In Re Chase & Sanborn Corporation, F/k/a General Coffee Corporation, Debtors. Paul C. Nordberg, as Creditor Trustee v. Societe Generale

Citations: 848 F.2d 1196; 1988 U.S. App. LEXIS 9295Docket: 87-5896

Court: Court of Appeals for the Eleventh Circuit; July 8, 1988; Federal Appellate Court

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Paul C. Nordberg, as trustee for Chase Sanborn Corporation, is attempting to recover a $500,000 transfer that he claims was constructively fraudulent. Nordberg asserts that Societe Generale, which received the wire transfer into Colombian Coffee Corporation's account, is the initial transferee and should return the funds to the estate. The U.S. Bankruptcy Court for the Southern District of Florida examined the case and assumed the transfer could be seen as a fraudulent conveyance under section 548 but ruled that Societe Generale was not the initial transferee. Instead, the court determined that the bank acted merely as a commercial conduit for the funds, which precluded Nordberg from recovering the amount under 11 U.S.C. § 550(a). This ruling was affirmed by the U.S. District Court, leading to Nordberg's appeal to the Eleventh Circuit.

The background indicates that Societe Generale is a French bank with a New York branch, holding an account for Colombian Coffee. The case involves the processing of checks through the New York Clearing House system, where checks drawn on Societe Generale accounts are automatically paid by Citibank, the clearing bank, regardless of account status. If funds are insufficient, an overdraft occurs on paper, but Societe Generale retains the right to decide by noon the following business day whether to honor or return the check. Importantly, Colombian Coffee did not have any agreement with Societe Generale allowing it to write overdraft checks, and the bank closely monitored the account due to the company's financial issues.

Societe Generale followed a protocol upon discovering an overnight overdraft in Colombian Coffee's account, first confirming with Colombian Coffee about incoming funds to cover a check before honoring it. On November 29, 1982, a check for $1,747,403.00 triggered a $1,033,135.07 overdraft. Colombian Coffee indicated two incoming wire transfers from Credit Lyonnais Panama totaling $1,200,000. Despite this, the transfers had not cleared when Societe Generale honored the check, resulting in an overdraft charge of $351.51 at a 12.25% annual rate from November 29 to 30. The funds were confirmed received by Societe Generale on November 30. Approximately six months later, C. S. declared bankruptcy, prompting Nordberg to sue Societe Generale to recover the $500,000 as a fraudulent conveyance. To succeed, Nordberg must demonstrate a fraudulent transfer under section 548 and establish Societe Generale's liability under section 550. The bankruptcy court assumed, without deciding, that fraud was proven and instead focused on Societe Generale's role in the transaction. The court referenced the control test from In re Chase Sanborn Corp. to assess the debtor's possession of recoverable property, agreeing that this framework should apply to the case at hand.

In In re Chase Sanborn Corp., the court addressed a bankruptcy trustee's attempt to recover funds transferred as a fraudulent conveyance. The core issue was whether the funds originated from the debtor corporation, which had been temporarily reopened solely for laundering purposes. The debtor had an account into which another party deposited funds, and then the debtor transferred the money to a third party before closing the account. The court ruled against the trustee's recovery, concluding that the debtor corporation lacked sufficient control over the funds to classify them as its property, despite having possession.

The court applied a "control test," previously utilized in evaluating avoidable preferences, to assess whether the debtor had actual possession of the property under section 548. This test emphasizes a holistic evaluation of the transaction's circumstances rather than a narrow focus on specific transfers. This approach aligns with the equitable principles underpinning bankruptcy law.

The ruling clarified that courts must consider the entire transaction context when determining a defendant's status as an initial transferee. Traditionally, courts have refrained from allowing trustees to recover property from defendants that merely acted as agents or conduits. If a bank receives funds to pay off a debtor's obligation, it gains control of those funds, warranting potential recovery. Conversely, if the funds are deposited into a customer's account without specific earmarking, the bank does not gain actual control and thus is not considered an initial transferee under section 550, regardless of subsequent transfers made by the customer.

Citibank's automatic payment of a check from Colombian Coffee on November 29 resulted in a paper overdraft, which Societe Generale extended by honoring the check on November 30. Traditionally, overdrafts are considered debts. If the overdraft is viewed as a debt owed by Colombian Coffee to Societe Generale, the funds wired to Societe Generale for this purpose would imply actual control over those funds, allowing recovery by Nordberg. However, if no debtor-creditor relationship existed, Societe Generale merely acted as a conduit, depositing the funds for Colombian Coffee to pay the check to Banco Popular, making recovery impossible.

The bankruptcy court ruled that the transaction did not create a real debt, characterizing it as simultaneous. Consequently, Societe Generale was deemed a conduit that credited Colombian Coffee's account with earmarked funds. Evidence supported the finding of simultaneity, particularly as Societe Generale honored the check only because it was assured that Credit Lyonnais had wired sufficient funds, indicating a reliance on that assurance rather than faith in Colombian Coffee’s solvency.

Societe Generale charged interest for November 29 due to the paper overdraft, asserting that this charge was routine and would have occurred regardless of its decision to honor the check. Policy considerations highlight the balance between avoiding fraudulent transfers and protecting conduits from liability when they cannot ascertain the transferor's identity. Imposing such a burden on banks would undermine the wire transfer system.

The conclusion reached is that Societe Generale's actions did not establish a debtor-creditor relationship with Colombian Coffee, and thus the transaction does not qualify as a voidable transfer under bankruptcy law. The ruling was affirmed by Judge Walter E. Hoffman.