Golden v. Guardian (In Re Lenox Healthcare, Inc.)Golden v. Guardian (In Re Lenox Healthcare, Inc.)
MEMORANDUM OPINION 1
Bеfore the Court is the Motion for Summary Judgment (the “Motion”) filed by The Guardian Life Insurance Company of America (“Guardian”) seeking a determi
I. BACKGROUND
A. The Debtor’s Employee Benefit Plans
The undisputed facts are as follows. Prior to seeking bankruptcy protection on July 10, 2001 (the “Petition Date”), the Debtor maintained certain health and dental employee benefit plans (the “Plans”) qualified under the Employee Retirement Income Security Act of 1974 (“ERISA”). The cost of the Plans was paid by employer contributions and employee payroll deductions.
Pursuant to the 1998 Administrative Services Agreement between the Debtor and Guardian, Guardian performed certain administrative services for the Plans in exchange for a fee. Those services included determining the eligibility of claimants for the Plans’ benefits and paying daily eligible claims on behalf of the Debtor. Guardian agreed to invoice the Debtor monthly (the “Monthly Claim Reimbursement Invoice”) for the claims paid by Guardian the previous month. Upon receipt of the Monthly Claim Reimbursement Invoice, the Debtor agreed to remit a check for the full balance due.
Between April 19 and July 25, 2001, the Debtor transferred the following payments (colleсtively, the “Transfers”) to Guardian:
AMOUNT CHECK NUMBER DATE
$108,852.04 367516 04/19/01
$161,212.30 368383 05/16/01
$131,204.72 369005 06/11/01
$201,389.39 370044 07/09/01
$147,145.88 370219 07/25/01
B. Procedural History
On July 10, 2003, Charles M. Golden, the chapter 11 trustee (the “Trustee”), filed a complaint (the “Original Complaint”) against Guardian seeking to avoid and recover the June 11, July 9, and .July 25 payments as alleged preferential, fraudulent, and unauthorized post-petition transfers. The Trustee amended the Original Complaint (the “Amended Complaint”) on April 4, 2005, to include the April 19 and May 16 payments (the “Additional Transfers”).
On November 28, 2005, Guardian filed the instant Motion, arguing that: (1) the Transfers were not property of the estate; (2) Guardian was not an initial transferee but a “mere conduit”; the Trustee cannоt satisfy his burden of proof under section 547(b)(5); and (4) the avoidance of the Additional Transfers is time-barred by the statute of limitations set forth in section 546(a). The Trustee opposed the Motion, arguing that the Additional Transfers relate back to the date of the Original Complaint and, therefore, are not time-barred. Additionally, the Trustee asserted that the Transfers consisted partially of property of the estate, and that the question of whether the Transfers were comprised wholly or partially of estate property is a disputed issue of material fact precluding summary judgment. Thе Motion has been fully briefed and is ripe for decision.
II. JURISDICTION
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C.
III. DISCUSSION
A. Standard of Review
Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); Fed. R. Bankr.P. 7056. The party moving for summary judgment has the initial burden of proving that there is no genuine issue as to any material fact.
Adickes v. S.H. Kress & Co.,
The burden then shifts to the non-moving party to “do more than simply show that there is some metaphysical doubt as to the material facts.”
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
B. Property of the Estate
As a threshold matter, for a trustee to exercise avoidance powers under sections 547, 548, and 549, there must have been a transfer of property of the estate.
See Begier v. I.R.S.,
Property of the estate includes “all legal or equitable interests of the debt- or in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The scope of section 541(a)(1) is broad.
United States v. Whiting Pools, Inc.,
Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... becomes property of the estate under [section 541(a)(1) or (2) ] only to the extent of the debtor’s lеgal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
11 U.S.C. § 541(d). Because property a debtor holds in trust for another is not property of the estate, transfers of such property cannot be avoided.
See, e.g., Begier,
In support of the Motion, Guardian argues that, because the Transfers consisted of employee payroll deductions and employer contributions, the Debtor never transferred property of the estate. Rather, it transferred property it held in trust for its employees. According to Guardian, a trust was imposed upon the Transfers when the employee wages were withheld and when the employer contributions were paid to Guardian. Because the Transfers consisted wholly of trust funds, Guardian argues that the Transfers cannot be avoided as a matter of law.
The Trustee does not disagree that trust funds are unavoidable, noting in his response that:
to the extent that the allegedly preferential transfers at issue here were trust funds belonging to the Debtor, and given to Guardian to fund the Benefit Funding Account for the purpose of funding the Debtor’s self fundеd Employee benefits payment program, they are probably not recoverable by the Debtor as preference payments.
According to the Trustee, however, the Transfers also included administrative fees paid to Guardian. Those portions, the Trustee argues, are avoidable under see-tions 547, 548, and 549. Because he is unable to determine how much of the Transfers were administrative fees, the Trustee asserts there is a genuine issue of material fact precluding a grant of summary judgment in favor of Guardian. In support of this contention, the Trustee points to the Administrative Services Agreement (in particular, Appendix IV) in which the Debtor agreed to pay Guardian administrative fees for services rendered.
Guardian denies that any portion of the Transfers consisted of administrative fees and asserts that the administrative fees were separately billed to, and paid by, each of the individual facilities owned and/or operated by the Debtor. In support of its argument, Guardian has submitted: (1) its June 2001 invoice sent to the Palmer House Alzheimer’s Center, a participating facility in the Debtor’s group plan, seeking payment of administrative fee prеmiums; and (2) its August 13, 2001, letter to the Debtor, detailing the amount of premiums owed by forty divisions within the Debtor’s group plan. In addition, Guardian has submitted copies of: (1) the five checks representing the Transfers; (2) the Monthly Claim Reimbursement Invoices for February through July 2001; and (3) the Monthly Financial Transaction Register and Medco
2
report for May 2001, both of which support in detail the amounts shown on the May 2001 Monthly Claim Reimbursement Invoice.
3
It is clear
It is true that employee wages which are withheld for the purpose of contributing to an employee benefit plan are assets of the plan held in trust for the employees from the moment they are withheld.
See Chao v. Lexington Healthcare Group, Inc. (In re Lexington Healthcare Group, Inc.),
In contrast, employer contributions to an employee benefit plan are not held in trust until they are actually transferred to the employee benefit plan.
College Bound,
Guardian argues, however, that once a debtor/employer delivers its contributions to an ERISA qualified plan, the contributions are unable to be avoided and recovered, relying on the
College Bound
decision. Guardian’s reliance on
College Bound
is misplaced. The Court in
College Bound
was not addressing the question of whether payment of employer contributions is avoidable as a preference or fraudulent conveyаnce. Instead, it was considering a request of the ERISA plan trustee for turnover of the contribution owed by the employer. The
College Bound
Court
That decision supports the conclusion that, in this case, to the extent the Transfers constituted employer contributions, they were property of the estate at the time of transfer and only became trust assets after the transfer. Thus, the Trustee may seek to avoid and recover the employer contributions under sections 547, 548, 549, and 550.
Begier,
Consequently, the Court concludes that the Trustee may not avoid the portion of the Transfers that constitutes employee contributions but may be able to avoid the portion that constitutes the Debtor’s contributions. A material issue remains in dispute as to which portion of the Transfers were employee withholdings and which were the Debtor’s contributions.
C. Mere Conduit Defense
Guardian next argues that summary judgment is appropriate because it was a “mere conduit,” not an initial transferee. Under section 550(a), a trustee may recover transfers avoided under sections 547, 548, and 549 from “the initial transferee of such transferís] or [from] the entity for whose benefit such transferís were] made[.]”
A defense to avoidance is available to those entities which are “mere conduits” of the avoided transfers.
See, e.g., Lyon v. Contech Constr. Prods., Inc. (In re Computrex, Inc.),
To be a “mere conduit,” a defendant must “establish that it lacked dominion and control over the transfer because the payment simply passed through its hands and it had no power to redirect the funds to its own use.”
CVEO,
In the instant case, Guardian argues that it did not have a beneficial interest in the Transfers and that it was a “mere claims paying agent,” required to receive the Transfers in trust for the Debt- or’s employees or for the healthcare providers rendering medical services.
The Trustee did not respond to Guardian’s “mere conduit” argument. The Court concludes, however, that the “mere conduit” defense is not available to Guardian. The documents presented by Guardian demonstrate that the Transfers were payments from the Debtor to reimburse Guardian for its advance payment of employee claims. The Transfers did not merely flow through Guardian to the health care providers.
Guardian’s own Motion refers to the Transfers as “claim reimbursement payments.” In addition, the Administrative Services Agreement did have an option, not chosen by Guardian, by which the Debtor could have established a funding account from which Guardian could have drawn checks and forwarded them directly to the employees or to the Debtor for distribution. A choicе of this option would have supported Guardian’s “mere conduit” defense because it would have required the Debtor to transfer funds to its benefit funding account
before
Guardian paid employee claims.
See Cypress Rests.,
The option actually chosen, however, required Guardian to pay employee claims first and then be reimbursed by the Debt- or after submitting its Monthly Claim Reimbursement Invoice.
As a result of the paying arrangement between the Debtor аnd Guardian, the Court concludes Guardian was not a mere conduit for any third party. It was not under any obligation to use the Transfers for the benefit of the Plans’ claimants and could use the Transfers for “ ‘whatever purpose [it wished], be it to invest in lottery tickets or uranium stocks.’ ”
CVEO,
Moreover, Guardian’s advance payment of employee claims transformed Guardian into a creditor of the Debtor. Courts have made it clear that to be a conduit, one cannot be a creditor and receive a payment to satisfy a debt—this is the “hallmark” of a preferential transfer.
360networks,
Guardian argues that because the Debtor was solely liable for employee claims and Guardian was merely the Debt- or’s agent, it clearly was a conduit. However, Courts have held that the existence of a principal-agent relationship is not dis-positive in establishing the “mere conduit” defense.
See 360networks,
Because the record establishes that the Transfers were reimbursements to Guardian for its prior payment of employee claims, Guardian’s dominion and control as well as its creditor status defeat the “mere conduit” defense, precluding a grant of summary judgment on this ground.
D. Statute of Limitations
Guardian further argues that it is entitled to partial summary judgment with respect to the Additional Transfers because they are time-barred by the two-year statute of limitations in section 546(a). The Additional Transfers were first challenged by the Trustee in the Amended Complaint filed on April 4, 2005. Under section 546(a), the statute of limitations for actions under sections 547 and 548 expired on July 10, 2003. Although the Original Complaint was filed within the required time period, the Amended Complaint was not. Therefore, for the Additional Transfers to survive, they must relate back to the date of the Original Complaint.
See
Fed.R.Civ.P. 15(c); Fed. R. Bankr.P. 7015.
See also Rouge Steel Co. v. Omnisource Corp. (In re Rouge Indus., Inc.),
No. 03-13272,
To relate back, the Additional Transfers must arise “out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the” Original Complaint. Fed.R.Civ.P. 15(c)(2). Because the relation back analysis focuses on whether the fact situation in the original complaint provided notice to the defendant that additional allegations would be pursued, Rule 15(c)(2) will be satisfied if an amended complaint “ ‘merely adds а new legal ground for relief, changes the date and location of the transaction alleged, ... spells out the details of the transaction originally alleged, ... [or] merely increases] the
ad damnum
clause....’”
Coan v. O & G Indus., Inc. (In re Austin Driveway Servs., Inc.),
In the preference context, to determine whether additional transfers relate back to those alleged in the original complaint, Courts hаve examined several factors.
See, e.g., Brandt v. Gerardo (In re Gerardo Leasing, Inc.),
The Trustee argues that the Additional Transfers relate back to the date of the Original Complaint because they arose out of the same transaction — the Administrative Services Agreement. The Court disagrees. The Amended Complaint challenged new Transfers; it did not simply set forth new legal grounds or facts on which to avoid and recover the original Transfers.
Coan,
The Original Complaint did not set forth any specific facts which could have encompassed the Additional Transfers; rather, it simply listed the dates and amounts of three payments and the elements of sections 547 and 548. The vague language of the Original Complaint “cаn hardly be said [to] ... indicate to [Guardian] that [the Trustee’s] prayer was to avoid all transfers made during the preference period.”
Rouge Indus.,
No. 03-13272,
According to the Trustee, the Administrative Services Agreement provided fair notice to Guardian that the Trustee sought to attack “transactions occurring during the entire history of [the] relationship” between Guardian and the Debtor. This is not correct. The Original Complaint did not reference the Administrative Services Agreement or specify any facts regarding the relationship between Guardian and the Debtor. In this case, the facts alleged in the Original Complaint did not provide Guardian with adequate notice that the Additional Transfers were subject to recovery by the Trustee. Therefore, the Court will grant partial summary judg
E. Count 1 — Avoidance of Preferential Transfers
Guardian’s final argument fоcuses on Count 1 of the Amended Complaint, which alleges that the Transfers constituted preferential transfers. Specifically, Guardian argues that the Trustee failed to carry his burden of proof under section 547(b)(5) which requires that the Trustee establish the Transfers enabled Guardian to receive more that it would have received if “(A) the case were a case under chapter 7 ...; (B) the transfer had not been made; and (C) [Guardian] received payment of such debt to the extent provided by the provisions of [the Code].” 11 U.S.C. § 547(b)(5)(A)-(C). To satisfy his burden, the Trustee must offer evidence of the Debtоr’s liabilities, the amount of claims filed against the Debtor, and whether any assets have been recovered since the Petition Date.
See Biggs v. Capital Factors, Inc. (In re Goetz),
No. 96-55944,
Guardian cites the lack of evidence produced by the Trustee as well as the Trustee’s answers to Guardian’s request for admissions. Of particular note is the Trustee’s admission that he did not perform any analysis or calculation to support his section 547(b)(5) allegation. Once again, the Trustee did not address this argument.
The Court concludes that the Trustee has failed to carry his burden of proof and that a grant of partial summary judgment in favor of Guardian with respect to Count 1 of the Amended Complaint is appropriate. The Trustee has the burden of proving the avoidability of the Transfers under section 547(b). See 11 U.S.C. § 547(g). As such, the Trustee must establish each element of section 547(b), including section 547(b)(5). In the instant case, there has been adequate time for discovery and the Trustee has presented no evidence in response to Guardian’s Motion for Summary Judgment to support an element essential to his claim.
The Supreme Court has made it clear that “Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof....”
Celotex Corp. v. Catrett,
[A] complete failure of proof concerning an essential element of the nonmov-ing party’s case necessarily renders all other facts immaterial. The moving party is “entitled to a judgment as a matter of law” because the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.
Celotex,
IV. CONCLUSION
The Court will grant partial summary judgment in favor of Guardian with respect to the Additional Transfers. The Court also will grant partiаl summary judgment with respect to Count 1 of the Amended Complaint.
An appropriate order is attached.
ORDER
AND NOW, this 1st day of JUNE, 2006, upon consideration of the Motion of The Guardian Life Insurance Company of America for Summary Judgment, the response of the Trustee thereto, and for the reasons set forth in the accompanying Memorandum Opinion, it is hereby
ORDERED that the Motion is GRANTED IN PART and Judgment is entered in favor of Guardian with respect to the April 19 and May 16, 2001 payments; and it is further
ORDERED that the Motion is GRANTED IN PART and Judgment is entered in favor of Guardian with respect to Count 1 (Avoidance of Preferential Transfers) of the Amended Complaint;
. This Opinion constitutes the findings of fact аnd conclusions of law of the Court pursuant to Federal Rule of Bankruptcy Procedure 7052.
Notes
. Guardian subcontracted to Medco the administration of the prescription drug portion of the Plans. Each Monthly Claim Reimbursement Invoice includes prescription drug claims paid by Medco and health and dental claims paid by Guardian.
. Normally documents may not be considered when deciding a Rule 56 motion, unless they are authenticated by affidavit. See,
e.g., Bouriez v. Carnegie Mellon Univ.,
No. Civ. A. 02-2104,