In re: Dayton Title Agency, Inc., Debtor.
Ruth A. Slone, as Trustee of the Bankruptcy Estate of Dayton Title Agency (12-3265); PNC Bank, National Association, successor by merger to National City Bank (12-3359), Appellants. The White Family Companies, Inc.; Nelson D. Wenrick, Appellees,
Argued: January 16, 2013
Appeal from the United States District Court for the Southern District of Ohio at Dayton. No. 3:01-cv-481—Walter H. Rice, District Judge.
Stephen D. Brandt, Dayton, Ohio, for Appellant in 12-3265. Marcel C. Duhamel, VORYS, SATER, SEYMOUR AND PEASE LLP, Cleveland, Ohio, for Appellant in 12-3359. Paul H. Shaneyfelt, DUNGAN & LEFEVRE CO., L.P.A., Troy, Ohio, for Appellee White Family Companies in 12-3265 and 12-3359. Dianne F. Marx, SEBALY SHILLITO DYER, Dayton, Ohio, for Appellee Wenrick in 12-3359.
Stephen D. Brandt, Dayton, Ohio, for Appellant in 12-3265. Marcel C. Duhamel, Heather M. Lutz, VORYS, SATER, SEYMOUR AND PEASE LLP, Cleveland, Ohio, Terry M. Miller, VORYS, SATER, SEYMOUR AND PEASE LLP, Columbus, Ohio, for Appellant in 12-3359. Paul H. Shaneyfelt, DUNGAN & LEFEVRE CO., L.P.A., Troy, Ohio, for Appellee White Family Companies in 12-3265 and 12-3359. Dianne F. Marx, SEBALY SHILLITO DYER, Dayton, Ohio, for Appellee Wenrick in 12-3359.
Before: BATCHELDER, Chief Judge; MERRITT and KETHLEDGE, Circuit Judges.
ALICE M. BATCHELDER, Chief Judge.
Dayton Title Agency (Dayton Title) was a small company that brokered financial transactions, primarily real estate closings. As part of its operation, it had an "IOTA" (Interest on Trust Account) banking account at PNC Bank (then National City Bank) to hold clients' funds in trust as money was passed from one party to the other in a transaction.
Dayton Title facilitated a series of loans that the defendants, White Family Companies ("White") and Nelson Wenrick, made to one Krishan Chari and his business partner Michael Karaman, as well as to their corporate interests, The Chari Group, Ltd., and Invesco, LLC, (collectively, "Chari"). During 1998 and 1999, White made a series of five short-term "bridge loans" to Chari, ranging from $1.9 million to $3.2 million, for 30 to 45 days, to facilitate specific commercial real estate purchases by Chari. Wenrick made a sixth bridge loan to Chari for $1.2 million in 1999. In all these transactions, the lender would deposit the funds into Dayton Title's PNC account and Dayton Title would then transfer the funds to Chari. Chari's loan payments would also pass through Dayton Title's account. These first six loans "were paid back in full, but not always before the due dates." In re Dayton Title Agency, Inc., 292 B.R. 857, 863 (Bankr. S.D. Ohio 2003).
White and Wenrick each provided another bridge loan to Chari in September of 1999, for $3.2 million and $1.6 million, respectively, or $4.8 million total. Id. Chari agreed to pay back the loans, with interest, by October 3, 1999. Several days after the deadline Chari paid back the loans, but both checks bounced because of insufficient funds. Finally, on October 19, Chari deposited a check for the full amount owed ($4.885 million once interest was accounted for) into Dayton Title's trust account at PNC. "The check was purportedly drawn on a[n] . . . account at Oak Hill Bank. The teller at [PNC] did not place a hold on the check Chari deposited." Id. at 864.
Continuing in its role as intermediary, Dayton Title "[o]n that same day" and "pursuant to Chari's instructions" issued checks to White and Wenrick. Id. On October 20, PNC extended a "provisional credit" to Dayton Title for $4.885 million (the face value of Chari's check), pursuant to PNC's standard "Rules for Business Accounts." Banks routinely extend these credits to a customer's checking account while a check is clearing, allowing the funds from the check to be "available" before the check has been fully processed (this is discussed more fully below). White exchanged its check from Dayton Title for an official bank check on October 20. Wenrick deposited his check at another bank and it cleared on October 25. On October 26, PNC learned that Chari's check was a forgery drawn on a non-existing account at another bank. Chari deposited two additional checks in Dayton Title's account in the subsequent weeks, but both were returned for insufficient funds.
PNC then exercised its right of "charge back" on the Dayton Title account. There was about $740, 000 already in the account (made up of third-party funds and Dayton Title's fees for other transactions) when Dayton Title deposited Chari's check. The provisional credit from PNC added $4.885 million to the account (the face value of the check). The payments to White and Wenrick then debited $4.885 million from the account, leaving $740, 000. Because of the "first-in first-out" rule, the $4.885 million paid to White and Wenrick was made up of the $740, 000 already in the account and about $4.1 million from the provisional credit funds. PNC's charge-back debited $4.885 million. PNC regained about $740, 000 of the provisional credit funds it advanced and left Dayton title with a negative balance of about $4.1 million. It is the roughly $4.1 million from the provisional credit funds, which were subsequently transferred to White and Wenrick, that is contested on appeal.
PNC froze Dayton Title's account on November 4, and Dayton Title was forced into bankruptcy. Chari and his corporate entities declared bankruptcy and Chari was convicted on charges of racketeering, fraud, and forgery. After Dayton Title filed for bankruptcy, the bankruptcy estate sued White and Wenrick, seeking to avoid the $4.885 million transfer to those parties as a fraudulent transfer under federal and state law. See 11 U.S.C. § 548; Ohio Rev. Code § 1336.04(A)(2). PNC intervened as an additional plaintiff, suing White and Wenrick for fraudulent transfer and unjust enrichment. The bankruptcy court held that all but $722, 101.49 of the transfer to White and Wenrick was fraudulent. On appeal, the district court held that all but $20, 747.13 of the transfer was not fraudulent. The Dayton Title estate and PNC now appeal.
When a case originates in bankruptcy court, we review the decision of the bankruptcy court directly. See Stevenson v. J.C. Bradford and Co., 277 F.3d 838, 849 (6th Cir. 2002) (In Re Cannon II). We give no deference to the opinion of the district court. Id. Because we review a grant of summary judgment here, we review the bankruptcy court's decision de novo. Id.
The only question on appeal is whether that portion of the payment to White and Wenrick that was drawn from the money that PNC had advanced was an "asset" of Dayton Title for purposes of Ohio's fraudulent transfer statute. Federal bankruptcy law allows a claimant to bring a fraudulent transfer claim under both federal and state law. A federal claim is brought under 11 U.S.C. § 548. A state fraudulent transfer claim may be brought in a bankruptcy case under 11 U.S.C. § 544 and the applicable state provision. See In re Fordu, 201 F.3d 693, 697 n.3 (6th Cir. 1999) ("The section 544 'strong-arm' provision of the Code allows the trustee to 'step into the shoes' of a creditor in order to nullify transfers voidable under state fraudulent conveyance acts for the benefit of all creditors.").
Here, Dayton Title appeals under 11 U.S.C. § 544 and the Ohio Uniform Fraudulent Transfer Act (UFTA). See Ohio Rev. Code § 1336.01 et. seq. In Ohio, a transfer is fraudulent as to a creditor if:
(1) It is "[a] transfer made or an obligation incurred by a debtor, "
(2) "the debtor made the transfer or incurred the obligation . . . [w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation, " and
(3) "either of the following applies: (a) The debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; (b) The debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due."
Ohio Rev. Code § 1336.04(A)(2).
Both the district court and the bankruptcy court found that the second and third elements of the claim are satisfied here, and we agree. Dayton Title did not receive a "reasonably equivalent value" in exchange for its payments to White and Wenrick. As the bankruptcy court explained, the transfer "created $4, 885, 000.00 in new claims against Dayton Title that did not exist prior to the transfer." In re Dayton Title Agency, Inc., 262 B.R. 719 (Bankr. S.D. Ohio 2001). Dayton Title received nothing of value in return for the transfer; nor was the transfer made to satisfy any obligation of Dayton Title, because Chari, not Dayton Title, owed the money to White and Wenrick.
The transaction also left Dayton Title with remaining assets that were unreasonably small in relation to the business or transaction. See id. at 732. In fact, the transaction left Dayton Title some $4.1 million in debt. Again, "[t]he transfer not only depleted Dayton Title's ...