The White Family Companies, Inc. v. Slone (In re Dayton Title Agency, Inc.)

Summarized by Thomas DeCarlo , John Steinberger & Associates, PC
12 years 7 months ago

Citation:

2013 WL 3925820 (6th Cir. 2013)

Tag(s):

Ruling:

Funds constituted property of the debtor at the time of transfer for purposes of avoiding a fraudulent transfer. Provisional credit by bank for check deposited by debtor to hold in trust for third party amounted to loan to debtor when deposited check bounced. As third party never actually conveyed any money to the debtor, there was nothing for the debtor to hold in trust.

Procedural context:

Chapter 7 Trustee brought adversary against recipients of funds paid by debtor to recover fraudulent transfers. Bankruptcy Court held that the majority of the funds transferred were property of the debtor at the time of the transfer and avoided the transfer to that extend. District Court affirmed but increased the amount of funds that consituted debtor's property and were fraudulently transferred. Sixth Circuit reversed the District Court and reinstated the Bankruptcy Court's calculation of the amount of the transfer that consisted of property of the debtor.

Facts:

Debtor was a title company that acted as an intermediary between private lenders and a group of borrowers. The lenders would make short term loans to the borrowers by depositing money in Debtor's trust account and Debtor would then forward the money to the borrower when all of the loan documents were signed. The borrower would repay the loans the same way, by depositing money into Debtor's trust account which Debtor would then forward to the lender, less the commission earned by the Debtor for the transfer. After multiple transactions between lender and borrower, lender made another loan to borrower using the same system. When the loan came due, borrower gave Debtor a check representing repayment of the loan. Debtor deposited the check in the trust account and recieved immediate "provisional credit" from the bank, which allowed Debtor to immediately issue payment to the lender to repay the loan without waiting for the deposit to clear. When the payment from the borrower bounced, the bank reversed the provisional credit and created a multi-million dollar deficit in the Debtor's Trust account. The defecit left the Debtor without the ability to continue to operate and Debtor filed Chapter 7. The Trustee sued the private lender claiming that the last loan repayment constituted a fraudulent transfer. The private lender defended, claiming that the money it has been repaid was not property of the Debtor as the money had been deposited into the Debtor's trust account by a third person, precluding a finding of fraudulent transfer. The Court disagreed, holding that when the check given by the borrower bounced, there could be no "trust" as there was never any money actually deposited into the account to which a trust could attach. Instead, when the bank gave the provisional credit for the check and reversed that credit when the check bounced, it essentially loaned money to the Debtor which was Debtor's own funds free of any alleged trust status. As such, the amount of the payment to the lender was a constructively fraudulent transfer.

Judge(s):

Batchelder, Merrit and Kethledge

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