Jenkins v. Chase Home Mortgage ( 1996 )

United States Court of Appeals,
Fifth Circuit.
No. 95-10491.
In the Matter of MAPLE MORTGAGE, INC., Debtor.
John James JENKINS, Trustee for Maple Mortgage, Inc., Appellant,
v.
CHASE HOME MORTGAGE CORPORATION, Appellee.
April 30, 1996.
Appeal from the United States District Court for the Northern
District of Texas.
Before REYNALDO G. GARZA, WIENER and STEWART, Circuit Judges.
STEWART, Circuit Judge:
Jenkins, trustee for Maple Mortgage (Maple) appeals from a
judgment dismissing its claim that a payment to Chase Home Mortgage
Corporation (Chase) was either preferential or fraudulent and thus
avoidable under 11 U.S.C. § 547 or 11 U.S.C. § 548. Because we
conclude that Maple had only legal title to the funds in question
and no equitable interest in them, we AFFIRM the district court's
grant of summary judgment to Chase.
FACTS
On December 2, 1988, debtor Maple entered into a Mortgage
Servicing Purchase and Sale Agreement with Chase. Maple agreed to
purchase the servicing rights to a portfolio of 7,140 single-family
mortgage loans. The purchase price for the servicing rights was an
amount equal to 1.21% of the aggregate unpaid principal balances of
the mortgages and was later calculated as $4,573,159 ($4.5 million)
on a principal balance of $377,947,054. Chase did not own the
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underlying mortgages and conveyed only the servicing rights to the
mortgages included in the portfolio.
The Agreement provided that, prior to the sale, Chase was
required to perform certain servicing duties including keeping a
complete, accurate, and separate account of all sums collected by
it from the mortgagors. Chase was also required to deposit all
funds received on account of the mortgages in a segregated trust or
custodial demand deposit account and maintain records in
conformance with applicable rules and regulations of the Government
National Mortgage Association ("GNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC").
The payment of the $4.5 million purchase price was made
pursuant to the Agreement as follows. First, Maple's parent
company, Western Community Money Centre of Alberta, Ltd.
("WesCom"), executed a debenture to Chase to secure payment of the
purchase price. Then, in accordance with the Agreement, the
following items were wired from Chase to Maple's account at
Fidelity National Bank on February 3, 1989: (1) mortgage payments,
(2) tax and insurance escrows, (3) outstanding receivables, and (4)
unearned fees. The total amount of these funds transferred from
Chase to Maple was approximately $9.7 million. Immediately
afterwards, Maple wire transferred back to Chase the $4.5 million
purchase price from the same Fidelity account. Once Chase received
the purchase price, it stamped the WesCom debenture "canceled" and
returned it to WesCom. As of the transfer date, Maple had not
taken any action to service the mortgages; therefore, Maple had
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not earned any servicing fees relating to those mortgages.
Prior to the wire transfer of the $9.7 million, Maple's
Fidelity account contained a balance of $28,400.59. The only
transactions made from this account on February 3, 1989 were the
two wire transfers to and from Chase. Less than forty-five days
after the Chase-Maple transfer, on March 17, 1989, Maple filed its
petition for bankruptcy.
John Jenkins, trustee for Maple ("Trustee"), brought an
adversary action to avoid the $4.5 million transfer on the theory
that it was either a preferential transfer under 11 U.S.C. § 547(a)
or a fraudulent transfer under 11 U.S.C. § 548(a). Chase filed a
motion for summary judgment, arguing that the $4.5 million conveyed
was not "an interest of the debtor in property" and thus that the
Trustee had failed to establish the existence of an element
necessary to both claims.
The bankruptcy court agreed with Chase's argument, and granted
summary judgment in favor of Chase. The court held that the
Trustee had failed to establish that the property transferred from
Maple to Chase was "an interest of the debtor in property" because
neither Chase nor Maple ever had equitable ownership of these
funds. The district court affirmed, and Trustee appeals.
DISCUSSION
Standard of Review
Summary judgment is proper when no genuine issue of material
fact exists and the moving party is entitled to judgment as a
matter of law. Fed.R.Civ.P. 56(c). Questions of law are reviewed
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de novo. In re Southmark, 49 F.3d 1111, 1114 (5th Cir.1995).
Summary judgment must be granted to the nonmovant if the movant
cannot make a showing sufficient to establish the existence of an
element essential to his case and on which he bears the burden of
proof. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct.
2548, 2552, 91 L. Ed. 2d 265 (1986).
"An interest of the Debtor in Property "
A trustee in bankruptcy can avoid a transfer that is either
preferential, as defined by § 547(b) or fraudulent, as defined by
§ 548(a). But in either case, the transfer must be "of an interest
of the debtor in property." 11 U.S.C. §§ 547(b), 548(a). The
reach of this avoidance power is limited to transfers of "property
of the debtor." Begier v. IRS, 496 U.S. 53, 58, 110 S. Ct. 2258,
2263, 110 L. Ed. 2d 46 (1990).
The scope of the debtor's bankruptcy estate includes "all
legal or equitable interests of the debtor in property as of the
commencement of the case." 11 U.S.C. § 541(a)(1). Section 541(d)
further explains that where the debtor holds only legal title and
not an equitable interest, the interest becomes property of the
estate only to the extent of the debtor's legal title. "Because a
debtor does not own an equitable interest in property he holds in
trust for another, that interest is not "property of the estate.'
Nor is such an equitable interest "property of the debtor' for
purposes of § 547(b)." Begier, 496 U.S. at 59, 110 S.Ct. at 2263.
The primary consideration in determining if funds are property
of the debtor's estate is whether the payment of those funds
diminished the resources from which the debtor's creditors
could have sought payment.
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Conversely, if funds cannot be used to pay the debtor's
creditors, then they generally are not deemed an asset of the
debtor's estate for preference purposes. A common example is
when a debtor holds funds in trust for another.
In re Southmark, 49 F.3d 1111, 1117 (5th Cir.1995).
Based on the facts of the transaction and the Agreement, both
the district court and the bankruptcy court determined that because
Chase neither owned nor attempted to transfer the mortgages
themselves, neither Chase nor Maple ever held the equitable
ownership of the funds transferred from Chase to Maple. Therefore,
the transfer of the $4.5 million to Chase did not diminish Maple's
estate, and was not avoidable as either a preferential or a
fraudulent transfer.
The Burden of Proof
The Trustee argues that In re Southmark establishes a
presumption that the Debtor's possession of funds in a bank account
in its name, coupled with the unfettered discretion to pay
creditors of its own choosing, demonstrates a sufficient "interest
of the debtor in property" for purposes of preference law. See In
re Southmark, 49 F.3d 1111, 1116 (5th Cir.1995). Furthermore, the
Trustee argues that, once it established that Maple had legal title
to the funds, Chase had the burden of establishing that it did not
have equitable title to the funds that had been deposited in its
Fidelity account, and that the funds constituted a "trust." The
Trustee insists that Chase failed to meet this burden.
The District Court and the bankruptcy court properly placed
the burden of proof on the Trustee because 11 U.S.C. § 547(g)
specifically provides that "the trustee has the burden of proving
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the avoidability of a [preferential] transfer." Similarly, the
trustee has the burden of proving the elements of a fraudulent
transfer. See In re McConnell, 934 F.2d 662, 665 n. 1 (5th
Cir.1991). However, the Trustee is correct in asserting that the
burden of proof was reallocated in Southmark. See Southmark, 49
F.3d at 1118.
At issue in Southmark was a payroll check drawn from a
commingled account. Southmark, 49 F.3d at 1113-14. The account,
which was owned by the debtor company, contained commingled funds
belonging to the debtor's parent and affiliate companies, as well
as its own funds. Id. The debtor company had complete control
over the account and could have totally depleted it to pay its own
creditors without regard to any other subsidiary's contribution to
or balance remaining in the account. Id. Consequently, this Court
held that when property that otherwise would be considered part of
a debtor's estate is alleged to be held in trust for another,
"[t]he burden of establishing the existence of the constructive
trust rests on the claimant." Id., 49 F.3d at 1118.
In the case sub judice, however, both Chase and Maple were
required to service the mortgages in accordance with applicable
regulations and prudent mortgage banking practices. They were
required to timely collect all payments due under the terms of each
mortgage, and were required to keep a complete, accurate, and
separate account of each mortgage and its appropriate tax and
insurance escrows. All funds received on account of the mortgages
were to be kept in a segregated trust or custodial demand deposit
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account, and detailed records of each individual mortgage were to
be maintained in a manner complying with applicable federal law.
From the funds in the segregated trust or custodial demand account,
both Chase and Maple were required to timely pay the proper
parties, including taxes, insurance, and all amounts of principal
and interest collected under each mortgage. Thus, while Maple had
discretion over the account itself, any presumption that it had
unfettered discretion over funds at issue in the transfer was
clearly rebutted by the specific terms of the Agreement.
Property held for the benefit of another
In Southmark, this Court distinguished generally between two
types of "equitable interests." In a contractual relationship, the
creditor may possess an "equitable claim" to property actually
owned by the debtor, but there is no division of ownership or title
in the property at issue, and the debtor is entirely free to
dispose of the property as he sees fit. In a trust relationship,
by contrast, the law actually divides the bundle of rights in the
property, and only when legal title to the property is held by the
bankrupt in trust for the benefit of another is the property
properly excluded from the bankrupt's estate. Southmark, 49 F.3d
at 1117. For example, in Begier, the Supreme Court found no
preference where funds were held in trust for the benefit of
another. The Court found that the money the debtor paid to the IRS
out of its general operating fund as a payment of withholding taxes
was a statute-based trust for the benefit of the IRS, and not
"property of the debtor." Begier, 496 U.S. at 62, 110 S.Ct. at
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2264.
In contrast to Begier where federal law established a
statutory trust, in the absence of controlling federal bankruptcy
law, the substantive nature of the property rights held by a
bankrupt and its creditors is defined by state law. See Matter of
Haber Oil Co., 12 F.3d 426, 435 (5th Cir.1994) (cited in Southmark,
49 F.3d at 1118 n. 28). Under the usual version of the
constructive trust doctrine, one who has been unjustly enriched at
another's expense is treated under state law much like a trustee,
holding legal title for the injured party's benefit. Haber, 12
F.3d at 435. Looking at Texas state law to determine whether the
Southmark creditor had adequately demonstrated that the property at
issue was held in trust for another, this Court found that there
was no evidence of unjust enrichment, and no evidence of either an
actual or a constructive trust. Southmark, 49 F.3d at 1118.
Unlike Southmark, however, the conclusion in this case that
Maple had only legal title to the transferred funds does not depend
on the remedy of constructive trust, but rather on the terms of the
contract between Maple and Chase. Under Texas law, an
interpretation of a contract is a question of law, and if a
contract is written so that a court may properly give it a certain
definite legal meaning or interpretation, it is not ambiguous.
Threadgill v. Farmers Ins. Exchange, 912 S.W.2d 264
(Tex.App.—Dallas 1995); see Matter of Oxford Management, Inc., 4
F.3d 1329, 1334 (5th Cir.1993). Under the terms of the Agreement
it is readily apparent that neither Chase nor Maple owned the
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underlying mortgages, and that the funds consisted of mortgage
payments, net escrows, outstanding receivables, and unearned fees.
As of the transfer date, Maple had not yet even earned any of the
servicing fees for which it had contracted; therefore, while Maple
had legal title to the funds, it was holding those funds for the
benefit of those to whom the money was owed, and therefore, Maple
had no equitable interest in the funds transferred. As Maple had
no equitable interest in the funds transferred to Chase, that
transfer cannot be avoided under either § 547 or § 548 of the
Bankruptcy Code, and thus Chase was properly granted summary
judgment as a matter of law. AFFIRMED.
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