In re: Hurtado v.

• Court: Court of Appeals for the Sixth Circuit
• Decided: August 28, 2003
• Docket: 02-1187
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 In re Hurtado et al. No. 02-1187 ELECTRONIC CITATION: 2003 FED App. 0312P (6th Cir.) File Name: 03a0312p.06 _________________ COUNSEL UNITED STATES COURT OF APPEALS ARGUED: Mark H. Shapiro, STEINBERG & SHAPIRO, FOR THE SIXTH CIRCUIT Southfield, Michigan, for Appellant. Joseph J. Bernardi, _________________ KASIBORSKI, RONAYNE & FLASKA, Detroit, Michigan, for Appellee. ON BRIEF: Mark H. Shapiro, STEINBERG In re: JON REY HURTADO and X & SHAPIRO, Southfield, Michigan, for Appellant. Joseph J. DENISE HURTADO, - Bernardi, KASIBORSKI, RONAYNE & FLASKA, Detroit, Michigan, for Appellee. Debtors. - - No. 02-1187 ________________________ - _________________ > , OPINION CHARLES J. TAUNT , - _________________ Plaintiff-Appellee, - - KAREN NELSON MOORE, Circuit Judge. The defendant v. - Barbara Hurtado appeals the district court’s decision granting - summary judgment against her, in favor of the Trustee - Charles Taunt. Barbara Hurtado (“Hurtado”), the mother of BARBARA HURTADO, - debtor Jon Rey Hurtado, was the recipient of a fraudulent Defendant-Appellant. - conveyance made by her son and her daughter-in-law, debtor N Denice Hurtado. The Hurtados eventually filed for Chapter Appeal from the United States District Court 7 bankruptcy protection in 1998. for the Eastern District of Michigan at Detroit. No. 00-74374—Gerald E. Rosen, District Judge. On appeal, Barbara Hurtado claims that she was not an “initial transferee” from whom the Trustee could recover a Argued: July 31, 2003 fraudulent conveyance under 11 U.S.C. § 550, because she only distributed the funds according to the desires of the Decided and Filed: August 28, 2003 debtors. She therefore claims to be a “mere conduit” for the funds, lacking the requisite legal dominion over the funds Before: DAUGHTREY, MOORE, and SUTTON, Circuit sufficient to be considered an initial transferee. Judges. The bankruptcy court agreed with Barbara Hurtado and rendered summary judgment in her favor. The district court reversed and granted summary judgment in favor of the Trustee. We AFFIRM the district court’s judgment.

1 No. 02-1187 In re Hurtado et al. 3 4 In re Hurtado et al. No. 02-1187

I. BACKGROUND a check on their behalf. Throughout the period of this arrangement, Barbara Hurtado kept the debtors’ money Jon Rey Hurtado (sometimes referred to as Jon Rey) and separate from her own and never spent any portion of it on Denice Hurtado, who are married, are the debtors in this case. herself. The funds from the sale of the debtors’ house and the They filed for Chapter 7 bankruptcy protection on September settled lawsuit against BCBS were depleted by mid-1996, two 9, 1998. Their debts were discharged on December 15, 1998. years before the debtors declared bankruptcy. Barbara The plaintiff in this case is Charles J. Taunt, the Trustee in the Hurtado had held funds for the debtors for over three years. underlying bankruptcy proceeding. The defendant, Barbara No consideration was given in exchange for her aid. Hurtado, is the mother of debtor Jon Rey Hurtado. Although Barbara Hurtado characterizes the funds as In the early 1990s, the two debtors incurred significant always belonging to the debtors (and herself as a mere agent financial obligations to various creditors. The creditors at their direction), there was, of course, a reason why the included Comerica Bank, which obtained a judgment on debtors insisted on having Barbara Hurtado take legal control June 12, 1992, against the debtors in the amount of of the money. With Barbara Hurtado legally in control of the $87,752.77, and the IRS, which was owed roughly $110,000 funds, the creditors had no access to them. The funds were for taxes evidently dating back to 1990. Smaller debts were not, for example, listed as the debtors’ assets on the 433-A owed to the state of Michigan, Michigan National Bank, and form filed with the IRS by the debtors in February 1996. Cigna Bank. There is no question that the transfer of funds was done During the time in which the debtors were incurring these deliberately to circumvent the creditors’ rights. Jon Hurtado debts, they received two significant blocks of income. In baldly admitted this in deposition. When asked why he gave September 1992, the debtors sold their house and received the funds to his mother to place in her account rather than his proceeds of $83,247.93. In August 1995, the debtors settled own, Jon Hurtado responded, “Well, several reasons. a lawsuit against Blue Cross and Blue Shield (“BCBS”) for Number one, I mean I’ve got creditors and creditors. I will $130,795.00. Instead of going to the debtors’ creditors or into just be very candid with you, you know, judgments and so the debtors’ accounts, however, the funds went immediately forth, and I needed to survive.” J.A. at 120 (Dep. Test. of Jon to Hurtado’s mother, defendant Barbara Hurtado. Hurtado). Barbara Hurtado also knew that the money was being used to pay certain creditors, for she was the individual Barbara Hurtado deposited the checks into her savings writing checks to them. account at TNC Credit Union. Barbara Hurtado and her husband Daniel were the only signatories on the account and The Trustee filed a complaint to avoid and recover the had exclusive control of the funds therein. transfer of conveyances and to revoke the debtors’ discharge in May 1999. The complaint was filed against the debtors as Although the funds stayed in Barbara Hurtado’s account, well as Barbara Hurtado. The debtors were later dismissed she spent them only at the direction of the debtors. The from the action by the bankruptcy court, and that decision was debtors used the funds to pay living expenses, which not appealed. amounted to $4,000 a month, and to pay certain specific creditors. When the debtors needed to pay some particular The bankruptcy court granted Barbara Hurtado’s motion for living expense, they would instruct Barbara Hurtado to write summary judgment and denied the Trustee’s summary- No. 02-1187 In re Hurtado et al. 5 6 In re Hurtado et al. No. 02-1187

judgment motion, on the ground that Hurtado was not liable The parties do not dispute that there has been a fraudulent under 11 U.S.C. § 550. The bankruptcy court reasoned that transfer under 11 U.S.C. § 544 in this case. Section 544 Barbara Hurtado never had sufficient control over the money “allows the trustee to step into the shoes of a creditor in order for liability to attach; instead, she was a mere conduit of the to nullify transfers voidable under state fraudulent funds. The district court reversed, finding that Hurtado was conveyance acts for the benefit of all creditors.” Corzin v. liable as an initial transferee under 11 U.S.C. § 550. The Fordu (In re Fordu), 201 F.3d 693, 697 n.3 (6th Cir. 1999) district court issued a limited remand in the case for (quotation omitted); see also Mason v. Young (In re Young), consideration of whether the statute of limitations barred the 238 B.R. 112, 114 (B.A.P. 6th Cir. 1999). Trustee from recovering the portion of the funds that came from the 1992 sale of the debtors’ home. On remand, the At the time of the transfer, there were two provisions of Trustee quickly conceded the issue. The bankruptcy court Michigan law that potentially rendered the transfer fraudulent, then entered a final judgment in favor of the Trustee on namely M ICH. COMP. LAWS § 566.14 and § 566.17. Section November 9, 2001, in the amount of the 1995 BCBS 566.14 deems fraudulent any conveyance made by an proceeds, and the district court affirmed. Hurtado appealed insolvent debtor without a fair consideration; Section 566.17 to this court, raising solely the question of whether she is deems fraudulent any conveyance made “with actual intent liable under 11 U.S.C. § 550 with regard to the BCBS . . . to hinder, delay, or defraud” any of a debtor’s present or proceeds. future creditors. MICH. COMP . LAWS § 566.14, § 566.17 (1998).1 II. ANALYSIS The debtors do not dispute that their conveyance of the A. Standard of Review BCBS funds to Barbara Hurtado was fraudulent under Michigan law. There is no doubt either that the conveyance “In a case which comes to us from the bankruptcy court by was made to hinder the debtors’ creditors or that the debtors way of an appeal from a decision of a district court, we were insolvent and did not receive any reasonably equivalent review directly the decision of the bankruptcy court. We value in exchange for the transfer to Barbara Hurtado. accord no deference to the district court’s decision; we apply Because the conveyance was fraudulent under Michigan law, the clearly erroneous standard to the bankruptcy court’s 11 U.S.C. § 544 vests the Trustee with the right to avoid the findings of fact, and we review de novo the bankruptcy transfer. court’s conclusions of law.” Brady-Morris v. Schilling (In re Kenneth Allen Knight Trust), 303 F.3d 671, 676 (6th Cir. 2002). 1 B. The Power of Avoidance Under 11 U.S.C. § 544 These statutes were repealed in 1998 when M ichigan passed the Uniform Fraudulent Transfer Act. Nevertheless, the changes made by Two provisions of the bankruptcy code are of particular that Act are not material to this case. Conveyances that are made with actual intent to defraud creditors are still fraudulent under the new M ICH . importance in this case, 11 U.S.C. § 544 and 11 U.S.C. § 550. C O M P . L AWS § 56 6.34(1)(a) (1999), although the “badges of fraud” are The former allows a Trustee to avoid certain types of now explicitly listed in the statute, see § 56 6.34 (2) (1 999 ). Similarly, fraudulent transfers; the latter empowers the Trustee to conveyances made by an insolvent debtor without reasonably equivalent recover the property transferred. value received in exchange are still considered fraudulent under § 566.35 (1) (1999). No. 02-1187 In re Hurtado et al. 7 8 In re Hurtado et al. No. 02-1187

C. The Power of Recovery Under 11 U.S.C. § 550 Because Barbara Hurtado received the funds directly from the debtors, it at first glance seems unquestionable that she must The disputed issue in this case is whether the Trustee can be considered an initial transferee and that the Trustee be recover the improper transfer under 11 U.S.C. § 550. allowed to recover from her. See First Nat’l Bank of Although related conceptually, these two issues must be kept Barnesville v. Rafoth (In re Baker & Getty Fin. Servs., Inc.), analytically separate. See Suhar v. Burns (In re Burns), 322 974 F.2d 712, 722 (6th Cir. 1992) (explaining that “[a]n F.3d 421, 427 (6th Cir. 2003) (explaining that “avoidance and initial transferee is one who receives money from a person or recovery are distinct concepts and processes” that “are entity later in bankruptcy, and has dominion over the funds”); addressed in two separate sections of the code”). Section 550 see also 5 COLLIER ON BANKRUPTCY ¶ 550.02[4][a], at 550- provides as follows: 18 (15th ed. 1996) (explaining that although “[t]he Code does not define the term[] ‘initial transferee’ . . . [g]enerally, the (a) Except as otherwise provided in this section, to the party who receives a transfer of property directly from the extent that a transfer is avoided under section 544, debtor is the initial transferee”). 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the An initial transferee must have “dominion” over the funds property transferred, or, if the court so orders, the to be an “initial transferee” under the statute. This point was value of such property, from — emphasized by the Seventh Circuit in Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890 (7th (1) the initial transferee of such transfer or the Cir. 1988). In Bonded, Michael Ryan was an insider of entity for whose benefit such transfer was Bonded Financial Services and the full owner of his unrelated made; or business, Shamrock Hill Farm (“Shamrock”). On January 21, (2) any immediate or mediate transferee of such 1983, Ryan caused Bonded to send European American Bank initial transferee. (“European”) a check for $200,000 with a note instructing (b) The trustee may not recover under section (a)(2) of European to deposit the check in Ryan’s account. European this section from— complied. Ten days later, on January 31, Ryan authorized (1) a transferee that takes for value, including European to apply the $200,000 to a large debt Shamrock satisfaction or securing of a present or owed European. After Bonded (and Ryan) went bankrupt, the antecedent debt, in good faith, and without Trustee sued European, claiming that European became the knowledge of the voidability of the transfer initial transferee of the funds on January 21 because it was the avoided; or payee of the check from Bonded. Although European did not (2) any immediate or mediate good faith transferee receive any benefit from the funds until January 31, and until of such transferee. that point was essentially “no different from a courier or an intermediary on a wire transfer,” id. at 893, the Trustee 11 U.S.C. § 550(a) & (b) (footnote omitted). As is plain from argued that European (rather than Ryan) was the initial its text, section 550(a)(1) holds initial transferees strictly transferee. The Seventh Circuit rejected this argument, liable for any fraudulent transfers they receive. See Christy requiring that a party do more than merely touch the money v. Alexander & Alexander of N.Y. Inc. (In re Finley, Kumble, before becoming a “transferee”: Wagner, Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52, 57 (2d Cir. 1997), cert. denied, 524 U.S. 912 (1998). No. 02-1187 In re Hurtado et al. 9 10 In re Hurtado et al. No. 02-1187

[W]e think the minimum requirement of status as a cash to a race track or a jewelry store.” Id. It was therefore “transferee” is dominion over the money or other asset, the Bank, not Rice, that was the initial transferee. the right to put the money to one’s own purposes. When A gives a check to B as agent for C, then C is the “initial Citing Bonded and Baker & Getty, Hurtado argues that she transferee”; the agent may be disregarded. too should not be considered an initial transferee, analogizing her situation to that of European in Bonded and Rice in Baker Id. From January 21 until January 31, full control over the & Getty. Because all of her actions were taken at the funds remained with Ryan, who “was free to invest the whole direction of the debtors, Hurtado argues that she was no more $200,000 in lottery tickets or uranium stocks.” Id. at 894. In than their agent, lacking the necessary dominion over the contrast, while European technically held the money, it was funds to be an initial transferee.2 While as a matter of raw legally bound to follow Ryan’s instructions. power, she could have absconded with the debtors’ funds, she argues that the money in reality continued to belong to the The test Bonded created has come to be known as the debtors. dominion-and-control test, and has been “widely adopted.” See Finley, 130 F.3d at 57-58. This court applied this test in In re Baker & Getty, 974 F.2d at 712. In Baker & Getty, Baker and Getty Financial Services (“B&G”) had been formed by two individuals, Philip Cordek and Steven 2 Barbara Hurtado’s brief actually makes this argument in two Medved. Cordek and one of B&G’s customers, Byron Rice, different ways. It first argues that Hurtado lacked the requisite dominion received a loan of $1.1 million from First National Bank. The and contro l over the funds to be an initial transferee within the meaning Bank, however, failed to secure the loan properly. It began of § 55 0. It then goes on to argue that even if Hurtado is an initial receiving payments from B&G accounts, including one of transferee, she should be excused from the liability § 550 imposes under $200,000 originating from the sale of a B&G airplane. In principles of equity because she wa s a “mere co nduit” for the funds. These two arguments, however, are merely different sides of the same exchange for the airplane, B&G received a $200,000 cashier’s coin, as entities will be considered “mere conduits” if and only if they check endorsed in blank. Cordek gave the check to Rice and lack dom inion and co ntrol over the relevant funds. See, e.g., Christy v. told Rice to apply it to the bank-loan indebtedness. Rice tried Alexander & Alexand er of N .Y. Inc. (In re Finley, Kum ble, Wagner, to apply the cashier’s check to the loan, but the Bank told Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52, 57 (2d Cir. Rice to deposit it into his account until it cleared. When the 1997) (joining “other circuits in adopting the ‘mere conduit’ test for determ ining who is an initial transferee”), cert. denied, 524 U.S. 912 check cleared, the money was given immediately to the Bank. (1998); see also Bailey v. Big Sky Motors, Ltd. (In re Ogden ), 314 F.3d We rejected the argument that Rice was the initial transferee, 1190, 1196 (10th Cir. 2002) (“Financial conduits are those entities that do instead holding that the Bank was the initial transferee of the not exercise ‘dominion and control’ over the funds.”). cashier’s check. For while it was true “that as a matter of W e believe the only question to be whether Hurtado is an initial commercial law, Rice could have applied the endorsed transferee within the meaning of § 550. To the extent that she is exempt from liability under § 5 50, it is because she d oes not fall under the cashier’s check to any purpose he chose . . . in law the money statutory definition of initial transferee; we reject Hurtado’s position that was not his and he was simply acting at the direction of equitable principles alone exempt her from the po tential statuto ry liability Cordek.” Id. at 722. The money, we held, always belonged in this case. Cf. Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d to Cordek and not Rice, “even though as a matter of raw 890, 894 (7th Cir. 1988) (noting that while “some courts say that an agent power, Rice could have violated his instructions and taken the . . . is an ‘initial transferee’ but that courts may excuse the transferee from repaying using equitable powers,” such analyses are “misleading” and “introduce useless steps”). No. 02-1187 In re Hurtado et al. 11 12 In re Hurtado et al. No. 02-1187

We reject Hurtado’s argument, finding her to be unlike the had legal obligations to follow the commands of their alleged initial transferees in Baker & Getty and Bonded. The respective principals. See Baker & Getty, 974 F.2d at 722 results in Baker & Getty and Bonded turned on the distinction (noting that “in law the money was not [Rice’s] and he was between mere possession and ownership. The parties found simply acting at the direction of Cordek”); Bonded, 838 F.2d not to be initial transferees in both cases never had legal title at 893 (pointing out that “[u]nder the law of contracts, the to the funds; they merely possessed the funds and were acting Bank had to follow the instructions that came with the as agents for the principals, who retained legal right to the check”). Here, Hurtado was not under any legal obligation to funds. These cases stand for the proposition that a party is follow the debtors’ directions. The funds placed in her not to be considered an initial transferee if it is merely an account were presumptively hers under Michigan law, see agent who has no legal authority to stop the principal from Muskegon Lumber & Fuel Co. v. Johnson, 62 N.W.2d 619, doing what he or she likes with the funds at issue. See 5 622 (Mich. 1954) (noting “the rule that a bank deposit is COLLIER ON BANKRUPTCY ¶ 550.02[4][a], at 550-18, 550-19 prima facie the property of the person in whose name the (15th ed. 1996) (listing examples); see also Davis v. deposit is made and that an adverse claimant must show a Davenport (In re Davenport), 147 B.R. 172, 185-86 (Bankr. clear and perfect title to it”), and there has been no evidence E.D. Mo. 1992) (refusing to hold a debtor’s son liable as an of some formal contractual arrangement that required her to initial transferee, because although the debtor held funds in an obey the debtors’ commands. Even if such an arrangement account with his son’s name, the debtor had the authority to, existed, it would have been void because it lacked and did in fact, write checks on the account without his son’s consideration, see Yerkovich v. AAA, 610 N.W.2d 542, 546 consent); Bumgardner v. Ross (In Re Ste. Jan-Marie, Inc.), (Mich. 2000) (noting that “[a]n essential element of a contract 151 B.R. 984, 988 (Bankr. S.D. Fla. 1993) (holding a debtor’s is legal consideration” and voiding a contractual agreement bookkeeper not to be an initial transferee when she drafted for lack of it), and because the very purpose of the contract and cashed salary checks, because she was merely an agent of would have been to carry out a fraudulent conveyance illegal the business). under Michigan law, see Kukla v. Perry, 105 N.W.2d 176, 183 (Mich. 1960) (noting that “where an illegal contract is Barbara Hurtado here was given legal title to the funds. involved, the court will not enforce it or grant relief This was, in fact, the very point of the fraudulent conveyance thereunder”). Hurtado had control over the bank account in — in order to insulate the debtors from the money (and thus this case for a number of years, exercising control on many from their creditors), legal title to the funds had to be turned occasions to write checks on the account; she points to no over entirely to Barbara Hurtado. Through this mechanism, legal recourse that the debtors would have had if she had the funds could no longer be considered assets of the debtors chosen to use the funds to her own benefit. The fact that she — note that, for example, this scheme enabled the debtors to did not choose to use the funds in that manner in no way avoid listing the funds on the 433-A form they filed with the undercuts the fact that she had that ability.3 IRS in early 1996. The funds were placed in Hurtado’s bank account (which the debtors could not access without going through Hurtado). With that established, Barbara Hurtado 3 One case in particular is quite similar to this one and reaches the had legal authority to do what she liked with the funds; she same result we reach here. This case is 718 Arch St. Assocs., Ltd. v. could have invested the funds in “lottery tickets or uranium Blatstein (In re B latstein), 244 B.R. 290 (Bankr. E.D. Pa. 2000) stocks.” Bonded, 838 F.2d at 894. This fact distinguishes (“Blatstein I”), rev’d, 260 B.R. 698 (E .D. Pa. 2001) (“Blatstein II”). To protect his funds from credito rs, Eric Blatstein fraudulently con veyed his both Bonded and Baker & Getty, where European and Rice assets to his wife, Lori, who had engaged in no fraud or other No. 02-1187 In re Hurtado et al. 13 14 In re Hurtado et al. No. 02-1187

We believe it clear that Hurtado was vested with legal conveyance under Michigan law, her counsel responded, “I authority to do what she liked with the funds, and so we reject don’t believe so, your Honor.” Having admitted that there her argument that she was not an initial transferee. We add, was a fraudulent conveyance under Michigan law, Barbara however, that Barbara Hurtado’s argument that she was never Hurtado cannot now argue that there was never any actual really given legal control over the funds runs into an conveyance of the funds in question. additional problem — it proves far too much. To the extent that Barbara Hurtado alleges that she was never really given III. CONCLUSION the funds in question, she is not merely disputing her status as an initial transferee — she is questioning whether there ever For the foregoing reasons, we hold that Barbara Hurtado was a conveyance at all.4 Yet Barbara Hurtado never did have the requisite dominion and control over the disputed contested the finding of a fraudulent conveyance, either in the funds as to make her an initial transferee subject to liability bankruptcy or district courts, or in her appellate briefs to this under 11 U.S.C. § 550. We therefore AFFIRM the judgment court. Moreover, at oral argument, when asked whether there of the district court. was a disagreement regarding whether there was a fraudulent

wrongdoing. Blatstein I, 244 B.R. at 292-93. At his direction, Lori spent all of the funds. Blatstein II, 260 B.R. at 705. After Blatstein declared bankruptcy, the question became whether Lori should be considered an initial transferee within the meaning of 11 U.S.C § 550. The bankruptcy court in Blatstein (like the bankruptcy court below in the case at b ar) held that she was not an initial transferee, because she “lacked ‘dominion’ over the monies in question.” Blatstein I, 244 B.R. at 303. Instead, she “was mere ly a pawn who used the monies deposited into her accounts where Blatstein directed her to do so.” Id. Stating that it would make no sense for a mere pawn to be liable for Eric Blatstein’s fraud, the bankru ptcy court found her no t to be an initial transferee. Id. The d istrict court in Blatstein reversed, holding that Lori must be considered an initial transferee. The district court noted that “Lori clearly had the right to put the transferred funds to her own purpose” and held that it was irrelevant that she “may or may not have exercised control” over the funds. Blatstein II, 260 B.R . at 717. Concluding that “the ‘dominion and control’ test is purely concerned with rights,” the district court held Lori to be an initial transferee. Id. at 718. For the reasons explained above, we think the reasoning of the district court in Blatstein more persuasive than that of the Blatstein bankruptcy court.

4 In this regard, this case is quite unlike the prototypical dominion- and-control case, where a party claims it is not an initial transferee because some other party (which had legal authority over the funds) was actually the initial transferee. Here, however, Barbara Hurtado is not arguing that som e other party was the initial transferee; she is claiming that there was never any transfer at all.