Corporate Res. Servs., Inc. v. Wells Fargo Bank, N.A. (In re TS Emp't, Inc.)

597 B.R. 494

IN RE TS EMPLOYMENT, INC., Debtor.

In re Corporate Resources Services, Inc., et al.,

Debtors.

James S. Feltman, Not Individually But Solely as Chapter 11 Trustee for TS Employment, Inc., Corporate Resource Services, Inc., et al., Plaintiff,

v.Wells Fargo Bank, N.A., and Wells Fargo Financial Leasing, Inc., Defendants.

Case No. 15-10243 (MG)

Case No. 15-12329 (MG) (Jointly Administered)

Adv. Pro. No. 17-1175

Adv. Pro. No. 17-1176

United States Bankruptcy Court, S.D. New York.

Signed February 28, 2019

JENNER & BLOCK LLP, Attorneys for Plaintiff, 919 Third Avenue, New York, NY 10022, By: Vincent E. Lazar, Esq., Richard Levin, Esq., Carl N. Wedoff, Esq.

OTTERBOURG P.C., Attorneys for Defendants, 230 Park Avenue, New York, NY 10169, By: Richard G. Haddad, Esq., John Bougiamas, Esq.

MEMORANDUM OPINION AND ORDER AFTER TRIAL

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

TABLE OF CONTENTS

I. Introduction ...499

II. Procedural History ...500

III. Jurisdiction And Venue ...500

IV. Findings of Fact ...500

A. Background...500

B. The CRS Receivables Financing Facility...501

C. The June 2014 Amendments...502

D. The February 2015 Amendments...511

E. The Cash Management System and Payroll Overdraft...512

F. The Indemnification Agreement...513

G. Diligence Undertaken Prior to Making the Payroll Advance...514

H. The TSE 2002 Account Charges...515

I. The Post-Petition Overdrafts...520

J. WFFL Lease Payments...522

K. The Indemnification for Legal Fees...523

V. Legal Standards ...524

A. Constructive Fraudulent Transfer...524

B. New York Debtor and Creditor Law...524

C. Preference...525

VI. Discussion ...525

A. The Trustee is Entitled to Avoid and Recover the $ 4.1 Million in Fees Paid to Wells Fargo as Constructive Fraudulent Transfers...525

B. The Payroll Overdraft Cannot Be Recovered as Constructive Fraudulent Transfers...530

C. Post-Petition Bank Charges Are Recoverable...533

D. The Trustee Cannot Recover the WFFL Lease Payment...537

E. Order for Accounting of Reimbursed Legal Fees...539

VII. Conclusion ...543

I. INTRODUCTION

Plaintiff James S. Feltman is the chapter 11 trustee ("Trustee") for the bankruptcy estates of TS Employment, Inc. ("TSE"), Corporate Resource Services, Inc. ("CRS"), and CRS's subsidiaries—Accountabilities, Inc., Corporate Resource Development Inc., Diamond Staffing Services, Inc., Insurance Overload Services, Inc., Integrated Consulting Group, Inc., The CRS Group, Inc. and TS Staffing Services, Inc. (the "CRS Subsidiaries," together with CRS, the "CRS Debtors," and collectively with TSE, the "Debtors").

CRS was a publicly-traded holding company for various temporary staffing businesses. TSE was the professional employer organization ("PEO") for workers employed by those businesses. Robert Cassera owned the majority of CRS's stock and 100% of TSE's stock. Cassera also owned 100% of Tri-State Employment Service, Inc. ("Tri-State"). ("Joint Pre-Trial Order," ECF Doc. # 22 at 2.)

Wells Fargo, N.A. provided receivables financing to certain of the CRS Debtors, and cash management services to TSE, Tri-State and Tri-State subsidiaries. A Wells Fargo affiliate, Wells Fargo Financial Leasing, Inc. ("WFFL," together with Wells Fargo, N.A., "Wells Fargo"), leased copiers to certain of the CRS Debtors. (Id. )

In late January 2015, Wells Fargo learned that TSE had not paid more than $ 100 million in federal payroll taxes for workers supplied to CRS customers. On February 2, 2015, TSE filed a chapter 11 bankruptcy petition. The Court approved the appointment of Mr. Feltman as the chapter 11 trustee for TSE on February 27, 2015. The CRS Debtors, however, did not file bankruptcy petitions at that time, and instead sold or closed their businesses under the supervision of CRS's chief restructuring officer. Following the sale of the CRS Debtors' businesses, CRS filed a chapter 11 bankruptcy petition on July 23, 2015. (Id. )

The Trustee seeks recoveries from Wells Fargo based on claims arising from the following five sets of transfers: (1) $ 4,100,000 in prepetition account monitoring, facility, and amendment fees paid to Wells Fargo; (2) a $ 2,572,570.26 transfer to Wells Fargo on February 5, 2015 to satisfy an overdraft in a non-debtor affiliate's account; (3) $ 439,710.58 in post-petition bank charges to TSE's accounts and paid by the CRS Debtors; (4) a $ 240,220.26 payment on June 30, 2015 to pay off 17 copier leases; and (5) $ 1,702,037 in legal fees paid to Wells Fargo, most of which related to advice concerning or defending against the foregoing claims. (Id. at 2–4.)

For the reasons explained below, the Court concludes that the Trustee is entitled to recover a total of $ 4,539,710.58 so far, comprised of the following: $ 4.1 million in prepetition account monitoring, facility, and amendment fees; $ 439,710.58 in post-petition bank charges. Additionally, the Trustee is entitled to recover a portion of the $ 1,702,037 in legal fees, pending settlement or a proper accounting; and pre-judgment interest in an amount still to be determined. The Court concludes that Wells Fargo has prevailed with respect to the Trustee's claims to recover the $ 2,572,570.26 transfer to Wells Fargo on February 5, 2015 for an overdraft; and the $ 240,220.26 payment on June 30, 2015 to pay off 17 copier leases.

II. PROCEDURAL HISTORY

On October 2, 2017, the Trustee filed the complaint (the "Complaint," ECF Doc. # 1), which contains twenty-three counts, seeking to recover the transfers in question based a variety of legal theories under the Bankruptcy Code, including constructive fraudulent transfer, preferential transfer, and violation of the automatic stay. (Compl. at 100–101.) The Complaint also contains claims based on state law theories, including breach of contract and unjust enrichment. (Id. ) The Court conducted a trial on November 16, 2018 and heard closing arguments on January 23, 2019. During the trial, the focus of the parties' evidence and arguments was on whether the CRS Debtors received reasonably equivalent value from the subject transfers.

III. JURISDICTION AND VENUE

This Court has jurisdiction pursuant to 28 U.S.C. § 1334(b) because this is an adversary proceeding arising in and related to the chapter 11 cases In re TS Employment, Inc. , Case No. 15-10243, and In re Corporate Resource Services, Inc. et al , Case No. 15-12329. Venue is proper in this District pursuant to 28 U.S.C. § 1409(a). The Complaint contains both "core" and "related to" claims, but the parties consented to the entry of final orders and judgment by this Court. (Joint Pre-Trial Order at 4.)

This opinion sets forth the Court's findings of fact and conclusions of law pursuant to Rule 52(a) and (c) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings in bankruptcy by Rule 7052 of the Federal Rules of Bankruptcy Procedure. The results in this case are fact-dependent. Therefore, the Court provides extensive findings of fact, detailed in several sections below with information arranged in chronological order.

IV. FINDINGS OF FACT

A. Background

Plaintiff James S. Feltman is the chapter 11 trustee for the bankruptcy estates of the Debtors. (Joint Pre-Trial Order at 4–40 ("Stipulated Facts") ¶ 1.)

CRS was a publicly-traded Delaware corporation, with its principal place of business in New York. (Id. ¶ 3.) The CRS Subsidiaries are 100%-owned subsidiaries of CRS. (Id. ¶¶ 4–10.) The CRS Debtors were engaged in the temporary staffing business. (Id. ¶¶ 15–16.) Cassera directly or indirectly owned a majority of the issued and outstanding stock of CRS. (Id. ¶ 15.) TSE is a privately-held Florida corporation. (Id. ¶ 2.) Cassera owned 100% of TSE. (Id. ¶ 2.)

Wells Fargo is a nationally chartered bank headquartered in San Francisco, California. (Id. ¶ 11.) Wells Fargo provided receivables financing to certain of the CRS Debtors, and cash management services to TSE and another affiliate, Tri-State. (Id. ¶¶ 23, 30–33.) A Wells Fargo subsidiary, WFFL, leased copiers to certain of the CRS Debtors. (Id. ¶¶ 12, 201.)

Cassera founded Tri-State in 1993 as a temporary staffing company, which grew through acquisitions over the next fifteen years. (Id. ¶ 14.) CRS was organized as a publicly-traded company in 2010 and pursued a strategy of rapid expansion by acquiring staffing businesses from Tri-State, Cassera and competitors. (Id. ¶ 15.) By the end of 2013, CRS reported that the CRS Debtors had 5,000 customers with whom they placed 150,000 temporary staff during 2013; CRS earned revenue of $ 819 million in the process. (Id. ¶ 16.).

Cassera incorporated TSE so that it could act as the PEO for the CRS Debtors' staffing businesses. (Id. ¶ 17.) The CRS Debtors were TSE's only customers. (Id. ¶ 18.) TSE provided PEO services to CRS pursuant to an agreement under which TSE was the co-employer of record for temporary and seasonal workers sourced by the CRS Debtors for their customers. TSE was responsible for the payment of temporary workers' wages and payroll, remittance of withholdings, payment of employer taxes, risk-management underwriting, and payment of workers' compensation insurance and expenses. (Id. ¶ 19.) TSE had no employees. Substantially all of TSE's business, accounting, and other corporate functions were performed by Cassera-affiliated entities and their employees and agents. (Id. ¶ 20.)

B. The CRS Receivables Financing Facility

In 2010, Wells Fargo exited a pre-existing receivables financing arrangement with Tri-State and established a receivables financing arrangement with CRS and its subsidiaries. (Stipulated Facts ¶ 30.) With two exceptions not relevant to this litigation, the CRS Subsidiaries then in existence began entering into Account Purchase Agreements (each an "APA" and collectively, the "APA Facility") with Wells Fargo. The terms of each of the APAs were substantially similar. (Id. ¶ 9.)

The receivables financing facility generally operated as follows: Wells Fargo lent funds to the CRS Subsidiaries based upon an advance rate against eligible customer receivables and in...