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
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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,
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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).
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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.
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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.
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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
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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
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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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