Hoskins v. Citigroup, Inc. (In re Viola)

BAP No. NC-11-1173-DoDH
A) The Defendants are not transferees under §550(e) for the purposes of imposing fraudulent transfer liability under the Ninth Circuit’s dominion test because the Defendants never had legal authority over the money nor the right to use the money however it wished. B) The bankruptcy trustee does not have standing to bring a claim for aiding and abetting of fraudulent transfers under California law because a bankruptcy trustee may only assert claims held by the Debtor itself. C) Citigroup Global Markets, Inc. (“CGMI”) is a protected entity under §546(e) and therefore the purchase of Citigroup Inc.’s (“Citigroup”) preferred stock more than two years before the petition was filed may not be recovered under §544(b). Nor can CGMI be treated as a mere conduit for Citigroup because 1) the test to determine a transferee under §550(a) does not extend to the safe harbor provisions of §546(e) and 2) CGMI was the transferee under the dominion test, not Citigroup.
Procedural context:
The Ninth Circuit BAP affirmed the Bankruptcy Court’s dismissal with prejudice of the Second Amended Complaint against the Defendants, including Citigroup and CGMI, for avoidance of fraudulent transfers and damages for aiding and abetting intentionally fraudulent transfers.
The Debtor was a convicted felon and fugitive from justice when he opened the Ralph Napolitano Irrevocable Living Trust with Mr. Napolitano. Viola had full power of attorney for Mr. Napolitano and was co-trustee of the trust with Mr. Napolitano. Mr. Schrammel, a vice president at the San Francisco Branch of Citibank, was the successor trustee. Mr. Napolitano died in 2000, however, the funds in his trust were not distributed to the chosen beneficiaries. Instead, in 2005, Mr. Viola began using the trust accounts to operate a Ponzi scheme. As the account grew in early 2005 Citi required updated information forms for the trust account, which Viola fraudulently filled out on behalf of the deceased Mr. Napolitano. On February 21, 2008, Mr. Viola purchased $1,007,600 in Citigroup preferred stock through an investment brokerage account managed by CGMI. In October of 2008, Citi provided two letters of reference attesting to Viola and Napolitano’s wealth, sophistication, and integrity and included that Mr. Schrammel was the successor trustee who could act in the event Viola was not able. Citi also falsely represented to investors that Viola was a practicing attorney, a skilled investment advisor, and recommended that an aggressive investment with Viola was a sound investment strategy. In September 2009, Citi closed some of Viola’s accounts for failure to provide documentation requested by Citi’s compliance department. Viola continued to operate his Ponzi scheme for six more months, through other accounts he opened with Mr. Schrammel’s assistance at Citi, until his arrest and involuntary Chapter 7 on March 16, 2010. The Chapter 7 Trustee filed an adversary Complaint against the Citi defendants (1) in order to avoid fraudulent transfers under 11 U.S.C. §548(a)(1) and 544(b); (2) for damages for aiding and abetting fraudulent transfers under §544(a)(2); and (3)in order to avoid Mr. Viola’s purchase of Citigroup’s preferred stock.
Bankruptcy Judges Donovan (sitting by designation), Dunn, and Hollowell (concurring opinion)

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