Opinion
Case No. SG 96-87739. Chapter 7. Adversary Proceeding No. 98-88611.
December 13, 1999.
John A. Porter, Esq., Robert F. Wardrop II, Esq., Lawyer's Title Insurance Corporation and James H. Geary, Esq.
NOT FOR PUBLICATION
OPINION AND ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
Chapter 7 Trustee, John A. Porter ("Trustee") filed this adversary proceeding seeking to avoid a pre-petition transfer of funds by Kent County Land Title, Inc. ("Kent County" or "Debtor"), and to recover an alleged preferential payment made on account of Kent County by First American Title Insurance Co. ("First American") to Lawyers Title Insurance Corp. ("Lawyers Title"). Now before us is Lawyers Title's Motion for Summary Judgment arguing that the transfer was not prepetition because it did not occur on or within ninety days before the filing of the bankruptcy petition as required by 11 U.S.C. § 547(b)(4)(A).
We note that the law firm of Wardrop Wardrop, P.C., was not appointed as Special Counsel to Trustee John Porter in this matter until November 18, 1998, more than two years after Porter was appointed Trustee. Soon after his appointment, Trustee Porter was and continues to be represented by that counsel in other adversary proceedings pending in this case. According to the Petition for Appointment of Wardrop Wardrop as Special Counsel, Trustee Porter's general counsel found itself in a conflict position and thus could not pursue the cause of action against Defendant Lawyers Title Insurance Corporation.
Facts
The transaction which gives rise to the alleged preferential transfer involves the sale of the Debtor's assets to First American. The following is a chronology of relevant events regarding the sale of Kent County.
Prior to October 28, 1996, and as part of its upcoming sale, the Debtor authorized First American to disburse some portion of the sale proceeds to Lawyers Title. On October 28, 1996, the sale of Debtor Kent County to First American was consummated. As previously agreed, a portion of the sale proceeds were deposited with First American.
Lawyers Title thereupon received First American's check in the amount of $217,949.33 which it immediately deposited in its account.
On October 31, 1996, First American's check was presented to Comerica Bank as the drawee bank. At 4:29 p.m. that day, an involuntary petition in bankruptcy was filed against Kent County Land Title, Inc.
On November 18, 1998, the Trustee filed this adversary proceeding seeking to recover as a preference the $217,949.33 payment made to Lawyers Title. Lawyers Title argues that as the check was not "honored" until November 1, 1996, the transfer occurred post-petition. Accordingly, the Trustee's lawsuit must fail because he cannot meet the prepetition requirement of 11 U.S.C. § 547(b)(4)(A).
Standard for Summary Judgment
Summary judgment is appropriate if there is no genuine issue of material fact and the moving party Fed.R.Bankr.P.7056. The summary judgment rule requires that the disputed facts be material, that is, facts which are defined by substantive law and are necessary to apply the law. The rule also requires the dispute to be genuine. A dispute is genuine if a reasonable jury could return a judgment for the nonmoving party. First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 88 S.Ct. 1575 (1968). "Only disputes over the facts that might affect the outcome of the suit under the governing law will property preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Anderson v. Liberty Lobby, Inc, 477 U.S. 242, 248; 106 S.Ct. 2505, 2510 (1986). The Court must draw all inferences in a light most favorable to the nonmoving party (in this case the Trustee), but the Court may grant summary judgment when "the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party." Agristor Financial Corp. v. Van Sickle, 967 F.2d 233, 236 (6th Cir. 1992) (quoting Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986)).
Discussion
11 U.S.C. § 547(b) states in pertinent part:
[T]he trustee may avoid any transfer of an interest of the debtor in property
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
"What constitutes a transfer and when it is complete is . . . necessarily a federal question, since it arises under a federal statute intended to have uniform application throughout the United States." McKenzie v. Irving Trust Co., 323 U.S. 365, 369-70, 65 S.Ct. 405, 407-408 (1945). The Bankruptcy Code defines "transfer" as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption." 11 U.S.C. § 101(54).
The Bankruptcy Code's definition of "transfer" is broad enough to include both the transfer that occurred at the time the Debtor authorized First American to distribute the funds to Lawyers Title and the time First American's check was presented to and honored by Comerica Bank. See In re Newcomb 744 F.2d 621, 626 (8th Cir. 1984) (Code's definition of "transfer" is broad enough to include both transfer that occurred when escrow fund is created and transfer that occurred when condition of escrow is met); The Plan Committee v. Clark (In re Bank Building and Equipment Corporation of America), 158 B.R. 138, 140 (E.D.Mo. 1993) (Code's definition of "transfer" is broad enough to include both the transfer that occurred when the trust was created and the transfer that occurred when the trust funds were distributed). Thus, what must be considered is the "real substance of the interest transferred." Newcomb, 744 F.2d at 626.
The Court finds that the real interest in the funds was transferred when the money in question was placed beyond the reach of creditors. In re O.P.M. Leasing Services, Inc., 46 B.R. 661, 668 (Bankr.S.D.N.Y. 1985) (money placed in escrow account by debtor was not property of estate because interest retained by debtor in escrow funds could not be reached by judgment creditors). Based on the pleadings, we are unable to determine whether this took place at the time of the "first" transfer, to wit, when Debtor Kent County authorized the transfer of funds to First American. The Trustee asserts that once the Debtor authorized payment, it lost all rights to claim or reclaim the funds from First American. If this were correct, transfer would have occurred at that time because the Debtor's creditors could not have reached these funds. Lawyers Title disagrees, presumably claiming that at that point the Debtor still had control over the funds. Consequently, we cannot positively determine in a Motion for Summary Judgment whether the Debtor relinquished control over the funds at the time of this transfer.
Accordingly, we must look to when the check was physically transferred in order to determine if this was a pre or post-petition transfer.
Lawyers Title cites Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386 (1992) as controlling. In Barnhill, the Supreme Court determined that until the moment of honor, the debtor remains in control over the account's disposition and the account remains subject to a variety of actions by third parties.
Barnhill, 503 U.S. at 399. The Supreme Court continues its analysis stating that when a check is delivered, the recipient of the check has a contingent cause of action, the contingency being a subsequent dishonoring of the check and a demand to the drawer for payment. See U.C.C. § 3-122(3). The instant case however, is readily distinguishable from Barnhill; here, the drawer of the check is not the Debtor but a third party. The payment in question did not come directly from the Debtor, but rather from First American as disbursing agent. Consequently, neither the Debtor nor a creditor of the Debtor, would have had the ability to stop payment on the check or retrieve the funds in question once First American wrote its own check to Lawyers Title at the closing. At that point the Debtor lost control over the funds. Had "myriad events" intervened between delivery and presentment resulting in the check being dishonored, the chose in action gained by Lawyers Title in the "conditional transfer" discussed in Barnhill would have been against First American, not the Debtor.
Because the Debtor had no control over the funds after the October 28, 1996 closing, we find that for purposes of 11 U.S.C. § 547(b)(2)(A), the transfer took place before the October 31, 1996 filing of the involuntary bankruptcy petition.
The Defendant's Motion for Summary Judgment be and hereby is DENIED.
ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
At a session of said Court, held in and for said District, at the United States Bankruptcy Court, Federal Building, Grand Rapids, Michigan this 13 day of December, 1999.NOW, THEREFORE, for the reasons set forth in this Court's December 13, 1999 Opinion Denying Defendant's Motion for Summary Judgment,
IT IS HEREBY ORDERED that:
1. Defendant's Motion for Summary Judgment be and hereby is DENIED.
2. A second pretrial conference shall be conducted at 11:00 a.m. on Thursday, December 30, 1999, in Grand Rapids, Michigan.
IT IS FURTHER ORDERED that a copy of the Opinion and Order Denying Defendant's Motion for Summary Judgment shall be served by first-class United States mail, postage prepaid, upon John A. Porter, Esq., Robert F. Wardrop II, Esq., Lawyer's Title Insurance Corporation and James H. Geary, Esq.