Brady v. Bestworth Rommel, Inc.

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 03-45806 TD
Chapter 7
BRUCE JOHNSON AND LEE
JACOBSEN,
Debtors.
___________________________/
LOIS I. BRADY, Trustee in 	A.P. No. 05-4432 AT
Bankruptcy,
Plaintiff,
vs.
BESTWORTH-ROMMEL, INC.,
Defendant.
___________________________/
MEMORANDUM OF DECISION
In 	this 	adversary 	proceeding, 	plaintiff 	Lois 	I 	Brady 	(the
“Trustee”), 	the 	duly 	appointed 	chapter 	7 	trustee 	for 	the 	above-
captioned bankruptcy case, seeks to avoid a pre-petition transfer to
defendant Bestworth-Rommel, Inc. (“Bestworth”) pursuant to 11 U.S.C.
§ 548(a)(2) and to recover the amount of the transfer from Bestworth
pursuant to 11 U.S.C. § 550(a) or (b). 	Trial was conducted in this
Signed: November 25, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 27, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 05-04432 Doc# 19 Filed: 11/25/06 Entered: 11/27/06 14:41:41 Page 1 of
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26 	1The Debtors were not personally obligated for the Debt
Amount.
2
adversary 	proceeding 	on 	October 	11, 	2006. 	Having 	considered 	the
evidence 	and 	argument 	presented 	at 	trial, 	the 	Court 	concludes 	that
the 	Trustee’s 	claim 	must 	fail 	and 	that 	Bestworth 	is 	entitled 	to 	a
judgment in its favor. 	The reasons for the Court’s decision are set
forth below.
SUMMARY OF FACTS
The 	underlying 	facts 	are 	not 	in 	dispute. 	The 	above-captioned
debtors (the “Debtors”) commenced this chapter 7 bankruptcy case on
October 	8, 	2003, 	by 	filing 	a 	voluntary 	petition. 	At 	the 	time 	the
petition was filed and during the year preceding the filing, Debtor
Bruce 	Jacobsen 	was 	an 	employee 	and 	shareholder 	of 	a 	California
corporation 	known 	as 	Elephant 	& 	Slon, 	Inc. 	(“Elephant”). 	Elephant
was 	the 	owner 	of 	certain 	real 	property 	located 	in 	San 	Pablo,
California, consisting of a gas station (the “San Pablo Property”).
Elephant was indebted to Bestworth in the amount of $13,572.39
(the 	“Debt 	Amount”) 	for 	fabrication 	and 	installation 	of 	a 	metal
canopy on the San Pablo Property. 1 	Bestworth had issued an invoice
for 	the 	Debt 	Amount 	in 	January 	2003. 	However, 	the 	Debt 	Amount 	was
not paid on a timely basis. 	As a result, on April 7, 2003, Bestworth
recorded 	a 	mechanic’s 	lien 	on 	the 	San 	Pablo 	Property 	(the 	“Lien”).
Thereafter, in early July 2003, Bestworth filed an action in Contra
Costa 	Superior 	Court 	against 	Elephant 	to 	foreclose 	Lien 	(the 	“Lien
Suit”).
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3
At the time the Lien was recorded and the Lien Suit was filed,
Elephant 	was 	attempting 	to 	sell 	the 	San 	Pablo 	Property. 	The
recordation 	of 	the 	Lien 	and 	the 	filing 	of 	the 	Lien 	Suit 	was 	an
impediment 	to 	the 	sale. 	To 	remove 	this 	impediment, 	the 	Debtors
agreed to advance funds to pay the Debt Amount. 	The funds provided
were the separate property of Debtor Lee Jacobsen. 	On June 27, 2003
Mrs. 	Jacobsen 	purchased 	a 	cashier’s 	check 	in 	the 	Debt 	Amount 	(the
“Cashier’s Check”). 	She gave the Cashier’s Check to her husband, who
delivered it to North American Title Company (the “Title Company”),
the title company handling the sale of the San Pablo Property.
The 	Cashier’s 	Check 	was 	made 	payable 	to 	Bestworth. 	However,
instead of delivering the Cashier’s Check to Bestworth in return for
a 	release 	of 	the 	Lien, 	the 	Title 	Company 	negotiated 	the 	Cashier’s
Check. 	It 	then 	issued 	its 	own 	check 	in 	the 	Debt 	Amount 	payable 	to
Bestworth 	(the 	“Title 	Company 	Check”). 	Upon 	receipt 	of 	the 	Title
Company Check, Bestworth executed a release of the Lien, and the Lien
release 	was 	recorded 	in 	the 	County 	Recorder’s 	office. 	It 	is
undisputed that at the time Lee Jacobsen provided the Cashier’s Check
to the Title Company and the Title Company negotiated it and provided
the Title Company Check to Bestworth, the Debtors were insolvent.
APPLICABLE LAW
Section 	548(a)(1)(B) 	of 	the 	Bankruptcy 	Code 	provides, 	in
pertinent 	part, 	that 	a 	trustee 	may 	avoid 	a 	transfer 	of 	a 	debtor’s
interest in property made within one year preceding the commencement
of the debtor’s bankruptcy case if the debtor:
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(B) 	(i) 	received 	less 	than 	a 	reasonably
equivalent 	value 	in 	exchange 	for 	such
transfer... 	and
(ii) 	was 	insolvent 	on 	the 	date 	that 	such
transfer was made...[.]
See 11 U.S.C. § 548(a)(1)(B)(i) & (ii). 	Section 548(c) provides, in
pertinent part, as follows:
[A] 	transferee...of...a 	[fraudulent]
transfer...that 	takes 	for 	value 	and 	in 	good
faith 	has 	a 	lien 	on 	or 	may 	retain 	any 	interest
transferred...to 	the 	extent 	that 	such
transferee...gave 	value 	to 	the 	debtor 	in
exchange for such transfer....
See 11 U.S.C. § 548(c).
Section 	550(a) 	of 	the 	Bankruptcy 	Code 	provides, 	in 	pertinent
part, that:
...to 	the 	extent 	that 	a 	transfer 	is 	avoided 	under
section...548..., 	the 	trustee 	may 	recover, 	for 	the
benefit of the estate, the property transferred, or if
the 	court 	so 	orders, 	the 	value 	of 	such 	property,
from–-
(1) the initial transferee of such transfer...;
or (2) any immediate or mediate transferee of
such initial transferee.
See 11 U.S.C. § 550(a). 	Section 550(b) provides that the trustee may
not recover under section 550(a)(2)–-i.e., other than from an initial
transferee–-from:
(1) 	a 	transferee 	that 	takes 	for 	value,
including satisfaction or securing of a present
or 	antecedent 	debt, 	in 	good 	faith, 	and 	without
knowledge 	of 	the 	voidability 	of 	the 	transfer
avoided...[.]
See 11 U.S.C. § 550(b)(1).
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26 2A transfer that rendered the debtor insolvent may also be
avoided. 	However, in this case, it is undisputed that the Debtors
were insolvent at the time of the transfer.
5
DISCUSSION
This adversary proceeding presents four issues, which the Court
will address in turn:
(A) 	Is 	the 	transfer 	of 	the 	Debt 	Amount 	an 	avoidable 	transfer
under 11 U.S.C. § 548(a)(1)(B)?
(B) Is Bestworth nevertheless entitled to retain the Debt Amount
pursuant to 11 U.S.C. § 548(c)?
(C) Was Bestworth the initial transferee and thus entitled to no
defense under 11 U.S.C. § 550(b)?
(D) If Bestworth was a subsequent transferee, has it established
a 	defense 	to 	the 	Trustee’s 	recovery 	action 	pursuant 	to 	11 	U.S.C. 	§
550(b)?
A. 	IS TRANSFER AVOIDABLE UNDER 11 U.S.C. § 548(a)(1)(B)?
There are four elements to a claim for avoidance of a fraudulent
transfer 	under 	11 	U.S.C. 	§ 	548(a)(1)(B). 	The 	elements 	are: 	(1) 	a
transfer to the defendant of an interest of the debtor in property;
(2) 	within 	one 	year 	prior 	to 	the 	commencement 	of 	the 	debtor’s
bankruptcy 	case, 	(3) 	for 	less 	than 	reasonably 	equivalent 	value 	in
exchange 	for 	the 	transfer, 	and 	(4) 	at 	a 	time 	when 	the 	debtor 	was
insolvent. 2 	Bestworth does not dispute that the Trustee is able to
establish her burden of proof with respect to each of these elements.
Thus, the transfer of the Debt Amount is clearly avoidable.
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B. 	IS BESTWORTH ENTITLED TO RETAIN THE DEBT AMOUNT PURSUANT TO 11
U.S.C. § 548(c)?
Bestworth contends that, nevertheless, 11 U.S.C. § 548(c) gives
it the right to retain the Debt Amount. 	As recited above, 11 U.S.C.
§ 548(c) permits a good faith transferee to retain funds fraudulently
transferred 	to 	the 	extent 	that 	the 	transferee 	gave 	“value 	to 	the
debtor in exchange for...[the] transfer....” 	See 11 U.S.C. § 548(c).
The 	Trustee 	does 	not 	dispute 	that 	Bestworth 	is 	a 	good 	faith
transferee. 	However, 	she 	contends 	that 	Bestworth 	did 	not 	give 	any
value to the Debtors in return for the transfer of the Debt Amount.
She is clearly correct.
Bestworth contends that the value it provided to Elephant–-the
satisfaction 	of 	the 	Debt 	Amount 	and 	release 	of 	the 	Lien-–was
sufficient for this purpose. 	In support of this argument, it cites
In re SLF News Distributors, Inc., 649 F.2d 613 (8 th Cir. 1981). 	In
SLF 	News, 	a 	contractor 	with 	an 	unpaid 	claim 	released 	its 	right 	to
record 	a 	mechanics’ 	lien 	against 	real 	property 	in 	return 	for
receiving payment of its claim. 	As in the instant case, the form of
the 	payment 	did 	not 	put 	the 	contractor 	on 	notice 	that 	the 	payment
came 	from 	someone 	other 	than 	the 	owner 	of 	the 	real 	property, 	its
account debtor. 	When the party that furnished the payment filed for
bankruptcy, 	the 	trustee 	sought 	to 	avoid 	the 	transfer 	as
constructively 	fraudulent 	and 	to 	recover 	it 	from 	the 	contractor.
Id. 	at 	614. 	The 	SLF 	News 	court 	held 	that, 	under 	these 	facts, 	the
contractor was entitled to retain the payment.
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The principal problem with Bestworth’s reliance on SLF News is
that it was decided under the Bankruptcy Act, which was repealed in
1978, 	and 	replaced 	by 	the 	Bankruptcy 	Code. 	In 	granting 	the
contractor a defense, the SLF News court was construing a different
statute: 	i.e., 	section 	67(d)(6) 	of 	the 	Bankruptcy 	Act. 	Section
67(d)(6) provided as follows:
(6) 	A 	transfer 	made...by 	a 	debtor 	adjudged 	a
bankrupt 	under 	this 	title, 	which 	is 	fraudulent
under this subdivision against creditors of such
debtor having claims provable under this title,
shall 	be 	null 	and 	void 	against 	the 	trustee,
except 	as 	to 	a 	bona 	fide 	purchaser, 	lienor, 	or
obligee 	for 	a 	present 	fair 	equivalent 	value
[emphasis added.]
See 	11 	U.S.C. 	§ 	107(d)(6)(1976)(repealed 	1978), 	as 	quoted 	in 	SLF
News, 649 F.2d at 615. 	The SLF News court held that the contractor
qualified 	as 	a 	bona 	fide 	purchaser 	with 	respect 	to 	the 	payment
received. 	Id.
The statute applicable–-11 U.S.C. § 548(c)--here is worded quite
differently. 	As 	noted 	above, 	it 	expressly 	requires 	that 	party
asserting the right to retain the transferred interest in property to
have 	given 	“value 	to 	the 	debtor 	in 	exchange 	for...[the]
transfer....[emphasis 	added.]” 	By 	contrast, 	11 	U.S.C. 	§ 	107(d)(6)
protects “a bona fide purchaser for present fair equivalent value[.]”
It does not expressly require that the value be given to the debtor.
Because 	Bestworth 	did 	not 	give 	value 	to 	the 	Debtor, 	Bestworth’s
defense under 11 U.S.C. § 548(c) must fail.
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C. 	IS BESTWORTH AN INITIAL TRANSFEREE?
The Trustee contends that Bestworth was the initial transferee
of the payment of the Debt Amount within the meaning of 11 U.S.C. §
550(a)(1). 	As 	a 	result, 	she 	contends, 	it 	has 	no 	right 	to 	assert 	a
defense to her recovery action pursuant to 11 U.S.C. § 550(b). 	She
contends that the Title Company, which was acting as an escrow agent,
was a mere “conduit” to the transfer and should not be considered the
initial transferee. 	In support of this contention, she cites In re
Williams, 104 B.R. 296, 298 (Bankr. C.D. Cal. 1989).
In 	Williams, 	after 	filing 	a 	chapter 	7 	bankruptcy 	case, 	the
debtor 	sold 	real 	property 	to 	a 	third 	party 	through 	an 	escrow. 	A
portion of the sale proceeds were paid to the IRS which had filed a
lien 	against 	the 	real 	property. 	The 	trustee 	sued 	to 	avoid 	the
transfer 	and 	to 	recover 	the 	sale 	proceeds 	from 	the 	IRS. 	As 	here,
the 	issue 	was 	whether 	the 	IRS 	was 	the 	initial 	transferee, 	and
therefore 	not 	entitled 	to 	assert 	a 	defense, 	or 	a 	subsequent
transferee 	and 	therefore 	absolutely 	liable. 	Id., 	at 	298-99.
The Williams court held that the IRS was the initial transferee. It
reasoned that, for the IRS to be a subsequent transferee, the escrow
company 	would 	have 	to 	be 	viewed 	as 	the 	initial 	transferee. 	It
rejected this notion, making the following observation:
That is not an accurate view of the typical role
of 	an 	escrow 	company. 	An 	escrow 	company 	is
merely a conduit through which funds flow from a
purchaser 	to 	a 	seller. 	The 	escrow 	company 	did
not purchase the property itself.
Id., at 299.
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The 	problem 	with 	the 	Trustee’s 	reliance 	on 	Williams 	is 	that
Bestworth 	does 	not 	contend 	that 	the 	Title 	Company 	was 	the 	initial
transferee, 	at 	least 	not 	on 	its 	own 	behalf. 	To 	the 	contrary, 	it
contends that Elephant was the initial transferee and that the Title
Company was acting as Elephant’s agent when it received the Cashier’s
Check from the Debtors.
Given this argument, a case more on point is In re Presidential
Corp., 	180 	B.R. 	233 	(Bankr. 	9 th 	Cir. 	1995). 	In 	Presidential, 	a
chapter 	7 	trustee 	of 	a 	corporation 	sued 	a 	real 	estate 	agent 	to
recover 	a 	commission 	received 	through 	a 	sale 	escrow. 	The 	sale
transaction 	was 	constructively 	fraudulent 	and 	therefore 	avoidable
because the corporation’s funds were used to purchase real property
for 	the 	corporation’s 	sole 	shareholder--Vatche 	Manoukian
(“Manoukian”).
The 	real 	estate 	agent 	argued 	that 	Manoukian 	was 	the 	initial
transferee 	and 	that, 	as 	a 	good 	faith 	subsequent 	transferee, 	he 	was
entitled 	to 	assert 	a 	defense 	under 	11 	U.S.C. 	§ 	550(b). 	The
Presidential 	court 	agreed. 	It 	observed 	that, 	under 	the 	law
applicable 	to 	that 	adversary 	proceeding, 	i.e., 	Washington 	law, 	an
escrow agent is the agent of both the buyer and the seller. 	On whose
behalf 	the 	agent 	hold 	funds 	depends 	on 	the 	purpose 	for 	which 	the
funds are held. 	In either event, the agent is a mere conduit for the
party in question. 	Under the facts presented there, the Presidential
court found that the escrow agent was acting on behalf of Manoukian.
See id., 180 B.R. at 238.
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California law is consistent with Washington law. 	See St. Paul
Title Co. v. Meier, 181 Cal. App. 3d 948, 952 (1986). 	In the instant
case, the Title Company clearly received the funds as a conduit for
Elephant. 	The 	purchaser 	of 	the 	San 	Pablo 	Property 	had 	no 	claim 	to
the funds, and Bestworth was not a party to the transaction. 	Thus,
the Title Company could not have been acting as agent for either of
them. 	Elephant 	cannot 	be 	viewed 	as 	a 	mere 	conduit 	for 	Bestworth
because 	it 	had 	dominion 	and 	control 	over 	the 	funds 	once 	they 	were
placed in escrow.
The testimony at trial was consistent with this conclusion. 	Mr.
Jacobsen testified that he and the other shareholder had agreed that,
if the San Pablo Property sold for a sufficient amount to repay all
creditors, 	he 	would 	have 	the 	right 	to 	be 	repaid 	the 	amount 	of 	the
advance before the net sale proceeds were divided between the two of
them. 	Thus, the advance may be viewed as either subordinated loan or
as 	preferred 	equity 	investment. 	In 	either 	event, 	it 	represented 	a
transfer to the corporation. 	As a result, the Court concludes that
Bestworth is a subsequent transferee and, as such, entitled to assert
a defense under 11 U.S.C. § 550(b)(1).
D. 	CAN BESTWORTH ESTABLISH A DEFENSE UNDER 11 U.S.C. § 550(b)(1)?
As set forth above, a trustee may not recover the amount of an
avoided transfer from”:
(1) 	a 	transferee 	that 	takes 	for 	value,
including satisfaction or securing of a present
or 	antecedent 	debt, 	in 	good 	faith, 	and 	without
knowledge 	of 	the 	voidability 	of 	the 	transfer
avoided...[.]
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See 11 U.S.C. § 550(b)(1). 	This defense has three elements: (1) the
transferee 	must 	have 	received 	the 	transfer 	for 	value, 	which 	may
include the satisfaction or securing of a present or antecedent debt;
(2) the transferee must have received the transfer in good faith; and
(3) the transferee must have had no knowledge of the voidability of
the transfer at the time the transfer was received. 	The Trustee does
not 	appear 	to 	dispute 	Bestworth’s 	ability 	to 	satisfy 	each 	of 	these
three prongs.
Unlike 	11 	U.S.C. 	§ 	548(c), 	11 	U.S.C. 	§ 	550(b)(1) 	does 	not
expressly 	require 	that 	the 	value 	provided 	by 	the 	subsequent
transferee 	be 	given 	to 	the 	debtor. 	Since 	this 	requirement 	was
expressly 	stated 	in 	11 	U.S.C. 	§ 	548(c), 	it 	seems 	unlikely 	that 	its
omission in 11 U.S.C. § 550(b)(1) was an oversight. 	Moreover, since
a subsequent transferee receives the transfer from someone other than
the debtor, absent unusual circumstances, it would be unreasonable to
expect 	a 	subsequent 	transferee 	to 	give 	value 	to 	the 	debtor 	in
exchange for the transfer. 	Thus, the Court concludes that Bestworth
has a established a defense to the Trustee’s recovery action under 11
U.S.C. 	§ 	550(b)(1). 	This 	conclusion 	is 	consistent 	with 	the 	few
reported 	cases 	on 	the 	issue. 	See 	Bonded 	Fin. 	Servs. 	v. 	Eur. 	Am.
Bank, 	838 	F.2d 	890, 	897 	(7 th 	Cir. 	1988); 	In 	re 	KZK 	Livestock, 	Inc.,
221 B.R. 464, 469-70 (Bankr. C.D. Ill. 1998).
CONCLUSION
The 	transfer 	represented 	by 	payment 	of 	the 	Debt 	Amount 	is
avoidable 	as 	a 	constructively 	fraudulent 	transfer 	pursuant 	to 	11
U.S.C. 	§ 	548(a)(1)(B). 	Bestworth 	is 	not 	entitled 	to 	retain 	the
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avoided 	transfer 	pursuant 	to 	11 	U.S.C. 	§ 	548(c) 	because 	it 	did 	not
provide value to the Debtors in exchange for the transfer. 	Bestworth
is a subsequent transferee pursuant to 11 U.S.C. § 550(a)(2), rather
than an initial transferee pursuant to 11 U.S.C. §550(a)(1). 	Thus,
it is entitled to assert a defense to the Trustee’s recovery action
pursuant 	to 	11 	U.S.C. 	§ 	550(b)(1). 	Bestworth 	has 	established 	the
right 	to 	such 	a 	defense, 	having 	proven 	by 	a 	preponderance 	of 	the
evidence 	that 	it 	received 	payment 	of 	the 	Debt 	Amount 	for 	value, 	in
good 	faith, 	without 	knowledge 	of 	its 	voidability. 	Counsel 	for
Bestworth 	is 	directed 	to 	submit 	a 	proposed 	form 	of 	judgment 	in
accordance with this decision.
END OF DOCUMENT
Case: 05-04432 Doc# 19 Filed: 11/25/06 Entered: 11/27/06 14:41:41 Page 12 of
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COURT SERVICE LIST
Timothy C. Williams
The Williams Firm
1850 Mt. Diablo Blvd., Ste. 340
Walnut Creek, CA 94596
Mariam S. Marshall
Marshall & Ramos, LLP
350 Frank H. Ogawa Plaza, Ste. 600
Oakland, CA 94612
Case: 05-04432 Doc# 19 Filed: 11/25/06 Entered: 11/27/06 14:41:41 Page 13 of
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