LandAmerica Financial Group, Inc. v. Southern California Edison Co.

Citations: 525 B.R. 308; 2015 U.S. Dist. LEXIS 5677; 2015 WL 236657Docket: Civil Action No. 3:14-CV-762

Court: District Court, E.D. Virginia; January 15, 2015; Federal District Court

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The Court, led by Senior District Judge James R. Spencer, reviewed an appeal from the United States Bankruptcy Court concerning LandAmerica Financial Group, Inc. The appeal was filed on September 23, 2014, with supporting briefs submitted by both the Appellant and Appellee, culminating in a decision to forgo oral arguments due to the sufficiency of the presented materials. The Court affirmed the Bankruptcy Court's decision, which had granted partial summary judgment in favor of Southern California Edison, Company (SCE) while denying LandAmerica's motion for summary judgment.

LandAmerica Financial Group, Inc. (LFG) was a holding company with operating subsidiaries including LandAmerica OneStop, Inc. and Southland Title Corporation, specializing in title insurance and real estate transaction services. LFG's financial viability depended on generating cash flow from these subsidiaries. Southland provided title and escrow services primarily in Southern California, while OneStop offered integrated residential real estate services. 

LFG operated a centralized cash management system (CCMS) to manage funds across its subsidiaries, collecting and disbursing cash related to their operations. Approximately 90% of LandAmerica's revenue flowed through the CCMS, which used concentration accounts as a central hub for managing funds, supported by a network of linked bank accounts. Cash transfers to LFG from subsidiaries were made based on available cash rather than a regular schedule.

LFG utilized funds from Concentration Accounts to establish approximately nine Disbursement Accounts, from which it issued checks to fulfill its obligations and those of its subsidiaries, OneStop and Southland. These transactions were documented in LFG's accounting system under 'Accounts with Affiliates.' Between February 1, 2008, and November 26, 2008 (the Petition Date), OneStop and Southland contributed nearly all their earned cash revenues to LFG, resulting in insufficient funds for their own expenses, which LFG covered. During this period, LFG gained over $80 million in revenue from OneStop, surpassing its disbursements for that subsidiary, and over $11 million from Southland, resulting in a total positive cash flow of approximately $40 million from both subsidiaries. LFG also paid electrical utility expenses for OneStop and Southland, totaling $206,394.49 and $39,479.14, respectively, to SCE.

The financial downturn from 2007 through 2008, characterized by declines in mortgage financing and property values, severely impacted LandAmerica's business and liquidity, with revenues dropping over 40% from Q4 2006 to Q3 2008. On the Petition Date, LFG filed for Chapter 11 bankruptcy in the Eastern District of Virginia, continuing to operate as a debtor in possession. Other LandAmerica entities, including OneStop and Southland, subsequently filed for bankruptcy, and their cases were jointly administered with LFG’s. A Joint Chapter 11 Plan established liquidating trusts for LFG and its affiliates, with a Plaintiff created to manage the liquidation of LFG assets.

On November 24, 2010, the Plaintiff filed a Complaint against SCE to recover transfers totaling $263,462.69 made by LFG to SCE during the Avoidance Period (February 27, 2008, to the Petition Date). The Complaint included two counts: Count I aimed to avoid the transfers as constructively fraudulent under 11 U.S.C. 548(a)(1)(B) due to lack of reasonably equivalent value; Count II sought to avoid the transfers under 11 U.S.C. 544(b)(1) and Virginia Code § 55-81, claiming they were not made for valuable consideration. Following motions for partial summary judgment from both parties, the Bankruptcy Court ruled in favor of SCE on May 19, 2014.

On June 2, 2014, LFG filed a Motion to Alter or Amend Order, which the Court denied on September 9, 2014. A notice of appeal was submitted on September 23, 2014, adhering to the timelines set forth in Federal Rule of Bankruptcy 8002(a) and (b). Appeals from bankruptcy courts are governed by 28 U.S.C. § 158, allowing district courts to hear appeals from final judgments and certain interlocutory orders. Under Federal Rule of Bankruptcy Procedure 8013, a district court may affirm, modify, reverse, or remand a bankruptcy judge’s decision. Legal conclusions are reviewed de novo, while factual findings are assessed for clear error, as established in relevant case law.

The appellant raises four issues on appeal: 

1. Whether the Bankruptcy Court erred in finding that LFG received reasonably equivalent value for transfers to SCE, specifically through funds generated by its subsidiaries.
2. Whether a contractual obligation existed between LFG and its subsidiaries requiring LFG to pay their vendors via a centralized cash management system.
3. Whether the Bankruptcy Court correctly determined that any contractual obligation satisfied constituted reasonably equivalent value for the transfers to SCE.
4. Whether the Bankruptcy Court failed to specify the measure of value LFG received from satisfying its obligations to its subsidiaries.

The appellant argues that the Bankruptcy Court incorrectly interpreted Bankruptcy Code § 548, which allows the trustee to avoid transfers made within two years of a petition if the debtor received less than reasonably equivalent value. The appellant contends that LFG’s transfers to SCE were constructively fraudulent, lacking consideration in return. However, the plain language of § 548 does not specify whether the value must come directly from the transferee or can be derived indirectly from third parties, justifying the Bankruptcy Court's reliance on case law to address these issues.

The Court analyzes the 'indirect benefit rule' to determine if the debtor received 'fair consideration' for a transfer, referencing the challenges posed by 'three-sided transactions' as noted in Rubin v. Mfrs. Hanover Trust Co. The indirect benefit rule allows for reasonably equivalent value to be recognized from sources other than the direct recipient of payments, emphasizing that the transaction's benefits to the debtor do not need to be direct but can come through a third party. The critical focus is on the consideration received by the debtor rather than the value given by the transferee. Section 548 aims to preserve the debtor's estate for unsecured creditors, meaning that as long as the value received by the debtor is comparable to what was given up, the transfer is not fraudulent. In this case, LFG received significantly more from its subsidiaries than it disbursed, indicating that unsecured creditors are not adversely affected. 

The Appellant argues that the Bankruptcy Court overlooked the 'in exchange for' aspect of section 548, claiming that LFG would have benefitted from its subsidiaries regardless of the transfers to SCE, suggesting a lack of a bargained-for exchange. However, the Court finds this argument unfounded, noting that there is no evidence to support the hypothesis that the subsidiaries would continue to generate revenue without LFG's payments. The stipulation confirms that LFG had consistently covered the operating expenses of OneStop and Southland.

The Court emphasized that speculative alternatives lacking documentation do not establish a genuine issue of material fact. Appellant claims the Bankruptcy Court erred in basing its decision on net cash flow at the end of the Avoidance Period, arguing this disregards the contemporaneity requirement outlined in Greenspan v. Orrick, which states that any value received after a transfer should not be considered if not bargained for at the time of the original transaction. The Appellant also suggested that cash flow through CCMS may have been negative during the individual Transfers, yet the Court clarified that contemporaneous consideration is not a requirement. 

In the case of In re Kenrob Info. Tech. Solutions, Inc., the debtor, a chapter S corporation, was obligated to reimburse shareholders for additional taxes incurred due to pass-through liability. The Court upheld that past agreements could constitute valid consideration, rejecting the trustee's claim of fraudulent transactions. The continuing obligation of the corporation to reimburse shareholders established ongoing benefit.

In addressing Appellant's argument regarding the Bankruptcy Court's focus on net results, the Court referenced Fourth Circuit precedent, which indicates that the depletion of the bankruptcy estate is the key factor in assessing reasonably equivalent value, rather than requiring a precise dollar-for-dollar exchange. The stipulated facts revealed that LFG received approximately $40 million in positive net cash flow from its subsidiaries, underpinning the conclusion that LFG did not receive reasonably equivalent value for each transfer made to SCE.

LFG consistently received more cash than it disbursed on behalf of OneStop in several months of 2008 and similarly for Southland, except for March and May. Consequently, Claim 1 is deemed without merit. Regarding Claim 2, the Bankruptcy Court found that LFG had both a contractual and fiduciary obligation to process invoices for its subsidiaries. Appellant contends this conclusion lacks support, but the Court disagrees, emphasizing that agency relationships can be inferred from conduct and circumstances. The parties acknowledged that LFG acted as a "disbursement agent" for its subsidiaries under the CCMS. Additionally, subsidiaries had to approve invoices prior to LFG’s disbursements, further affirming the agency relationship. If LFG had prioritized its creditors over the subsidiaries, it would have faced claims for breaching fiduciary duties. The Bankruptcy Court also established that an implied contractual relationship existed, despite the absence of a formal written or oral contract. This implied contract arises from the conduct of the parties, reflecting their intention to engage in a binding agreement. The stipulations indicate that OneStop and Southland participated in the CCMS, and their actions demonstrated a clear expectation that LFG would cover their operating expenses, which it did by utilizing the revenues upstreamed to the CCMS.

The Stipulation of Facts acknowledges that the parties had an understanding that LFG would pay OneStop's and Southland’s operating expenses via CCMS accounts, indicating an implied contract existed. If LFG breached this contract, the subsidiaries would have grounds for a legal claim against LFG. The Appellant contends that even if a contractual relationship existed obligating LFG to pay vendor invoices for its subsidiaries, LFG's fulfillment of that obligation did not equate to reasonably equivalent value received in exchange for transferring over $237,000 to SCE, as per Bankruptcy Code § 548. While the Appellant agrees that satisfying a valid obligation constitutes reasonably equivalent value, they argue that the cases cited by the Bankruptcy Court do not address the three-party dynamic involved here. The Appellant asserts that LFG’s obligation to OneStop and Southland, rather than to SCE, is irrelevant to the analysis of value received. The statute focuses on the debtor's obligations, and since LFG paid the vendors, it satisfied its obligation. This relates to the purpose of § 548, which aims to protect the debtor’s estate for unsecured creditors. LFG preserved its net worth by receiving more funds from OneStop and Southland than it disbursed on their behalf. In essence, as noted by SCE, if a debt is removed from the debtor's books, creditors are not disadvantaged by the transfer. Furthermore, the Bankruptcy Court reportedly failed to articulate any quantifiable value received by LFG for its payments to OneStop and Southland. The assessment of whether reasonably equivalent value was received involves determining if the debtor received value and if the payment was proportionate to that value, as explained in relevant case law.

To assess whether the debtor received reasonably equivalent value for the transfer, the Court compares the value of the consideration the debtor received with the value of the property transferred. The determination of 'reasonably equivalent value' is fact-specific and must be evaluated on a case-by-case basis. The Appellant contends that the Bankruptcy Court did not adequately identify the value received by LFG, arguing there was insufficient record evidence to ascertain whether the value LFG received was $1,100,000 or $237,292.36. The Appellant claims the Bankruptcy Court erred in concluding that LFG received reasonably equivalent value for its transfers to SCE. However, the Bankruptcy Court found sufficient evidence to establish that LFG's value received was indeed reasonably equivalent to its transfers to SCE. Specifically, LFG received over $30 million more from OneStop and over $11 million more from Southland than it disbursed on their behalf during the relevant time. From February 1, 2008, through the Petition Date, LFG received total cash transfers of $289,488,203 and disbursed $259,037,818 for OneStop, while for Southland, it received $47,269,366 and disbursed $35,950,092. Consequently, since these transfers did not deplete LFG’s estate, the Bankruptcy Court correctly concluded that LFG received reasonably equivalent value.

The Court affirms the Bankruptcy Court's decision in its entirety and dismisses the appeal. A joint stipulation of fact, filed on March 26, 2014, under Docket Entry 1-1, served as the foundation for the summary judgment motions in the Bankruptcy Court. From February 1, 2008, to the Petition Date, LFG received $289,488,203 and disbursed $259,037,818 on behalf of OneStop via the CCMS. For Southland, LFG received $47,269,366 and disbursed $35,950,092 during the same period. The Plaintiff identified $26,170.33 of the transfers as originating from solvent subsidiaries, leaving $237,292.36 sought to be avoided as constructively fraudulent transfers. This issue is categorized as a core proceeding under 28 U.S.C. § 157(b)(2)(A, F, O). According to Bankruptcy Rule 8002, the notice of appeal must be filed within 14 days of the judgment entry, with provisions for extending this time if a motion to alter or amend the judgment is filed. During the Avoidance Period, LFG's cash receipts on OneStop’s behalf were a significant percentage of its disbursements in several months, with corresponding percentages noted for Southland. Relevant case law is cited, including Schoenmann v. BCCI Constr. Co. and Crumpton v. Stephens.