IVEY v. FIRST CITIZENS BANK & TRUST COMPANY
Filing
22
MEMORANDUM OPINION AND ORDER signed by CHIEF JUDGE WILLIAM L. OSTEEN, JR on 09/30/2015. For the reasons set forth herein, IT IS HEREBY ORDERED that the Bankruptcy Court's grant of summary judgment (Doc. 1 ) is AFFIRMED.(Taylor, Abby)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
CHARLES M. IVEY, III,
as Chapter 7 Trustee for the
Estate of JAMES EDWARDS
WHITLEY,
Plaintiff-Appellant,
v.
FIRST CITIZENS BANK AND
TRUST COMPANY,
Defendant-Appellee.
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1:14CV1067
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
This appeal is from a judgment of the United States
Bankruptcy Court for the Middle District of North Carolina.
Plaintiff Charles M. Ivey, III (“Plaintiff”) is appealing the
Bankruptcy Court’s December 8, 2014 Order in which the
Bankruptcy Court granted Defendant First Citizens Bank and Trust
Company’s (“Defendant”) summary judgment motion. For the reasons
set forth below, the Bankruptcy Court’s grant of summary
judgment will be affirmed.
I.
INTRODUCTION
This case arises out of the bankruptcy of James Edward
Whitley (“Debtor”), who was engaged in a Ponzi scheme1 disguised
as a factoring business.2 (Notice of Appeal, Memorandum Opinion
(“Mem. Op.”) (Doc. 1) at 5.)3 Plaintiff, as the Chapter 7 Trustee
for the Bankruptcy Estate of Debtor, filed the action underlying
the present appeal against Defendant. In an Adversary
Proceeding, Plaintiff filed a Complaint against Defendant on
April 27, 2012, asserting three claims: (1) civil conspiracy,
1
“The term Ponzi scheme is the namesake of Charles Ponzi, a
renowned Boston swindler, and refers to a phony investment plan
in which monies paid by later investors are used to pay
artificially high returns to the initial investors, with the
goal of attracting more investors.” United States v. Godwin, 272
F.3d 659, 665 n.3 (4th Cir. 2001).
2
As set out in United States v. Wachovia Corp.:
Factoring is a process by which business enterprises
acquire more capital and keep their own capital
turning over faster. A factor purchases the accounts
receivable without recourse but at a discount, and
then collects the accounts. This enables the factor's
customer to get his money out of his accounts
receivable without delay. Although not strictly a
lending business, it serves a credit-related purpose
by putting the factor's assets to work instead of
requiring borrowing from other sources by the factor's
customers.
313 F. Supp. 632, 636 (W.D.N.C. 1970).
All citations in this Memorandum Opinion and Order to
documents filed with the court refer to the page numbers located
at the bottom right-hand corner of the documents as they appear
on CM/ECF.
3
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(2) fraudulent transfer, and (3) unfair and deceptive trade
practices. (Complaint (“Compl.”) (Doc. 5).) On June 27, 2012,
Defendant filed a Motion to Dismiss pursuant to Rules 12(b)(1)
and 12(b)(6). (Id., Attach. (Doc. 5-8).) On February 7, 2013,
the Bankruptcy Court granted Defendant’s motion to dismiss as to
the two state law claims of (1) civil conspiracy and (2) unfair
and deceptive trade practices. (Doc. 3-7.) Defendant
subsequently filed a motion for summary judgment on the
remaining claim on May 6, 2014. (Doc. 5-18.) In a Memorandum
Opinion dated December 8, 2014, the Bankruptcy Court granted
Defendant’s motion for summary judgment as to the remaining
claim of fraudulent transfer. (Mem. Op. (Doc. 1) at 5-10.)
Plaintiff timely appealed the Bankruptcy Court’s grant of
summary judgement to this court on December 18, 2014. (Notice of
Appeal (Doc. 1).) Plaintiff filed a Brief in support of his
appeal on March 11, 2015. (Doc. 16.) Defendant filed a Brief
(Doc. 18) on April 10, 2015, and Plaintiff filed a Reply (Doc.
19) on April 27, 2015. This action is thus ripe for review.
II.
LEGAL STANDARD
This appeal is brought pursuant to 28 U.S.C. § 158(a) and
Rule 8001 of the Federal Rules of Bankruptcy Procedure. On
appeal from the Bankruptcy Court, this court functions as an
appellate court and reviews the Bankruptcy Court's findings of
fact for clear error and conclusions of law de novo. In re
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Merry–Go–Round Enters., Inc., 400 F.3d 219, 224 (4th Cir. 2005).
This court reviews the grant of summary judgment de novo. See
Hager v. Gibson, 109 F.3d 201, 207 (4th Cir. 1997). The district
court may affirm, modify, or reverse a Bankruptcy Judge's order,
or remand with instructions for further proceedings. See 11
U.S.C. § 158(a) (2012); Fed. R. Bankr. P. 8001, 9002(2).
III. FACTUAL BACKGROUND
As part of a Ponzi scheme, Debtor utilized a personal bank
account in his own name at one of Defendant’s branch banks to
deposit funds. (Notice of Appeal (Doc. 1) at 5-6.) During the
two years preceding the filing of involuntary Chapter 7
bankruptcy proceedings against Debtor, Debtor’s account at
Defendant bank received eleven deposits at issue, six checks and
five credits, via wire or telephone transfer, all of which
allegedly relate to Debtor’s Ponzi scheme activity.4 (Id. at 6.)
Plaintiff asserts that these deposits, as transfers, can be
4
Defendant notes a discrepancy in the number of deposits at
issue on this appeal. (Br. of Appellee (Doc. 18) at 12 n.1.)
The Bankruptcy Court ruled on the eleven deposits
identified in FCB's [First Citizens Bank and Trust]
summary judgment brief. Appellant's Brief identifies a
twelfth deposit, a cash deposit for $2000 made on 21
January 2009. Because this deposit was not identified
or included in the Bankruptcy Court's decision, it
should not be considered on appeal.
(Id. (citations omitted).) Because this court’s decision does
not depend on specific deposits, this court finds no need to
resolve this discrepancy.
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avoided pursuant to 11 U.S.C. § 548(a)(1)(A) or, alternatively,
pursuant to 11 U.S.C. § 544 and the North Carolina fraudulent
transfer statutes. (Id.) Defendant argues summary judgment in
its favor is appropriate based on two theories: (1) the
transfers into the bank account were made by third parties into
Debtor’s account and therefore are not transfers made by the
Debtor, and (2) the transfers did not diminish the bankruptcy
estate. (Def.’s Mot. for Summ. J. (Doc. 5-18) at 3.) In granting
the motion for summary judgment, the Bankruptcy Court
[r]eject[ed] the proposition that the deposit of the
checks by or on behalf of the Debtor and the
subsequent processing of the checks and wire transfers
did not result in transfers of property of the Debtor
to the [Defendant], [but] the court agree[d] that the
transfers to the [Defendant] that did occur involving
the checks and money orders did not diminish the
bankruptcy estate.
(Mem. Op. (Doc. 1) at 7.) For this reason, the Bankruptcy Court
granted summary judgment in favor of Defendant.
Plaintiff filed the present appeal and submitted a single
issue for this court to consider:
Whether, in order to survive summary judgment on his
fraudulent transfer claims, the appellant-trustee must
prove that the transfers of checks or wire transfers
that were made to First Citizens diminished the assets
of the bankruptcy estate?
(Br. of Appellant (Doc. 16) at 14.) Plaintiff goes on to argue
that:
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In requiring a diminution of estate assets, the
Bankruptcy Court fashioned a new implied element,
which is totally unsupported by the statutory text,
and contrary to established Fourth Circuit precedent.
(Id. at 20.)
IV.
ANALYSIS
This court concludes that the Bankruptcy Court did not err
in citing the lack of diminution of the estate to support the
grant of summary judgment.
In outlining what constitutes an avoidable transfer,
Bankruptcy Code § 548(a)(1)(A), Fraudulent transfers and
obligations, provides:
The trustee may avoid any transfer (including any
transfer to or for the benefit of an insider under an
employment contract) of an interest of the debtor in
property, or any obligation (including any obligation
to or for the benefit of an insider under an
employment contract) incurred by the debtor, that was
made or incurred on or within 2 years before the date
of the filing of the petition, if the debtor
voluntarily or involuntarily—
(A) made such transfer or incurred such
obligation with actual intent to hinder, delay,
or defraud any entity to which the debtor was or
became, on or after the date that such transfer
was made or such obligation was incurred,
indebted; . . . .
11 U.S.C. § 548(a)(1)(A) (2012). The parties do not dispute that
the transfers in question fall under § 548(a)(1)(A) or that
Debtor was involved in a Ponzi scheme. “A majority of federal
courts have held that proof of operation of a Ponzi scheme is
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sufficient to establish actual intent to hinder, delay, or
defraud creditors so as to permit avoidance as a fraudulent
transfer under section 548(a)(1)(A).”
In re Whitley, 463 B.R.
775, 781 (Bankr. M.D.N.C. 2012). That Debtor here was
effectuating a Ponzi scheme satisfies the actual intent prong of
§ 548(a)(1)(A).
Given this analysis of § 548(a)(1)(A), the Bankruptcy Court
discussed why these transfers nonetheless do not qualify as
fraudulent transfers under § 548(a)(1)(A). In explaining its
grant of summary judgment, the Bankruptcy Court found that
[T]he transfers to the Bank in this case resulting from
the deposits of the checks and wire transfers were
not fraudulent transfers because . . . they did not
diminish the Debtor's estate nor place the funds
involved in the transfers beyond the reach of
creditors. The critical facts underlying this result are
that (l) the transfers to the Bank made or caused to be
made by the Debtor were to a bank account belonging to the
Debtor and (2) such account was an ordinary checking
account in which the funds in the account were readily
available to the Debtor.
(Mem. Op. (Doc. 1) at 8.) The transfers that Plaintiff wants
avoided pursuant to § 548 are listed in Defendant’s summary
judgment brief, (Def.’s Mem. of Law in Supp. of Mot. for Summ.
J. (Doc. 6) at 2), and as found by the Bankruptcy Court, are all
credits to Debtor’s checking account at Defendant’s bank. (Mem.
Op. (Doc. 1) at 6.) The transfers in question do not cause any
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diminution of the estate and would otherwise be available for
administration.5
Section 101 of the Bankruptcy Code defines the term
“transfer” to include “an interest of the debtor in property.”
11 U.S.C. § 101(54)(D)(ii).6 Section 548 also defines a
fraudulent transfer as a “transfer . . . of an interest of the
debtor in property.” 11 U.S.C. § 548(a)(1)(A). In keeping with
established principles of statutory construction “requir[ing] a
court to construe all parts to have meaning and to reject
constructions that render a term redundant,” PSINet, Inc. v.
Plaintiff does argue that the transfers diminished the
estate. This court disagrees for reasons explained hereafter.
5
6
In full, § 101(54) provides:
The term “transfer” means-(A) the creation of a lien;
(B) the retention of title as a security
interest;
(C) the foreclosure of a debtor’s equity of
redemption; or
(D) 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)(A)-(D) (2012).
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Chapman, 362 F.3d 227, 232 (4th Cir. 2004),7 this court does not
read the inclusion of “an interest of the debtor in property” in
both § 101 and § 548 to be redundant or without meaning.
In reworking the Bankruptcy Code, Congress sought to make
“[t]he definition of transfer [] as broad as possible,” drafting
it to include “any transfer of an interest in property,”
including “[a] deposit in a bank account or similar account.”
S. Rep. No. 95-989, at 27 (1978); see also § 101(54). Thus,
Debtor here, who deposited into his own account, did effectuate
a transfer under § 101 and, due to the Ponzi presumption, is
deemed to have the requisite fraudulent intent under § 548.
The Fourth Circuit provided extensive citations in
support. PSINet, 362 F.3d at 232 (citing Reiter v. Sonotone
Corp., 442 U.S. 330, 339 (1979) (where the Supreme Court
explained that a court is “obliged to give effect, if possible,
to every word”); Platt v. Union Pac. R.R. Co., 99 U.S. 48, 58-59
(1878) (if a construction renders a term redundant, that is a
reason for rejecting that construction); Virginia v. Browner, 80
F.3d 869, 877 (4th Cir. 1996) (a court should not “construe a
statute in a manner that reduces some of its terms to mere
surplusage”); United States v. Snider, 502 F.2d 645, 652 (4th
Cir. 1974) (all parts of a statute must be construed so that
each part has meaning)). Other circuits have similar
interpretations of the requirements of statutory construction.
See, e.g., Scherr v. Marriott Int’l, Inc., 703 F.3d 1069, 1077
(7th Cir. 2013) (“When we do not have statutory definitions
available, ‘we . . . view words not in isolation but in the
context of the terms that surround them; we likewise construe
statutes in the context of the entire statutory scheme and avoid
rendering statutory provisions ambiguous, extraneous, or
redundant; we favor the more reasonable result; and we avoid
construing statutes contrary to the clear intent of the
statutory scheme.’” (quoting In re Merchants Grain, Inc.,
93 F.3d 1347, 1353-54 (7th Cir. 1996)).
7
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However, § 548 appears to require more, as Congress drafted
§ 548 to also require a fraudulently intended transfer “of an
interest of the debtor in property.” § 548. While the Code
itself does not define the phrase “interest of the debtor in
property,” the courts have. “The phrase ‘interest of the debtor
in property’ ‘is best understood as that property that would
have been part of the estate had it not been transferred before
the commencement of bankruptcy proceedings.’ ” In re
BeaconVision, Inc., 340 B.R. 674, 677 & n.2 (Bankr. D.N.H. 2006)
(quoting Begier v. IRS, 496 U.S. 53, 58 (1990)) (noting in
footnote 2: “The Supreme Court read the phrases ‘property of the
debtor’ and ‘an interest of the debtor in property’
‘coextensive[ly]’ and ‘[f]or guidance’ looked ‘to § 541, which
delineates the scope of ‘property of the estate’” (quoting
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Begier, 496 U.S. at 58-59 & n.3)).8 This definition of “interest
of the debtor in property” under § 548 means:
A bankruptcy trustee can recover for the bankruptcy
estate transfers made by a debtor by demonstrating the
transferred property was “of an interest of the debtor
in property.” “[A]ny funds under the control of the
debtor, regardless of the source, are properly deemed
to be the debtor’s property, and any transfers that
diminish that property are subject to avoidance.” A
debtor must have exercised “sufficient control over
Although Beiger v. Internal Revenue Service analyzed
§ 547(b), the terminology in § 548 is the same and thus the
Court’s holdings regarding “an interest of the debtor in
property” apply to both sections equally. See Bear, Stearns Sec.
Corp. v. Gredd, 275 B.R. 190, 193-94 (S.D.N.Y. 2002) (“[T]he
Supreme Court . . . ha[s] interpreted the identical statutory
language — ‘an interest of the debtor in property’ — in the
manner advocated . . . . In Begier, the Supreme Court stated
that ‘property of the debtor’ . . . is ‘that property that would
have been part of the estate had it not been transferred before
the commencement of bankruptcy proceedings.’ While Begier and
its progeny were concerned with § 547 . . . , the ‘normal rule
of statutory construction that identical words used in different
parts of the same act are intended to have the same meaning,’
counsels us to construe this language to have the same meaning
when it is used in § 548(a)(1)(A).” (citations omitted)).
8
Notably, in In re French, the Fourth Circuit also applies
Begier’s interpretation of “interest of the debtor in property”
in § 547 to § 548, but In re French is distinguishable from the
matter at hand as it addressed foreign real property in the
context of § 548(a)(1)(B). In re French, 440 F.3d 145, 151-52
(4th Cir. 2006) (“Section 541 defines ‘property of the estate’
as, inter alia, all ‘interests of the debtor in property.’ In
turn, § 548 allows avoidance of certain transfers of such
‘interest[s] of the debtor in property.’ By incorporating the
language of § 541 to define what property a trustee may recover
under his avoidance powers, § 548 plainly allows a trustee to
avoid any transfer of property that would have been ‘property of
the estate’ prior to the transfer in question — as defined by
§ 541 — even if that property is not ‘property of the estate’
now.” (other citations omitted)(citing Begier v. IRS, 496 U.S.
53, 58, 59 n.3 (1990))).
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the funds to warrant a finding that the funds were the
debtor’s property.” . . . The purpose of avoiding
fraudulent transfer actions is to prevent a debtor
from diminishing property that properly belongs to all
creditors.
In re Pearlman, 472 B.R. 115, 125-26 (Bankr. M.D. Fl. 2012)
(alteration in original)(footnotes and citations omitted).
Consequently, the parties and this court have addressed
this issue primarily as an issue of diminution of the estate,
and this court is of the opinion that such a purpose is
reflected in the statutory construction of § 548. Because the
statute requires not just a “transfer,” § 101, (i.e., a transfer
by a debtor of currency from a safe in his home to a deposit
bank account would be a transfer, § 101; S. Rep. No. 95-989, at
27 (1978)), but a “transfer of an interest of the debtor in
property,” § 548, a transfer would not necessarily be a
fraudulent conveyance under § 548. This construction simply
recognizes that a transfer is not subject to avoidance if it did
not or could not diminish the estate, reflecting that the
interest of the debtor in such property did not change. Thus,
because the Debtor here merely effectuated transfers to himself
within the estate, the § 548 phrase “interest of the debtor in
property” eliminates his actions from its scope, since his
actions had no actual or potential diminutive effect on the
bankruptcy estate. See In re BeaconVision, 340 B.R. at 677. As a
result, this court does not find that the Bankruptcy Court added
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an element to the fraudulent transfer claim, expressly or
impliedly.
In addition to the statutory basis, the Bankruptcy Court’s
grant of summary judgment based on a finding that there was no
diminution of the estate also recognizes past bankruptcy
practice as stated in New York Cty. Nat’l Bank v. Massey, 192
U.S. 138, 147 (1904) (“These transfers of property, amounting to
preferences, contemplate . . . the consequent diminution of the
bankrupt’s estate. . . . [A] deposit of money to one’s credit in
a bank does not operate to diminish the estate . . . .”), and
presently recognized in In re Derivium Capital LLC, 716 F.3d
355, 361 (4th Cir. 2013) (“The purpose of the Bankruptcy Code’s
avoidance provisions is to prevent a debtor from making
transfers that diminish the bankruptcy estate to the detriment
of creditors.”). The Bankruptcy Court’s holding is in keeping
with the Supreme Court’s reluctance to “interpret the Code . . .
to effect a major change in pre-Code practice that is not the
subject of at least some discussion in the legislative history.”
Dewsnup v. Timm, 502 U.S. 410, 419 (1992).
Consideration of actual or potential diminution of the
estate recognizes that “[w]hether the goal is to protect some
creditors, as in the case of § 547, or all creditors, as in the
case of § 548, only asset transfers that may have actually
harmed creditors may be avoided.” Bear, Stearns Sec. Corp., 275
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B.R. at 194. The Fourth Circuit has not explicitly addressed
this diminution issue, but “[t]he purpose of the Bankruptcy
Code's avoidance provisions is to prevent a debtor from making
transfers that diminish the bankruptcy estate to the detriment
of creditors.” Derivium, 716 F.3d at 361.
Although the Fourth Circuit has not explicitly addressed
this diminution issue,9 other courts have. “A diminution of
estate issue rarely arises in the context of fraudulent
transfers because there is usually no question that the
fraudulent transfer depleted the estate of the debtor in the
amount of the transfer.” In re Consol. Pioneer Mortg. Entities,
211 B.R. 704, 717 (S.D. Cal. 1997). The Pioneer court went on to
state:
[Plaintiff] argues that “depletion of the estate”
is not an element of proof in the fraudulent transfer
statute. Although there is no formal “diminution of
estate” requirement in the statutory language, the
purpose of fraudulent transfer recovery is to prevent
a debtor from putting assets otherwise available to
its creditors out of their reach: “In our quest to
understand fraudulent transfer liability, we often
overlook first principles. At its core, fraudulent
transfer law is a debt-collection device and not a
revenue generating tool; its mission is to prevent the
unjust diminution of the debtor's estate.”
The “diminution of estate” or “depletion of the
estate” concept usually arises in connection with
preferences. . . . The purpose of fraudulent transfer
However, the Fourth Circuit addresses the general issue of
what an interest of the debtor in property entails under
§ 548(a)(1)(B) in In re French, as discussed in supra note 8.
9
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law is to protect creditors from last-minute
diminutions of the pool of assets in which they have
interests.
Id. at 717 (citations omitted).
Plaintiff relies on several decisions to support his
contention that “diminution of the estate is not an element of a
fraudulent transfer claim, and was therefore irrelevant to the
Bankruptcy Court’s analysis.” (Br. of Appellant (Doc. 16) at
24.) This court is not persuaded by Plaintiff’s reliance on
these cases in support of a proposition that a transfer that
does not diminish the estate, as on these present facts, is
nonetheless a fraudulent transfer under § 548.
Plaintiff cites In re Model Imperial, Inc., 250 B.R. 776
(Bankr. S.D. Fla. 2000). (Br. of Appellant (Doc. 16) at 24-25.)
The Model court does state that “if diminution of the estate
were an essential element of a § 548(a)(1) claim, then
§ 548(a)(2) would be redundant.” In re Model Imperial, Inc., 250
B.R. at 793-94. However, in finding the transfers in question
not avoidable, the Model court goes on to state that, with
regard to some of the transfers that did not negatively affect
the estate, the “alleged fraudulent transfers are not avoidable
because in economic reality, they were a nullity.” Id. at 797.
The “economic nullity” in Model is strikingly similar to
Debtor’s bank deposits into his own checking account in the
present action. Debtor transferred money or credit into his own
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bank account with no discernable impact on the estate.
“[B]ankruptcy courts are courts of equity, and as such, ‘they
possess the power to delve behind the form of the transactions
and the relationships to determine the substance.’” Id. at 796
(citations omitted). The substance of the present transfers at
issue seems to be, like those in Model, an “economic nullity”
not eligible for avoidance.
Plaintiff also cites two Fourth Circuit cases for
“reject[ing]” the diminution of estate prong of fraudulent
transfer: Tavenner v. Smoot and In re Mahaffey. (Br. of
Appellant (Doc. 16) at 27-29.) This court does not agree with
Plaintiff’s contention that these cases do not take into account
the effect on the estate when considering fraudulent transfer
claims.
Tavenner v. Smoot, 257 F.3d 401 (4th Cir. 2001), is
distinguishable because the transfers at issue, even though they
involved otherwise-exempt property, were made in such a manner
(largely to third parties) as to remove the assets from the
estate. In contrast, Debtor here transferred funds into the
estate and the transfers at issue did nothing to actually or
potentially diminish the estate.
Further, the transfers at issue in Tavenner involved
exemptible property under Virginia law. The defendant argued
those transfers could not qualify under § 548 because “it is
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impossible to hinder, delay or defraud creditors by transferring
property to which the creditors were not entitled in the first
place.” Id. at 407. The Fourth Circuit agreed with the majority
position that transfers of exempt property are amenable to
avoidance actions, stating that “[n]othing in § 548 indicates
that a trustee must establish that a fraudulent conveyance
actually harmed a creditor,” id., and recognizing that “if a
debtor enters into a transaction with the express purpose of
defrauding his creditors, his behavior should not be excused
simply because, despite the debtor’s best efforts, the
transaction failed to harm any creditor.” Id. (citations
omitted).
However, more pointedly to this case, in Tavenner’s
rejection of the “no harm, no foul” approach, the Fourth Circuit
focused on the fact that:
Under a statutory scheme in which all property is presumed
to be part of the bankruptcy estate, and no property is
exempt until such time as the debtor claims an exemption
for it, creditors can be harmed by transfers of potentially
exempt property because it is not a foregone conclusion
that such property will be exempt from the estate.
Id.
Section 548, as analyzed by the Fourth Circuit in Tavenner,
does not require actual harm to establish a fraudulent
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transfer.10 Nevertheless, Tavenner is consistent with both § 548
and past bankruptcy practice because there is no indication from
Tavenner that the type of transfer or effect on the estate is
irrelevant to the Fourth Circuit’s analysis. Contrary to
Plaintiff’s argument, Tavenner discusses the potential or actual
effect on the estate. Under this analytical structure, while
actual harm is not required to establish a § 548 fraudulent
transfer, the actual or potential effect of a transfer is
relevant. Notably, the potential effect on the estate described
in Tavenner is a potential diminution in value, should the
debtor not have exempted the property from the estate. See id.
at 406-07.11 By focusing on a transfer’s potential to harm the
estate as a basis for its inclusion under the purview of § 548,
see id., the Fourth Circuit illustrates that reasoning and the
statutory text do not support a fraudulent transfer analysis
completely divorced from the actual or potential diminution of
the estate. As such, this court does not agree with Plaintiff’s
10
In Tavenner, the Fourth Circuit first discusses its
rejection of the “no harm, no foul” approach and then discusses
specific intent and harm under § 548 in the immediately
following section. See Tavenner, 257 F.3d at 406-07. The
Circuit’s reasoning in both analyses supports this opinion.
11
Notably, Tavenner also analyzes how the transfer of this
property is a removal of property from the estate,
notwithstanding its exemptible status, because, as quoted supra,
all property remains part of the estate until the debtor
actually claims an exemption. See Tavenner, 257 F.3d at 406.
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contention that the Bankruptcy Court’s discussion of diminution
of the estate is inconsistent with Tavenner.
Similarly, in rejecting the “no harm, no foul” rule in In
re Mahaffey, the Fourth Circuit stated that:
[T]he “no harm, no foul” approach seemed more appropriate
under the old Bankruptcy Act, in which exempt property was
not part of the bankruptcy estate. Under the new Bankruptcy
code, in contrast, all property, including potentially
exempt property, is part of the estate until the debtor
claims an exemption. Consequently, a transfer of
potentially exempt property could harm creditors.
In re Mahaffey, No. 95-2411, 1996 WL 383922, at *2 (4th Cir.
1996) (citations omitted). Again, this court does not find any
indication in Mahaffey that the Fourth Circuit did not consider
the actual or potential effect of a transfer on the estate in
addressing the fraudulent transfer claim. To the contrary, the
Fourth Circuit emphasizes that the property was part of the
estate unless or until an exemption was claimed and thus the
transfer was significant. In focusing on the changed Bankruptcy
Code, the Fourth Circuit’s analysis illustrates the principle
articulated in Tavenner—that the transfer could result in
diminution to the estate and thus could be avoidable under
§ 548.
Thus, given the text of § 548, prior bankruptcy practice,
and corresponding Fourth Circuit precedent, Plaintiff has not
persuaded this court that the Bankruptcy Court’s consideration
of no actual or potential diminution of the estate was improper.
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In the alternative, Plaintiff asserts that the bankruptcy
estate was in fact diminished by the transfers at issue. (Br. of
Appellant (Doc. 16) at 29-30.) This court does not find this
argument persuasive on the facts present.
In a case still cited by courts and referenced by the
Bankruptcy Court here, the United States Supreme Court addresses
the impact of a bank deposit on an estate in the bankruptcy
context.
As we have seen, a deposit of money to one's
credit in a bank does not operate to diminish the
estate of the depositor, for when he parts with the
money he creates at the same time, on the part of the
bank, an obligation to pay the amount of the deposit
as soon as the depositor may see fit to draw a check
against it. It is not a transfer of property as a
payment, pledge, mortgage, gift, or security.
New York Cty. Nat’l Bank v. Massey, 192 U.S. at 147. Plaintiff
contends that “[t]he Bankruptcy Court’s reliance upon Massey was
entirely misplaced. Massey addressed a preference claim under
the former Bankruptcy Act of 1898.” (Br. of Appellant (Doc. 16)
at 21.) Plaintiff relies on Meoli v. Huntington Nat'l Bank (In
re Teleservices Grp., Inc.), 469 B.R. 713 (Bankr. W.D. Mich.
2012), for the proposition that Massey is not currently viable.
(Br. of Appellant (Doc. 16) at 21-23.)
Teleservices Group makes clear . . . why Massey dealt
only with a preference under the old Act, back when
diminution was still a recognized element. The Massey
decision is simply not applicable anymore when
addressing issues under the current Bankruptcy Code’s
fraudulent transfer provisions.
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(Id. at 23.) Defendant counters that:
The Teleservices court ultimately concluded that
Massey's analysis of preferential set-offs had become
"an anachronism" because the Bankruptcy Code addressed
such setoffs by adding 11 U.S.C. § 553(b). Notably,
however, it did not, as the Trustee suggests, reject
as improper or no longer valid Massey's determination
that a bank account deposit does not diminish the
bankruptcy estate.
(Br. of Appellee (Doc. 18) at 29-30.) This court is not
persuaded that Plaintiff’s argument regarding Massey’s
inapplicability makes Massey invalid for the proposition upon
which the Bankruptcy Court relied.12 Of note are the
distinguishable facts and findings of Teleservices.
In Teleservices, the transfer in question placed funds in
the benefit of the depositor and the defendant bank because an
agreement allowed the bank to use the funds to offset debt at
the bank. Teleservices, 469 B.R. at 719. Although ultimately the
court found the defendant bank liable on the basis of transferee
liability, id. at 747, 767, Teleservices explicitly addresses
the estate diminution issue:
Indeed, diminution of the estate is not even an
issue when the liability of a transferee under Section
550 is being assessed. But then, this court sees no
12
Albeit in a different context, the Supreme Court noted
the relevance of prior bankruptcy to current bankruptcy code.
“When Congress amends the bankruptcy laws, it does not write ‘on
a clean slate’”. Hall v. United States, 566 U.S. ____, ____, 132
S. Ct. 1882, 1893 (2012)(quoting Dewsnup, 502 U.S. at 419).
- 21 -
reason why it should be a factor given that diminution
of the estate is relevant only with respect to the
initial transfer and then only as to its avoidability.
Teleservices, 469 B.R. at 742. Absent evidence to the contrary,
and on the present facts, Plaintiff has neither persuaded this
court that Massey’s holding that a deposit by a debtor into the
debtor’s own checking account does not serve to diminish the
debtor’s estate is an incorrect interpretation nor convinced
this court that Teleservices supports such a finding.13 Further,
nothing in the record here indicates the estate was negatively
impacted when these deposits were made into Debtor’s own
checking account at Defendant’s branch bank.
In the present action, the Ponzi presumption allows a court
to infer actual intent of fraud, but it does not negate the
relevance of actual or potential diminution of the estate to
§ 548 analysis. Further, this court finds that Debtor’s deposit
of funds into an unrestricted demand checking account neither
actually diminished nor had the potential to diminish the
estate. Accordingly, the Bankruptcy Court’s grant of summary
judgment on the fraudulent transfer claims will be affirmed.
13
Notably, in Teleservices, a part of the transfers were
deposits into bank accounts that themselves served as security
for the line of credit that the defendant bank extended to
debtor. See Teleservices, 469 B.R. at 719. Therefore, whether or
not the bank actually exercised its rights against the accounts,
the deposits themselves created an actual or potential
diminution of the estate by subjecting the funds to the bank’s
power under this credit agreement.
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V.
CONCLUSION
For the reasons set forth herein, IT IS HEREBY ORDERED that
the Bankruptcy Court’s grant of summary judgment (Doc. 1) is
AFFIRMED.
This the 30th day of September, 2015.
_____________________________________
United States District Judge
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