Appalachian Oil Co. v. Tennessee Education Lottery Corp. (In Re Appalachian Oil Co.)Appalachian Oil Co. v. Tennessee Education Lottery Corp. (In Re Appalachian Oil Co.)
MEMORANDUM
This is an action pursuant to 11 U.S.C. §§ 547(b) and 550(a) to avoid and recover certain alleged preferential transfers totaling $526,790.68 made by the debtor Appalachian Oil Company, Inc. (“APPCO”) to Tennessee Education Lottery Corporation (“TEL”). Presently before the court is TEL’s motion for summary judgment based on its contention that the transfers constituted trust funds and therefore were not property of the debtor, a necessary element of § 547(b). APPCO opposes the motion and contends, to the contrary, that
I.
On February 9, 2009, APPCO filed a voluntary petition for bankruptcy relief under chapter 11 and thereafter on August 9, 2010, initiated this adversary proceeding. In its complaint as amended, APPCO states that it operated approximately 57 convenience stores in Tennessee, Virginia, and Kentucky at the time of its bankruptcy filing. At its Tennessee stores, APPCO was an authorized seller of Tennessee lottery tickets. According to APPCO, the general practice for payment of these tickets was that each week TEL would issue an invoice to APPCO for amounts due that week for lottery tickets sold online and for instant tickets that APPCO had held for more than 21 days after activation and then sweep APPCO’s designated bank account to receive payment of the invoice by electronic funds transfer (“EFT”). Pursuant to this arrangement, during the 90 days prior to APPCO’s bankruptcy filing, TEL received six EFT payments totaling $229,155.81 between November 13, 2008, and December 16, 2008. Also during the same 90 day period, on December 28 and 30, 2008, and January 6, 2009, TEL attempted additional EFT sweeps in the amounts of $29,061.42, $51,658.85 and $216,864.60 respectively, but all were ineffective because APPCO did not have sufficient funds in its account. Because of these insufficiencies, TEL terminated APPCO’s ability to sell lottery tickets, and by December 30, 2008, had seized all unsold lottery tickets in APPCO’s possession. Thereafter, on January 8, 2009, TEL sent APPCO a letter demanding immediate payment of $297,634.87. In response, APPCO wired TEL $50,000 on January 9, 2009, and $247,634.87 on January 12, 2009. It is these two wire amounts, plus the six prior EFT sweeps totaling $229,155.81, that APPCO seeks to avoid and recover in this adversary proceeding as preferential transfers.
In moving for summary judgment on APPCO’s complaint as amended, TEL states that it is a quasi-governmental corporation, established in 2003 under Tennessee law for the operation of a state lottery, with its tickets being sold in 4,700 business locations across the state. According to TEL, APPCO became an authorized seller of Tennessee lottery tickets in its 24 Tennessee stores on November 19, 2003, when it entered into a retailer contract with TEL, under which the parties continually operated until APPCO’s bankruptcy filing. TEL asserts that this retailer contract, the Retailer Rules and Regulations incorporated by the contract, and Tennessee statutory law created an express trust in the proceeds from the sale of lottery tickets as recognized by the Honorable Richard Stair, Jr. in
Tennessee Education Lottery Corp. v. Cooper (In re Cooper),
TEL further asserts that these same provisions required APPCO to make daily deposits of proceeds from the sale of lottery tickets into a separate trust account established for the benefit of TEL, and that APPCO in fact set up the requisite trust account at Branch Banking & Trust (“BB & T”), account no. 930, under the name of “Appalachian Oil Company Inc. in trust for the TN Education Lottery Corporation.” TEL concedes, however, that APPCO failed to make the required daily deposits into the established trust account. Rather, APPCO’s practice, unbeknownst to TEL, was to make nightly deposits of all revenues from each store, including its
TEL argues that notwithstanding APP-CO’s failure to segregate proceeds from the sale of Tennessee lottery tickets from APPCO’s other funds, the proceeds constituted trust funds. TEL further argues that APPCO’s transfers to it constituted payment of these trust funds, citing
Begier v. Internal Revenue Service,
In response to these arguments, APPCO does not deny that the parties’ retailer contract and applicable provisions of Tennessee law purport to create a trust in proceeds from the sale of lottery tickets. APPCO argues, however, that a trust was not created or, at a minimum, was destroyed because APPCO failed to segregate the ticket sale proceeds. Consequently, maintains APPCO, no fiduciary relationship was ever created, and the parties’ relationship was reduced to the ordinary contractual one of debtor and creditor. Alternatively, APPCO argues that even if a trust was created in the proceeds, there is no evidence that the payments made to TEL were traceable to the trust proceeds. In this respect, APPCO seeks to limit
Begier
to its facts, and relies on the Sixth Circuit Court of Appeals’ decision in
First Federal of Michigan v. Barrow,
II.
Rule 56(a) of the Federal Rules of Civil Procedure, applicable in adversary proceedings by virtue of Rule 7056 of the Federal Rules of Bankruptcy Procedure, states in part that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” When deciding a motion for summary judgment, the court does not weigh the evidence to determine the truth of the matter asserted but simply determines whether a genuine issue for trial exists.
Anderson v. Liberty Lobby, Inc.,
III.
Subject to certain inapplicable limitations, § 1107(a) of the Bankruptcy Code permits a chapter 11 debtor in possession such as APPCO to exercise the rights of a bankruptcy trustee under the Code. See 11 U.S.C. § 1107(a). These rights include the ability of a trustee under § 547(b) to avoid a transfer of an interest of the debtor:
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b). As set forth in the prefatory clause of § 547(b), to be subject to avoidance, the transfer must be a transfer of property of the debtor.
As previously noted, the sole question which forms the basis of both TEL’s motion for summary judgment and APPCO’s responsive motion for partial summary judgment is whether the transfers in question were transfers of the debtor’s property. With respect to this phrase, the Bankruptcy Appellate Panel for the Sixth Circuit has stated the following:
Although the Bankruptcy Code does not define “property of the debtor,” the Supreme Court has found that the term is “best understood as that property that would have been part of the estate had it not been transferred [by the debtor] before the commencement of bankruptcy proceedings.” Begier v. IRS,496 U.S. 53 , 58,110 S.Ct. 2258 , 2263,110 L.Ed.2d 46 (1990). “In defining ‘an interest of the debtor in property’ the Sixth Circuit looks to 11 U.S.C. § 541(a)(1), which provides that the property of the estate includes ‘all legal or equitable interests of the debtor in property as of the commencement of the case.’ ” Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.),323 F.3d 439 , 443 (6th Cir.2003) (citing Stevenson v. J.C. Bradford & Co. (In re Cannon),277 F.3d 838 , 849 (6th Cir.2002)). In addition, in the absence of controlling federal bankruptcy law, the substantive nature of the debtor’s property interest is defined by state law. Id. (citing In re Cannon,277 F.3d at 849 ; Jenkins v. Chase Home Mortgage Corp. (In re Maple Mortgage, Inc.),81 F.3d 592 , 596 (5th Cir.1996)).
Moreover, pursuant to 11 U.S.C. § 541(d), “property of the estate” includes all property to which the debtor holds legal title, except “to the extent of any equitable interest in such property that the debtor does not hold.” “Because the 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).” Pass v. Morris (In re Morris),260 F.3d 654 , 670 (6th Cir.2001) (quoting Begier,496 U.S. at 59 ,110 S.Ct. at 2258 ).
Meoli v. Kendall Elec., Inc. (In re R.W. Leet Elec., Inc.),
Judge Stair of this district held in
Cooper
that the statutory, regulatory, and contractual scheme provided by Tennessee law, the Tennessee Lottery Rules and Regulations, and a retailer application and contract created an express trust in proceeds from the sale of Tennessee lottery tickets.
See In re Cooper,
Applying these requirements to the facts before him, Judge Stair concluded:
[A]n express trust was created between the Plaintiff and the Defendant by virtue of Tenn.Code Ann. § 4-51-120, the Retailer Contract, the Retailer Application, and the Retailer Rules and Regulations. First, the statute defines the identifiable trust res: all proceeds from the sale of lottery tickets or shares, including unsold instant tickets in the retailer’s possession and cash proceeds of the sale of any lottery product, less allowable sales commissions and cash prizes awarded to purchasers, which, pursuant to Tenn. Code Ann. § 4 — 51—111(a)(1), are property of the Plaintiff and which “shall constitute a trust fund until paid to the corporation either directly or through the corporation’s authorized collection representative.” Tenn.Code Ann. § 4-51 — 120(a). Similarly, the Retailer Contract expressly identifies as the trust fund res “all Instant Tickets accepted from the TEL or its distributor, as well as cash proceeds from the sale of any lottery products,” and states that “[a]ll proceeds from the sale of lottery Tickets and all other funds due the TEL shall constitute a trust fund in favor of the TEL until paid to the TEL.” Finally, the Retailer Rules and Regulations likewise state that all proceeds from the sale of tickets and other funds due the TEL “shall constitute a trust fund in favor of the TEL until paid to the TEL, and such proceeds are required by law to be deposited daily into the separate bank account no later than the close of the next banking day after the date of their collection by the Retailer.” Retailer Rules and Regulations at ¶ 2.12.A.
The Retailer Contract additionally establishes the Defendant as trustee and the Plaintiff as beneficiary, setting forth the following duties by the Defendant: (1) requiring the creation and maintenance of a separate bank account in his business’s name “as Trustee for the Tennessee Education Lottery Corporation”; (2) requiring the Defendant to make daily deposits of all lottery sales proceeds into the separate bank account; (3) requiring the Defendant to authorize the Plaintiff access to the separate account through electronic funds transfer; and (4) ensuring that the account funds are in the account for access by the Plaintiff, all of which are reiterated in the Retailer Rules and Regulations and are authorized by TenmCode Ann. § 4-51 — 120(b)(1). Retailer Rules and Regulations at ¶ 2.12.A
In re Cooper,
Cooper
arose in the context of a nondischargeability proceeding under § 523(a)(4) of the Bankruptcy Code rather than a determination of property of the estate under § 541. Nonetheless, its thorough conclusion regarding the creation of an express trust appears to be equally applicable to the case at hand, as the retailer contract in both cases, at least as to the pertinent provisions cited, appear identical.
1
Further, the relevant provisions of
As previously noted, APPCO maintains that, notwithstanding the Cooper decision, the express trust provided for in APPCO’s retailer contract with TEL and under Tennessee law never arose or was destroyed because APPCO failed to segregate the ticket sale proceeds from its other funds and failed to use the trust account exclusively for Tennessee lottery proceeds. APPCO cites no authority for the argument in its brief, other than the conclusory statement that “it is axiomatic that a party such as APPCO cannot be deemed a fiduciary or the trustee of [a] trust when the requisite elements necessary to create the trust were never established from the inception of the purported trust.”
Contrary to this assertion, however, the requisite elements of a trust were established. As previously noted, Tennessee law requires three elements: a trustee with certain equitable duties; a beneficiary to whom those duties are owed; and identifiable trust property.
In re Cooper,
The trust res — inclusive of proceeds and unsold tickets — was clearly created at the time the Defendant created the bank account and when he accepted the tickets from the Plaintiff to be held “in trust.” At that moment, under Tennessee law, the Defendant, as trustee, held legal title to the unsold lottery tickets he possessed and the lottery ticket sale proceeds he was to receive, even though equitable title remained in the Plaintiff. There can be no question that the parties intended to create a trust account into which the Defendant was required to deposit the lottery ticket sale proceeds received and collected by him but belonging to the Plaintiff, and his duty to pay over the proceeds to the Plaintiff arose upon his receipt of the lottery tickets.
In re Cooper,
The fact that APPCO subsequently failed to segregate the TEL trust funds and commingled them with its own funds does not destroy the previously established trust or the parties’ fiduciary relationship.
See Gowan v. The Patriot Group, LLC (In re Dreier LLP),
The court turns next to APPCO’s argument that the wired payments made on January 9 and 12, 2009, could not constitute transfers of trust funds because: (1) the trust relationship terminated prior to these transfers when TEL canceled APPCO’s ability to sell lottery tickets and
In summary, this court concludes that the proceeds from the sale of lottery tickets constituted funds APPCO held in trust for the benefit of TEL. This conclusion, however, does not necessarily resolve the issue before the court. As stated by the Supreme Court in
Begier,
the fact that a debtor held trust funds is insufficient to answer the question of whether the
particular dollars
that the debtor paid to the alleged preference creditor were trust funds.
See Begier,
APPCO maintains that in order for TEL to establish that it was actually paid with trust funds, it must trace the trust funds through APPCO’s commingled accounts, citing,
inter alia, First Federal of Michigan v. Barrow,
Once the trust relationship has been established, one claiming as a cestui que trust thereunder must identify the trust fund or property in the estate, and, if such fund or property has been mingled with the general property of the debtor, sufficiently trace the trust property. If the trust fund or property cannot be identified in its original or substituted form, the cestui becomes merely a general creditor of the estate.
Id. at 915 (quoting 4 Collier on Bankruptcy ¶ 541.13 (15th ed. 1988)).
Based on this statement of common law, the Sixth Circuit in First Federal affirmed a preference judgment against a group of mortgage companies who had argued that funds paid to them by the debtor had been held in constructive trust, but had otherwise failed to trace the trust funds through the debtor’s commingled bank account. Id. According to the court:
[HJaving asserted a constructive trust of which they were beneficiaries, the appellants assumed the burden of identifying the sums of their entitlements by tracing the trust funds through [the debt- or’s] commingled accounts....
It is beyond peradventure that, as a general rule, any party seeking to impress a trust upon funds for purposes of exemption from a bankruptcy estate must identify the trust fund in its original or substituted form. In the instant case, appellants have not attempted to trace- their funds beyond the deposits into the commingled [debtor] Central Account, which evidence, standing alone,is insufficient to support their constructive trust theory of recovery. Since the purported constructive trust consisted of money, which had no extrinsic identifiable characteristics of its own, was initially deposited and commingled into the [debtor] Depository Account with unidentifiable funds received from innumerable and diverse other sources and daily redeposited and again commingled in the negative balance [debtor] Central Account, appellants’ funds irretrievably lost their identity and “tracing” became a futile pursuit as a result of which the controversial payments here in issue became avoidable transfers within the meaning of 11 U.S.C. § 547(b).
Id. (citations omitted).
In the present case, APPCO relies on this discussion from
First Federal
in support of its argument that TEL’s summary judgment motion must fail because it has failed to perform the required tracing to demonstrate that it was actually paid with trust funds. However, a critical distinction between the facts in
First Federal
and the facts in the present case is that the first six alleged preferential payments made by APPCO to TEL were not made from APPCO’s commingled bank account, but from a trust account specifically set up for TEL’s benefit. In light of this critical factual distinction, at least with respect to the first six payments, this court believes that the Sixth Circuit’s decision in
Cannon
is more instructive.
See Stevenson v. J.C. Bradford & Co. (In re Cannon),
In Cannon, a Tennessee real estate attorney maintained several escrow accounts to hold client funds in connection with the clients’ real estate transactions. The attorney subsequently began using the funds in the escrow accounts to pay various personal and business expenses, and later made numerous transfers from the accounts to a brokerage company in order to engage in commodities trading. Id. at 844. Upon experiencing significant losses from this trading, the attorney filed for bankruptcy relief under chapter 7 (and was subsequently disbarred and imprisoned after pleading guilty to numerous federal crimes). Id. at 845. His bankruptcy trustee sought to recover the transfers from the brokerage company as fraudulent transfers under § 548 of the Bankruptcy Code. Although the bankruptcy court ruled in favor of the trustee, the district court reversed, concluding that the transfers were not property of the debtor attorney, a necessary element of § 548. Id. at 847. The court of appeals affirmed on the same basis. Id.
In reaching this conclusion, the Sixth Circuit first recognized that the client escrow accounts were express trusts and the funds therein trust funds for which the debtor only possessed legal title with equitable title remaining vested in the clients.
Id.
at 850. The court observed that “[although Tennessee law generally treats claimants of an insolvent trust as general creditors rather than beneficiaries unless they trace their property among commingled funds,” tracing was not necessary in the case before it because the alleged fraudulent transfers had been from the trust accounts.
Id.
at 850-51. And, while the debtor attorney had placed some of its personal funds into the trust accounts, thus commingling trust funds with non-trust monies, under common law trust principles these added personal funds were deemed to constitute trust funds because the debtor had made the deposits in order to repay some of the misappropriated funds.
Id.
at 851 (citing,
inter alia, Bo-gert’s Trusts and Trustees
§ 929 (2d ed. rev. 1984) (explaining that a trustee’s later deposits of his own money into a trust account are presumed to be restitution for
A similar result was reached in
Suwan-nee Swifty Stores, Inc. v. Georgia Lottery Corp. (In re Suwannee Swifty Stores, Inc.),
The bankruptcy court concluded that Georgia law created a statutory trust in favor of the Georgia Lottery Corporation in all proceeds from the sale of lottery tickets.
Id.
at 549 (citing Ga.Code Ann. § 50-27-21(a)). The court further concluded that it was unnecessary for the Georgia Lottery Corporation to perform any tracing to establish that it was actually paid with trust funds, citing, in part,
4
the common law presumption that a trustee is restoring a beneficiary’s trust funds when it adds funds to a depleted trust account.
Id.
at 553 (citing
Bethlehem Steel Corp. v. Tidwell,
Applying
Cannon
and
Suwannee Swifty Stores,
along with the common law trust presumption applied therein, to the present case, this court concludes that payments from the Tennessee Lottery trust account to TEL were payments of trust funds rather than funds of APPCO even though no tracing has been demonstrated. By setting up the trust account to pull funds from APPCO’s master account when it was drawn upon by TEL’s weekly EFT sweep, APPCO in essence created a systematic, electronic means of restoring the trust funds that it should have been depositing in the trust account all along. This restoration of trust funds in the trust account is conclusively presumed to be trust
With respect to the two payments that APPCO wired to TEL in January 2009, no common law presumption saves TEL from thé tracing requirement because these payments were not made from the trust account but from an APP-CO general account. This conclusion is unaltered by the fact that the general account from which TEL was paid may have included some of TEL’s trust funds. As explained by the Sixth Circuit in
First Federal,
if a defaulting fiduciary combines trust money with his own funds in a non-trust account, makes withdrawals from the account, but later adds his own funds into the account, the added funds are not presumed to constitute trust funds.
5
See First Fed. of Mich.,
In response to the tracing necessity, TEL makes three successive counter arguments: (1) First Federal’s tracing requirement is limited to its facts, a constructive trust under Michigan law, and has no applicability to an express trust under Tennessee law; (2) under the Supreme Court’s decision in Begier, rendered subsequent to First Federal, tracing is not required if the debtor made voluntary payments of trust funds; and (3) even if tracing is required, the undisputed evidence in this case adequately traces the proceeds from the sale of lottery tickets through APPCO’s bank accounts to TEL. Each of these arguments will be addressed in the order presented.
Turning first to TEL’s initial argument that the tracing requirement is limited to constructive trusts under Michigan law, the court finds no merit. The language in
First Federal
regarding tracing in the context of commingled accounts in the name of the debtor is extremely broad, and there
Moreover, the tracing mandate appears to be grounded in federal law, in particular the Bankruptcy Code’s “policy of equal distribution among similarly situated creditors.”
See Panning v. Bozek (In re Bullion Reserve of N. Am.),
Further, to the extent that state law is applicable, Tennessee law similarly treats claimants of an insolvent trust as general creditors rather than beneficiaries unless they can trace their property through commingled funds.
See In re Cannon,
TEL’s second argument as to why it is not required to trace the payments received by it from APPCO’s commingled general account to the trust funds collected by APPCO is the
Begier
decision. In
Begier,
the Court considered whether pre-petition payments of withholding and excise taxes to the IRS from the debtor’s
Unable to find the answer in the statute or in common law principles, the Supreme Court turned to the legislative history of § 547 and § 541 of the Bankruptcy Code, the latter of which defines property of the estate. The Court noted that prior to the enactment of the Bankruptcy Code in 1978, the Court in
United States v. Randall,
[A] serious problem exists where “trust fund taxes” withheld from others are held to be property of the estate where the withheld amounts are commingled with other assets of the debtor. The courts should permit the use of reasonable assumptions under which the Internal Revenue Service, and other tax authorities can demonstrate that amounts of withheld taxes are still in the possession of the debtor at the commencement of the case.
H.R. Rep. 95-595, at 549 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6570.
The Supreme Court in
Begier
concluded that these same “reasonable assumptions” should apply to prepetition payments of trust-fund taxes to the IRS, but queried how extensive the “required nexus” between the trust and the payments should be.
Id.
at 66,
A payment of withholding taxes constitutes a payment of money held in trust under Internal Revenue Code § 7501(a), and thus will not be a preference because the beneficiary of the trust, the taxing authority, is in a separate class with respect to those taxes, if they have been properly held for payment, as they will have been if the debtor is able to make the payments.
H.R. Rep. 95-595, at 373 (1977), reprinted in 1978 U.S.C.C.A.N. 5963 at 6329.
Based on the foregoing, the Court held that “[t]he debtor’s act of voluntarily paying its trust-fund tax obligation therefore is alone sufficient to establish the required
In the present case, TEL cites
Begier
for the proposition that it, similarly, is not required to trace the payments it received to its trust funds, because APPCO voluntarily made the payments, thereby providing the required nexus. This court disagrees.
6
The Supreme Court in
Begier
was focused solely on trust-fund taxes pursuant to § 7501 of the Internal Revenue Code for which common-law tracing principles could not be applied because the trust res as defined by statute was in an abstract dollar
“amount
” rather than specific property, the common-law paradigm. In fact, the court even utilized the phrase “special context” to describe how the issue before it arose. In contrast, the trust res in the present case is not in an abstract “amount.” As previously described, the trust res is identified both in the retailer contract and by statute as specific property: proceeds ¡from the sale of lottery tickets and unsold tickets in the retailer’s possession. There was simply no indication in
Begier
that the Court was abandoning the traditional tracing rule in contexts outside of § 7501 trusts or for trusts which continue to fit within the common-law paradigm.
See Wyle v. S & S Credit Co. (In re Hamilton Taft & Co.),
Consistent with this conclusion, common-law tracing generally has continued to be required for alleged trust payments outside the trust-fund tax context.
7
See, e.g., Stoebner v. Consumers Energy Co. (In -re LGI Energy Solutions, Inc.),
Having confirmed that tracing is required, this court turns to TEL’s final argument, that the requisite tracing is established by the undisputed evidence in this case. As proof of tracing, TEL points out that APPCO’s practice was to transfer local bank deposits, which included lottery proceeds, to its master account no. 957, and that in December 2008, APPCO transferred from this master account sums totaling $1,853,726.36 to account no. 353. It is from this latter account that APPCO wired the two wired payments totaling $297,634.87 to TEL on January 9 and 12, 2009. 8 According to TEL, this evidence demonstrates that the wired payments were trust funds.
The court disagrees. The funds on deposit in master account no. 957 consisted of commingled trust and non-trust funds from which APPCO regularly paid its vendors and other creditors. There is no evidence in the record that any lottery trust funds remained in the master account at the time of the transfer to account no. 353. Because of the general nature of the two accounts, it is incumbent upon TEL to allocate the funds in the accounts between trust and non-trust monies utilizing the lowest intermediate balance test.
See First Fed. of Mich.,
The situation frequently occurs where trust funds have been traced into a general bank account of the debtor. Thefollowing general principles have been applied. The bankruptcy court will follow the trust fund and decree restitution where the amount of the deposit has at all times since the intermingling of funds equaled or exceeded the amount of the trust fund. But where, after the appropriation and mingling, all of the moneys are withdrawn, the equity of the cestui is lost, although moneys from other sources are subsequently deposited in the same account. In the intermediate case where the account is reduced to a smaller sum than the trust fund, the latter must be regarded as dissipated, except as to the balance, and funds subsequently added from other sources cannot be subject to the equitable claim of the cestui que trust. If new money is deposited before the balance is reduced, the reduction should be considered to be from the new money and not from the monies held in trust. This analysis may be referred to as the lowest intermediate balance test.
Id.
(quoting 4
Collier on Bankruptcy
¶ 541.13 (15th ed. 1988));
Old Republic National Title Insurance Co. v. Tyler (In re Dameron),
No attempt has been made by TEL to apply the lowest intermediate balance test to establish that it was actually paid with trust funds when it received the wired payments. Accordingly, TEL’s motion for summary judgment based on its contention that the payments represented trust funds rather than property of the debtor must be denied.
In turn, APPCO seeks partial summary judgment on the same issue. APPCO maintains that because TEL received the wired payments from APPCO’s general account, and because TEL has not demonstrated by the required tracing with its lowest intermediate balance test that any of the payments represented trust funds, the court should summarily rule that the payments represented property of the debtor. Alternatively, APPCO contends that tracing is an impossibility because of the multiple accounts into which the lottery proceeds were commingled before payment to TEL.
The court agrees that APPCO is entitled to a ruling in its favor on this issue because TEL has failed to establish that it was paid with trust funds. As discussed in
Leet Electric,
although a party seeking to avoid a preference has the burden of establishing all of the elements of a preference under § 547(b),
see
11 U.S.C. § 547(g), APPCO met this burden by evidence that TEL was paid from APPCO’s general account.
See In re R.W. Leet Elec., Inc.,
In summary, the court concludes that the six payments totaling $229,155.81 made by APPCO to TEL between November 13, 2008, and December 16, 2008, were trust fund property rather than property of the debtor. Accordingly, TEL is entitled to summary judgment in its favor as to APP-CO’s claim that these payments represent avoidable preferences under 11 U.S.C. § 547(b). Regarding the two wired payments made by APPCO to TEL on January 9, 2009, and January 12, 2009, in the amounts of $50,000.00 and $247,634.87 respectively, the court concludes that these payments were property of the debtor APPCO. Therefore, APPCO will be granted partial summary judgment on these claims, and TEL’s motion for summary judgment will be denied. The court will enter an order consistent with this ruling.
Notes
. In Paragraph 1 of the retailer contract, APPCO agreed to comply with the Rules and Regulations of TEL and the Tennessee Lottery for Education Act. Additionally, paragraph 5 states the following:
Electronic Funds Transfer. Retailer shall have a fiduciary duty to preserve and account for all proceeds from the sale of lottery Tickets collected by it and shall be responsible and liable for all such proceeds. All proceeds from the sale of lottery Tickets and all other funds due the [TEL] shall constitute a trust fund in favor of the [TEL] until paid to the [TEL]. Subject to the Actand the Rules and Regulations, Retailer agrees (i) to maintain for the purpose of this Retailer Contract a separate bank account in the name of the Retailers as "Trustee for the Tennessee Lottery Corporation,” with a bank acceptable to [TEL] which is a member of an automated clearing house association; (ii) to deposit daily into that bank account all proceeds from the sale of lottery Tickets and other funds due the [TEL]; (iii) to authorize [TEL] to initiate Electronic Funds Transfer (EFT) to and from that account for the net settlement due from the sales of [TEL] lottery Tickets; and (iv) that sufficient funds shall be available in the designated account on the dates specified by [TEL] to cover the amounts due [TEL], as determined by [TEL],
. Tenn.Code Ann. § 4-51-111 (a) states that: "All lottery proceeds shall be property of the corporation [TEL].” Additionally, Tenn Code Ann. § 4-51-120(a) provides:
All proceeds from the sale of the lottery tickets or shares shall constitute a trust fund until paid to the corporation either directly or through the corporation's authorized collection representative. A lottery retailer and officers of a lottery retailer’s business shall have a fiduciary duty to preserve and account for lottery proceeds and lottery retailers shall be personally liable for all proceeds. Proceeds shall include unsold instant tickets received by a lottery retailer and cash proceeds of the sale of any lottery products, net of allowable sales commissions and credit for lottery prizes sold to or paid to winners by lottery retailers. Sales proceeds and unused instant tickets shall be delivered to the corporation or its authorized collection representative upon demand.
. The parties in this case focused their arguments on whether an express trust was created. However, the Sixth Circuit Court of Appeals has recognized that “[s]tatutoiy trust funds are not the property of the debtor and are not subject to the ... preference (§ 547) provisions of the new [Bankruptcy] Act.”
Sel-by
v.
Ford Motor Co.,
. The primary basis of the court's ruling was the
Begier
decision, with the bankruptcy court concluding that it stood for the proposition that a voluntary payment, “regardless of its source,” is conclusively presumed to be from the trust corpus.
Id.
at 552. In reaching this conclusion, the
Suwannee Swifty Stores
court cited
Begier’s
description of a § 7501 Internal Revenue Code trust, a trust created in an "abstract amount” without regard to the source of the funds, and concluded that the statutory trust in lottery proceeds was the same type of trust.
Id.
at 553 (citing
Begier,
This court respectfully disagrees with this aspect of the Suwannee Swifty Stores decision. Like the trust in the present case, the trust in Suwannee Swifty Stores was not in an abstract amount without regard to source; rather the trust was in specific property from a particular source, proceeds from the sale of lottery tickets. See Ga.Code Ann. § 50-27-21(a) ("All proceeds from the sale of the lottery tickets or shares shall constitute a trust fund until paid to the corporation ...”).
. There is a possible exception to this rule if it is demonstrated that the deposited funds were added for the express purpose of restoring the property previously misappropriated. However, the mere fact that a deposit occurred does not raise an inference of an intention to make restitution, unless, as in Cannon, the commingling and redeposit took place in a trust account. See Restatement (Second) of Trusts § 202 cmt. m (2011); Restatement (First) of Restitution § 212 cmts. a and c (2011); Bogert’s Trusts and Trustees § 929 (2011); 90A C J.S. Trusts § 740 (2012).
. Even if Begier applied, there is an issue of fact as to whether the two wired payments were truly voluntary, as they were made in response to TEL’s demand letter.
. Most courts have limited
Begier
exclusively to § 7501 trust-fund taxes, although a few, including the Third Circuit Court of Appeals, have extended its holding to other types of trust-fund taxes.
See, e.g., City of Farrell v. Sharon Steel Corp.,
. TEL also points out that in December 2008 APPCO transferred $1,853,726.36 from master account no. 957 to account no. 906, and then on January 12, 2009, transferred $247,634.87 from account no. 906 to account no. 353. The relevance of this information is unclear since the transfer into account no. 353 occurred after the January 9, 2009 wire transfer to TEL and the evidence does not indicate whether the transfer of funds from account no. 906 to account no. 353 on January 12, 2009, took place before APPCO made the wired payment to TEL on January 12, 2009.