“4

asking appellants to hold the funds and that the debtor used part of the transferred funds to pay
some of his creditors, which “preserved” the bankruptcy estate even though admittedly it might
have created a preference. (Appellants’ Br. at 10.) As the trustee points out, the bankruptcy
court specifically found that the debtor’s purpose was “at least, hindering and delaying
[American National] Bank in its efforts to collect [a] judgment... .” In re Roti, 271 B.R. at 297.
That a different fact-finder might have drawn a different conclusion does not make this finding
clearly erroneous. Furthermore, the trustee was not required to prove intent to defraud if she
proved intent to hinder or delay. E.g., Shapiro v. Wilgus, 287 U.S. 348, 353-56 (1932). Or,
similarly stated, actual intent is shown where the debtor’s transfers are motivated even in part by
a desire to hinder, delay, or defraud creditors. Kelley v. Thomas Solvent Co., 725 F. Supp. 1446,
1455 & n.4 (W.D. Mich. 1988) (holding the same under Michigan law); see also Premier Prop.
Mgmt. v. Chavez, 728 N.E. 2d 476, 481-82, 191 Ill. 2d 101, 110-11 (2000). Certainly, the
bankruptcy court properly found that American National Bank was hindered in its efforts to
collect its judgment. In fact, the bankruptcy court went further, stating, “[T]his is a classic
example of a debtor engaging in fraudulent transfers by placing assets in the names of insiders,
under his control or direction, to frustrate the enforcement of a judgment of another creditor
whose claim he did not want to pay.” Jn re Roti, 271 B.R. at 297. Appellants do not
demonstrate that the bankruptcy court’s findings were clearly erroneous or incorrect as a matter
of law under § 548(a)(1)(A) and 740 ILCS 160/5(a)(1).
2. constructive fraud/fraud in law

Appellants argue that the bankruptcy court erred in finding that the debtor did not receive
“reasonably equivalent value” under § 548(a)(1)(B) and the UFTA, 740 ILCS 160/5(a)(2) and
160/6(a), when appellants provided the debtor with value by allowing him to use their bank

4



Y

Cc. whether appellants had a good faith defense

Appellants contend that the bankruptcy court erred in finding that they were not entitled
to a good faith defense under § 548(c), which provides that a transfer is voidable where a
transferee “takes for value and in good faith has a lien on or may retain any interest transferred
or may enforce any obligation incurred, as the case may be, to the extent that such transferee . . .
gave value to the debtor in exchange for such transfer... .” As discussed above, there was no
value transferred to the debtor. See In re Roti, 271 B.R. at 299. Further, the bankruptcy court
made extensive findings that appellants failed to act in good faith. Jd. at 298-99. Indeed,
contrary to appellants’ contention that they played no “role in placing funds out of the reach of
creditors” (Appeliants’ Br. at 13-14), the bankruptcy court determined that appellants lacked
good faith because, inter alia, they knew of the debtor’s financial problems and were parties to
his scheme to hinder and delay his creditor in its collection efforts. Jn re Roti, 271 B.R. at 298-
99, citing, inter alia, In re Harbour, 845 F.2d at 1258 (“Examining [the] facts in the light most
favorable to [the defendant], the kindest inference which can reasonably be drawn is that she
aggressively ignored facts which would have put her on notice that she should investigate these
facially suspect transactions.”). Appellants do not demonstrate that the bankruptcy court’s
findings were clearly erroneous or incorrect as a matter of law.
D. whether the value transferred to appellants is subject to turnover to the trustee

Appellants argue that the value transferred to them by the debtor is not subject to

turnover to the trustee pursuant to § 542(a)* because they returned the funds to the debtor’s

®Section 542(a) states:

Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in
possession, custody, or control, during the case, of property that the trustee may use, sell, or lease
under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall
deliver to the trustee, and account for, such property or the value of such property, unless such

9



demonstrate that the bankruptcy court’s findings were clearly erroneous or incorrect as a matter
of law.
B. whether appellants were initial transferees

Having concluded that the transfers were fraudulent, the bankruptcy court ruled that the
appellants were liable under § 550(a)(1) to the estate for the value of the transfers, concluding
that none of the exceptions applied, including that of § 550(b)(1), which provides an exception
where “a transferee takes for value . . . in good faith, and without knowledge of the voidability of
the transfer avoided; or any immediate or mediate good faith transferee of such transferee.” The
bankruptcy court cited cases holding that the defense under § 550(b)(1) is unavailable to an
initial transferee, Jn re Roti, 271 B.R. at 295, and ruled further that the defense of § 548(c),
which requires good faith on the part of the transferee as well as an exchange of “value,” was not
proved.

Appellants argue that the bankruptcy court erred in finding that they were “initial
transferees” within § 550(a)(1) under the “dominion and control” test set forth in Bonded Fin.
Serv., Inc. v. European Am. Bank, 838 F.2d 890, 893 (7" Cir. 1988).3 Appellants assert that they
were “mere conduits,” not initial transferees, because they did not receive any benefit from
holding the debtor’s funds in their bank accounts, and they were obligated to follow the debtor’s

instructions in disposition of the funds and would have been liable to the debtor had they used

3Section 550 (Liability of transferee of avoided transfer) states, in relevant part:

(a) Expect as otherwise provided in this section, to the extent that a transfer is avoided under
section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, 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... .



accounts and returning the funds back to the debtor. (Appellants’ Br. at 11.) Appellants further
dispute the bankruptcy court’s determination that where the debtor chose to spend the transferred
funds on his home and boat, the bankruptcy estate did not receive a benefit nor did the debtor
preserve the estate. In re Roti, 271 B.R. at 298.

Appellants cite no authority that use of their own personal bank accounts constitutes
value to the debtor. Rather, the bankruptcy court stated, “The Seventh Circuit has held that the
receipt of funds for a debtor by a transferee and subsequent transfer back to the debtor without
consideration paid by the initial transferee lacks reasonably equivalent value.” Jd. at 295, citing
In re Carlson, 263 F.3d 748, 750 (7" Cir. 2001) (stating that where the debtor, a personal injury
attorney, transferred his already earned fees to his friend and fellow attorney pursuant to a
purported “practice merger agreement,” the transfer was “made without consideration and with
intent to defraud [the debtor’s] creditors, and thus a fraudulent conveyance and indeed one
involving both constructive and actual fraud.”); see also The Nostalgia Network, Inc. v.
Lockwood, 215 F.3d 717, 720 (7" Cir. 2002) (determining that a court need not inquire further
under 740 ILCS 160/6(a) when the facts show a transfer is not supported by consideration, citing
Jn re Roti). The bankruptcy court properly reasoned that appellants did not give the debtor any
consideration for the transfers because the debtor did not receive any value at the time of his
transfers to appellants, Jn re Roti, 271 B.R. at 297-98; see In re Mussa, 215 B.R. 158, 172
(Bankr. N.D. Ill. 1997) (“Reasonably equivalent value is measured at the time of the transfer.”).
Furthermore, the bankruptcy court pointed out that the debtor’s subsequent use of the funds on
his home and boat primarily benefitted him because he continued to occupy his home and have
use of his boat. In re Roti, 271 B.R. at 298; see also The Nostalgia Network, 315 F.3d at 720
(discussing the “seeping back” of funds to the debtor and citing Jn re Roti). Appellants do not

5



Here, appellants rely on a verbal agreement with their father that they would hold the
money and follow his instructions, which they did, in fact, as a basis for their “intermediary”
argument. They received no benefit, they say, and they, like the bank and the attorney in the
cited cases, were subject to liability if they converted the funds to their own use. Although the
facts here and in Bonded and Jn re Circuit Alliance, Inc. are arguably alike in these respects,
appellants ignore other parts of the record which were not at issue in the cited cases and would
readily distinguish them, for example, that they were the debtor’s daughters, thus insiders, and
they commingled the debtor’s funds with their own funds. See Jn re Roti, 271 B.R. at 296.
Further, as the trustee points out, the record demonstrates that the debtor in his bankruptcy
filings never identified his daughters as custodians of his money as he was obligated to do had
that been the case, and he did not list the funds as an asset in his bankruptcy schedules. With
these facts added, it is obvious that appellants were neither commercial or professional
intermediaries nor otherwise akin to the defendant in either Bonded or In re Circuit Alliance, Inc.
See In re Harbour, 845 F.2d 1254, 1257-58 (4" Cir. 1988) (holding that the defendant, who
served as an intermediary for transferring funds from the debtor, who was her son’s business
associate and friend, to her son, was not a mere conduit but an initial transferee in a fraudulent
conveyance action).> For these reasons, appellants do not demonstrate that the bankruptcy
court’s determination that appellants were initial transferees under § 550(a)(1) was clearly

erroneous as a matter of fact or incorrect as a matter of law.

5 Appellants misread Jn re Harbour where they argue that the court applied equitable principles to hold that the
defendant was liable as an initial transferee. The court, however, only noted with approval how other courts applied
equitable principles to find commercial entities that routinely handle transactions are mere conduits but distinguished
the facts in its case, finding that the defendant was an insider. 845 F.2d at 1257-58, In any event, Bonded explicitly
rejects the use of equitable powers to excuse an initial transferee from repaying, resting instead on a narrowed
definition of initial transferee. 838 F.2d at 894.



a
Minute Order orm (06/97)

United States District Court, Northern District of Illinois

fine of Assigned Judge
or Magistrate Judge

Joan H. Lefkow

Sitting Judge if Other
than Assigned Judge

CASE NUMBER 02 C925 DATE 3/11/2003
CASE Nelmark, et al. vs. Helms
TITLE
[In the following box (a) indicate the party filing the motion, c.g,, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented_]

DOCKET ENTRY:

(1) o Filed motion of [ use listing in “Motion” box above.]
(2) Oo Bricf in support of motion due
3) ia Answer brief to motion due . Reply to answer brief due
(4) ia Ruling/Hearing on set for at
(5) a Status hearing[held/continued to] [sct for/re-set for] on set for at
(6) oO Pretrial conference(held/continued to] [sct for/re-set for] on set for at
(7) Qo Triai{set for/re-set for] on at
(8) oO [Bench/Jury trial] [Hearing] held/continued to at
(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
DOFRCP4(n) COLocal Rute 41.1 CIFRCP41(a)(1)  FRCP41(a)(2).
qo) of (Other docket entry] Enter Memorandum Opinion and Order. Judgment of the Bankruptcy Court
is affirmed.
di) ff {For further detail see order attached to the original minute order.]
No notices required, advised in open court. Document
, 2 Number
No notices required. uanber of ntices
X | Notices mailed by judge's staff.
2 1 2 2003

Notified counsel by telephone. dare docketed

Docketing to mail notices.

xX Mail AQ 450 form. Mailed by MD,

>

14nd,

MLSS

3/1/2003

Copy to judge/magistrate judge.

Else kd Ti s¥Heu
Ot 03-03 4 Mp

Date/lime received in
central Clerk’s Office

date riled notice

courtroom.
dopnty’s
initials

MD

ailing deputy initials



ORDER

Wherefore, for the reasons set forth above, the judgment of the bankruptcy court is

affirmed.
ENTER:
vs
JOAN HOMPHREY LEFKOW
Dated: March 11, 2003 United States District Judge

1


estate. The trustee argues that this argument was never made to the bankruptcy court and is thus
waived and further argues that the bankruptcy court properly concluded that delivering the funds
to the debtor or a creditor does not satisfy § 542(a). The bankruptcy court correctly found that
the appellants returned the proceeds to the debtor or others at his direction, not to the trustee,
stating

Although the Defendants either returned the proceeds to the Debtor or to others at

his direction, this was done without notice to the Trustee, the creditors or the

Court, and their lack of possession of the funds does not obviate their liability for

the value thereof. The Defendants have not raised any affirmative defense to the

Trustee’s turnover claim.
In re Roti, 271 B.R. at 292. The bankruptcy court correctly construed § 542(a), stating,

Defendants having possession or control of property of the estate must turn it over

to the trustee or become liable to the trustee for its value, unless they have

disposed of the property without actual notice or knowledge of the bankruptcy

case. In re USA Diversified Prods., Inc., 100 F.3d 53, 56-57 (7" Cir. 1996).
Id. Plainly, appellants have failed to demonstrate that the bankruptcy court’s findings of fact
were clearly erroneous or that it misapplied the law. Although appellants find themselves liable
for the transfer even though they received no monetary benefit, the policy of the law is served in

that the harsh consequences on those who knowingly participate in proscribed transactions create

an incentive to obey the law.

property is of inconsequential value or benefit to the estate.

10



the funds for their own purposes. Appellants also rely on Jn re Circuit Alliance, Inc., 228 B.R.
225 (D. Minn. 1998), for the proposition that the dominion and control test involves more than
possession of funds and a one-time act of directing the funds to further the transfer but “an
unfettered /egal right to use the funds for the possessor’s own purposes and benefit.” Jd. at 232
(emphasis in original).*

To determine what constitutes an “‘initial transferee” under § 550(a)(1), the Seventh
Circuit in Bonded, 838 F.2d at 893, adopted what has become known as the “dominion and
control” test when it stated that “the minimum requirement of status as a ‘transferee’ is dominion
over the money or other asset, the right to put the money to one’s own purposes.” The court held
that where a bank received no benefit and had to follow the instructions that came with the check
to deposit the funds in a particular account, a bank was a “financial intermediary” and not an
initial transferee under § 550(a)(1). Jd. at 893-94. The court in Bonded thus placed a boundary
on the general principle which avoids “transfers without either sufficient consideration or bad
intent, for they, no less than gifts, reduce the value of the debtor’s estate and thus the net return
to creditors as a group.” Jd. at 892. A similar result occurred in Jn re Circuit Alliance, Inc.,
which held that a lawyer who placed funds in her client trust account was not an initial transferee

but a “professional intermediary.” 228 B.R. at 232-33.

The court in In re Circuit Alliance, Inc. held that the debtor’s bankruptcy attorney was not an initial transferee but a
“mere conduit” when she, according to the debtor’s instructions, received funds from the debtor, deposited the funds
in her law firm’s trust account and then disbursed the funds to the debtor’s home mortgage lender. 228 B.R. at 228-
29, 233. The court noted that the attorney acted solely as an intermediary, had no legal interest in the funds and had
no authority to direct the funds to her own use. Jd. at 233. In making this determination, the court stated:

Generally, “mere conduits” hold transferred funds via escrow, trust, or deposit, and do so only in
the status of commercial or professional intermediaries for the parties that actually hold or receive
a legal right, title, or interest. Examples of them include banks, . . . real estate escrow and title
companies, . . . securities or investment brokers, . . . and attorneys holding funds in trust in
connection with settlement of disputes.

Jd. (internal citations and quotations omitted).



1. actual fraud/fraud in fact

Appellants perfunctorily contend that the bankruptcy court erred in finding that certain
“badges of fraud,” used to determine whether a transfer was made with actual intent to defraud a
creditor, were present in this case. Jn re Roti, 271 B.R. at 294, 297, 301, 303-04. The trustee
argues, and the court agrees, that appellants have waived this argument because they fail to cite
the record to demonstrate that the bankruptcy court was erroneous in finding nine badges of
fraud. Jd. at 297, 303-04; see FED. R. BANKR. P. 8010(a)(1)(E) (the argument in the brief shall
contain “the contentions of the appellant with respect to the issues presented, and the reasons
therefor, with citations to the authorities, statutes and parts of the record relied on.”).

More to their point, appellants argue that even if badges of fraud were present, that does
not necessarily mean there was fraud; rather, the bankruptcy court failed to consider other factors
that demonstrated the debtor did not actually intend to hinder, delay or defraud his creditors. For

example, they point out that the debtor made several attempts to open a bank account before

obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation
was incurred, or became insolvent as a result of such transfer or obligation; . . . .

In addition, 740 ILCS 160/5 (Transfer or obligation fraudulent as to creditor--Claim arising before or after
transfer) states, in relevant part:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the
creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the
debtor made the transfer or incurred the obligation:

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, . . . .

Moreover, 740 ILCS 160/6 (Transfer or obligation fraudulent as to creditor--Claim arising before the
transfer) states, in relevant part:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim
arose before the transfer was made or the obligation was incurred if the debtor made the transfer or
incurred the obligation without receiving a reasonably equivalent value in exchange for the
transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a
result of the transfer or obligation... .



Appellants filed a timely appeal which is presently before this court. As an appeal of a
core proceeding under 28 U.S.C. § 157(b)(2)(B) and (H), this court is to review the bankruptcy
court’s findings of fact under a clearly erroneous standard and conclusions of law under a de
novo standard. In re Smith, 286 F.3d 461, 464-65 (7" Cir. 2002). Because the bankruptcy court
summarized the facts and testimony in detail in its opinion, Jn re Roti, 271 B.R. at 287-91, the
court does not recite them here but incorporates them by reference. For the reasons set forth
herein, this court affirms the bankruptcy court’s judgment.

DISCUSSION

Appellants argue that the bankruptcy court erred when it held that (a) the transfers were
fraudulent under § 548(a)(1) and the UFTA, 740 ILCS 160/5(a) and 160/6(a); (b) appellants
were “initial transferees” under § 550(a)(1); (c) appellants were not entitled to a good faith
defense under § 548(c); and (d) the trustee was entitled to recover the value of the transfers
pursuant its turnover claim under § 542(a).

A. whether the transfers were fraudulent

Appellants argue that the bankruptcy court erred in holding that the transfers constituted
“actual fraud” within § 548(a)(1)(A) and “fraud in fact ” under the UFTA, 740 ILCS 160/5(a)(1).
Further, appellants argue that the bankruptcy court erred in finding “constructive fraud” pursuant

to § 548(a)(1)(B) or “fraud in law” pursuant to the UFTA, 740 ILCS 160/5(a)(2) and 160/6(a).?

Section 548 (Fraudulent transfers and obligations) states, in relevant part:
(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation
incurred by the debtor, that was made or incurred on or within one year before the date of the
filing of the petition, if the debtor voluntarily or involuntarily--
(A) made such transfer or incurred such obligation with actual intent to hinder, delay or defraud
any entity to which the debtor was or became, on or after the date that such transfer was made or
such obligation was incurred, indebted; or

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or

2



UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

JULIE MARIE NELMARK and
ANN GRECO,

Appellants,
v. Case No. 02 C 0925

Judge Joan H. Lefkow
BRENDA PORTER HELMS, not

individually but solely as Trustee in
bankruptcy for James P. Roti,

yar 2% 2008

weer ere ewer Se SY

Appellee.

MEMORANDUM OPINION AND ORDER

In an adversary complaint filed in the United States Bankruptcy Court for the Northern
District of Illinois (Bankr. Case No. 00 A 1179), appellee Brenda Porter Helms, as Chapter 7
trustee (“the trustee”) of the estate of James P. Roti (‘the debtor”), under 11 U.S.C. § 542(a)!
claimed turnover of property of the debtor’s estate by appellants Julie Marie Nelmark
(“Nelmark”) and Ann Greco (“Greco”), who are daughters of the debtor; and avoidance of the
transfers as fraudulent, pursuant to § 548(a)(1)(A) and (B) and the Illinois Uniform Fraudulent
Transfer Act (“UFTA”), 740 ILCS 160/5(a)(1), 160/5(a)(2) and 160/6(a). The Honorable John
H. Squires, Bankruptcy Judge, made findings of fact and conclusions of law after a two-day
bench trial. The bankruptcy court entered judgment in favor of the trustee on all claims and
ordered under § 544(b)(1) that each appellant pay the trustee the principal sum of $29,850 plus

prejudgment interest. /n re Roti, 271 B.R. 281 (Bankr. N.D. Ill. 2002),

‘All references hereinafter to statutory sections are to the Bankruptcy Code, 11 U.S.C. §§ 101 ef seg., unless
specifically stated otherwise.