Opinion ID: 2827943
Heading Depth: 2
Heading Rank: 2

Heading: Underlying Bankruptcy Adversary Complaint

Text: In 2010, GCB was named as a defendant in an adversary proceeding filed in the U.S. Bankruptcy Court in the District of Idaho. In the Chapter 7 bankruptcy adversary proceeding, the trustee for Payroll America Inc. (“Payroll America”) sued GCB. According to the adversary complaint, Payroll America contracted with one of GCB’s bank account holders, Lori Duke d/b/a Data Processing Services (“DPS”), to complete certain payroll transactions, such as withholding taxes and then depositing those tax withholdings with the appropriate government agency. Using the Automated Clearing House (“ACH”) network and the Federal Reserve banking system, DPS collected funds from Payroll America’s client accounts and transferred them to the relevant taxing authority. Pursuant to a written agreement, GCB, the “Sending Bank,” allowed DPS, as the “Third-Party Sender,” to use GCB’s Originating Depository Financial Institution routing number to obtain direct access to the Federal Reserve Bank in Atlanta and perform these payroll functions. The bankruptcy trustee’s initial complaint sought only an accounting, but subsequent amendments added claims of fraudulent transfers by Payroll America 3 Case: 15-11806 Date Filed: 08/18/2015 Page: 4 of 10 through GCB’s bank. Specifically, the trustee’s second amended complaint alleged that Payroll America had operated a fraudulent scheme similar to a Ponzi scheme that robbed “Peter to pay Paul,” and had used DPS’s money transfers made through GCB’s bank to hide Payroll America’s insolvency and defraud its creditors. The trustee’s second amended complaint alleged that these money transfers made at Payroll America’s instruction were fraudulent transactions under federal and Idaho and Georgia law, that GCB and DPS knew or should have known the transfers were fraudulent, and that GCB was liable for DPS’s actions because they were engaged in an agency relationship or a joint venture. The trustee’s second amended complaint also alleged that when Payroll America had “insufficient funds” for some of these ACH money transfers, GCB “paid out” those funds on Payroll America’s behalf, obligating Payroll America to repay GCB for the “advance.” DPS, on GCB’s behalf, then demanded “repayment” from Payroll America to satisfy the “obligation,” which Payroll America did with commingled funds. The second amended complaint alleged that when these insufficient-funds transfers occurred, GCB knew or should have known that Payroll America “was incurring debt to” GCB. The second amended complaint sought, among other things, to recover the full amount of the money transfers from GCB and DPS. C. Defendant Federal Insurance’s Refusal to Defend 4 Case: 15-11806 Date Filed: 08/18/2015 Page: 5 of 10 Based on the bankruptcy trustee’s initial complaint for an accounting, GCB filed a claim with Federal Insurance. Federal Insurance denied coverage and refused to defend GCB. After the bankruptcy trustee amended the complaint to allege the fraudulent transfer claims, GCB resubmitted its claim to Federal Insurance. Federal Insurance again denied coverage and refused to defend on the basis that the trustee and Payroll America were not GCB’s customers and because the factual allegations in the bankruptcy trustee’s second amended complaint did not involve professional services, i.e., loan servicing or lending services, as defined in the policy. GCB defended itself in the bankruptcy-adversary proceedings, ultimately winning summary judgment. In opposing summary judgment, the bankruptcy trustee (orally and in writing) argued unsuccessfully that Payroll America was a customer of GCB and that when DPS’s debit transactions on behalf of Payroll America failed and GCB temporarily covered the shortfall, Payroll America briefly owed GCB a debt, which it then repaid through DPS.3 On appeal to the district court, the bankruptcy trustee renewed this argument, claiming that Payroll America in effect obtained “short-term loans” from GCB. The district court affirmed the 3 The trustee made this argument to try to persuade the bankruptcy court that GCB was liable for Payroll America’s fraudulent transfers under 11 U.S.C. § 550(a)(1) as an “entity for whose benefit” the transfers were made. The trustee contended that some of Payroll America’s fraudulent wire transfers to DPS, as a third party, were in exchange for DPS’s payment of Payroll America’s short-term debt to GCB and thus were “for the benefit of” GCB. 5 Case: 15-11806 Date Filed: 08/18/2015 Page: 6 of 10 grant of summary judgment, rejecting, inter alia, the bankruptcy trustee’s theory that GCB lent money to Payroll America. 4 D. Breach of Contract Action Plaintiff GCB filed this diversity action against Defendant Federal Insurance, alleging a breach of its insurance contract under Georgia law. The district court granted Federal Insurance’s motion to dismiss GCB’s amended complaint because the underlying fraud claims in the bankruptcy-adversary proceeding did not fall, or even arguably fall, within the policy’s coverage. The district court concluded that the bankruptcy trustee’s second amended complaint contained no allegations of loan servicing or lending services as defined in the policy, and GCB did not claim that it “in fact gave loans to” Payroll America. The district court looked to the pleadings—the second amended complaint—and explained that it would not consider the bankruptcy trustee’s later arguments to the bankruptcy court and on appeal about short-term loans because GCB did “not claim that [Payroll America] was in fact a customer of [GCB] or that a loan agreement existed between [Payroll America] and [GCB].” The district court 4 When this breach of contract action was filed, an appeal of the district court’s order affirming summary judgment was pending in the Ninth Circuit. The Ninth Circuit recently affirmed and, like the bankruptcy court and the district court before it, rejected the bankruptcy trustee’s argument that some of the DPS money transfers (called cure wires) were to repay a debt to GCB. See In re: Payroll Am., Inc., No. 13-35903, 2015 WL 4123469 (9th Cir. July 9, 2015). 6 Case: 15-11806 Date Filed: 08/18/2015 Page: 7 of 10 dismissed GCB’s amended complaint without prejudice and denied without prejudice GCB’s pending motion for leave to file a second amended complaint. GCB filed a motion for reconsideration, arguing that the district court had not addressed the bankruptcy trustee’s allegations that Payroll America owed GCB a debt. The district court denied the motion. The district court explained that none of the second amended complaint’s factual allegations indicated that Payroll America’s “debt” to GCB “could reasonably be understood as a loan or extension of credit: there is no claim of a loan agreement, an interest [r]ate, or even a due date. Plaintiffs have not provided any evidence suggesting that a reasonable insured bank would have believed that it was engaged in either Loan Servicing or Lending Services, as defined by the Policy, when it processed ACH transactions. In fact, it is clear that Plaintiffs knew that they did not provide Professional Services to [Payroll America].” (footnote omitted). The district court denied GCB’s motion for leave to file a second motion for reconsideration.