In re CUSTOM CONTRACTORS, LLC, Debtor. Deborah C. Menotte, Plaintiff-Appellant, v. United States of America, Defendant-Appellee.
No. 12-16489.
United States Court of Appeals, Eleventh Circuit.
March 26, 2014.
745 F.3d 1342
“The standing Article III requires must be met by persons seeking appellate review, just as it must be met by persons appearing in courts of first instance.” Arizonans for Official English v. Arizona, 520 U.S. 43, 64, 117 S.Ct. 1055, 1067, 137 L.Ed.2d 170 (1997). A party‘s ability “to appeal a trial court judgment is governed by a body of doctrine distinct from that which controls standing to bring suit as a plaintiff, although there is a significant overlap between the two.” Knight v. Alabama, 14 F.3d 1534, 1556 (11th Cir. 1994). One aspect of this overlap is “the general rule that a party may not appeal to protect the rights of others.” Id. (citation omitted) (internal quotation marks omitted).
Gleicher has not established, nor could he, that he suffered an injury-in-fact as a result of Hawes‘s filing of this lawsuit. Therefore, he lacked standing to intervene and he lacks standing to appeal the District Court‘s final judgment. On appeal, he is not asserting his own rights;14 rather, he is asserting, albeit indirectly, MAM‘s rights. This appeal is accordingly dismissed.
SO ORDERED.
Kenneth W. Rosenberg, Rachel Ida Wollitzer, Thomas J. Clark, Philip Doyle, U.S. Department of Justice, Washington, DC, Wifredo A. Ferrer, Anne Ruth Schultz, U.S. Attorney‘s Office, Miami, FL, for Defendant-Appellee.
Before CARNES, Chief Judge, WILSON and FAY, Circuit Judges.
WILSON, Circuit Judge:
This case arises from an attempt by Deborah C. Menotte, as trustee for the estate of Custom Contractors, LLC (Debtor), to avoid eight transfers made by the Debtor to the Internal Revenue Service (IRS) as payment for the income tax liability of the Debtor‘s principal, Brian Denson. The bankruptcy court ruled in favor of the United States as to the first seven transfers, finding that Menotte failed to prove all the elements of constructive fraud because she could not show the Debtor was operating with unreasonably
I.
Denson formed the Debtor in 2006 as a single-member limited liability company operating a commercial construction business and structured it as a Subchapter S corporation, commonly referred to as a “pass through” entity. Unlike ordinary corporations, S corporations do not pay federal income tax. Instead, the profits “pass through” to the shareholders—here, Denson—and are reported as income on the shareholders’ personal tax returns. Denson paid the taxes on his pass through income by causing the Debtor to send checks directly to the IRS using funds from the company‘s operational account. These payments, which were made in 2007 and 2008, were listed as distributions to Denson in the Debtor‘s books.1
The Debtor operated at a loss in 2008, leaving Denson with no tax liability and obligating the IRS to grant a refund, upon Denson‘s request, for the amount of the 2008 estimated tax payments the Debtor made to the IRS on Denson‘s behalf. See
On July 15, 2009, the Debtor filed for relief under Chapter 7 of the Bankruptcy Code. After being appointed Trustee, Menotte filed an adversary proceeding in the United States Bankruptcy Court for the Southern District of Florida alleging, under various theories of federal and state law, that the eight payments made by the Debtor to the IRS for the personal tax liability of Denson were fraudulent transfers. The bankruptcy court held a two-day trial and determined that the eighth payment was a constructively fraudulent transfer because it was made while the Debtor was insolvent, and the Debtor did not receive reasonably equivalent value. Furthermore, the bankruptcy court held that the IRS was an initial transferee under
The district court affirmed the decision as to the first seven transfers, holding that the bankruptcy court properly considered all the evidence and did not clearly err in finding that the Debtor was not operating with unreasonably small capital. As to the IRS‘s status as a mere conduit, the district court reversed, stressing the “flexible, pragmatic, equitable approach” adopted by this court and noting that “a strict application of the exception to the present situation would result in an illogical outcome,” requiring the IRS to refund the money for a second time. The district court, “analyzing the transaction in its entirety,” held that the IRS merely acted as an intermediary, holding “the funds until Denson‘s tax liability could be assessed.” Thus, the IRS was not liable as an initial transferee under
On appeal, Menotte asks this court to reverse the finding that the Debtor was not operating with unreasonably small capital, arguing that the bankruptcy court completely disregarded evidence that the downturn suffered by the construction industry in 2008 was foreseeable. Menotte also argues that the district court erred when it ruled that the IRS qualified for the mere conduit exception. The United States asks us to affirm the district court and argues that sovereign immunity bars recovery as to the first three transfers.
II.
“As the second court of review of a bankruptcy court‘s judgment, we independently examine the factual and legal determinations of the bankruptcy court and employ the same standards of review as the district court.” IBT Int‘l, Inc. v. Northern (In re Int‘l Admin. Servs., Inc.), 408 F.3d 689, 698 (11th Cir. 2005) (internal quotation marks omitted). Determinations of law made by the bankruptcy court or the district court are reviewed de novo. Senior Transeastern Lenders v. Official Comm. of Unsecured Creditors (In re TOUSA, Inc.), 680 F.3d 1298, 1310 (11th Cir. 2012). The bankruptcy court‘s findings of fact are reviewed for clear error. Id. “[F]indings of fact are not clearly erroneous unless, in light of all the evidence, we are left with the definite and firm conviction that a mistake has been made.” Westgate Vacation Villas, Ltd. v. Tabas (In re Int‘l Pharmacy & Discount II, Inc.), 443 F.3d 767, 770 (11th Cir. 2005) (per curiam).
III.
Section 550(a) of the Bankruptcy Code allows a trustee to recover, from initial transferees, the value of certain avoidable transfers made by a debtor.2
A.
Menotte seeks to avoid the first three transfers under
Sovereign immunity acts as a jurisdictional bar that shields the federal government from suits to which it has not consented. FDIC v. Meyer, 510 U.S. 471, 475, 114 S.Ct. 996, 1000, 127 L.Ed.2d 308 (1994); Asociacion de Empleados del Area Canalera (ASEDAC) v. Pan. Canal Comm‘n, 453 F.3d 1309, 1315 (11th Cir. 2006) (“It is axiomatic that the United States may not be sued without its consent and that the existence of consent is a prerequisite for jurisdiction.” (internal quotation marks omitted)). Such consent exists where Congress has “unequivocally expressed” its intent to waive sovereign immunity. United States v. Nordic Vill., Inc., 503 U.S. 30, 33, 112 S.Ct. 1011, 1014, 117 L.Ed.2d 181 (1992) (internal quotation marks omitted). By enacting
However, the government argues that this does not end our inquiry because
The issue presented by the parties, then, is what effect, if any,
We need not decide the issue, however, because Menotte has failed to prove that the transfers were avoidable under FUFTA. See infra Part III.B. Therefore, regardless of whether Menotte can—or must—prove the existence of an actual creditor, her attempt to avoid the transfer fails for other reasons to which we now turn. Thus, having determined that we have jurisdiction to hear Menotte‘s
B.
As discussed above, Menotte challenges the first three transfers using
Under FUFTA, a transfer is fraudulent when a debtor “[w]as engaged ... in a transaction for which the remaining assets of the debtor were unreasonably small” and failed to receive reasonably equivalent value.
Menotte alleges that the bankruptcy court failed to give due credit to the testimony of her expert, Alan Barbee. At trial, Barbee testified that the Debtor was operating with unreasonably small capital based, in part, on his determination that the impending deterioration of the housing market required the Debtor to keep a greater amount of capital. The bankruptcy court discredited this testimony, noting that “[t]o the extent that Mr. Barbee‘s opinion is based upon the need for additional capital because of the risk of being in the construction industry in the middle of a downturn, it appears to suffer from hindsight bias.” Menotte claims that this amounted to a “wholesale rejection” of the evidence as irrelevant and constituted error as a matter of law. We disagree.
Menotte‘s argument rests on her assertion that the bankruptcy judge completely disregarded Barbee‘s evidence related to the economic downturn. However, the record does not support this allegation. Rather, the record shows that the court considered all of the evidence presented by Barbee but discredited his opinion based on a finding that it was influenced by hindsight bias. As such, the bankruptcy court did not err as a matter of law. Nor can we say, based on the record, that the bankruptcy court clearly erred in deter-
C.
Section 548 of the Bankruptcy Code allows a trustee to “avoid any transfer ... of an interest of the debtor” made within the two years before the filing of a bankruptcy petition when “the debtor voluntarily or involuntarily ... received less than a reasonably equivalent value in exchange for such transfer or obligation; and ... was insolvent on the date that such transfer was made.”
The IRS argues that it is not an initial transferee because it lacked control over the fraudulently transferred funds, making it eligible for the mere conduit exception most recently recognized by this court in Martinez v. Hutton (In re Harwell), 628 F.3d 1312, 1322 (11th Cir. 2010). The district court agreed, and held that the bankruptcy court erred in finding “that the IRS ... did not qualify for the conduit defense.” We review the district court‘s application of our mere conduit law to these facts de novo. See Northern, 408 F.3d at 698, 703-08.
“The term ‘initial transferee’ is a term of art whose meaning in any given transaction is not always straightforward.” Andreini & Co. v. Pony Express Delivery Servs., Inc. (In re Pony Express Delivery Servs., Inc.), 440 F.3d 1296, 1300 (11th Cir. 2006). A “literal or rigid interpretation” of the term leads to the conclusion that “the first recipient of the debtor‘s fraudulently-transferred funds is an initial transferee.” Harwell, 628 F.3d at 1322 (internal quotation marks omitted). Recognizing the inequity that would result if every initial recipient of fraudulently-transferred funds could be forced, as an initial transferee, to return the funds to the bankrupt‘s estate, this court crafted an exception—grounded in the equitable powers of the bankruptcy court—known as the “mere conduit or control test.”5 Id. To meet the mere conduit or control test and avoid liability as an initial transferee under
The question before us is whether the IRS satisfies the control prong. In Pony Express, we stated that an initial recipient fails this prong “if they exercise legal control over the assets received, such that they have the right to use the assets for their own purposes.” 440 F.3d at 1300. However, we noted that in situations where the initial recipient is an entity that owes “legal obligations to the debtor-transferor ..., the control test turns on the recipient‘s legal rights and obligations toward the transferred assets, not simply their legal relationship with the debtor-transferor or the ultimate use of the assets.” Id. at 1301. Thus, when applying the conduit test, we must consider both the initial recipient‘s legal rights to the funds at issue as well as any existing obligations. “To ascertain these rights and obligations, ... [we] look at all the circumstances of the transaction that resulted in the avoidable transfer.” Id.
Our precedent dealing with the mere conduit or control test offers principles to guide our analysis. We have consistently found that when an initial recipient receives funds as payment of an existing debt, the recipient exercises sufficient control to be held liable as an initial transferee. See id. at 1302 (“[U]nder the control test, the initial transferee question turns on whether a debt existed....“); Arab Banking, 904 F.2d at 599-600 (holding a bank liable as an initial transferee where it received funds from a debtor as payment of a third party‘s debt owed to the bank); Societe Generale, 848 F.2d at 1200 (noting that banks that receive funds as payment of a debt gain control over the funds, whereas banks that receive funds as a deposit into an account do not). Implicit in these cases is the principle that funds received as payment of a debt leave the recipient with no obligations; that is, the transferee receives them with no strings attached. Thus, neither the transferor, nor any other party, has any rights—currently held, expected to accrue, or even currently held but expected to vanish—in the funds held by the initial transferee. Additionally, we have held that a bank that merely receives funds as a deposit into an account does not exercise control over those funds. Societe Generale, 848 F.2d at 1200-02. We have said this despite the fact that a bank has legal rights to put deposited funds to use. Banks regularly use deposited funds by giving them out in the form of loans. Indeed, this is a bank‘s primary source of income. Our case law, then, stands for the proposition that, when a bank receives funds in the form of a deposit, the attendant obligations owed to the transferor—namely to return the funds upon request—are sufficiently important that we will not hold the bank liable as an initial transferee in spite of the significant control it exercises over the funds.6 See id.
Menotte argues that these facts show that the payment made by the Debtor was, in fact, the payment of a debt, thereby giving the IRS sufficient control over the funds to be held liable as an initial transferee. We disagree.
At no point did Denson actually owe income taxes for 2008. When the Debtor made the transfers to the IRS, it likely expected that Denson would accrue tax liability—otherwise, there would have been no legitimate reason for making the transfers. But, because that expectation was never realized, the IRS was always subject to the looming possibility that
We view the circumstances here as more akin to those that exist when a bank receives a deposit because the IRS‘s control was always subject to the obligation created by
Of course, there are factual differences between the circumstances in Societe Generale and those presently before us. First, in Societe Generale, we viewed the relevant transfers—one from the bank to a third party and the other from the debtor to the bank to replenish the funds the bank gave to the third party—as “virtually simultaneous.” Id. at 1201. Here, we are faced with a nearly six month interval between the two transfers. In Societe Generale, however, the timing of the transfers was integral to the determination that the bank and the debtor did not enter into a debtor-creditor relationship. See id. Had we viewed the second transfer—from the debtor to the bank to make the bank whole—as actually and effectively occurring later in time than the first transfer,
Similarly, the fact that the IRS, unlike the bank in Societe Generale, actually put the funds to use does not impact our analysis because “the control test turns on the recipient‘s legal rights and obligations.” See Pony Express, 440 F.3d at 1301. Because the IRS‘s use of the funds neither enlarged its rights nor reduced its obligations, its use is irrelevant to our analysis.
Finally, we note that the obligations owed by a bank to an entity making a deposit are slightly different from the obligations owed by the IRS to the Debtor or Denson. Most importantly, neither the Debtor nor Denson had any rights in the funds until Denson‘s tax liability was determined, whereas an entity making a deposit into a bank account always has a right to call on those funds. This difference, though relevant to our determination, does not require a different outcome because, again, the focus of our analysis remains on the rights and obligations of the initial recipient. The rights held by the IRS here, like the rights held by a bank that receives a deposit, were circumscribed by the obligations owed such that the transfer to the IRS could not be considered the payment of a debt. Thus, we view the transaction here as sufficiently similar to the deposit of funds into a bank account to conclude that the IRS acted as a mere conduit.
Our conclusion is both logical and equitable in that it furthers the goals of the Bankruptcy Code. Avoidance actions allow trustees to recover prepetition payments made by debtors in order to ensure that similarly situated creditors receive equal treatment. Hartvig v. Tri-City Baptist Temple of Milwaukee, Inc. (In re Gomes), 219 B.R. 286, 296 (Bankr. D. Or. 1998). Section 550 limits the entities from which a trustee may recover the value of avoidable transfers to, among others, initial transferees.
For the aforementioned reasons, we affirm the judgment of the district court.
AFFIRMED.