Dembsky v. Frommer, Lawrence & Haug, LLP (In re Lambertson Truex, LLC), Adv. Case No. 10-55563 (PJW) (Bankr. D. Del. Oct. 5, 2011), read opinion here.
Whether mere conduit defense was available to defeat action seeking the recovery of an unauthorized post-petition transfer under sections 549 and 550 of the Bankruptcy Code.
Short Answer: The mere conduit defense was not available to defendant because defendant exercised dominion and control over the transferred funds.
Tara Lattomus of Eckert Seamans prepared this summary.
Lambertson Truex, LLC, the debtor, was a designer of luxury consumer goods and engaged defendant, Frommer, Lawrence & Haug, LLP, a law firm, to register its trademark in various countries, including in Europe. Defendant in turn contacted the Paris based law firm of Gilbey Delorey for the initial trademark registration in 2002 and a renewal in 2009, with the defendant acting as the intermediary between the debtor and Gilbey. In November 2009, Gilbey sent an invoice to defendant for $2,371.93 and thereafter on December 10, 2008, defendant submitted an invoice to debtor for the Gilbey invoice plus a minimal fee for defendant’s services. Before receiving any payment from the debtor, defendant paid Gilbey’s invoice on January 6, 2009. On March 5, 2009, the debtor filed a bankruptcy petition. Under the terms of the debtor’s plan, the defendant had a claim against the debtor’s estate for the unpaid December invoice. Pursuant to the terms of plan, the debtor was authorized to pay defendant $367.42 on account of the claim; however, the debtor actually paid the defendant $2,449.44 far in excess of the amount provided for in the plan. The check from debtor to defendant was dated September 24, 2009, over eight months after the defendant paid Gilbey.
On November 24, 2011, plaintiff, the debtor’s liquidation trustee, commenced an action against defendant to avoid and recover the transfer of $2,082.02, the amount in access of that authorized by the plan. The theory of recovery was that the excess payment was not authorized by the Bankruptcy Court or the Bankruptcy Code. Defendant responded by claiming it was not a transferee as that term is contemplated by section 550 of the Bankruptcy Code and, therefore, the amount could not be recovered for the debtor. In other words, defendant claimed it acted as a mere conduit for the payment. Defendant claimed that as a mere pass through for the debtor, it was obligated to pass along the amount of the invoice to Gilbey on behalf of the debtor. Plaintiff moved for summary judgment on the issue of whether the defendant was a transferee.
The issue before the Bankruptcy Court was whether there were any genuine issues of material fact with respect to whether or not the defendant was a transferee of the September, 2009 payment from the debtor. Although the Bankruptcy Code does not define the term transferee, courts have evaluated the recipient’s dominion and control over the funds in order to consider whether or not the recipient is a transferee. In order to be considered a mere conduit, a party must receive a transfer solely for another and not for its own benefit. The defendant must claim that it lacked dominion and control over the funds, that the funds merely passed through their hands and that they had no power to use the funds for whatever purpose they wished. The Bankruptcy Court concluded that the mere conduit defense was unavailable to the defendant in this case. Defendant had in fact paid the outstanding invoice to Gilbey nine months before it received payment from the debtor. Accordingly, at the time defendant received the transfer, its obligation to pay Gilbey had long expired and defendant was free to use the funds for whatever purpose it chose. As the defendant was able to exercise dominion and control over the funds, it was considered a transferee of the funds and summary judgment was granted in favor of the plaintiff.