Mangan v. Univ. of Conn. (In re Hamadi)

597 B.R. 67

IN RE: Michael HAMADI and Mirna Y. Hamadi, Debtors.

Bonnie C. Mangan, Chapter 7 Trustee, Plaintiff

v.University of Connecticut, Defendant.

CASE NO. 16-20653 (JJT)

ADV. PRO. NO. 17-02090 (JJT)

United States Bankruptcy Court, D. Connecticut, Hartford Division.

Signed January 31, 2019

Jeffrey Hellman, Esq., Law Offices of Jeffrey Hellman, LLC, 195 Church Street, 10th Floor, New Haven, CT 06510, Counsel for Bonnie C. Mangan, Chapter 7 Trustee

Denise S. Mondell, Esq., Assistant Attorney General, Office of the Attorney General, 55 Elm Street, 4th Floor, P.O. Box 120, Hartford, CT 06141, Counsel for the University of Connecticut

MEMORANDUM OF DECISION GRANTING IN PART AND DENYING IN PART UCONN'S MOTION FOR SUMMARY JUDGMENT

RE: ECF NOS. 1, 15, 16, 20, 21, 27, 35

James J. Tancredi, United States Bankruptcy Judge

I. INTRODUCTION

Avoidance actions involving debtors making tuition payments on behalf of their children are currently percolating all throughout the United States bankruptcy and district courts.¹ The Defendant, the University of Connecticut ("UConn"), asks this Court to grant its Summary Judgment Motion ("Motion," ECF No. 15), dismissing the Complaint (ECF No. 1) filed by Bonnie C. Mangan ("Chapter 7 Trustee") in this Chapter 7 avoidance action. Pursuant to 11 U.S.C. §§ 548, 550, and 551 of the Bankruptcy Code, the Chapter 7 Trustee seeks to recover as constructive fraudulent transfers certain payments made by Michael Hamadi ("Debtor Husband") and Mirna Y. Hamadi (collectively, "Debtors") to UConn for college tuition and fees paid on behalf of their adult son Ali Hamadi ("Ali"). For the reasons stated herein, the Motion is GRANTED in part and DENIED in part.

II. JURISDICTION

This Court has jurisdiction under 28 U.S.C. § 1334(b) and may hear and determine this matter pursuant to the District Court's General Order of Reference dated September 21, 1984. UConn filed the instant Motion in this adversary proceeding, which the Chapter 7 Trustee asserts is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (H).² Venue is proper under 28 U.S.C. § 1409(a).

III. FACTUAL BACKGROUND

The Court notes the following undisputed material facts.

The Debtors filed a voluntary petition (Case No. 16-20653 (JJT), ECF No. 1) for Chapter 7 bankruptcy protection on April 26, 2016 ("Petition Date"). Def.'s D. Conn. L. Civ. R. 56(a)(1) Statement ¶ 1, ECF No. 16; Pl.'s D. Conn. L. Civ. R. 56(a)(2) Statement ¶ 1, ECF No. 21. On December 14, 2017, the Chapter 7 Trustee commenced this adversary proceeding by filing the Complaint.

Ali is the Debtors' son, who was an adult at all times relevant to this adversary proceeding. Def.'s Statement ¶ 3; Pl.'s Statement ¶ 3. Ali enrolled as an undergraduate student at UConn from August 2014 through September 2016. Def.'s Statement ¶ 4; Pl.'s Statement ¶ 4. UConn received tuition payments and fees in exchange for providing the value of a college education to Ali. Def.'s Statement ¶ 14; Pl.'s Statement ¶ 14.

UConn bills each of its students for tuition, fees, and expenses through an online portal called the Student Administration System ("Online Portal"). Def.'s Statement ¶ 5; Pl.'s Statement ¶ 5. UConn maintains the Online Portal, and every student possesses a unique NetID and password, giving him access to the Online Portal. Def.'s Statement ¶ 6; Pl.'s Statement ¶ 6. UConn treats every payment to a student's account as credit belonging to the individual student, rather than the third-party individual who made the payment on the student's behalf. Def.'s Statement ¶ 11; Pl.'s Statement ¶ 11. If a student chooses to enroll in university classes at UConn, UConn thereafter retains the money paid and applies it to the student's tuition bill. Def.'s Aff. ¶ 9, ECF No. 15-2; Def.'s Statement ¶ 12; Pl.'s Statement ¶ 12. If a student chooses not to register for classes or withdraws from UConn, then UConn issues a refund directly to the student, regardless of who paid the money to the student account.³ Def.'s Aff. ¶ 10; Def.'s Statement ¶ 13; Pl.'s Statement ¶ 13.

Ali held his student account ("Account") in the Online Portal in his name only. Def.'s Statement ¶ 7; Pl.'s Statement ¶ 7. The Debtors exerted no ownership or control over his Account and did not have any rights in or to the Account. Def.'s Statement ¶ 7; Pl.'s Statement ¶ 7. In the two years preceding the Petition Date, the Debtor Husband made four electronic payments to Ali's Account through the Online Portal.⁴ Def.'s ¶ 8; Pl.'s ¶ 8. UConn retained and applied each of the pre-petition payments to Ali's tuition bill when he registered for 2014 fall semester, 2015 spring semester, and 2016 spring semester classes. Def.'s Statement ¶ 12; Pl.'s Statement ¶ 12. Although the payments made on August 25, 2014 and January 20, 2015 would have entitled Ali to a full refund, he would have only been entitled to a 90% refund on January 22, 2016 and a 25% refund on February 15, 2016 if he decided not to register for classes or to withdraw from UConn ("Refundable Payments"). See Def.'s Suppl. Aff. ¶ 5. Ali would have been unable to receive a refund for the remaining 10%, totaling $ 636.35, and 75%, totaling $ 2,393.81, respectively, even if he withdrew from UConn or did not enroll in classes ("Nonrefundable Payments").See id. After the Petition Date, on September 1, 2016, the Debtor Husband made three additional electronic payments totaling $ 3,426.75 into Ali's Account via the Online Portal ("Post-Petition Payments"). Def.'s Statement ¶¶ 9–10; Pl.'s Statement ¶¶ 9–10.

UConn accepted the Refundable Payments and Nonrefundable Payments in good faith. Def.'s Statement ¶ 15; Pl.'s Statement ¶ 15. UConn only first learned that the Refundable Payments, Nonrefundable Payments, and Post-Petition Payments were in dispute in February 2017 when it received a demand letter from the Chapter 7 Trustee. Def.'s Statement ¶ 16; Pl.'s Statement ¶ 16.

In connection to this Motion, UConn submitted the Affidavit of Margaret Selleck, UConn's Bursar ("Affidavit," ECF No. 15-2). UConn also filed the Supplemental Affidavit in Support of the Motion sworn to by Nicole LeBlanc, Associate Bursar for UConn ("Supplemental Affidavit," ECF No. 35). The Chapter 7 Trustee does not dispute that the payments made to Ali's Account were treated according to the school policies laid out in the Affidavit and Supplemental Affidavit.

IV. DISCUSSION

A. Summary Judgment Standard

It is well settled that summary judgment is "an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy[,] and inexpensive determination of every action.’ " Celotex Corp. v. Catrett , 477 U.S. 317, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed. R. Civ. P. 1 ). The Court shall grant a summary judgment motion if "the movant shows that there is no genuine dispute as to any material fact." Fed. R. Civ. P. 56(a) ; see also Fed. R. Bankr. P. 7056. The burden is on the moving party, and the facts "must be viewed in the light most favorable to the opposing party." Tolan v. Cotton , 572 U.S. 650, 657, 134 S.Ct. 1861, 188 L.Ed.2d 895 (2014) (internal quotations and citations omitted). When ruling on motions for summary judgment, "the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby , 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

B. Constructive Fraudulent Avoidance Claims Asserted in the Complaint

The Court is tasked with determining whether there is a genuine issue of material fact regarding the alleged constructive fraudulent conveyances preventing the Court from granting summary judgment in UConn's favor. The Chapter 7 Trustee bases her claims against UConn on 11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Noticeably absent in the Chapter 7 Trustee's Complaint is any claim under 11 U.S.C. § 549 to avoid the Debtor Husband's Post-Petition Payments. UConn seeks summary judgment on all claims.

UConn asserts two defenses in its Motion: 1) that Ali was the initial transferee of the tuition payments, and pursuant to 11 U.S.C. § 550(b)(1), UConn acted as Ali's immediate transferee when it received the tuition payments, which it took for value, in good faith, and without knowledge of the voidability of the transfers, and 2) that any tuition payments made on September 1, 2016 occurred post-petition. The Chapter 7 Trustee counters in her Memorandum of Law in Opposition to the Motion ("Opposition Memo," ECF No. 20) that UConn is an initial transferee because it exercised dominion and control over the monies once the Debtor Husband deposited them into Ali's Account. The Chapter 7 Trustee does not raise material issues of fact relating to the 11 U.S.C. § 550(b)(1) good faith defense.

After reviewing the Motion, the parties' Local Rule 56(a) Statements, the Opposition Memo, UConn's Reply to the Opposition Memo (ECF No. 27), the Affidavit, and the Supplemental Affidavit, this Court finds and adjudges that: 1) UConn is both an initial transferee and an immediate transferee under 11 U.S.C. § 550(a), depending on the transfer date of the tuition payments; 2) UConn has established the elements of a good faith defense under 11 U.S.C. § 550(b)(1) as an immediate transferee; and 3) the Post-Petition Payments are not avoidable or recoverable under 11 U.S.C. §§ 548 or 550.

C. Payment Timing Determines UConn's Status as an Initial Transferee or Immediate Transferee of Such Initial Transferee.

To determine the status of an initial transferee, the Second Circuit has adopted the "mere conduit" test in Christy v. Alexander & Alexander of N.Y. Inc. (In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey) , 130 F.3d 52, 58 (2d Cir. 1997). To qualify as an initial transferee, "the minimum requirement ... is dominion over the money or other asset, the right to put the money to one's own purposes." Id. at 57 (citation omitted). "[A] commercial entity that, in the ordinary course of...