Guttman v. Construction Program Group
Filing
19
MEMORANDUM. Signed by Judge James K. Bredar on 7/8/13. (hmls, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
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ZVI GUTTMAN, Litigation Trustee,
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Appellant
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v.
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CONSTRUCTION
PROGRAM
CIVIL NO. JKB-13-385
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GROUP,
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Appellee
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In re RAILWORKS
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CORPORATION,
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Debtor
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MEMORANDUM
Appellant Zvi Guttman, Litigation Trustee for the Debtor, Railworks
Corporation,
appeals from the bankruptcy court's summary judgment for Appellee Construction Program
Group ("CPG") in the Trustee's adversary proceeding against CPG for recovery of an avoidable
preference.
I
The matter has been fully briefed (ECF Nos. 8, 13, 18), and no hearing is required,
Local Rule 105.6 (D. Md. 2011). The bankruptcy court's judgment will be vacated and the case
remanded for further proceedings.
I. Background
Railworks
filed a voluntary
petition
for reorganization
under Chapter
11 of the
Bankruptcy Code on September 20, 200 I. Pursuant to the con finned plan for reorganization, a
I The bankruptcy proceeding involved Railworks and 21 of its affiliates.
In this opinion, they are referred
to collectively as "Railworks" or the "Debtor."
litigation
trust was created, and it included
claims for recovery
of avoidable
transfers.
(RAOI521.)2 One of those claims is at issue in this appeal.
Filed on September 16, 2003, the complaint sought to avoid several preferential transfers
made by Railworks to CPG within the ninety days preceding the filing of the bankruptcy
petition.
The complaint alleged that CPG was a creditor of Railworks and that CPG received
$2,178,041 in these transfers that "were to or for the benefit of the Defendant."
(Bkr. Case No.
03-5363, ECF No. I.) During the course of proceedings in the bankruptcy court, the Trustee
reduced the amount sought to be recovered to $2,113,507, which represented four payments of
insurance premiums by Railworks for various forms of insurance coverage.
On appeal, the
Trustee clarifies that the amount sought to be recovered from CPG is $1,585,130.25,
which
constitutes the amount of the contested transfers minus 25%; the 25% figure is comprised of
commissions earned by CPG. (Appellant's Br. 5.)
The bankruptcy court rendered summary judgment for CPG, ruling that it was neither a
creditor nor an entity for whose benefit the transfers were made and therefore not one from
which the transfers could be recovered, denied summary judgment for the Trustee, and dismissed
the complaint.
(RAOOI518-59.)
The Trustee has appealed.
This matter is a core proceeding
under 28 U.S.C. ~ I 57(b)(2)(F), and this Court has appellate jurisdiction
under 28 U.S.C.
~ I 58(a)(1 ).
II. Ulldisputed Facts
CPG served as a managing general underwriter for TIG, the insurance company that
provided
general liability, automobile,
Railworks.
("Sherwood")
2
(RAOI522-23.)
(Appellee's
and workers'
compensation
insurance
coverage to
CPG's predecessor in interest was Sherwood Insurance Services
Br. 3-4), which was party to a General
"RA" refers to the Record Appendix.
2
Agency
Agreement
("Agreement")
RAOI523.)
with TIG.
The Agreement was effective December 15, 1996. (RA00705-85,
TIG sought to employ Sherwood's "expertise in soliciting, developing, marketing,
underwriting, and issuing contracts of insurance."
(RA00705, preamble.)
One of Sherwood's
contractual duties was "to collect, receive, and account for premiums on [p]olicies."
Sec. 1.2.b.)
In Section Three of the Agreement,
one of the "limitations
(RA00705,
of authority" of
Sherwood was that it "shall not act as an insurer for any insureds, and this Agreement shall not
be construed as an insurance policy or any contract or agreement of indemnity of insureds."
(RA00706, Sec. IIIA.)
In Section Five, Sherwood and TIG agreed that Sherwood "shall be liable for and shall
pay to [TIG] all net premiums attributable to the [p]olicies produced hereunder, whether or not
such premiums have been collected by [Sherwood] less [c]ommissions ....
V.1 (emphasis added).)
" (RA00709, Sec.
Further, the Agreement specified that all premiums collected by
Sherwood were TIG's property and were to be held in trust on TIG's behalf in an account
segregated from Sherwood's
operational funds and that after premiums were collected and
deposited into the trust account, Sherwood could then deduct from the trust account its
commission.
(RA00709-10,
Sec. V.2.)
Finally, the parties agreed the Agreement was to be
"governed by and construed in accordance with the laws of the State of Texas, without regard to
its rules regarding conflict of laws."
Sherwood's
(RA007l7,
Sec. X.5.)
At some point, ePG became
successor in interest to the Agreement and the relationship
formerly between
Sherwood and TIG became one between ePG and TIG; apparently, the 1996 Agreement
continued to govern this relationship.
From July 20 through August 17, 2001, Railworks issued four checks payable to ePG
(RA00650, -657, -664, -671) as payments of insurance premiums for policies issued by TIG
through ePG (RAOI522-23).
ePG deposited them into ePG's trust account and, after deducting
3
commISSIOns due, remitted the net premiums to TIG (RA00970-72,
Aff. Montero, Apr. 15,
2011). As earlier noted, Railworks's petition for reorganization was filed September 20,2001,
less than ninety days following the issuance and negotiation of these four checks.
III. Standard of Review
On appeal, this Court reviews the bankruptcy court's legal determinations de novo and its
factual findings for clear error.
In re Official Comm. of Unsecured for Dornier Aviation (N.
Am.), Inc., 453 F.3d 225, 231 (4th Cir. 2006); Rosen v. Kore Holdings, Inc. (In re Rood), 448
B.R 149, 157 (D. Md. 2011). Each cross-motion for summary judgment is viewed separately on
its own merits. Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir. 2003). "When considering
each individual motion, the court must take care to 'resolve all factual disputes and any
competing, rational inferences in the light most favorable' to the party opposing that motion."
Id. (citation omitted). Because the bankruptcy
court granted CPG's
judgment, it made no factual findings with regard to CPG's motion.
motion for summary
In denying the Trustee's
motion for summary judgment, the bankruptcy court determined a genuine dispute existed as to a
material fact.
IV. Analysis
The Trustee argues that the transfers are avoidable under 11 U.S.C.
are recoverable from CPG under
elements to be proven under
S 550(a).
S 547(b)
and that they
The Fourth Circuit has set forth its summary of the
S 547(b):
Under 11 U.S.C. S 547(b), there are six elements that must be proved in order for
a transfer to be set aside as preferential. The transfer must have been: (1) of an
interest of the debtor in property; (2) to or for the benefit of a creditor; (3) for or
on account of an antecedent debt owed by the debtor before the transfer was
made; (4) made while the debtor was insolvent; (5) made on or within ninety days
of the filing of the bankruptcy petition; and (6) it must enable the creditor to
receive a greater percentage of its claim than it would under the normal
distributive provisions in a liquidation case under the Bankruptcy Code.
4
In re Barefoot, 952 F.2d 795, 798 (4th Cir. 1991).
The bankruptcy court clearly concluded that, out of the above six elements, the Trustee
satisfied the first, third, fourth, and fifth elements. (RAOI541-43.)
Although the court below did
not conclude that CPG was a creditor, it did conclude that TIG was a creditor, as conceded by
CPG, and that TIG received the transfers through CPG. (RAOI544.)
Thus, it would have been
correct for the bankruptcy court to conclude that the second element was established.
The court
did not rule one way or the other on the sixth element, but did note "the Trustee's deposition
testimony to the effect that general unsecured creditors will receive far less that [sic] 100% of
their claims."
(RAOI544.)
No evidence in opposition to the Trustee's deposition testimony on
that point was cited, allowing an inference it was unrefuted.
Consequently,
the evidence
supports a conclusion that the Trustee proved the sixth element.
To be sure, the Trustee's complaint alleged that CPG was a creditor (Bkr. Dkt, ECF
No. I, ~ 10), and the bankruptcy court seems to have analyzed the Trustee's motion for summary
judgment
only on that basis and not on whether the second element was satisfied by the
undisputed proof that TIG was a creditor and received the transfers.
established in federal jurisprudence
expressed in a complaint.
However, it is well
that a plaintiff is not held to a particular legal theory
Rather, under Federal Rule of Civil Procedure
8(a)(2), made
applicable to bankruptcy adversary proceedings under Bankruptcy Rule 7008(a), a complaint
need only set forth "a plausible 'short and plain' statement of the plaintiff's
exposition of his legal argument."
claim, not an
Skinner v. Switzer, 131 S. Ct. 1289, 1296 (2011) (noting "a
complaint need not pin plaintiff's claim for relief to a precisc legal theory").
See also New
Amsterdam Cas. Co. v. Waller, 323 F.2d 20, 24-25 (4th Cir. 1963) (plaintiff "need not set forth
any theory or demand any particular relief for the court will award appropriate relief if the
5
plaintiff is entitled to it upon any theory"; "party's misconception of the legal theory of his case
does not work a forfeiture of his legal rights"), cited in Gilbane Bldg. Co. v. Federal Reserve
Bank of Richmond, Charlotte Branch, 80 FJd 895, 900 (4th Cir. 1996).
But even under the theory that CPG was a creditor of Railworks and received a benefit
from the transfers, the evidence would support such a conclusion to establish the second element
of
9
547(b).
In the Bankruptcy Code, a "creditor" is defined to include an "entity that has a
claim against the debtor that arose at the time of or before the order for relief concerning the
debtor"
II U.S.C.
9
101(1)(A). In tum, "claim" is defined as follows in pertinent part:
right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured.
II U.S.C.
9
101(5)(A). See In re Cybermech, Inc., 13 F.3d 818, 821 (4th Cir. 1994) (observing
Bankruptcy Code's "broad definition of 'claim"').
The Agreement between CPG and TIG mandated that CPG "shall be liable for and shall
pay" to TIG all premiums due whether or not CPG collects the premiums from insureds.
The
bankruptcy court stated without explanation that this language did not "make CPG a guarantor of
Railworks for its payment of insurance premiums to TIG." (RAOI55I.)
Whether this language
creates a guaranty or other obligation on CPG must be decided in reference to Texas law. In the
Texas Supreme Court's decision of Langdeau v. Bouknight, 344 S.W. 2d 435 (Tex. 1961), an
insurance agent was held liable to an insurer's receiver for net premiums due based upon the
agreement between the agent and the insurer. The agency agreement provided, "the agent shall
not later than 60 days from the close of the month in which such policies were effective pay to
the company the premiums thereon, whether such premiums have been collected or not less
commissions."
Id. at 46-47.
This Court can discern no appreciable difference between the
operative language in Landeau, found by the Texas Supreme Court to fix clear liability on the
6
agent for uncollected premiums on policies issued by the agent on behalf of the insurer, and the
language at issue in the instant case.
CPG argues that this is not a proper interpretation of the Agreement because another
section specifically provides that CPG "shall not act as an insurer for any insureds, and [the]
Agreement shall not be construed as an insurance policy or any contract or agreement of
indemnity of insureds."
Sec. IlIA.
Thus, CPG effectively argues that this provision in the
Agreement nullifies the liability imposed by section V.l on CPG for payment of uncollected
premiums.
This argument is contrary to the governing Texas law on contract interpretation.
"Texas law generally mandates that one contract provision not be interpreted in a way that
nullifies another provision."
Greater Houston Radiation Oncology, P.A. v. Sadler Clinic Ass 'n,
PA., 384 S.W.3d 875, 886 (Tex. App. 2012).
Moreover, CPG's chosen interpretation of the
Agreement is contrary to another basic principle of contract construction, which is, that a court
must, if possible, harmonize the various provisions of a contract so that all provisions have
meaning.
Frost Nat'! Bank v. L & F Distribs., Ltd., 165 S.W.3d 310, 312 (Tex. 2005) (per
curiam). It is possible to interpret both provisions at issue in harmonious fashion by recognizing
that the liability for uncollected premiums imposed in section V.I coexists with the overarching
principle in section IlIA that CPG shall not act as an insurer and does not become an insurer of
TlG's insureds simply by performing its work under the Agreement in arranging for and
servicing their insurance policies.
More specifically, CPG's duty to pay uncollected but due
premiums to TlG is not inconsistent with the parties' recognition that CPG is not an insurance
company.
In addition, section IlIA seems, when read in its entirety, to be aimed at protecting
CPG trom being regarded as an insurance company and thereby not being held liable for failure
to provide insurance coverage.
7
CPG further contends that section V.l was only intended to act as an incentive to CPG to
be diligent in collection of premiums and remittance of them to TIG. No doubt exists that CPG
is correct on that point.
Certainly, imposing liability for remittance of uncollected premiums
serves that function and is consistent with CPG's averred intent.
But such an intent does not
modifY or negate the plain language "shall be liable for and shall pay."
Texas courts "give the
contract terms their plain and generally accepted meaning unless the contract shows the parties
intended to use them in another manner."
883.
Greater Houston Radiation Oncology, 384 S.W.3d at
The Agreement does not show the parties intended this language to mean something
different from what it says. A reasonable person would understand the words "shall be liable for
and shall pay" as meaning just that. Id. ("We will determine how a reasonable person would
have understood the contract language, keeping in mind the circumstances
surrounding the
contract's negotiation and the parties' intended purpose in executing the agreement.").
This
plain meaning is especially compelling, and therefore reasonable, given the use of the language
in a contract by parties who are presumed aware of its governing law, including the Landeau
decision.
Having established CPG's liability to TIG for uncollected but due premiums, the Court
next determines whether CPG is a creditor of Railworks within the meaning of the Bankruptcy
code, i.e., whether CPG has a claim against Railworks.
premiums was contingent upon Railworks's
CPG's
failure to pay them.
liability for uncollected
Had Railworks not paid the
premiums, CPG would have been required to pay them to TIG anyway.
In turn, CPG would
have acquired a cause of action under Maryland la~ against Railworks for reimbursement.
See,
e.g., Fireman's Fund ins. Co. v. Continental Ins. Co., 519 A.2d 202, 319 (Md. 1987) (discussing
3 Although Texas law provides the rule of decision in interpreting the Agreement, CPG's potential causes
of action against Railworks arise outside the Agreement and are not governed by Texas law but by Maryland law,
being the law of the forum state.
8
doctrine of equitable subrogation); Alternatives
Unlimited, Inc. v. New Baltimore City Bd. of
School Comm 'rs, 843 A.2d 252 (Md. Ct. Spec. App. 2004) (expounding on differences between
various "legal" and "equitable" causes of action). Thus, given the broad definition of "claim" in
the Bankruptcy Code, CPG would have a "claim" against Railworks and would fit the applicable
definition of "creditor."
Likewise, CPG received a benefit from the transfers by being relieved of its contingent
liability to pay uncollected premiums.
The bankruptcy court was of the view that CPG's
contingent liability for uncollected premiums was a moot point because the premiums were, in
fact, received from Railworks and remitted to TIG. (RA01551.)
liability is the possibility it will be imposed.
uncollected premiums
But the nature of contingent
In this case, CPG's contingent liability for
definitely existed, and it ceased to exist only because of transfers
occurring during the ninety-day preference period. Consequently, it may be concluded that the
transfers were for the benefit of CPG, satisfYing the second element.
Therefore, different ways are available to meet the second element of
S 547(b):
one, TIG
as an undisputed creditor received the transfers; and two, CPG, a creditor in possession of a
contingent claim, received a benefit from the transfers. Having determined that the Trustee has
established all six elements of
S
54 7(b) and that the four transfers are avoidable, it is next
necessary to decide from whom the Trustee may recover the transfers under
S
550(a)(1). See In
re Harbour, 845 F.2d 1254, 1255-56 (4th Cir. 1988) (noting legislative history recognizing
separation between avoidance of transfers and recovery of avoided transfers).
Section 550(a)(1) permits recovery of an avoided transfer from either the initial transferee
or the entity for whose benefit the transfer was made. A fair portion of the bankruptcy court's
opinion was devoted to determining whether CPG was the initial transferee of the premium
payments, concluding it was not because CPG served as a "mere conduit" of the premiums from
9
Railworks to TIG, with TIG being deemed the initial transferee. The Trustee does not take issue
with that particular determination but argues that the bankruptcy court's conclusion on that point
does not end the matter since it leaves the second alternative for recovery under
unresolved.
S
550(a)(l)
This Court agrees. It is reasonable to conclude that CPG occupied a dual status,
both as a "mere conduit" of money between Railworks and TIG and as one for whose benefit the
transfer occurred.
Such conclusion is not at odds with the Fourth Circuit's observation that the
same entity cannot be both an initial transferee and a "mere conduit."
In re Southeast Hotel
Props. Ltd. P'ship, 99 F.3d 151, 155 (4th Cir. 1996). The undisputed fact is that the transfers
were made to a creditor, TIG, and therefore avoidable under
S 547(b).
Furthermore, under Texas
law, CPG was contingently liable to TIG for Railworks's premiums, and that contingent liability
was extinguished when the premiums were paid to TIG. A recognized basis for concluding that
an entity benefited from an avoidable transfer is the extinguishment of contingent liability. See,
e.g., In re Meredith, 527 F.3d 372, 375 (4th Cir. 2008) (describing entity for whose benefit
transfer was made as "'someone who receives the benefit but not the money''').
Thus, CPG is an
entity for whose benefit the avoided transfers were made, and the Trustee is entitled under
S 550(a)(l)
to recover the net premiums from CPG.
The Court notes that the bankruptcy court declined to grant the Trustee's motion for
summary judgment because, in that court's view, a dispute of material fact existed as to whether
CPG was Railworks's creditor. (RA01545.) The undersigned is unable to find a genuine dispute.
of material fact on this point. Regardless, the matter need not be resolved because TIG clearly
was a creditor and avoidance under
S
547(b) may properly rest on that basis.
On another,
unrelated point, the bankruptcy court properly disregarded "expert testimony" on the meaning of
section V.1 in the Agreement because its interpretation is a question of law.
Forrest Creek
Associates, Ltd v. McLean Sav. and Loan Ass'n, 831 F.2d 1238,1242 (4th Cir. 1987). Finally,
10
because the bankruptcy court denied summary judgment to the Trustee, it did not reach the
question of whether CPG has a viable affirmative defense under II U.S.c.
places limitations
on the Trustee's
ability to avoid transfers, or otherwise.
9
547(c), which.
Even so, the
bankruptcy court ruled that the transfers were for significantly past-due debts and "that they were
neither contemporaneous exchanges for new value, nor were they made in the ordinary course of
business."
(RAOI542-43.)
That ruling would seem to reflect negatively on some of CPG's
affirmative defenses.
V. Conclusion
By separate order, the bankruptcy court's judgment
will be vacated and the case
remanded for further proceedings consistent with this opinion.
DATED this
B
day of July, 2013.
BY THE COURT:
Q~.r 1{.
~
a.~
James K. Bredar
United States District Judge
II
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