Jalbert v. Allpro Corporation et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
EASTERN DIVISION
Chapter 7
Case No. 07-10355-FJB
Adversary Proceeding
No. 09-1030
MEMORANDUM OF DECISION AND ORDER
ON MOTIONS OF ALLPRO CORPORATION FOR SUMMARY JUDGMENT
In this action to recover allegedly preferential transfers, the Court has before it two
motions of defendant AllPro Corporation (“AllPro”) for summary judgment, the first as to three
transfers to Valspar Corporation and the other as to all other vendor transfers. AllPro was
involved in all of these transfers as an intermediary between the debtor and the ultimate vendor
payee. As to all transfers, AllPro seeks summary judgment on the basis of the equitable “mere
conduit” defense; as to the transfers to the non-Valspar vendors, AllPro also seeks summary
judgment on the basis of the statutory ordinary-course-of-business defense. For the reasons
set forth below, the Court will deny both motions.
In re
LEFT-WAY CORPORATION,
f/k/a RIGHT-WAY DEALER
WAREHOUSE, INC.,
Debtor
CRAIG JALBERT,
LIQUIDATING SUPERVISOR,
Plaintiff
v.
ALLPRO CORPORATION,
VALSPAR CORPORATION, el al.,
Defendants
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Mere Conduit
The mere conduit defense is an equitable exception to the status of initial transferee
under § 550(a)(1). As the exception is essentially an affirmative defense, the burden of proving
qualification for the exception falls on the party asserting that it applies. To prevail on summary
judgment, AllPro must therefore adduce such evidence as to each element of its defense as
would permit AllPro at trial to withstand a motion for directed verdict under F. R. CIV. P. 50(a).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).
The mere conduit exception requires proof that the recipient of the funds had, despite
physical possession of the funds, no dominion or control over them, no legal right to dispose of
them as it pleased. Richardson v. Preston (In re Antex, Inc.), 397 B.R. 168 (1 st Cir. BAP 2008).
Accordingly, in In re Chase & Sanborn Corp., 848 F.2d 1196 (11 th Cir 1988), the court held that
when a bank receives funds only for deposit into a customer’s account, it does not have
sufficient control over the funds and is a mere commercial conduit, not an initial transferee. See
also In re Jet Florida, 69 B.R. 83 (Bankr S.D. Fla. 1987). For present purposes, the Second
Circuit stated the rule concisely: “[A] commercial entity that, in the ordinary course of its
business, acts as a mere conduit for funds and performs that role consistent with its contractual
undertaking in respect of the challenged transaction, is not an initial transferee within the
meaning of § 550(a)(1).” In re Finley Kumble et al.,130 F.3d 52, at 59 (2d Cir. 1997). The
pleaded defense therefore requires proof not only that the funds were passed along to a third
party, but also that the “conduit” was, by contract or otherwise, legally obliged to pass the funds
on to the third party.
The only facts in evidence are in the affidavit of Joseph Poliseo, which contains
averments as to what AllPro did with the payments it received from the Debtor but is devoid of
evidence of AllPro’s legal obligations with respect to the payments. There is no evidence that
AllPro was obligated—by contract, its bylaws, or otherwise—to make the payments. Lacking
this evidence, the court must deny summary judgment for lack of evidence of an essential
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element of the defense.
Ordinary Course of Business
With respect to the non-Valspar transfers, AllPro also seeks summary judgment on the
alternative basis that each such transfer was made in the ordinary course of business, 11
U.S.C. § 547(c)(2). Again, the defense in question is an affirmative one, on which AllPro would
bear the burden of proof at trial. For that reason, AllPro must support its motion for summary
judgment with such evidence as to each element of its defense as would permit AllPro at trial to
withstand a motion for directed verdict under F. R. CIV. P. 50(a). Anderson v. Liberty Lobby,
Inc., supra. And the evidence must be construed in the light most favorable to the nonmoving
party. In this instance, the evidence as to ordinary course of business is highly conclusory,
especially as to the timing of the transfers as between the debtor and the vendors and whether
that timing is consistent either with the ordinary course of business between the parties or with
ordinary business terms. AllPro has introduced virtually no evidence on these issues. The
court must therefore deny summary judgment as to this defense as well.
ORDER
For the reasons set forth above, the Motions of AllPro Corporation for Summary
Judgment as the Valspar Transfers and as to the Vendor Transfers are hereby denied.
Date: January 19, 2010 	_______________________________
Frank J. Bailey
United States Bankruptcy Judge
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