597 B.R. 494
Bankr. S.D.N.Y.2019Background
- Trustee James Feltman sued Wells Fargo seeking avoidance/recovery of five categories of transfers made in connection with CRS/TSE receivables financing and cash-management: $4.1M in prepetition amendment/facility/monitoring fees; $2.572M payroll overdraft advance; $439,710.58 in post‑petition bank charges; $240,220.26 paid to Wells Fargo affiliate WFFL to buy out copier leases; and ~$1.7M in legal fees Wells Fargo self‑paid and sought indemnification for.
- CRS was a public staffing holding company; TSE (a PEO owned by the same principal) paid workers and had its payroll accounts at Wells Fargo. Wells Fargo provided receivables financing to CRS and cash management to TSE/Tri‑State; WFFL (affiliate) leased copiers.
- In June 2014 Wells Fargo amended CRS’s account-purchase agreements to add a stepped monitoring fee, facility fee and amendment fee. The Court found these fees punitive, tied to pressuring CRS to obtain replacement financing, and not tied to actual monitoring costs.
- After discovery of unpaid payroll taxes at TSE, TSE filed chapter 11 (Feb 2, 2015). Wells Fargo and CRS/TSE negotiated short‑term forbearance, an indemnity agreement for payroll overdrafts, and post‑petition stipulations about funding/overdrafts; Wells Fargo advanced funds to pay payroll.
- The Trustee prevailed on most counts: court avoided $4.1M in APA fees and $439,710.58 in post‑petition bank charges (and portions of other service‑charge items), denied recovery of the $2.572M payroll advance and the $240,220.26 WFFL lease payoff, and ordered an accounting to allocate legal fees reimbursed to Wells Fargo.
Issues
| Issue | Plaintiff's Argument (Feltman) | Defendant's Argument (Wells Fargo) | Held |
|---|---|---|---|
| 1) Recoverability of $4.1M in APA amendment/facility/monitoring fees | Fees were excessive/punitive, provided no reasonably equivalent value to insolvent CRS and thus are avoidable as constructive fraudulent transfers | Fees compensated bank for added risk/monitoring and forbearance; amendments and continued advances gave CRS value | Court avoided and ordered recovery of $4.1M: fees were punitive, not tied to costs, and the forbearance value was illusory given 30‑day termination and other constraints |
| 2) Payroll overdraft advance ($2.572M) | Payment diverted CRS/estate assets to satisfy obligations not owed by CRS (or not properly benefitting CRS) and thus was avoidable | Payment satisfied CRS’s indemnity/guaranty and preserved CRS’s accounts receivable by keeping employees paid; produced new receivables—reasonably equivalent value | Denied recovery: advance satisfied CRS’s indemnity and conferred indirect, reasonably equivalent value by preserving operations/accounts receivable |
| 3) Post‑petition bank charges (~$439,710.58) including Tri‑State charges, overdraft fees, unused account charges, and a July overcharge | Many charges were improper (assessed to debtor for non‑debtor activity), some violated automatic stay or were not agreed, and payments funded by CRS are avoidable | Wells Fargo says charges were legitimate contractual charges and necessary banking administration; some were automated | Court: recoverable in part. Tri‑State charges (assessed against TSE) violated automatic stay and are void; post‑petition overdraft and unused‑account charges avoided as constructively fraudulent; portion ($56,521.42) of July 2015 charge recoverable. No punitive damages awarded (no clear & convincing proof of willful stay violation) |
| 4) WFFL copier lease payoff ($240,220.26) | Payment to Wells Fargo affiliate for copier buyouts should be avoidable (preference/fraudulent transfer) | Payment was within Bank Product Supplement; WFFL claims payment was secured and collateralized under the APA/Bank Product Supplement | Denied recovery: transfers were either on account of antecedent debt and/or covered by the Bank Product Supplement and secured; trustee failed to show lack of reasonably equivalent value or that creditor received more than in chapter 7 |
| 5) Reimbursement/indemnification of Wells Fargo legal fees (~$1.7M) | Large portion unrelated to defended claims (Tri‑State, WFFL, etc.) and Wells Fargo's invoices lack detail—Trustee entitled to disgorgement/accounting | Wells Fargo asserts contractual indemnity and relies on prior stipulations and facility documents | Court: Trustee entitled to recover legal fees that are unrelated to APA matters and fees for claims on which Trustee prevailed; ordered accounting because invoices lack sufficient detail and Wells Fargo bears burden to justify retained fees |
Key Cases Cited
- BFP v. Resolution Trust Corp., 511 U.S. 531 (U.S. 1994) (elements of constructive fraudulent transfer/analysis of value)
- Orr v. Kinderhill Corp., 991 F.2d 31 (2d Cir.) (1993) (integrated‑transaction/"collapse" doctrine; analyze transaction as a whole)
- Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir.) (1981) (debtor’s payment of another’s debt may be rescued unless debtor received indirect reasonably equivalent benefit)
- Mellon Bank, N.A. v. Metro Commc’ns, Inc., 945 F.2d 635 (3d Cir.) (1991) (focus on whether debtor received realizable commercial value reasonably equivalent to asset transferred)
- Crysen/Montenay Energy Co. v. Esselen Assoc., Inc. (In re Crysen/Montenay), 902 F.2d 1098 (2d Cir.) (1990) (standard for civil contempt/automatic stay violations)
- Local Loan Co. v. Hunt, 292 U.S. 234 (U.S. 1934) (bankruptcy courts are courts of equity; equitable remedies like accounting available)