the purpose for the transfers (although it denies the legal consequences and the circumstances surrounding the transfers). Runnymede lost possession and ownership over the funds after the transfers.
SunTrust asks the Court to declare as a matter of law that the Trustee cannot prevail because Dandridge accomplished the transfers at a time when he had legal authority to transfer funds out of the account as agent for Runnymede on behalf of the account beneficiaries. Yet once he moved the funds from Runnymede for the purpose of creating bank accounts tied to his personal loans and those of his businesses, he could not "undo" the transfer. Had he done so, his loans with SunTrust would have fallen through which would have set off a series of other consequences. Hence, Runnymede parted with the funds.
Runnymede, Dandridge, Timberlake, and Wycliffe are separate persons. It appears SunTrust wants this Court to assume that the Runnymede is the alter ego of Dandridge, before the Court has made any such finding, and without anyone having made such showing. SunTrust argues the deposits into Runnymede's account were really deposits into Dandridge's accounts and so when Dandridge transferred the funds from "his" account (in the name of Runnymede) to "his" personal account or his other entities' accounts, he was simply making a bank deposit of his own funds, from one of his accounts to another one of his accounts. At this stage, the parties have not agreed, nor has the Court found, that Runnymede is the alter ego of Dandridge or that Runnymede's account is Dandridge's account. Neither party has pointed to facts in the record which establish this finding, and so, the Court will not infer it.
At this stage, the Court does not rule as a matter of law that the transfers out of the Runnymede bank accounts were not "transfers" as that term is defined under the Bankruptcy Code.
II. Is SunTrust the initial transferee?
a. Deposits that "flowed through" SunTrust
i. Wycliffe bank account
Dandridge caused funds to be moved from Runnymede to Wycliffe by a bank transfer. The transaction accomplished a transfer (this Court concludes it was a transfer as that term is defined under the Bankruptcy Code and SunTrust refers to it as one of the "Runnymede Book Transfers."). Money was transferred from Runnymede's account into Wycliffe's account.
The Trustee argues that the money deposited into the Wycliffe account was, in effect, transferred to SunTrust because SunTrust had sufficient dominion and control over the Wycliffe account. Or in other words, SunTrust is the initial transferee of the deposits.
SunTrust counters that, as a matter of law, the deposits into the Wycliffe account were not transfers to SunTrust as to deposits of amount that "flowed through" SunTrust and were not paid to or received by SunTrust for interest, fees, and loan payments from the Wycliffe account.
At the December 18, 2019 hearing, counsel for SunTrust clarified that the request for partial summary judgment is as to funds that "flowed through SunTrust bank accounts" but not funds "where the money came to SunTrust." See Hr'g Tr. at 9:19–24, ECF Doc. No. 80. Counsel further explained that "if the bank does exercise a set off right, if the bank received the loan payment, if the bank receives an interest payment, the bank is a recipient." Id. at 11:5–17. Counsel further clarified that the partial summary judgment is not requested as to payments "that SunTrust received from Dandridge, Runnymede, to SunTrust." Id. at 12:1–5.
On this question, the Court agrees with SunTrust. The circuit courts who have addressed the question (i.e. , is a bank a transferee of bank deposits?) have uniformly found (1) to qualify as a transferee requires sufficient "dominion and control" over the amounts transferred and (2) simply serving as repository of an account does not render a bank a transferee. See Meoli v. Huntington Nat'l Bank , 848 F.3d 716 (6th Cir. 2017) ; Bowers v. Atlanta Motor Speedway (In re Se. Hotel Props. Ltd. P'ship , 99 F.3d 151, 158 (4th Cir 1996) (dominion and control requires more than mere physical access or possession)); Bonded Fin. Servs., Inc. v. European Am. Bank , 838 F.2d 890 (7th Cir. 1988) ; see also Danning v. Miller (In re Bullion Reserve of N. Am.) , 922 F.2d 544 (9th Cir. 1991) (adopting Bonded definition of "transferee" and "dominion and control"). More specifically, the bank's security interest in the bank account, or ability to use the funds in a bank account for its lending operation is not requisite "dominion and control" to permit the bank to withdraw all funds from the account for its own use or convert the funds to its own use. See Meoli , 848 F.3d at 727–28.
The Trustee points to SunTrust's contractual interest, security interest, and power to view the activity in the account and pull its loan payment from the account as forms of dominion and control over the accounts. The Trustee has not pointed to how these facts raise a genuine issue over whether these powers enabled SunTrust to convert the entire funds in the account (or convert the deposits originating from Runnymede's account) to its own use.
SunTrust contracted with Dandridge, Wycliffe, and Timberlake to extend credit and required as a condition of these agreements that the borrower (Dandridge, Wycliffe, and Timberlake) maintain a bank account at SunTrust.
Wycliffe pledged the account as collateral and gave SunTrust a security interest in the accounts.
The Trustee did not point to facts in the record upon which a trier of fact could rely to show how the requirement to retain a bank account at SunTrust rendered a difference in the amount it loaned, how the requirement to retain a bank account at SunTrust provided SunTrust with the power to convert the funds in the account to its own use, or that it indeed did so.
The Trustee failed to point to facts upon which a trier of fact could rely that show how SunTrust's security interest in the bank accounts converted the funds in the account to SunTrust when the facts show that SunTrust declined to exercise its rights to collect from the account balance.
The Trustee does not point to any other facts that show how SunTrust exercised power over the funds in the accounts other than through the receipt of fees, interest, and loan payments. Indeed, the facts emphasized by the Trustee show SunTrust declined to enforce its security interest, and simply failed to assert actual control over the accounts.
When SunTrust received interest, fees, and loan payments, it acquired the ability to use these amounts, for its own purpose, in its discretion. On the other hand, the Trustee does not point to facts showing (or raising a genuine issue) that SunTrust used the funds remaining in the accounts not paid to SunTrust as fees, interest, or loan payments. Even though SunTrust had a possessory interest (repository of the account), security interest (to secure repayment of a line of credit), and contractual interest (loan agreement included requirement for bank account), it apparently did not convert the balance of the funds in the account, nor did it have right to do so under the facts pled and disclosed through discovery See Meoli , 848 F.3d at 724–28.
SunTrust's access to the accounts, knowledge of the accounts, and behavior in response to that access may be relevant to its defenses to the extent it is a subsequent transferee but does not render it an initial transferee.
For these reasons, the Court agrees with SunTrust that based on the applicable caselaw, as a matter of law, the Trustee cannot show that the deposits into Wycliffe, that were not paid to SunTrust for fees, interest or loan payments, were made to SunTrust as an initial transferee as that term is applied under section 550 of the Bankruptcy Code.
ii. Transfers from Runnymede to the Timberlake bank account
The Trustee argues the deposits into the Timberlake bank accounts were transfers to SunTrust as an initial transferee for the same facts noted above, plus the existence of a merchant processing agreement. Just like the deposits into Wycliffe, SunTrust asks the Court to rule that as a matter of law it is not the initial transferee of the deposits into the Timberlake accounts.
Just like Wycliffe, Timberlake had a line of credit with SunTrust, pledged the bank account as collateral, and gave SunTrust permission to automatically withdraw loan payments from the accounts.
As explained already, SunTrust's possessory interest (repository of the account), security interest (to secure repayment of a line of credit), and contractual interest (loan agreement included requirement for bank account at SunTrust) do not show that SunTrust used the funds in the account or converted the funds in the account for its own use, except when it took loan payments, fees, and interest. The Trustee has not identified how these facts show a genuine issue as to whether SunTrust used all the deposits to the account or converted all the deposits for its own use.
But as to the Timberlake accounts, the Trustee identified an additional circumstance. SunTrust and Timberlake had a "merchant processing agreement" for credit card transactions. The merchant processing agreement, like the name suggests, enabled the processing of credit card receipts and disbursements on certain terms and conditions. Under the agreement, if the terms and conditions were not met, SunTrust could impose fees, or cancel the merchant processing agreement. Under the agreement, SunTrust had authority to debit the Timberlake bank accounts for amounts including "settlement funds" in certain circumstances. Despite this authority, no facts have been shown that the merchant processing agreement enabled SunTrust to convert the funds in the Timberlake bank accounts to its own use, nor that it did so. The Trustee does not point to facts that show the merchant processing agreement conveyed to SunTrust (for its use) the funds in the Timberlake bank accounts, other than for amounts to pay fees and settlements. And so, as with the transfers to the Wycliffe accounts, the Court agrees that as a matter of law SunTrust is not the initial transferee of the deposits into Timberlake bank accounts that flowed through SunTrust and were not paid to or received by SunTrust for fees, interest, loan payments, and settlements.
The merchant processing agreement also included an extension of credit to Timberlake which was personally guaranteed by Dandridge. This obligation is in addition to the lines of credit extended to Timberlake.
The Trustee filed the merchant processing agreement as an exhibit under seal. The Trustee also filed bank statements as exhibits.
iii. Transfers from Runnymede to Dandridge's bank account
Like the deposits into the Wycliffe and Timberlake accounts, the Trustee argues the deposits into the Dandridge account from Runnymede are transfers to SunTrust as the initial transferee. For the reasons stated above, the Court agrees as a matter of law SunTrust is not the initial transferee of the deposits that flowed through SunTrust and were not paid to or received by SunTrust for loan payments, fees, and interest.
The Trustee pointed to a "sweep agreement" with the Dandridge account as another means of dominion and control. Like the merchant processing agreement, nothing in the sweep agreement provided SunTrust with authority to convert the funds in Dandridge's accounts to SunTrust for SunTrust's use.
b. Funds received by SunTrust (not "flowed through" SunTrust)
As shown above, the Court grants judgment as a matter of law as to the amounts that "flowed through" SunTrust. On the other hand, the Court does not rule as a matter of law, and will permit the Trustee to proceed to trial, on the Trustee's actions to recover amounts paid to, or received by, SunTrust in fees, interest, loan payments, or settlements.
III. Is SunTrust the subsequent transferee as to deposits to settle overdrafts and as to certain loan payments after December 2012?
a. Transfers after the accounts were overdrawn
In addition to the facts just outlined, the Trustee points to the overdraft protection arrangement between SunTrust and Dandridge, Timberlake, and Wycliffe to show that the deposits from Runnymede were transfers to SunTrust. If the Dandridge, Timberlake, and Wycliffe accounts were overdrawn (checks presented when the account had insufficient funds to pay them), and SunTrust did not return the items for non-sufficient funds, then deposits made thereafter to "cover" the item would be transfers to SunTrust (to repay it for the credit extended to cover the item).
In response to the Trustee's argument, SunTrust notes that its overdraft coverage is part of the service the bank provides to its customers and that such coverage is not an extension of credit to the account holder. See, e.g. , Pioneer Mortg. Entities v. San Diego Tr. & Sav. Bank (In re Consolidated Pioneer Mortg. Entities ), No. 97-56238, 1999 WL 23156, at *1 (9th Cir. Jan. 13, 1999). If the overdraft coverage did not result in a debt to SunTrust, the payments to resolve the overdraft were not transfers to SunTrust. SunTrust argues that only deposits made after midnight on the banking day following the banking day on which the check had been presented would be made to SunTrust as a subsequent transferee. According to SunTrust, it only extends credit to the account holder if it pays the item (or delays return of the item) when the account has insufficient funds and the account holder failed to make deposits by midnight of the banking day following the banking day the item was presented.
The Code of Virginia "establishes strict time limits within which a bank must take actions on checks presented for payment." Am. Title Ins. Co. v. Burke & Herbert Bank & Tr. Co. , 813 F. Supp. 423, 426 (E.D. Va. 1993), aff'd , 25 F.3d 1038 (4th Cir. 1994). A payor bank has until the "midnight deadline" to decide to honor or dishonor a demand item. The " ‘[m]idnight deadline’ with respect to a bank is midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later." Va. Code § 8.4-104(10). If a payor bank properly dishonors the demand item prior to the midnight deadline, the payor bank avoids accountability to the payee for the dishonored amount. See Va. Code § 8.4-302(a) (establishing liability for a payor bank if a payor bank, in cases in which "it is not also the depositary bank, retains [a demand] item beyond midnight of the banking day of receipt without settling for it or, regardless of whether it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline."). If the payor bank, however, honors the demand item and the payment of the item results in an overdraft of the customer's account, the bank may charge against the account. See Va. Code § 8.4-401(a).
In its memorandum in support of the motion for partial summary judgment, SunTrust notes that "courts have found that a debt arises between the account holder and the bank in the amount of the overdraft" only if a payment order remains unpaid after the midnight deadline "and that a subsequent payment of that debt is a transfer to the bank." See, e.g. , Sarachek v. Luana Sav. Bank , 490 B.R. 852, 880–81 (Bankr. N.D. Ia. 2013). As to this point, SunTrust's interpretation may be a bit overbroad. The Court agrees transfers intended to resolve the overdrafts which remained unpaid as of the midnight deadline are transfers to SunTrust as a payment of a debt to SunTrust. The Court disagrees that a debt to SunTrust arises only in such circumstances.
Under Virginia law (applicable here), a debt may potentially arise prior to the midnight deadline. A debt certainly arises between SunTrust and the account holder at the time when the account holder becomes legally obligated to pay SunTrust for the payment of the item which resulted in the overdraft. The account holder would become legally obligated to SunTrust when SunTrust has "finally paid" an item. Virginia Code § 8.4-213(a) describes when "[a]n item is finally paid by a payor bank." Va. Code § 8.4-213. If payment of an item results in an overdraft but the item has not been "finally paid by a payor bank" or has only been provisionally paid, the transfer of funds into the account to cover the overdraft is not a payment to the bank, and so may not result in the payor bank qualifying as a subsequent transferee of a payment on the overdraft amount. The bank may revoke and recover a "settlement if, before it has made final payment and before its midnight deadline , it (1) returns the item; or (2) sends written notice of dishonor or nonpayment if the item is unavailable for return." Va. Code § 8.4-301(a) (emphasis added). If, however, the payor bank makes final payment of an item (even if before the midnight deadline), the debt has arisen and a subsequent payment to cover the bank's payment is a transfer and the payor bank is a transferee. Based on the pleadings and arguments made at hearing, the Trustee and SunTrust disagree as to whether a debt to SunTrust arose prior to the midnight deadline. The Court, based on the evidence it has been provided, recognizes a genuine issue of material fact that should be determined at trial: whether the transfers made prior to the midnight deadline were for final payments or provisional payments made by SunTrust on demand items. SunTrust has not pointed to evidence in the record showing whether all of the transfers at issue made prior to the midnight deadline covered final payments or provisional payments. The Court finds it inappropriate at this stage to grant the motion for partial summary judgment as to transfers made prior to the midnight deadline when there is a dispute over whether the transfers made prior to the midnight deadline were for final payments or provisional payments made by SunTrust.
SunTrust has not pointed to specific evidence in the record to show the Court that all of the overdraft coverage payments made by SunTrust were merely provisional and not final. Specifically, SunTrust has not cited particular materials in the record evidencing that it could have exercised its ability to revoke settlement of each demand item prior to the midnight deadline at the moment the transfers were made from the Runnymede account. If SunTrust could not revoke the settlement payment made to the other bank (that is the payment ultimately to the payee on the demand items), then the payment was final and not provisional and thus it was an extension of credit. That is why the Court will not grant judgment as a matter of law as to the deposits made before the midnight deadline. See Fed. R. Civ. P. 56(c)(1).
b. Loan payments made between December 31, 2012 and May 2013
SunTrust asks this Court to rule as a matter of law that loan payments to SunTrust for the Timberlake Acquisition Loan made after December 2012 and before May 1, 2013, were not transfers from Runnymede. In response, the Trustee points to bank statements showing a transfer followed by a loan payment during this time period as support for his position. SunTrust does not dispute the payment or that the bank statement reports the transfer but questions the source of the funds for the payment based on the ending balance reported on the bank statement. These details show a genuine of issue of material fact: whether funds transferred from Runnymede's account to Dandridge's account during this period were used to pay SunTrust for the Timberlake Acquisition Loan, or not. The Trustee points to enough facts showing irregularities in the bank accounts, plus a pattern of overdrafts, to raise a question as to whether the trier of fact can rely upon the ending balance appearing on a bank statement as evidence a payment was not made from that account. For purposes of this motion for partial summary judgment, the Court must construe the facts in the light most favorable to the non-moving party (the Trustee). In so doing, the Court finds the Trustee has pointed to facts sufficient to permit him to proceed to trial on whether SunTrust is a subsequent transferee for the payments made after December 2012 and before May 1, 2013 for the Timberlake Acquisition Loan.
SunTrust did not point to any facts proving the bank statements on which it relies to deny the transfer had been reconciled or audited.
It is therefore ORDERED the motion for summary judgment is granted in part and denied in part consistent with the terms of this Order.
END OF ORDER
A copy of this Order shall be provided to the Trustee, W Stephen Scott, P.O. Box 1312, Charlottesville, VA 22902; Counsel for the Trustee, John M. Ryan, Crowley, Liberatore, Ryan & Brogan, PC, 150 Boush Street, Ste. 300, Norfolk, VA 23510; Counsel for SunTrust, Timothy S. Baird, Kutak Rock LLP, 901 East Byrd St., Ste. 1000, Richmond, VA 23219; and Counsel for SunTrust, Peter J. Barrett, Kutak Rock LLP, 901 East Byrd St., Ste. 1000, Richmond, VA 23219.