In re Personal Bus ( 2003 )

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
6-26-2003
In re Personal Bus
Precedential or Non-Precedential: Precedential
Docket No. 02-1192
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2003
Recommended Citation
"In re Personal Bus " (2003). 2003 Decisions. Paper 399.
http://digitalcommons.law.villanova.edu/thirdcircuit_2003/399
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2003 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
PRECEDENTIAL
Filed June 26, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 02-1192
IN RE: THE PERSONAL AND BUSINESS INSURANCE
AGENCY,
Debtor
JAMES K. MCNAMARA, ESQ., TRUSTEE,
Appellant
v.
PFS a/k/a PREMIUM FINANCING SPECIALISTS
On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Civil No. 01-cv-0092E)
District Judge: Honorable Sean J. McLaughlin
Argued February 24, 2003
Before: BECKER, Chief Judge,* SCIRICA, Circuit Judge**
and SHADUR,*** District Judge.
(Filed: June 26, 2003)
* Judge Becker completed his term as Chief Judge on May 4, 2003.
** Judge Scirica succeeded to the position of Chief Judge on May 4,
2003.
*** Honorable Milton I. Shadur, United States District Judge for the
Northern District of Illinois, sitting by designation.
2
LAWRENCE C. BOLLA (Argued)
KENNETH W. WARGO
Quinn, Buseck, Leemhuis, Toohey &
Kroto, Inc.
2222 West Grandview Boulevard
Erie, PA 16506
Attorneys for Appellants
RICHARD A. LANZILLO (Argued)
MARK G. CLAYPOOL
Knox McLauglin Gornall & Sennett
120 West Tenth Street
Erie, PA 16501
Attorneys for Appellee
OPINION OF THE COURT
BECKER, Circuit Judge.
This appeal from an order of the District Court affirming
the Bankruptcy Court’s dismissal of a fraudulent
conveyance claim brought against Premium Finance
Specialists (“PFS”) on behalf of the debtor, The Personal &
Business Insurance Agency (“PBI”), by the bankruptcy
trustee, James K. McNamara (the “Trustee”), poses the
question whether a court may consider post-bankruptcy
petition events, in this case the appointment of the Trustee,
in evaluating a claim brought under § 548 of the
Bankruptcy Code.
PBI was used as a pawn in an illegal scheme perpetrated
by its CEO and sole owner, Emil Kesselring, who caused
PBI to make payments totaling $580,000 to PFS in putative
repayment for loans that Kesselring had fraudulently
obtained from PFS. The Trustee now seeks to recover those
funds, arguing that the payments were a fraudulent
conveyance under § 548 of the Code. The District Court
determined that despite the fact that Kesselring’s actions
were adverse to PBI’s interests, under the “sole actor
exception” detailed in Official Committee of Unsecured
Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 359-60 (3d
3
Cir. 2001), Kesselring’s fraud must be imputed to PBI
because he was its sole representative. On this basis, the
District Court reasoned that PBI owed PFS a debt, that the
payments made to PFS were made in partial satisfaction of
that debt, and therefore that PBI received a reasonably
equivalent value for these payments, meaning that the
transfers to PFS were neither constructively nor actually
fraudulent.
The Trustee responds that even if Kesselring’s fraud was
properly imputed to PBI pre-petition, it cannot be imputed
to the Trustee, who is bringing this claim on behalf of
innocent creditors. He asserts that we must consider his
claim in light of a post-petition event, namely his
appointment as Trustee in place of the “bad actor”
Kesselring, in determining whether the transfers were
fraudulent under § 548. The Trustee urges that when we
take his appointment into account, the imputation of
Kesselring’s fraud to PBI would lead to an inequitable result
— loss to innocent creditors. He cites persuasive caselaw
which holds that the invocation of the doctrine of
imputation against a trustee should not be allowed when a
bad actor has been removed and the defense is serving only
to bar the claims of an innocent successor.
We find nothing in the language of § 548 that prevents a
court from considering post-petition events, and so we may
consider PBI’s claim in light of the appointment of the
Trustee. Because we agree that imputing Kesselring’s fraud
(and his debt) to the Trustee would lead to an inequitable
result, we conclude that Kesselring’s fraudulent acts (and
the debts he incurred) cannot be imputed to the Trustee,
and therefore that the District Court erred in affirming the
Bankruptcy Court’s dismissal of the Trustee’s fraudulent
conveyance claim. We will therefore reverse the judgment of
the District Court and remand the matter for further
proceedings.
I.
The Debtor, PBI, was an insurance brokerage firm in the
business of obtaining coverage for trucking companies and
their cargo by placing such coverage with various insurers.
4
Between March 1997 and November 1998, Kesselring, the
sole owner and chief executive officer of PBI, took
advantage of PBI’s operating procedures to use the
company in an illegal money-making scheme. As a
standard part of its business, PBI would sometimes obtain
for its clients financing for the insurance premium
payments necessary to secure coverage. PFS was one of two
financing companies that PBI used for this purpose.
Usually, when a client requested financing, PBI would
prepare an application and Kesselring would either sign the
application on behalf of the client, or obtain the client’s
signature by delivering it a copy of the application. PBI
would then send the application to PFS (or the other
finance company) for approval. Upon such approval, PFS
would arrange to bill the borrower. PFS would transmit the
loan monies to PBI by wire transfer or check and, normally,
PBI would then transfer the funds, less its commission, to
the insurer.
Beginning in March 1997, Kesselring began to take
advantage of this established procedure as a way to illegally
obtain funds for himself. He prepared false applications for
finance company loans in the name of actual PBI clients or
fictitious entities, either forging the borrower’s signature or
signing as the borrower’s agent/broker. He then submitted
the applications to PFS and obtained the loan proceeds.
Rather than paying for insurance coverage with these
funds, however, Kesselring pocketed the money. To avoid
detection, Kesselring caused PBI to make payments on the
fraudulent loans using PBI funds. Kesselring made a total
of $580,000 in such payments to PFS.
Kesselring’s malfeasance was nonetheless uncovered and
he was indicted by a grand jury for mail and wire fraud. In
August 1999, PBI’s Chapter 7 bankruptcy trustee, James
McNamara, filed a complaint against PFS, seeking to
recover the funds Kesselring had transferred to PFS
pursuant to his illegal scheme. The Trustee then filed an
amended complaint, alleging a claim for fraudulent
conveyance under 11 U.S.C. § 548 and the Pennsylvania
Uniform Fraudulent Conveyance Act, 12 Pa. C.S.A. § 5104
et seq., and a second amended complaint, which added a
claim of preference. PFS filed an answer to the second
5
amended complaint and then moved to dismiss the
fraudulent conveyance count of the second amended
complaint. The Bankruptcy Court granted this motion on
October 24, 2000. The Trustee voluntarily dismissed the
preference count of the second amended complaint,
resulting in a dismissal of the action. The Trustee appealed
the Bankruptcy Court’s decision to the District Court,
which affirmed, and he now appeals to this Court.
The District Court had jurisdiction pursuant to 28 U.S.C.
§158 (a)(1), based on an appeal from the final order of the
Bankruptcy Court. This Court has jurisdiction under 28
U.S.C. §158(d) and 28 U.S.C. §1291. Our review of an
appeal from the grant of a motion to dismiss under
Bankruptcy Rule 7012(b)(6), the equivalent of Fed. R. Civ.
P. 12(b)(6), is plenary. Meridian Bank v. Allen, 958 F. 2d
1226, 1229 (3d Cir. 1992). To affirm the dismissal of a
complaint under rule 12(b)(6), we take all well-pleaded
allegations as true and construe the complaint in the light
most favorable to plaintiff. Estate of Bailey Orr v. County,
768 F.2d 503, 506 (3d Cir. 1985).
II.
Under § 548 of the Bankruptcy Code, a conveyance is
fraudulent, and therefore avoidable, if it involved either
“actual” or “constructive” fraud.1 Actual fraud occurs when
1. § 548 reads, in pertinent part:
(a) The trustee may avoid any transfer of an interest of the debtor
in property, or any obligation incurred by the debtor, that was made
or incurred on or within one year before the date of the filing of the
petition, if the debtor voluntarily or involuntarily —
(1) made such transfer or incurred such obligation with actual
intent to hinder, delay, or defraud any entity to which the debtor
was or became, on or after the date that such transfer was made or
such obligation was incurred, indebted; or
(2)(A) received less than a reasonably equivalent value in exchange
for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or
such obligation was incurred, or became insolvent as a result of
such transfer or obligation. . . .
The language of the Pennsylvania Uniform Fraudulent Conveyance Act,
under which PBI also brought suit, mirrors that of the Code.
6
the debtor makes the transfer with the intent to hinder,
delay, or defraud creditors, and constructive fraud occurs
when the debtor receives less than a reasonably equivalent
value for a transfer and either is insolvent at the time of
transfer, or becomes insolvent because of it. The
Bankruptcy Court determined that the transfers in question
in this case were neither actually nor constructively
fraudulent because they were made in repayment of a debt
owed to PFS. The District Court agreed and rejected the
Trustee’s argument that Kesselring’s fraudulent conduct
cannot be imputed to the corporation and that the debt was
Kesselring’s alone. In rejecting this argument, the District
Court was guided by the analysis laid out in Waslow v.
Grant Thornton L.L.P. (In re Jack Greenberg, Inc.), in which
the Court held that:
“the fraud of an officer of a corporation is imputed to
the corporation when the officer’s fraudulent conduct
was (1) in the course of his employment, and (2) for the
benefit of the corporation. This is true even if the
officer’s conduct was unauthorized, effected for his own
benefit but clothed with apparent authority of the
corporation, or contrary to instructions. The underlying
reason is that a corporation can speak and act only
through its agents and so must be accountable for any
acts committed by one of its agents within his actual or
apparent scope of authority and while transacting
corporate business.”
212 B.R. 76, 83 (Bankr. E.D. Pa. 1997) (quoting Rochez
Bros., Inc. v. Rhoades, 527 F.2d 880, 884 (3d Cir. 1976)).
The District Court correctly found that the first prong of
this test was satisfied because Kesselring committed the
fraud in the course of his employment; applying for loans
from PFS was part of Kesselring’s standard work at PBI.
The second prong proved more difficult, however. Under
what is known as the “adverse interest exception,”
“fraudulent conduct will not be imputed if the officer’s
interests were adverse to the corporation and ‘not for the
benefit of the corporation.’ ” Lafferty, 267 F.3d at 359(citations omitted). This exception applied to the situation
at hand, as Kesselring’s illegal actions redounded only to
7
his own benefit, not to the corporation’s. There is however,
an exception to this exception, which states that:
[I]f an agent is the sole representative of a principal,
then that agent’s fraudulent conduct is imputable to
the principal regardless of whether the agent’s conduct
was adverse to the principal’s interests. The rationale
for this rule is that the sole agent has no one to whom
he can impart his knowledge, or from whom he can
conceal it, and that the corporation must bear the
responsibility for allowing an agent to act without
accountability.
Id.The District Court determined that this “sole actor”
exception applied because Kesselring was the sole
representative of PBI in the alleged fraudulent scheme. On
the basis of this determination, the Court concluded that
the transfers of money from PBI to PFS were not
constructively fraudulent because the corporation, through
Kesselring’s imputed conduct, received a reasonably
equivalent value for them (the loan proceeds disbursed by
PFS to PBI and appropriated by Kesselring), and therefore
the transfers were made in payment of an antecedent debt.
The Court further held that there was no actual fraud here
as the “ ‘badges of fraud,’ the most significant of which
include the adequacy of the consideration . . .,” were not
present. Specifically, the Court explained that “after having
determined that Kesselring’s alleged fraud is imputable to
the Debtor corporation, we have little difficulty concluding
that the transfers made in repayment of this debt were
given for adequate consideration.”
III.
A.
As it did before the District Court, PFS argues that the
Trustee’s fraudulent conveyance claim was properly
dismissed because PBI transferred the $580,000 in
question in payment of an antecedent debt owed to PFS.
PFS advances two theories for how this debt was created.
8
First, it argues that PFS transferred the loan monies
directly to PBI’s general checking account, not to
Kesselring, and therefore PBI was responsible for using the
funds appropriately and for making repayment to PFS. We
cannot agree. To the extent that PBI held the loan monies,
it did so only as a conduit; Kesselring appropriated the
monies for his own uses and PBI exercised no control over
them. Therefore, PBI’s transitory possession of the loan
funds did not create a debt owed to PFS.2
PFS next asserts that even if the transfer of funds to the
PBI account did not create a debt, the District Court was
correct in holding that, on the basis of the “sole actor”
exception, Kesselring’s fraud, and therefore his debt, must
be imputed to PBI, thereby creating a debt owed to PFS.
The Trustee responds that even if Kesselring’s fraud may be
imputable to PBI, it is not imputable to the Trustee, who is
now bringing this claim. In making this contention, the
Trustee must confront our decision in Lafferty, which held
that the fraud of a corporation’s owners must be imputed
to an Official Committee of Unsecured Creditors bringing a
claim under § 541 of the Bankruptcy Code.
B.
Lafferty arose out of the bankruptcy of two lease
financing companies that were allegedly involved in a
2. We therefore disagree with the Bankruptcy Court, which concluded
that the transfer of money into the PBI account created a debt to PFS,
reasoning that PBI:
had an obligation to forward the loan proceeds (less the Debtor’s
commission) to the insurance carriers or, if the insurance was not
placed or otherwise canceled, to return the loan proceeds to
Premium Finance. Thus, when the Debtor received the loan
proceeds, it had an obligation to Premium Finance.
McNamara v. Premium Finance Specialists (In re the Personal and
Business Insurance Agency, Inc.), Bankr. No. 99-10585, Adv. No. 99-
1090, slip op. at 7 (Bankr. W.D. Pa. 2001).
The District Court also appears to have rejected the Bankruptcy
Court’s reasoning, determining instead that PBI’s debt to PFS was
created through the imputation of Kesselring’s fraud to PBI.
9
“Ponzi” scheme. The Official Committee of Unsecured
Creditors brought suit on behalf of the debtor corporations
against, inter alia, the corporations’ counsel, accountant,
and underwriters (one of which was Lafferty), claiming that
these third parties had fraudulently induced the
corporations to issue debt securities, thereby deepening
their insolvency and forcing them into bankruptcy. The
complaint alleged that these parties had conspired with the
debtors’ managers, who were also the debtors’ sole
shareholders, to perpetrate the Ponzi scheme. The District
Court held that the suit against the third parties was
barred by the doctrine of in pari delicto, which provides that
a “plaintiff who has participated in wrongdoing may not
recover damages from the wrongdoing,” Black’s Law
Dictionary (7th ed. 1999), because the debtors, acting
through their sole shareholders, the Shapiro family, had
helped perpetrate the scheme.
On appeal, this Court addressed the key question
whether the fraud committed by the corporations’ owners
must be imputed to a Committee in bankruptcy.3 The
Committee, citing to In re Jack Greenberg, argued that a
court may disallow an in pari delicto defense when its
invocation would create an inequitable result. It urged that
this was just such a case, because the Committee was an
“innocent successor” and represented the corporations’
creditors, not the wrongdoers. The Committee urged that
the facts that the companies had declared bankruptcy and
that the “bad actors” (the Shapiros) had been removed
meant that only the innocent creditors would benefit from
the suit, hence applying in pari delicto would lead to an
inequitable result.
In analyzing the Committee’s claim, the panel determined
that it raised two issues: (1) “whether, when evaluating a
claim brought by a bankruptcy trustee, a court of law may
consider post-petition events that may affect an equitable
defense, such as in pari delicto”; and (2) whether, in light of
the answer to question (1), the Shapiro family’s conduct
should be imputed to the debtors so that in pari delicto
3. By the time the case was heard by this Court, Lafferty was the only
remaining defendant and sole appellee.
10
barred the Committee’s claims. Id. at 355. In deciding the
first question, the panel began by noting that the
application of in pari delicto in this particular case was
controlled by the rules governing bankruptcy. The
bankruptcy laws authorized the Committee to take one of
two types of actions in pursuing the bankruptcy: one type
is “ ‘brought by the trustee as successor to the debtor’s
interest included in the estate under Section 541,’ ” while
the second type is “ ‘brought under one or more of the
trustee’s avoiding powers.’ ” Id. at 356 (quoting 3 Collier on
Bankruptcy ¶ 323.03[2] (15th Rev. Ed. 2001)).
The Committee chose to bring its claim under Section
541, which states that the bankruptcy estate includes “all
legal or equitable interests of the debtor in property as of
the commencement” of bankruptcy. The panel explained
that “these legal and equitable interests include causes of
action” and that:
[g]iven these provisions, we have held that “in actions
brought by the trustee as successor to the debtor’s
interest under section 541, the ‘trustee stands in the
shoes of the debtor and can only assert those causes of
action possessed by the debtor. [Conversely,] [t]he
trustee is, of course, subject to the same defenses as
could have been asserted by the defendant had the
action been instituted by the debtor.’ ”
Id. (quoting Hays & Co. v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 885 F.2d 1149, 1154 (3d Cir. 1989)). The Court
concluded that “the explicit language of section 541 directs
courts to evaluate defenses as they existed at the
commencement of the bankruptcy” and that therefore it
was barred from considering the Committee’s status as an
innocent successor by the “plain language” of § 541. Id. at
356-57.
C.
As we have explained above, the Trustee submits that we
must consider his claim in light of a post-petition event,
namely his appointment as Trustee in place of the “bad
actor” Kesselring, in determining whether the transfers
were fraudulent under § 548. This Court’s ability to take
11
the Trustee’s appointment into account is the pivotal issue
in this case because the Trustee comes to us with clean
hands, whereas pre-petition, PBI bore the taint of
Kesselring’s fraud and therefore could not successfully have
brought a fraudulent conveyance claim. We therefore
confront two questions: (1) does Lafferty prohibit
consideration of post-petition events in the adjudication of
§ 548 claims, and (2) if not, should a court in fact consider
such events in ruling on these claims?
The Trustee argues that Lafferty cannot control our
decision here because the Committee in Lafferty brought
suit under § 541, which specifically bars consideration of
events that occurred after the commencement of the
bankruptcy, while the Trustee is bringing suit under § 548,
which has no such language. This argument has merit. The
Lafferty Court made clear that its holding did not extend to
actions brought under Code sections other than § 541, and
it specifically stated that the “trustee’s ‘avoiding’ powers are
not implicated here, as they relate to the trustee’s power to
resist pre-bankruptcy transfers of property.” Id. at 356. In
addition, the panel distinguished cases in the receivership
context, in which courts had declined to apply in pari
delicto on the ground that the application of the doctrine to
an innocent successor would be inequitable, solely by
relying on the text of § 541: “unlike bankruptcy trustees,
receivers are not subject to the limits of section 541.” Id. at
358.
We therefore agree with the Trustee that Lafferty does not
extend to the situation at bar because the Trustee is acting
under § 548 rather than § 541. This does not, however, end
our inquiry, for the fact that Lafferty does not control here
does not settle the question whether a court may consider
post-petition events, in this case the appointment of the
Trustee, in actions based on a trustee’s avoiding powers.
As the Trustee points out, there are strong equitable
arguments that favor courts’ consideration of post-petition
events. A number of courts have applied these arguments
in concluding that the defense of in pari delicto should not
be applied when a bad actor has been removed and the
defense is serving only to bar the claims of an innocent
successor. For example, in In re Jack Greenberg, discussed
12
supra, the Bankruptcy Court for the Eastern District of
Pennsylvania observed that:
The refusal of Pennsylvania’s highest court in Universal
Builders to allow the invocation of the equitable
defense of unclean hands against a bankruptcy trustee
when its application would produce an inequitable
result (i.e., application of the defense would result in
harm to innocent third parties) convinces me that there
are circumstances when the trustee’s position as
plaintiff is different from that of the corporation, even
when bringing the corporation’s claim. Accordingly,
while the true and oft stated maxim that a trustee
standing in the shoes of the corporation takes no
greater rights than the debtor is certainly the beginning
of my analysis, my inquiry does not end there. I
perceive that under Pennsylvania law equitable
defenses such as the doctrine of imputation that may
be sustainable against the corporation may fail to act
as a total bar to recovery when the beneficiaries of the
action are the corporation’s innocent creditors. . . .
240 B.R. at 505-06. Likewise, in Scholes v. Lehmann, 56 F.
3d 750, 754 (7th Cir. 1995), the Court noted that “the
defense of in pari delicto loses its sting when the person
who is in pari delicto is eliminated.” Similar equitable
considerations apply here as the bad actor, Kesselring, has
been eliminated and the Trustee comes to us with clean
hands, representing the interests of innocent creditors. If
the doctrine of imputation were applied to bar PBI’s
recovery, that application would lead to an inequitable
result (loss to innocent creditors).
We agree that “under Pennsylvania law equitable
defenses such as the doctrine of imputation that may be
sustainable against the corporation may fail to act as a
total bar to recovery when the beneficiaries of the action are
the corporation’s innocent creditors,” and find that the
same logic applies to suits brought under § 548 of the
Code, and we therefore conclude that we may take the
appointment of the Trustee into account when evaluating
his fraudulent conveyance claim.4 In re Jack Greenberg, 240
4. PBI brought its fraudulent conveyance claim under both the
Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. C.S.A. § 5104. et
seq., and § 548 of the Code.
13
B.R. at 506. There is no limiting language in § 548 similar
to that in § 541, and without that language there is no
reason not to follow the better rule, under which
Kesselring’s conduct would not be imputed to the Trustee
because it would lead to an inequitable result in this case.
D.
In sum, nothing in the language of § 548 precludes us
from considering the replacement of Kesselring by the
Trustee and the concomitant removal of the taint of
Kesselring’s fraud from PBI, and we hold that Kesselring’s
conduct will not be imputed to the Trustee. In that event,
the Trustee had no “antecedent debt,” and consequently no
value was received for the payments made by PBI to PFS.
The District Court’s order granting the motion to dismiss
will therefore be vacated and the matter remanded to the
District Court, which we assume will remand the matter to
the Bankruptcy Court for further proceedings consistent
with this opinion.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit