Court Opinion

ID: 2686039
Source: CourtListenerOpinion
Date Created: 2014-07-29 07:00:42.000541+00
Date Added: 2024-06-11T13:12:30.322923
License: Public Domain

PUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                              No. 13-1931

In Re: RAILWORKS CORPORATION,

                Debtor.

-----------------------------

ZVI GUTTMAN, Litigation Trustee,

                Plaintiff - Appellee,

           v.

CONSTRUCTION PROGRAM GROUP,

                Defendant - Appellant.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.      James K. Bredar, District Judge.
(1:13-cv-00385-JKB; 01-64463; 03-05363)

Argued:   March 18, 2014                    Decided:   July 28, 2014

Before KEENAN and FLOYD, Circuit Judges, and Max O. COGBURN,
Jr., United States District Judge for the Western District of
North Carolina, sitting by designation.

Reversed and remanded with instructions by published opinion.
Judge Floyd wrote the opinion, in which Judge Keenan and Judge
Cogburn joined.

ARGUED: Annapoorni Rohini Sankaran, GREENBERG TRAURIG, LLP,
Houston, Texas, for Appellant. Zvi Guttman, LAW OFFICES OF ZVI
GUTTMAN, PA, Baltimore, Maryland, for Appellee. ON BRIEF: Lori
Simpson, LAW OFFICE OF LORI SIMPSON, LLC, Baltimore, Maryland;
Elliot H. Scherker, GREENBERG TRAURIG, P.A., Miami, Florida, for
Appellant.    Richard M. Goldberg, SHAPIRO, SHER, GUINOT &
SANDLER, Baltimore, Maryland, for Appellee.

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FLOYD, Circuit Judge:

       This     appeal   concerns    the        efforts      of   Zvi   Guttman,    the

Chapter    11     Litigation   Trustee          for    the    estate    of   Railworks

Corporation (Railworks), to avoid and recover premium payments

that   Railworks     transferred      to    the       Construction      Program    Group

(CPG), which later transferred them to TIG Insurance Company

(TIG).    Railworks made the transfers within ninety days before

Railworks filed for bankruptcy protection.

       The bankruptcy court granted summary judgment in favor of

CPG, thus preventing Guttman from avoiding and recovering the

premium payment transfers to CPG.                     The district court vacated

the bankruptcy court’s grant of summary judgment and remanded

the case to the bankruptcy court for further proceedings.                           CPG

then noted this appeal.             We have jurisdiction over the matter

under 28 U.S.C. § 1291.

       For the reasons that follow, we hold that the bankruptcy

court’s grant of CPG’s summary judgment motion was proper.                           As

such, we reverse the district court’s decision and remand with

instructions to reinstate the bankruptcy court’s judgment.

                                           I.

       Railworks is a national provider of rail systems services.

On September 20, 2001, it filed a petition for reorganization

under Chapter 11 of the Bankruptcy Code.                      TIG provided general

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liability,      automobile,         and    workers’        compensation         insurance      to

Railworks.         CPG was TIG’s managing general underwriter.

       Before       CPG    became     TIG’s          managing        general    underwriter,

Sherwood Insurance Services (Sherwood) and TIG entered into a

General Agency Agreement (Agreement), with an effective date of

December 15, 1996, in which Sherwood agreed to provide to TIG

its     “expertise           in      soliciting,              developing,         marketing,

underwriting,         and     issuing       contracts           of     insurance.”           The

Agreement     provided       that    Sherwood          would    collect,        receive,      and

account for the premiums on the insurance policies.                              Because CPG

at    some   point        became    Sherwood’s         successor        in     interest,      the

relationship that previously existed between Sherwood and TIG

became one between CPG and TIG, with the Agreement continuing to

define the relationship between the two parties.                                We set forth

the relevant portions of the Agreement below.

       First, section 1.2 allowed CPG, among other things, “to

effect cancellation and non-renewal of Policies.”

       Second, section 3.4 stated that CPG would “not act as an

insurer      for    any    insureds,       and       th[e]    Agreement        shall   not     be

construed as an insurance policy or any contract or agreement of

indemnity of insureds.”

       Third,      under    section       5.1,       CPG   “shall      be    liable    for    and

shall pay to [TIG] all net premiums attributable to the Policies

produced      hereunder,       whether      or       not     such     premiums    have       been

                                                 4
collected by [CPG] less Commissions, as defined in section 6.1

of th[e] Agreement.”

     Fourth, according to section 5.2:

     All premiums collected by [CPG] are the property of
     [TIG] and shall be held in trust on behalf of [TIG] in
     a fiduciary capacity (“Premium Trust Funds”) and shall
     be deposited and maintained in an account separate and
     segregated from [CPG’s] own funds or, at [CPG’s]
     option, the Premium Trust Funds may be maintained in a
     pooled account maintained by affiliates of [CPG] for
     the investment of fiduciary funds (the “Premium Trust
     Account”).     The Premium Trust Account shall be
     maintained in an account at least equal to the
     premiums (unpaid to [TIG]), and return premiums
     (unpaid to policyholders or insureds) received by
     [CPG] less return premiums due to cancellations and
     endorsements.    After such funds have been deposited
     into the Premium Trust Account, [CPG] may deduct from
     such   account   the   appropriate   Commission.     The
     privilege   of  retaining    Commission  shall   not  be
     construed as changing this fiduciary relationship.

     [TIG] authorizes [CPG] to retain premiums in an
     interest-bearing trust account in a non-affiliated
     bank approved by [TIG] in writing which meets the
     “Premium Trust Account Guidelines,” . . . with
     interest payable to [CPG] until such amounts are due
     to [TIG] as set forth [in another section of the
     Agreement],   and  to  deduct Commissions  from  the
     premiums so collected.

     [CPG] shall be responsible for full compliance with
     all   applicable   laws,    regulations,   rules, and
     requirements regarding the Premium Trust Funds.

     And finally, section 6.1 provided that TIG would pay to CPG

“a Commission on gross premiums for all Policies written and

received pursuant to the Commission Schedule.”

     Guttman filed a complaint seeking to avoid and recover the

premium payment transfers that Railworks made to CPG during the

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ninety   days    preceding     Railworks’          filing    of    its     Chapter   11

bankruptcy petition.         The parties later filed cross-motions for

summary judgment.          Having considered the parties’ motions, the

bankruptcy court denied Guttman’s motion for summary judgment

and granted CPG’s motion.             This had the effect of not allowing

Guttman to avoid and recover the premium payments that Railworks

transferred     to   CPG    during    the       ninety   days     before    Railworks’

filing for bankruptcy.           On appeal, the district court vacated

and remanded the bankruptcy court’s judgment.                          CPG then filed

this timely appeal.

                                        II.

      There are two bankruptcy statutes at play in this appeal:

the   preference     avoidance       statute,      11    U.S.C.    §    547,   and   the

recovery statute, id. § 550.

                                         A.

      Section 547 defines certain transfers that were made out of

the debtor’s estate before the filing of the bankruptcy petition

as “preferences” and allows the trustee to avoid them.                         Vogel v.

Russell Transfer, Inc., 852 F.2d 797, 798 (4th Cir. 1988).                           As

explained by the House Committee on the Judiciary regarding the

Bankruptcy Reform Act of 1978, and relied upon by the Supreme

Court in Union Bank v. Wolas,

                                            6
     A preference is a transfer that enables a creditor to
     receive payment of a greater percentage of his claim
     against the debtor than he would have received if the
     transfer had not been made and he had participated in
     the distribution of the assets of the bankrupt estate.
     The purpose of the preference section is two-fold.
     First,    by   permitting    the    trustee    to    avoid
     prebankruptcy transfers that occur within a short
     period before bankruptcy, creditors are discouraged
     from racing to the courthouse to dismember the debtor
     during his slide into bankruptcy. The protection thus
     afforded the debtor often enables him to work his way
     out   of   a  difficult   financial   situation   through
     cooperation with all of his creditors.        Second, and
     more important, the preference provisions facilitate
     the    prime   bankruptcy   policy    of    equality    of
     distribution among creditors of the debtor.            Any
     creditor that received a greater payment than others
     of his class is required to disgorge so that all may
     share equally.      The operation of the preference
     section to deter “the race of diligence” of creditors
     to dismember the debtor before bankruptcy furthers the
     second goal of the preference section—that of equality
     of distribution.

502 U.S. 151, 160-61 (1991) (quoting H.R. Rep. No. 95-595, at

177–78 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6137-38).

     Under § 547(b),

     there are six elements that must be proved in order
     for a transfer to be set aside as preferential.   The
     transfer must have been: (1) of an interest of the
     debtor in property; (2) to or for the benefit of a
     creditor; (3) for or on account of an antecedent debt
     owed by the debtor before the transfer was made; (4)
     made while the debtor was insolvent; (5) made on or
     within ninety days of the filing of the bankruptcy
     petition; and (6) it must enable the creditor to
     receive a greater percentage of its claim than it
     would under the normal distributive provisions in a
     liquidation case under the Bankruptcy Code.

Morrison v. Champion Credit Corp. (In re Barefoot), 952 F.2d

795, 798 (4th Cir. 1991).

                                 7
                                          B.

     As set forth in § 550(a)(1):

     to the extent that a transfer is avoided under section
     . . . 547 . . . 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 or
     the entity for whose benefit such transfer was made.

11 U.S.C. § 550(a)(1).

     “The    Bankruptcy        Code    does        not   define   the    term    ‘initial

transferee.’     This Court applies the ‘dominion and control’ test

to   determine    whether       an     entity        qualifies     as     the    ‘initial

transferee.’”      Grayson Consulting, Inc. v. Wachovia Sec., LLC

(In re Derivium Capital LLC), 716 F.3d 355, 362 (4th Cir. 2013)

(quoting Bowers v. Atlanta Motor Speedway, Inc. (In re Se. Hotel

Props.   Ltd.    P’ship),      99     F.3d      151,     155–56   (4th    Cir.    1996)).

Under this      test,    “an    initial        transferee     must      (1)   have    legal

dominion and control over the property—e.g., the right to use

the property for its own purpose—and (2) exercise this legal

dominion and control.”              Id.        “[A] party cannot be an initial

transferee if he is a ‘mere conduit’ for the party who had a

direct business relationship with the debtor.”                       In re Se. Hotel

Props. Ltd. P’ship, 99 F.3d at 155.

     “[T]he     entity    for       whose      benefit     the    transfer      was   made

cannot be a subsequent transferee of the property, but rather

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‘is a guarantor or debtor—someone who receives the benefit but

not the money.’”            Id.       (alteration omitted) (citation omitted)

(quoting Lowry v. Sec. Pac. Bus. Credit, Inc. (In re Columbia

Data Prods., Inc.), 892 F.2d 26, 29 (4th Cir. 1989) (internal

quotation marks omitted)).

                                                    C.

     The    avoidance           of   a    transfer          and    the      recovery     from    the

transferee are distinct from one another.                             Suhar v. Burns (In re

Burns),    322     F.3d     421,         427    (6th        Cir.     2003).       Although       the

avoidance     of       a   transfer            is        necessary     to     recover     from     a

transferee,      avoidance           of    a        transfer       does     not   automatically

entitle the trustee to a recovery under § 550.                                     Id.     “[T]he

transaction must first be avoided before a plaintiff can recover

under 11 U.S.C. § 550.”                    IBT Int’l, Inc. v. Northern (In re

Int’l Admin. Servs., Inc.), 408 F.3d 689, 703 (11th Cir. 2005).

“After § 547 defines which transfers may be avoided, § 550(a)

identifies       who       is    responsible               for     payment:       ‘the    initial

transferee of such transfer or the entity for whose benefit such

transfer was made.’”                 Levit v. Ingersoll Rand Fin. Corp., 874

F.2d 1186, 1194 (7th Cir. 1989) (quoting § 550).                                  Of course, if

the funds are not recoverable under § 550, then it matters not

whether they are avoidable under § 547.

                                                     9
                                    III.

       When we consider an appeal from a district court acting as

a bankruptcy appellate court, we make a de novo review of the

legal conclusions of both the district court and the bankruptcy

court.    Gold v. First Tenn. Bank Nat’l Ass’n (In re Taneja), 743

F.3d 423, 429 (4th Cir. 2014).             “Like the district court, we

review for clear error the factual findings of the bankruptcy

court.”    Id.

        First,   CPG   maintains   that    the    district   court   erred   in

concluding that Guttman properly pled his claims under §§ 547

and 550.    We can quickly dispense with this argument.               Suffice

it to say that we have long held that a plaintiff is not limited

by any one specific legal theory set forth in the complaint.

New Amsterdam Cas. Co. v. Waller, 323 F.2d 20, 24 (4th Cir.

1963) (“[The plaintiff] need not set forth any theory or demand

any    particular   relief   for   the    court    will   award   appropriate

relief if the plaintiff is entitled to it upon any theory.”).

“Rule 8(a)(2) of the Federal Rules of Civil Procedure,” which is

made     applicable     to   bankruptcy      adversary       proceedings     by

Bankruptcy Rule 7008(a), “generally requires only a plausible

‘short and plain’ statement of the plaintiff’s claim, not an

exposition of his legal argument.”           Skinner v. Switzer, 131 S.

Ct. 1289, 1296 (2011).         In short, we think that Guttman has

sufficiently pled his §§ 547 and 550 claims.

                                     10
       Although      CPG     argues      that        the     district       court     erred       in

holding that Guttman satisfied the requirements of both §§ 547

and 550, if we hold that Guttman cannot recover the premium

payment transfers under § 550, then that determination will be

dispositive of the appeal and we will not need to decide whether

the premium payment transfers can be avoided under § 547.                                        So,

we begin there with our analysis.

       As we have already noted, “the trustee may recover, for the

benefit of the estate, the property transferred . . . from . . .

the initial transferee of such transfer or the entity for whose

benefit      such    transfer       was       made.”          11    U.S.C.     §    550(a)(1).

Guttman does not dispute the bankruptcy court’s determination

that CPG was not an initial transferee but instead states that

CPG    was    an    entity       for     whose       benefit        the     premium     payment

transfers were made.

       The    district      court      held,       and     Guttman     agrees,      “that        CPG

occupied      a    dual    status,       both      as    a   ‘mere     conduit’       of     money

between      Railworks     and     TIG       and    as     one   for   whose       benefit       the

transfer     occurred.”          Guttman        v.      Constr.     Program     Grp.       (In    re

Railworks Corp.), No. JKB–13–385, 2013 WL 3427897, at *6 (D. Md.

July    8,    2013).         The    district         court         stated    that     “CPG       was

contingently        liable    to       TIG    for       Railworks’s         premiums.”           Id.

But, according to the court, when the premiums were paid to TIG,

that contingent liability was extinguished.                            Id.     “A recognized

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basis for concluding that an entity benefited from an avoidable

transfer is the extinguishment of contingent liability.”                          Id.

Therefore, the district court concluded, “CPG is an entity for

whose benefit the avoided transfers were made, and [Guttman] is

entitled    under    §    550(a)(1)     to    recover   the   net    premiums    from

CPG.”     Id.   We cannot yield to the force of this reasoning.

     We    long     ago   held   that    “a     party   cannot      be    an   initial

transferee if he is a mere conduit for the party who had a

direct business relationship with the debtor.”                      In re Columbia

Data Prods., 892 F.2d at 28.                 Contrary to the district court’s

conclusion, it is also true that a party—in this instance CPG—

cannot be an entity for whose benefit the transfer was made if

it is a mere conduit for the party that had a direct business

relationship with the debtor.                This dispute presents a perfect

example as to why this is so.

     Everyone agrees that CPG was a “mere conduit”: the parties,

the bankruptcy court, and the district court.                  As the bankruptcy

court aptly observed, “Paragraph 5.2 of the Agreement created an

express trust, with CPG as trustee in favor of TIG.                        Therefore,

while CPG had physical control over the transfers it received,

it did not have the legal right to use them as it pleased.”

Guttman v. Constr. Program Grp. (In re Railworks Corp.), Nos.

01-64463-JS, 01-64485-JS, 01-64463-JS, 2012 WL 6681894, at *10

(Bankr. D. Md. Dec. 21, 2012) (citation omitted).                        Instead, the

                                         12
Agreement mandated that CPG, the agent, hold the funds in trust

for TIG, the principal.        Id.    This arrangement is set out in the

agency section—section 5.2—of the Agreement.

     Yet, according to Guttman and the district court, section

5.1 of the Agreement made CPG a contingent creditor of Railworks

inasmuch as CPG was contingently liable to TIG for Railworks’s

premium payments.        So, Guttman contends—and the district court

held—that the      remittance of Railworks’s premium payments to TIG

extinguished CPG’s contingent liability to TIG.                   And, according

to Guttman and the district court, because the extinguishment of

that contingent liability benefitted CPG, Guttman satisfied “the

entity for whose benefit such transfer was made” component of §

550, thus allowing him to recover the premium payment transfers.

     But, as CPG states, if that were true, then a conduit would

always    be    contingently    liable—and     thus      an    entity     for    whose

benefit a transfer was made.           This is so because a conduit, by

definition, has an obligation to pass the funds on to a third

party, and, if he fails to pass the funds to the third party, he

is liable for those funds.

     If    we    were   to   adopt   Guttman      and   the     district    court’s

position that one can be both a “mere conduit” and “one for

whose benefit the transfer occurred” we would eviscerate the

conduit    defense—something         that    we    are        unwilling     to    do.

Consequently, because CPG was unquestionably a mere conduit for

                                       13
the   premium     payments   between   Railworks     and   TIG,    and      a   party

cannot be both a mere conduit and an entity for whose benefit a

transfer    was    made,   Guttman   is   unable    to   recover      the   premium

payment transfers under § 550.

                                       IV.

      For   the    foregoing   reasons,      we   hold   that   the    bankruptcy

court’s decision granting summary judgment to CPG was correct.

Therefore, we reverse and remand the district court’s decision

with instructions to reinstate the bankruptcy court’s judgment. ∗

                                                         REVERSED AND REMANDED
                                                         WITH INSTRUCTIONS

      ∗
       We note that the bankruptcy court’s grant of summary
judgment was grounded on some bases not discussed here.       As
such, although we agree on the correctness of the bankruptcy
court’s ultimate grant of summary judgment to CPG, we express no
opinion as to its reasons for doing so.

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