Marcia R. Meoli, Plaintiff-Appellee/Cross-Appellant,
The Huntington National Bank, Defendant-Appellant/Cross-Appellee.
Argued: September 29, 2016
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.
A. Long, Jr, COVINGTON & BURLING LLP, Washington, D.C.,
Douglas A. Donnell, MIKA MEYERS PLC, Grand Rapids, Michigan,
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.
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.
ROGERS, Circuit Judge.
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.
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.
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.
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.
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."
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.
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
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.
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
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.
Huntington employees were apparently satisfied with
Watson's explanation-at least for the time being.
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.
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.
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.
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.
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.
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
in 2004, the FBI raided Cyberco's offices. Watson
committed suicide shortly thereafter.
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.
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
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 ...