Brady v. Bestworth-Rommel, Inc.

Citations: 357 B.R. 136; 57 Collier Bankr. Cas. 2d 251; 2006 Bankr. LEXIS 3249Docket: Bankruptcy No. 03-45806 TD; Adversary No. 05-4432 AT

Court: United States Bankruptcy Court, N.D. California; November 25, 2006; Us Bankruptcy; United States Bankruptcy Court

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Plaintiff Lois I. Brady, the chapter 7 trustee for a bankruptcy case, seeks to avoid a pre-petition transfer to Bestworth-Rommel, Inc. and recover the transferred amount under 11 U.S.C. §§ 548(a)(2) and 550. Following a trial on October 11, 2006, the court ruled in favor of Bestworth, stating the Trustee’s claim must fail.

The facts show that the debtors filed for bankruptcy on October 8, 2003. Prior to this, Debtor Bruce Jacobsen was affiliated with Elephant, which owed Bestworth $13,572.39 for work on the San Pablo Property. Bestworth recorded a mechanic’s lien on April 7, 2003, due to non-payment and subsequently filed a lawsuit to foreclose the lien, which hindered Elephant's sale of the property. To facilitate the sale, Debtors advanced funds—comprised of Lee Jacobsen’s separate property—by purchasing a cashier’s check for the debt amount on June 27, 2003. The title company handling the sale negotiated the cashier’s check and issued a check to Bestworth instead, which led to the release of the lien.

The court acknowledged that the Debtors were insolvent at the time of the transaction. Under 11 U.S.C. § 548(a)(1)(B), a trustee can avoid a transfer if the debtor received less than reasonably equivalent value and was insolvent at the time of the transfer. However, § 548(c) protects a transferee who takes in good faith for value, allowing them to retain the interest transferred. The court's decision aligned with these provisions, confirming Bestworth's entitlement to the transfer.

Section 550(a) of the Bankruptcy Code allows a trustee to recover property transferred or its value, if a transfer is avoided under section 548, from either the initial transferee or any immediate or mediate transferee. However, section 550(b) restricts recovery from a subsequent transferee who takes for value, in good faith, and without knowledge of the voidability of the transfer.

The adversary proceeding involves four key issues: 
A) Whether the transfer of the Debt Amount is avoidable under section 548(a)(1)(B), which requires proof of four elements: a transfer of debtor's property, made within one year before bankruptcy, for less than reasonably equivalent value, while the debtor was insolvent. Bestworth does not dispute that the Trustee meets these elements, confirming the transfer is avoidable.
B) Bestworth claims entitlement to retain the Debt Amount under section 548(c), which allows a good faith transferee to keep fraudulently transferred funds if they provided value in exchange. Although the Trustee acknowledges Bestworth's good faith, she argues that no value was provided to the Debtors in return for the Debt Amount. Bestworth asserts that it satisfied the Debt Amount and released a lien, claiming this as sufficient value, referencing In re SLF News Distributors, Inc. to support its position. 
However, the reliance on SLF News is problematic, as it was decided under the repealed Bankruptcy Act and involved different statutory provisions regarding fraudulent transfers.

Overall, the analysis highlights the legal framework for avoiding transfers and the defenses available to transferees under the current Bankruptcy Code.

Under 11 U.S.C. 548(c), a party wishing to retain a transferred interest must have provided value to the debtor for the transfer, a requirement Bestworth did not meet, thus failing its defense. The Trustee argues that Bestworth is the initial transferee of the Debt Amount under 11 U.S.C. 550(a)(1) and cannot assert a defense under 11 U.S.C. 550(b). The Trustee claims the Title Company acted merely as a conduit in the transfer, citing In re Williams, where the court deemed the IRS an initial transferee because the escrow company was not the purchaser. However, Bestworth asserts that Elephant, not the Title Company, is the initial transferee, with the Title Company acting as Elephant’s agent. In support, the Trustee references In re Presidential Corp., where a court ruled that an escrow agent is a conduit for the party on whose behalf the funds are held. The Presidential court found that the escrow agent was acting for the initial transferee, consistent with California law.

The Title Company acted solely as a conduit for Elephant, with no claims from the purchaser of the San Pablo Property or involvement from Bestworth, negating any agency relationship between the Title Company and these parties. Elephant had control over the funds in escrow, indicating it could not be merely a conduit for Bestworth. Testimony established that Mr. Jacobsen and another shareholder agreed on repayment priorities from the sale of the property, suggesting the advance was either a subordinated loan or preferred equity investment, thus representing a corporate transfer.

The Court concludes that Bestworth qualifies as a subsequent transferee under 11 U.S.C. 550(a)(2) and can assert a defense under 11 U.S.C. 550(b)(1). This statute protects a transferee who receives a transfer for value, in good faith, and without knowledge of its voidability, which Bestworth meets according to the Trustee's lack of dispute on these points. Unlike 11 U.S.C. 548(c), 11 U.S.C. 550(b)(1) does not require the value provided to be given to the debtor, indicating a deliberate legislative choice. The Court supports this interpretation with precedent from relevant case law.

While the transfer related to the Debt Amount is found to be avoidable as a constructively fraudulent transfer under 11 U.S.C. 548(a)(1)(B), Bestworth is not entitled to retain it under 11 U.S.C. 548(c) due to lack of value provided to the Debtors. Bestworth has proven its defense by showing it received the Debt Amount in good faith and without knowledge of its voidability. Counsel for Bestworth is instructed to draft a judgment consistent with this ruling, noting that the Debtors were insolvent at the time of the transfer.