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Whitlock v. Lowe

United States District Court, W.D. Texas

March 22, 2017

CHERI ANN WHITLOCK, Appellant,
v.
JOHN PATRICK LOWE, Trustee, Appellee.

          MEMORANDUM OPINION

          Royce C. Lamberth United States District Judge

         I. INTRODUCTION

         This case comes before the Court on appeal from the Bankruptcy Court's October 13, 2015 grant of judgment in favor of the trustee, and the Bankruptcy Court's subsequent December 4, 2015 Order granting in part and denting in part the trustee's motion for attorneys' fees. The debtor in this case, Curtis DeBerry, who is not a party to this appeal, filed a Chapter 7 bankruptcy petition on February 10, 2014. Prior to filing this petition, Mr. DeBerry fraudulently transferred $275, 000 to his sister-in-law Cheri Ann Whitlock, the appellant here, to be deposited in a joint bank account held by Ms. Whitlock and Mr. DeBerry's wife, Kathy DeBerry. At some point, Kathy DeBerry's name was taken off the account and it remained solely in the name of Ms. Whitlock. At the direction of the DeBerrys, and still before Mr. DeBerry filed for bankruptcy, Ms. Whitlock made several transfers of money out of that account. After Mr. DeBerry disclosed the $275, 000 transfer in the course of his bankruptcy case, the trustee, the appellee here, filed an adversary proceeding seeking to avoid the fraudulent transfer and recover the $275, 000 from Ms. Whitlock.

         On June 24, 2015, the Bankruptcy Court granted partial summary judgment in favor of the trustee, finding that the $275, 000 transfer from Mr. DeBerry was fraudulent and avoidable, and that Ms. Whitlock was an "initial transferee" from whom the trustee could recover the funds.[1] The Bankruptcy Court found, however, that a material issue of fact existed regarding whether the trustee was seeking double recovery of some of the funds in violation of the "single satisfaction" rule, specifically, the $32, 000 transferred to Kathy DeBerry and the $200, 000 transferred to MBC. After briefing and the presentation of evidence, the Bankruptcy Court concluded that allowing the trustee to recover the $232, 000 from Ms. Whitlock did not violate the single satisfaction rule. The Bankruptcy Court later ordered Ms. Whitlock to pay the trustee's attorneys' fees and costs in the amount of $80, 409.40.

         Ms. Whitlock has appealed the final judgment and the order of attorneys' fees, arguing that the Bankruptcy Court erred in not applying the single satisfaction rule to the funds transferred back to Mr. DeBerry prior to his bankruptcy filing, that it erred in finding that Ms. Whitlock was an initial transferee, that it should not have proceeded to summary judgment or trial before Ms. Whitlock had the opportunity to obtain Kathy DeBerry's testimony, and that the award of attorneys' fees was therefore improper.

         The Court finds that the Bankruptcy Court did not err in finding that Ms. Whitlock was an initial transferee, did not err in not applying the single satisfaction rule to the funds allegedly transferred back to Mr. DeBerry, did not err in proceeding to summary judgment and trial before Ms. Whitlock had an opportunity to depose Kathy DeBerry, and therefore did not err in awarding attorneys' fees to the trustee. The decision of the Bankruptcy Court will be affirmed.

         II. BACKGROUND

         A. Factual Background

         The debtor in this case, Curtis DeBerry, is the former owner of a produce company in Texas. On February 10, 2014, Mr. DeBerry filed a voluntary Chapter 7 bankruptcy petition.[2] Prior to the filing of this petition, on August 26, 2013, Mr. DeBerry's wife, Kathy DeBerry, and his sister-in law, Cheri Whitlock opened a joint account at Wells Fargo Bank. That same day, Mr. and Mrs. DeBerry withdrew $275, 000 from one of their bank accounts and obtained a cashier's check in the same amount made payable to Ms. Whitlock. Ms. Whitlock endorsed the check and deposited it into the Wells Fargo account. On August 29, 2013, a Relationship Change Application was submitted to Wells Fargo Bank whereby Kathy DeBerry relinquished her ownership interest in the account, leaving the account only in Ms. Whitlock's name.[3]

         Ms. Whitlock subsequently completed the following wire transfers out of the Wells Fargo account: 1) $33, 500 to Chantel DeBerry (Curtis and Kathy DeBerry's daughter); 2) $9, 200 to Maria Bainbridge; 3) $32, 000 to Kathy DeBerry; 4) $200, 000 to Masterbaiter Charters, LLC ("MBC").[4] MBC is a Texas limited liability company owned by the debtor, Curtis DeBerry.[5] The money transferred to Kathy DeBerry and MBC was spent prior to the bankruptcy filing. In response to a question regarding why the $200, 000 was returned to MBC when the funds had previously belonged to the Mr. DeBerry, he responded "because I told her to . . . because that's where I needed it."

         B. Bankruptcy Court Decision

         After Mr. DeBerry filed his bankruptcy petition, and after he (belatedly) disclosed the existence of the $275, 000 transfer, the bankruptcy trustee initiated an adversary proceeding against Ms. Whitlock to avoid the transfer and recover the funds, and later moved for summary judgment. The Bankruptcy Court first found that the $275, 000 transfer to Ms. Whitlock was made with the actual intent to hinder, delay or defraud creditors under 11 U.S.C. § 544 and § 548(A)(1)(A), and Texas Business and Commercial Code § 24.005(A)(1) as evidenced by the following badges of fraud: 1) Ms. Whitlock did not provide any consideration for the funds; 2) Ms. Whitlock is a family member of Mr. DeBerry's; 3) Mr. DeBerry instructed Ms. Whitlock to transfer $200, 000 to MBC; 4) Mr. DeBerry transferred the funds while under great financial stress; 5) the transfer was concealed by Mr. DeBerry; and 6) Mr. DeBerry had been sued prior to the transfer (by Eclipse Berry Farms for fraud in connection with an agreement to obtain strawberries). The Bankruptcy Court also found that the $275, 000 transfer was constructively fraudulent and avoidable under 11 U.S.C. § 548(a)(1)(B) because Mr. DeBerry, the debtor, received less than a reasonably equivalent value in exchange for the transfer and was insolvent at the time. It also found that the transfer was avoidable under 11 U.S.C. § 544 and Texas Business & Commercial Code § 24.006(A).

         Finally, the Bankruptcy Court held that Ms. Whitlock was an "initial transferee" from whom the trustee could recover the funds. Section 550 provides "to the extent that a transfer is avoided... 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." 11 U.S.C. § 550(a). Relying on the Fifth Circuit's "dominion or control" test to determine whether a party is an initial transferee, the Bankruptcy Court found that, regardless of whether Ms. Whitlock knew that Ms. DeBerry had removed her name from the account and whether she was simply being directed by the DeBerrys to make transfers out of the account, she had sufficient dominion and control. The $275, 000 check was made out solely to Ms. Whitlock and she endorsed it. She was, in fact, the sole owner of the Wells Fargo account, each of the transfers made from the account were executed by Ms. Whitlock. In sum, Ms. Whitlock had legal title to the funds and no legal obligation to follow the DeBerry's instructions on where to distribute the funds. Therefore, the trustee could recover the funds from Ms. Whitlock as an initial transferee.

         The Bankruptcy Court then received additional briefing and evidence regarding whether the trustee was seeking double recovery in violation of the single satisfaction rule of Section 550, which states that "[t]he trustee is entitled to only a single satisfaction under subsection (a) of this section." 11 U.S.C. § 550(d). On September 28, 2015, the Bankruptcy Court read onto the record its finding that the trustee did not violate the single satisfaction rule. The court first found that the single satisfaction rule does not apply to pre-petition transfers. Acknowledging that there is little caselaw on point and that no case specifically says when the transfer should be examined in this context, the court agreed with the trustee that the issue was one of statutory interpretation. It concluded that Section 550(a) discusses evaluating fraudulent transfers as they affect the bankruptcy estate and does not relate to the pre-petition relationship between the parties. Noting that a court may not use its equitable powers to circumvent a clear statute, the court found that the statute was clear and that it had to examine the transfers at the time the petition was filed. Furthermore, the court noted that initial transferees are strictly liable for any fraudulent transfers they receive. Thus, it found "that the application of the statute requires the court to look at the transfers that benefited the estate. Here, there is no showing that that occurred. The [d]efendant is strictly liable for the transfers." Transcript Regarding Hearing Held 9/28/2015 at 10:5-9, No. 14-ap-5044 (Bankr.W.D.Tex. Sept. 28, 2015). The Bankruptcy Court later ordered Ms. Whitlock to pay the trustee's attorneys' fees and costs in the amount of $80, 409.40.

         III. JURISDICTION AND STANDARD OF REVIEW

         This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a) which provides that district courts have jurisdiction to hear appeals from final judgments and orders of bankruptcy judges.

         When a district court reviews the decision of a bankruptcy court, it "functions as an appellate court, applying the standards of review generally applied in federal appeals courts." Harvey Gulflnt'l Marine, Inc. v. Bennu Oil & Gas, LLC,559 B.R. 152, 154 (S.D. Tex. 2016). District courts "review[] orders granting summary judgment de novo, guided by the ...


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