DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DZ BANK AG DEUTSCHE ZENTRAL- No. 15-35086
GENOSSENSCHAFT BANK,
FRANKFURT AM MAIN, New York D.C. No.
Branch, 2:14-cv-00869-
Plaintiff-Appellant, JLR
v.
OPINION
LOUIS PHILLIPUS MEYER; LYNN
MEYER,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Washington
James L. Robart, Senior District Judge, Presiding
Argued and Submitted May 19, 2017
Seattle, Washington
Filed August 24, 2017
Before: Michael Daly Hawkins, Ronald M. Gould,
and Richard A. Paez, Circuit Judges.
Opinion by Judge Paez
2 DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER
SUMMARY*
Bankruptcy
The panel reversed the district court’s decision affirming
the bankruptcy court’s judgment in favor of a creditor in the
creditor’s adversary proceeding alleging that the debtors
fraudulently transferred assets in order to place the assets out
of the creditor’s reach, and that the debt therefore was non-
dischargeable under 11 U.S.C. § 523(a).
The panel held that the bankruptcy court correctly found
that, under the Washington Uniform Fraudulent Transfer Act,
the debtors engaged in fraudulent transfers and, therefore,
actual fraud, to the creditor’s detriment. The bankruptcy
court erred, however, in limiting relief to the value of the
assets that were directly traceable to the creditor’s security
interest. The panel held that the non-dischargeable debt
resulting from the fraudulent transfers was the full amount
that the creditor would have recovered if it had been able to
execute against the debtor’s ownership interest in the closely-
held corporation from which the debtor transferred the assets.
COUNSEL
D. Alexander Darcy (argued) and Michael W. Debre III,
Askounis & Darcy PC, Chicago, Illinois, for Plaintiff-
Appellant.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER 3
Marc S. Stern (argued), Seattle, Washington; for Defendants-
Appellees.
OPINION
PAEZ, Circuit Judge:
This case arises from a dispute between DZ Bank AG
Deutsche Zentral-Genossenschaftsbank (“DZ Bank”), as
creditor, and Louis and Lynn Meyer (“the Meyers”),1 as
debtors. DZ Bank filed an adversary action against the
Meyers in bankruptcy court, alleging that the Meyers had
fraudulently transferred assets in order to place them out of
the bank’s reach. The bankruptcy court agreed, but limited
the judgment to the value of the assets that were directly
traceable to DZ Bank’s security interest. The district court
affirmed, reasoning that DZ Bank could not recover the value
of the other assets because those assets were not the property
of the Meyers, but rather, were the property of Louis Meyer’s
closely-held corporation. We have jurisdiction pursuant to
28 U.S.C. § 1291, and we reverse.
I.
In January 2008, Louis Meyer was the sole member and
1
At oral argument, Appellees’ counsel represented to the court that
the Meyers are no longer married. For the sake of convenience, however,
we continue to refer to Appellees as “the Meyers.”
4 DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER
manager of Choice Cash Advance LLC (“Choice”).2 Choice
purchased five insurance agencies and their books of business
in a sale arranged by Brooke Credit Corporation and its
associated entities (collectively, “Brooke”). As part of the
purchase, Brooke loaned Choice $1,771,715.20. The loan
itself was financed pursuant to a credit and security
agreement that Brooke entered into with a third-party entity,
whose agent was DZ Bank. Under the terms of that
agreement, Brooke granted DZ Bank a security interest in,
among other things, its right, title, and interest to the Choice
loan. Choice executed a promissory note for the $1.7 million
and gave Brooke a blanket security interest in all of its assets,
including intangibles. The Meyers personally guaranteed the
note, as well.
In October 2008, Brooke defaulted on its obligations
under the agreement with DZ Bank, and multiple Brooke
entities filed for bankruptcy. Then, DZ Bank and Brooke
entered into an agreement to transfer Choice’s note and the
Meyers’ personal guarantee to DZ Bank. Choice formally
acknowledged the assignment and agreed to pay the
$1,728,834.65 balance that remained on the promissory note
to DZ Bank. Over the next two years, however, Choice and
DZ Bank entered into several forbearance agreements after
Louis Meyer, on behalf of Choice, repeatedly requested loan
modifications.
During the same time period, the Meyers executed an
elaborate series of transfers and sales in an effort to place
their assets beyond the reach of their creditors. In October
2
We take this factual background from the bankruptcy court’s
amended findings of fact and conclusions of law, following trial of DZ
Bank’s adversary action.
DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER 5
2008, Louis Meyer caused Choice to transfer assets valued at
$123,200 to Meyer Insurance (“MI”), a closely-held
corporation in which he owned 100% of the shares.
In 2010, Louis Meyer purchased Insurance Choices 4 U,
Inc. (“IC4U”) for $200 from a family friend. The Meyers
also set up the Meyer Irrevocable Trust, presumably for
estate-planning purposes. Their daughter was designated as
trustee, and they were listed as beneficiaries. In December
2010, Louis Meyer caused MI to transfer its assets to IC4U
for no consideration, and then arranged for the Meyer Trust
to purchase 100% of IC4U’s stock. At that time, MI’s assets
had a fair market value of $385,000 of which $123,200 was
attributable to the assets originally transferred from Choice.
IC4U agreed to pay $385,000 back to Louis Meyer,
personally, over time. There was testimony that this
agreement was to repay him for a shareholder loan, but the
bankruptcy court found that “[t]here was no evidence at trial
. . . of any underlying loan documents or any accounting for
that loan.”
In January 2011, IC4U transferred its assets to Connect
Insurance Agency, Inc. (“Connect”) in exchange for paying
IC4U all commissions Connect received from the transferred
insurance policies for nine months. Together, these transfers
left Choice, MI, and IC4U all insolvent. And within a few
months, Choice and the Meyers had defaulted on the note and
their personal guarantee.
In August 2011, DZ Bank filed an action against Choice
and the Meyers. After the complaint was filed, the Meyers
filed for bankruptcy. As a result, the district court stayed DZ
Bank’s action against the Meyers. But the district court
permitted proceedings to go forward against Choice,
6 DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER
eventually entering a final judgment of $1,710,469.93 in
favor of DZ Bank in March 2013. As Choice was insolvent,
however, DZ Bank could not collect on the judgment.
As a result, DZ Bank filed an adversary action against the
Meyers in bankruptcy court alleging that the transfer of assets
out of MI was a fraudulent transfer under the Washington
Uniform Fraudulent Transfer Act (“WUFTA”),3 see Wash.
Rev. Code § 19.40.041, and therefore non-dischargeable
under 11 U.S.C. § 523(a). See Husky Int’l Elecs., Inc. v. Ritz,
136 S. Ct. 1581 (2016). Among other exceptions from
dischargeability, § 523(a) excepts debts obtained by “actual
fraud.” See 11 U.S.C. § 523(a)(2)(A). As the Supreme Court
has recently explained, the term “‘actual fraud’ is broad
enough to incorporate a fraudulent conveyance.” Husky,
136 S. Ct. at 1587.
In Washington, under WUFTA, a conveyance is
fraudulent when made by a debtor “[w]ith actual intent to
hinder, delay, or defraud any creditor of the debtor.” See
Wash. Rev. Code § 19.40.041(a)(1). WUFTA defines a
transfer as “every mode, direct or indirect” of disposing of an
asset, id. § 19.40.011(12), which, in turn, is defined as the
“property of a debtor,” id. § 19.40.011(2). The statute defines
“property” as “anything that may be the subject of
ownership.” Id. § 19.40.011(10).
3
In April 2017, the Washington state legislature passed a bill
amending WUFTA and renaming it the Washington Uniform Voidable
Transactions Act (“WUVTA”). See S.B. 5085, 65th Leg., Reg. Sess.
(Wash. 2017). Although WUVTA took effect on July 23, 2017, we
continue to refer to the WUFTA version of the statute in this opinion, as
it is the law that governs the subject transactions. See id. (“[WUVTA]
does not apply to a transfer made or obligation incurred before the
effective date . . . .”).
DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER 7
Although the bankruptcy court ruled in favor of DZ Bank
on its fraudulent transfer claim, it ultimately limited the
judgment to $123,200, which was the portion of the $385,000
that was traceable to DZ Bank’s security interest in the assets.
DZ Bank appealed, arguing that the bankruptcy court
erroneously limited the amount of its non-dischargeable debt.
But the district court affirmed the bankruptcy court’s
determination that DZ Bank could not maintain a fraudulent
transfer claim as to MI’s “non-collateral assets,” albeit on a
slightly different ground. The court reasoned that DZ Bank
could only recover assets that were the “property of [the]
debtor[s],” see id. § 19.40.011(2)—i.e., legally titled in the
Meyers’ name. Since the assets were legally titled in MI’s
name, WUFTA did not apply. For WUFTA to apply, DZ
Bank was required to obtain a ruling that MI was the alter ego
of the Meyers, which it failed to do. On the facts of this case,
we disagree with both courts.
II.
We review the bankruptcy court’s findings of fact for
clear error and its conclusions of law de novo. In re Kimura,
969 F.2d 806, 810 (9th Cir. 1992). As the issue presented is
purely legal, our review is de novo.
III.
A.
The Washington Supreme Court has explained that “the
overriding purpose of the UFTA is to provide relief for
creditors whose collection on a debt is frustrated by the
actions of a debtor to place the putatively satisfying assets
beyond the reach of the creditor.” Thompson v. Hanson,
8 DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER
219 P.3d 659, 665, as amended (Mar. 26, 2010), republished
as modified at 239 P.3d 537 (Wash. 2009); see also Husky,
136 S. Ct. at 1586–88 (discussing the history of “actual
fraud”). This “overriding purpose,” Hanson, 219 P.3d at 665,
can be traced to “the beginning of English bankruptcy
practice,” Husky, 136 S. Ct. at 1587. Since then, “courts and
legislatures have used the term ‘fraud’ to describe a debtor’s
transfer of assets that . . . impairs a creditor’s ability to collect
the debt.” Id.
B.
With WUFTA’s purpose in mind, we look to what other
courts have concluded when faced with similar circumstances
under the UFTA. Thompson v. Hanson, 174 P.3d 120, 126
(Wash. Ct. App. 2007) (“Because an explicit purpose of the
UFTA is uniformity among the States that have adopted it,
the interpretation of other courts also provides guidance.”),
aff’d, 239 P.3d 537 (Wash. 2009); see also Wash. Rev. Code
§ 19.40.903 (“[WUFTA] shall be applied and construed to
effectuate its general purpose to make uniform the law . . .
among states enacting it.”). In Wiand v. Lee, for example, the
defendants argued that “transfers of funds from the
receivership entities could not have been transfers of ‘assets’
because assets under FUFTA[, Florida’s statute identical to
WUFTA,] must be [the] ‘property of a debtor,’ and the funds
. . . transferred were property of the corporations.” 753 F.3d
1194, 1203 (11th Cir. 2014) (quoting Fla. Stat. § 726.102(2),
(12)). The Eleventh Circuit rejected that argument,
explaining that FUFTA did not require the debtors,
themselves, to have legal title to the assets transferred.
Florida law required only that the assets “could have been
applicable to the payment of the debt due.” Id. (emphasis
DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER 9
removed) (quoting Nationsbank, N.A. v. Coastal Utils., Inc.,
814 So. 2d 1227, 1229 (Fla. 4th Dist. Ct. App. 2002)).
A Minnesota court interpreting Minnesota’s identical
version of WUFTA in Reilly v. Antonello rejected a corporate
officer’s argument that it was the corporation, not the officer,
that legally diluted the corporation’s shares and thereby
reduced the officer’s ownership from 100% to 2%.
852 N.W.2d 694, 701 (Minn. Ct. App. 2014). The court
refused to “ignore[] the reality that [the officer] was
exclusively responsible for the actions of the corporation and
that he fraudulently transferred assets to the detriment of his
creditors.” Id. The court reasoned that “[t]o allow a sole
director, officer, and shareholder to mask his fraudulent
actions behind the facade of a closely held corporation would
defy the plain meaning and intent of the Minnesota Uniform
Fraudulent Transfer Act.” Id.
In In re Nickeson, a South Dakota bankruptcy court
interpreting that state’s version of UFTA, which is also
identical to WUFTA, held similarly. See Bankr. No. 13-
10137, Adversary No. 14-1004, 2014 WL 6686524, at *11
(Bankr. D.S.D. Nov. 25, 2014). There, a sole shareholder and
director of a farming corporation caused the corporation to
dilute its shares, reducing the shareholder’s ownership from
100% to 20%. Id. Refusing to “reward . . . [the] pervasive
disregard for corporate formalities,” the court rejected the
shareholder’s argument that it was the corporation that
diluted its own shares. Id.
These cases are instructive. If MI had retained the
$385,000 in assets, DZ Bank would have been able to enforce
any judgment against the Meyers, prior to their filing for
bankruptcy protection, by executing against Louis Meyer’s
10 DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFT BANK V. MEYER
100% ownership interest in MI to satisfy $385,000 of its
claim. See Wash. Rev. Code § 6.17.090 (“All property, real
and personal, of the judgment debtor that is not exempted by
law is liable to execution.”). When Louis Meyer indirectly
transferred all of MI’s assets to another corporation, he, as in
Wiand, Antonello, and Nickeson, depleted the value of his
assets to the detriment of his creditors. His shares in MI
became worthless as a result of his actions as MI’s sole owner
and shareholder, while, even after filing for bankruptcy, he
continued to receive payments from IC4U. In other words, he
prevented DZ Bank from collecting $385,000 of the debt he
owed.
Although the bankruptcy court correctly found that the
Meyers engaged in fraudulent transfers and, therefore, actual
fraud, to DZ Bank’s detriment, the court limited relief to
$123,200—the amount of the collateralized debt. This was
error. The bankruptcy court should have granted relief for the
full $385,000 that DZ Bank would have recovered if it had
been able to execute against Louis Meyer’s ownership
interest in MI. See 4 Collier on Bankruptcy ¶ 523.08[2] (16th
ed. 2016) (“[A] nondischargeability claim based on a[]
scheme in which a debtor fraudulently transfers assets of one
closely held corporation to other closely held companies,
purposefully intended to hinder, delay, or defeat the
collection of a debt, constitutes actual fraud under section
523(a)(2)(A).”). The amount of the non-dischargeable debt
resulting from the fraudulent transfers is therefore $385,000,
which DZ Bank is entitled to recover.
REVERSED and REMANDED.