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Meoli v. The Huntington National Bank

United States Court of Appeals, Sixth Circuit

February 8, 2017

Marcia R. Meoli, Plaintiff-Appellee/Cross-Appellant,
v.
The Huntington National Bank, Defendant-Appellant/Cross-Appellee.

          Argued: September 29, 2016

         Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 1:12-cv-01113-Paul Lewis Maloney, District Judge.

         ARGUED:

          Robert A. Long, Jr, COVINGTON & BURLING LLP, Washington, D.C., for Appellant/Cross-Appellee.

          Douglas A. Donnell, MIKA MEYERS PLC, Grand Rapids, Michigan, for Appellee/Cross-Appellant.

         ON BRIEF:

          Robert A. Long, Jr, Mark W. Mosier, David M. Zionts, COVINGTON & BURLING LLP, Washington, D.C., Jeffrey O. Birkhold, James Moskal, Matthew T. Nelson, WARNER NORCROSS & JUDD LLP, Grand Rapids, Michigan, for Appellant/Cross-Appellee.

          Douglas A. Donnell, Fredric N. Goldberg, MIKA MEYERS PLC, Grand Rapids, Michigan, for Appellee/Cross-Appellant.

          Joshua D. McKarcher, CLEMENTS, BROWN & MCNICHOLS, P.A., Lewiston, Idaho, for Amicus Curiae.

          Before: MOORE, ROGERS, and SENTELLE, [*] Circuit Judges.

          ROGERS, J., delivered the opinion of the court in which SENTELLE, J., joined, and MOORE, J., joined in part. MOORE, J. (pp. 27-28), delivered a separate opinion concurring in Parts I, II, III, and V, and in the judgment as to Part IV.

          OPINION

          ROGERS, Circuit Judge.

         In this bankruptcy case, Trustee Marcia Meoli seeks to recover allegedly fraudulent transfers of funds from the now-bankrupt company, Teleservices, to Huntington National Bank. Huntington lent money to, and maintained the deposits of, another company called Cyberco, which had created Teleservices to perpetuate a Ponzi scheme. As a part of the scheme, Cyberco and Teleservices shuttled the fraud's proceeds between their bank accounts.

         The Trustee sought to recover from Huntington three types of transfers from Teleservices: (i) direct loan repayments, which Teleservices sent directly to Huntington to pay down Cyberco's debt to Huntington; (ii) indirect loan repayments, which Teleservices sent to Cyberco's deposit account at Huntington, and which Cyberco later used to repay its debt to Huntington; and (iii) excess deposits, which Teleservices sent to Cyberco's deposit account at Huntington, and which Cyberco later withdrew or the government later seized. The bankruptcy court held that the Trustee could recover all three types of transfers from Huntington. The district court agreed. Huntington appeals, arguing that it is not a transferee of the excess deposits, and that it received the loan repayments in good faith. The Trustee cross-appeals, challenging as unreasonably low the bankruptcy court's calculation of prejudgment interest on the recoverable transfers.

         Because Cyberco was free to withdraw its money from its deposit account, Cyberco retained "dominion and control" over the deposits, despite Huntington's security interest in them. Huntington gained dominion and control only over the money that it received in satisfaction of Cyberco's debt to it; Huntington is a transferee of the direct and indirect loan repayments, but not of the excess deposits. Furthermore, because Huntington's investigator discovered a critical clue to Cyberco's fraud on April 30, 2004, and because that investigator failed to share that discovery with Huntington's manager who oversaw the Cyberco account, Huntington has failed to prove that it continued to receive transfers from Teleservices in good faith after that date. But this court's precedent does not necessarily require recoverability of transfers before that date, just because Huntington had earlier inquiry notice of fraud. Finally, the bankruptcy court did not err in calculating prejudgment interest using the statutory rate.

         I.

         Teleservices Group, Inc. and Cyberco Holdings, Inc. are two related bankrupt companies. Marcia Meoli is Teleservices's bankruptcy trustee. Huntington National Bank is a bank headquartered in Columbus, Ohio. Barton Watson was the chairman and chief executive of Cyberco.

         Barton Watson masterminded a Ponzi scheme. As the chairman and chief executive of Cyberco, Watson represented widely that Cyberco needed money to buy more computer equipment to support its growing computer-services business. Watson also represented widely that Cyberco purchased its equipment from a company called Teleservices. It was not widely known, though, that Teleservices was a paper company that Watson had created to perpetuate his fraud. Teleservices had no separate officers, directors, or employees, and it acted only through Cyberco's executives, who assumed fake names for their fake Teleservices jobs. Watson and his accomplices would fabricate Teleservices invoices that purported to document the purchase of computer equipment. Under that pretense, Watson borrowed money from several equipment financing companies and instructed them to send the money directly to Teleservices to pay for the computer equipment. Once they paid Teleservices, Watson moved the money from Teleservices's bank account to Cyberco's account at Huntington. Watson then used that money to pay his and others' salaries and to pay Cyberco's earlier debts to financing companies for previous "purchases."

         From September 2002 to October 2004, Huntington was Cyberco's bank. A team of Huntington employees in Michigan managed the Cyberco account. Huntington maintained Cyberco's deposit account and lent money to Cyberco. Originally, Huntington had lent about $9 million to Cyberco, but by 2004 the loan would grow to $16 million.

         In September 2003, Cyberco tried to deposit into its Huntington account a check for $2.3 million, but the check bounced. The check was from Teleservices. Gail White, a Huntington employee, was responsible for processing the bounced check. Smelling danger, she decided not to credit the check to Huntington's account, despite knowing that without it, Cyberco's checks would begin bouncing, too. White had discovered that, in the immediately preceding months, Cyberco had deposited a series of checks from Teleservices, all in large amounts. Neither White nor her superiors knew what Teleservices was.

         In October 2003, several Huntington employees met with Watson. When asked about Teleservices, Watson explained that Teleservices was a recent addition to Cyberco's holdings, that Teleservices was not yet operational, and yet that Teleservices was already collecting Cyberco's receivables before sending them to Cyberco.

         Although the Huntington employees did not know it, Watson's explanation contradicted his previous representation that Teleservices was Cyberco's supplier of computer equipment. While White and her superiors were unaware, Huntington's files actually recorded that previous representation. If they had been aware of that previous representation, they would easily have dismissed Watson's explanation of Teleservices at the meeting. If indeed Teleservices were Cyberco's supplier, then Cyberco should have been paying Teleservices for the purchased computer equipment-not the other way around-and Teleservices would not have suddenly transformed into a collector and aggregator of Cyberco's receivables.

         Though unaware of that smoking gun, White was still suspicious. Watson stated that Teleservices was not yet operational, but also that Teleservices had already begun transferring millions of dollars to Cyberco, as White had seen. White suspected foul play also because Cyberco refused to use the lockbox that Huntington had set up. A lockbox is a service offered by a bank, where the bank receives and processes checks on behalf of a company. Through the lockbox, Huntington had hoped to monitor Cyberco's revenues. But Cyberco did not use the lockbox, allegedly because its customers refused to use it, and thereby blinded White to Cyberco's source of money. White continued to investigate Cyberco's account with what information she had.

         Other Huntington employees were apparently satisfied with Watson's explanation-at least for the time being.

         Nevertheless, in January 2004, Huntington asked Cyberco to find a new bank. Some Huntington employees explained that Huntington simply did not understand Cyberco's complex business. But other Huntington employees clearly worried that Cyberco might not pay back its debt. John Kalb, one of White's superiors, wrote at the time that "the 'red flags' continue, " that there was in "recent times . . . the heightened risk of financial misinformation (as well as fraud), " and that he hoped Huntington would not "lose money" in the process of ending its relationship with Cyberco.

         By April 2004, Kalb was even more certain that there was foul play. Kalb believed that, in general, the computer services business was risky and that there was a tendency in the industry to exaggerate receivables. Kalb also knew that Cyberco had previously overspent its deposits and that Huntington had covered the excess spending by extending Cyberco's loan to offset the overdraft. Finally, Kalb knew that Cyberco never gave audited financial statements to Huntington, even though the loan agreement required Cyberco to do so. Cyberco just kept promising that it would give the statements as soon as the auditors signed off on sales and mergers of Cyberco's subsidiaries.

         Also around April 2004, White found proof of Cyberco's foul play. White had accessed Cyberco's receivables aging report, which is a standard accounting report that lists unpaid customer invoices. Cyberco had claimed in that report that its customers included many companies in the Fortune 500-companies that would never object to sending their checks to a lockbox. Furthermore, Cyberco listed companies like Electronic Data Systems as customers, even though such companies were also in the computer services business and were Cyberco's competitors, not customers.

         Kalb and White contacted Huntington's security department. Larry Rodriguez, Huntington's regional head of security, found out that the FBI was investigating Cyberco. Rodriguez also learned that Watson had a fraudulent past: Watson had been permanently blacklisted by the National Association of Securities Dealers; he had confessed to a bank fraud in Michigan and another fraud in California; and he had served three years in jail for a fraud-related crime. Rodriguez relayed that information to the FBI. But he did not share the information with Kalb or White. According to Kalb, Kalb asked Rodriguez about Rodriguez's findings, and Rodriguez was reluctant to share them.

         Meanwhile, Kalb suggested to Watson that Huntington contact Cyberco's customers to verify that they were indeed Cyberco's customers. Watson fumed at the idea. As he explained, Cyberco's customers would "smell a rat of some kind" if a bank called them for verification. As a compromise, Watson suggested that Grant Thornton, a renowned accounting firm, independently audit Cyberco. Huntington agreed. In early May 2004, Grant Thornton reported that Cyberco's customers were real. Later, it would turn out that Watson had deceived Grant Thornton by providing it with fake responses from Cyberco's fake customers.

         In the following months, Cyberco paid its debt to Huntington. By July 2004, Cyberco had paid down around half of its debt. Cyberco promised that more checks would arrive from Teleservices for the remaining debt. Although those checks from Teleservices did not arrive on time, causing Huntington to demand the full balance due, the checks did finally arrive in the following months. The last check cleared on October 29, 2004; that was also the largest check. Upon hearing the news, Kalb remarked: "All I can say is 'whew'!!"

         Later in 2004, the FBI raided Cyberco's offices. Watson committed suicide shortly thereafter.

         Creditors of Cyberco commenced an involuntary Chapter 7 proceeding against it. By then, a state court had already ordered a receiver to take control of both Cyberco and Teleservices. That receiver also filed for Teleservices's bankruptcy.

         In this suit, the trustee for Teleservices sought to recover from Huntington all of the direct loan repayments, the indirect loan repayments, and the excess deposits. The parties fully litigated the case in the bankruptcy court. The bankruptcy court conducted two trials and issued multiple opinions. On the issues on appeal alone, the bankruptcy court issued five opinions, some of which are published: (1) Bench Opinion (9/25/2009); (2) Bench Opinion (10/7/2009); (3) Bifurcated Issues Opinion (3/17/2011), Meoli v. The Huntington National Bank (In re Teleservices Group, Inc.), 444 B.R. 767 (Bankr. W.D. Mich. 2011); (4) Summary Judgment Opinion (3/30/2012), Meoli v. The Huntington National Bank (In re Teleservices Group, Inc.), 469 B.R. 713 (Bankr. W.D. Mich. 2012); and (5) Bench Opinion (7/23/2012).

         The bankruptcy court concluded first that the Trustee could potentially recover $72 million in loan repayments and excess deposits from Huntington, as Huntington was those transfers' "transferee" under the Bankruptcy Code. Reasoning that a bankruptcy trustee may recover certain transfers out of the bankrupt company only if the recipient of those transfers was the transfers' "transferee, " the court applied the dominion-and-control test to determine whether Huntington was a transferee of the loan repayments and excess deposits. The court concluded that Huntington was a transferee of the direct and indirect loan repayments because, once received, the loan repayments were Huntington's to spend however Huntington liked. The bankruptcy court also concluded that Huntington was a transferee of Cyberco's excess deposits, even ...


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