Stoebner v. Consumers Energy Co. (In re LGI Energy Solutions, Inc.)

Citation:
Case Nos. 11-6045; 11-6046; 11-6047; 11-6048; 11-6049; 11-6050; 11-6051 (8th Cir. B.A.P. Dec. 8, 2011)
Tag(s):
Ruling:
The Court reversed the bankruptcy court's ruling granting summary judgment in favor of the defendants, and remanded for further proceedings. The Court held that funds paid by the debtor's customers to the debtor, which the debtor was then contractually required to pay to defendants (who provided utility services to the debtor's customers), constituted estate property. The Court then held that, notwithstanding the defendants assertion that a trust or bailment existed as to the disputed funds, preference defendants are nonetheless required to trace funds back to their appropriate customers to prevent avoidance. Finally, the Court held that the bankruptcy court did not make sufficient factual findings to determine that the debtors received reasonably equivalent value and that there was no intent to hinder, delay, or defraud creditors.
Procedural context:
The chapter 7 trustee of LGI Energy Solutions, Inc. ("LGI-ESI") and LGI Data Solutions Company, LLC ("LGI-DSC") sought to avoid certain payments made by the debtor to utility companies on behalf of the debtor's customers as preferential and fraudulent transfers. The bankruptcy court granted summary judgment in favor of the defendants, concluding that the payments were not assets of the debtor, and that the defendants were not required to trace the funds received back to the funds paid. The chapter 7 trustee appealed.
Facts:
LGI-DSI and LGI-DSC were in the business of providing utility-management and billing services to restaurants and other customers. They collected funds from their customers and paid the customers' utility bills. Due to their volume, they were able to obtain discounts from some utilities, and were paid a percentage of such discounts in the form of a monthly fee. All payments at issue came from an account held in the name of LGI-ESI, without any reference to its being held for any particular purpose or for the benefit of any other party. Defendants asserted that the account was actually a funnel through which the customers paid their utility bills, and that LGI-ESI typically paid those bills within hours or days after receipt of payment from its customers. The trustee agreed that the funds paid to LGI-DSI by its customers were required by contractual agreement to be held in a "trust-like relationship" and only be used to pay customers bills. However, the trustee contended that LGI-DSI did not act in accordance with its contract requirements, and that the debtors' principal was siphoning money out of the debtors and engineering a Ponzi scheme, and began shuffling money between different accounts. Defendants conceded that they were unable to trace money from customer payments to the payment of that customer's utility bills. The bankruptcy court agreed with Defendants, holding that Defendants were not required to show that the funds they received were the funds paid by their utility users to LGI-ESI, and that no tracing is required where the debtor has made payments which it was obligated to make. The bankruptcy court also ruled that the debtors received reasonably equivalent value, and that there was no intent to delay, hinder or defraud creditors. The trustee appealed, arguing that the payments did constitute estate property under 11 U.S.C. 541, and that defendants were required to trace the payments received back to the appropriate customer to prevent avoidance. The Court reversed the bankruptcy court's ruling granting summary judgment in favor of the defendants, and remanded for further proceedings. The Court held that funds paid by the debtor's customers to the debtor, which the debtor was then contractually required to pay to defendants, constituted estate property. The Court then held that, notwithstanding the defendants assertion that no tracing is required where the debtor has made payments which it was obligated to make, preference defendants are required to trace trust or bailment funds back to their appropriate customers to prevent avoidance. Finally, the Court held that the bankruptcy court did not make sufficient factual findings to determine that the debtors received reasonably equivalent value and that there was no intent to hinder, delay, or defraud creditors.
Judge(s):
Federamn, Venters, and Nail

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