Riley v. Countrywide Home Loans, Inc. (In re Duplication Management, Inc.)
501 B.R. 462
Bankr. D. Mass.2013Background
- Duplication Management, Inc. (the Debtor) ceased operations Feb. 26, 2010; an involuntary Chapter 7 petition followed and trustee filed this adversary to avoid and recover mortgage payments the Debtor made on the personal mortgage of its president/sole shareholder, Michael Jenoski.
- From Dec. 2004–Mar. 2010 the Debtor (although not a maker or guarantor) made many monthly payments on the Jenoskis’ Meredith, NH mortgage; Countrywide/BAC/BofA received and applied those payments to the loan principal.
- Trustee sued for fraudulent conveyance under 11 U.S.C. § 548 (2‑year lookback) and derivatively under § 544(b)/Mass. Gen. Laws ch. 109A § 6 (4‑year lookback), and for unjust enrichment/money had and received.
- The Debtor’s balance sheets showed insolvency from 2006 through June 2010; defendants argued solvency if Debtor’s finances were combined with affiliate DMI, but produced no consolidated statements.
- Defendants argued the payments were compensation (indirect benefit) for Jenoski’s services and thus provided reasonably equivalent value; trustee argued defendants bore the burden to quantify any indirect benefit and failed to do so.
- Court took the Trustee’s evidence as establishing transfers, insolvency, and absence of direct benefit; found defendants failed to carry the shifted burden to prove quantifiable indirect value and granted summary judgment to the Trustee on all counts, awarding prejudgment interest at the Massachusetts rate.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Insolvency during lookback periods | Trustee: Debtor insolvent (balance sheets) from 2006–2010; creditors existed to invoke §544(b) | Defs: Must combine Debtor with affiliate DMI to show solvency; O’Connor testified consolidation was used | Court: Trustee met prima facie case; defendants failed to produce consolidated financials or evidence to rebut; Debtor insolvent as claimed |
| Reasonably equivalent value / indirect benefit | Trustee: No direct benefit (Debtor not liable on loan); burden shifted to banks to prove and quantify any indirect benefit (value of Jenoski’s services); banks produced no quantification | Defs: Payments were in lieu of salary/compensation to Jenoski; that equals value | Court: Shifts burden of production; banks failed to quantify concrete, cognizable indirect value; payments were distributions/bonuses that depleted estate; no reasonably equivalent value |
| Unjust enrichment / money had and received | Trustee: Debtor conferred a benefit (mortgage payments) which banks retained; inequitable for banks to keep funds; seeks restitution | Defs: Banks lacked knowledge/payor ambiguity (checks processed via automated systems) and statute of limitations arguments | Court: Face of checks and documentary record gave constructive notice; elements satisfied; claim treated as contractual in nature and recoverable from Dec. 2004 onward |
| Prejudgment interest rate | Trustee: State law governs interest where state fraudulent transfer law supplies substantive basis; requests MA prejudgment rate | Defs: Not contended to alter result | Court: Following First Circuit BAP precedent, state law governs where substantive claim is state law; awards MA prejudgment interest (12%) from suit commencement where applicable |
Key Cases Cited
- Executive Benefits Ins. Agency v. Arkison, 702 F.3d 553 (9th Cir. 2012) (discusses bankruptcy court authority and consent to final adjudication of core fraudulent-transfer claims)
- Braunstein v. Walsh (In re Rowanoak Corp.), 344 F.3d 126 (1st Cir. 2003) (distinguishes burden of proof from burden of production in fraudulent-transfer context)
- Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir. 1981) (indirect benefit theory: debtor’s net worth preserved if value received approximates value given)
- Official Comm. of Unsecured Creditors v. Citicorp N. Am. (In re TOUSA, Inc.), 680 F.3d 1298 (11th Cir. 2012) (indirect benefits must be concrete, cognizable, and quantified to defeat avoidance)
- Desmond v. Moffie, 375 F.2d 742 (1st Cir. 1967) (characterizing fraudulent conveyance avoidance as essentially contractual for statute‑of‑limitations purposes)