456 B.R. 150
Bankr. E.D.N.Y.2011Background
- Two debtor-entities RPC and RPNY transferred funds to Isserlis via LMB under a 2007 settlement; Isserlis to receive 70% of payments and LMB 30% as fees.
- Settlement and subsequent Stipulation/Judgment obligated RPC to pay Isserlis; LMB was to receive fees as Isserlis's counsel, not as RPC creditor.
- LMB held funds in escrow and disbursed Isserlis’s 70% and LMB’s 30% from escrow; interposed payments labeled “settlement.”
- Transfers occurred July 18, 2008 ($80,000) and August 4, 2008 ($30,000); bankruptcy petition filed August 25, 2008.
- Trustee seeks to avoid these transfers under 11 U.S.C. §547 and recover under §550; court finds transfers avoidable but not recoverable from LMB under §550.
- Court substantively consolidated RPC and RPNY; Isserlis is the sole creditor for §547 analysis; LMB acted as an escrow conduit rather than initial transferee.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Transfers are avoidable under §547(b). | Isserlis (creditor) via LMB received funds; transfers were on Isserlis's account. | LMB not a RPC creditor; funds went to Isserlis; LMB acted as counsel and escrow agent. | Yes; transfers are avoidable under §547(b). |
| Who is the creditor for §547 analysis? | LMB is creditor due to fee arrangement. | Isserlis is the creditor; LMB is merely conduit. | Isserlis is the creditor for §547 analysis. |
| Whether RPC was insolvent when transfers were made. | RPC unable to pay debts before filing; insolvency presumed for 90 days prior. | Schedules show solvent; contigent asset inflated solvency. | RPC insolvent at the transfers; presumption satisfied. |
| Whether transfers occurred within 90 days of petition. | Transfers occurred July–August 2008; petition August 25, 2008. | No dispute; within 90 days. | Transfers occurred within 90 days. |
| Whether Trustee can recover from LMB under §550 as initial/mediate transferee. | LMB was initial transferee or mediate; can be recovered from. | LMB a conduit; not initial transferee; good faith/value defenses apply. | Cannot recover from LMB under §550; LMB acted as conduit and good faith recipient. |
Key Cases Cited
- In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52 (2d Cir.1997) (adopts mere conduit test for initial transferee)
- Gropper v. Unitrac, S.A. (In re Fabric Buys of Jericho, Inc.), 33 B.R. 334 (Bankr.S.D.N.Y.1983) (escrow conduit not initial transferee; funds pass through law firm to client)
- In re Warnaco Grp., 2006 WL 278152 (Bankr.S.D.N.Y.2006) (escrow and conduit considerations; though not official reporter, cited for conduit concept)
- St. Parklex Assocs. (In re Parklex Assocs.), 435 B.R. 195 (Bankr.S.D.N.Y.2010) (knowledge of voidability; insolvency considerations)
- Wasserman v. Bressman (In re Bressman), 327 F.3d 229 (3d Cir.2003) (knowledge of voidability standard for good faith defense)
- Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890 (7th Cir.1988) (knowledge threshold for good faith def refines §550(b))