Welch v. Regions Bank (In re Mongelluzzi)

587 B.R. 392

IN RE: Frank Michael MONGELLUZZI; Able Body Temporary Services, Inc.; Professional Staffing—A.B.T.S., Inc.; Westward HO II, LLC; Westward HO, LLC ; YJNK II, Inc.; YJNK XI CA, LLC; ABTS Holdings, LLC; Able Body Gulf Coast, Inc. ; Cecil B. DeBoone, LLC; Preferable HQ, LLC; Rotrpick, LLC; Training U, LLC; USL & H Staffing, LLC; Organized Confusion, LLP; YJNK III, Inc.; and YJNK VIII, LLC, Debtors.

Angela Welch and Christine Herendeen, as Chapter 7 Trustees, Plaintiffs,

v.Regions Bank, Defendant.

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United States Bankruptcy Court, M.D. Florida, Tampa Division.

Signed June 20, 2018

Robert F. Elgidely, Genovese Joblove & Battista, P.A., Fort Lauderdale, FL, John H. Genovese, Genovese Joblove & Battista, P.A., Miami, FL, for Plaintiff Angela Welch.

Ashley Dillman Bruce, Berger Singerman, LLP, Fort Lauderdale, FL, James D. Gassenheimer, Berger Singerman, P.A., Miami, FL, Jordi Guso, Brian G. Rich, Paul Steven Singerman, for Plaintiff Christine Herendeen.

D. Christopher Carson, Hanna Lahr, Burr & Forman, LLP, Birmingham, AL, Garry K. Grooms, Burr & Forman, LLP, Nashville, TN, Edmund S. Whitson, III, Burr & Forman, LLP, Tampa, FL, for Defendant.

MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTIONS FOR PARTIAL SUMMARY JUDGMENT

(Doc. Nos. 335, 336, 337, and 360)

Caryl E. Delano, United States Bankruptcy Judge

In four of these administratively consolidated adversary proceedings,¹ Plaintiff, Chapter 7 Trustee Christine Herendeen, ("Plaintiff") has moved for partial summary judgment on Counts IV and VII of her complaints (the "Complaints") and on the Ninth and Twelfth Affirmative Defenses asserted by Defendant Regions Bank ("Regions") (the "Summary Judgment Motions"). For the reasons set forth below, the Court will grant the Summary Judgment Motions in part and deny them in part.

I. FACTS

The basic facts are not in dispute. Together, Frank and Anne Mongelluzzi owned about 100 corporations and limited liability companies (the "Mongelluzzi Entities"). A number of the Mongelluzzi Entities were engaged in the temporary staffing industry (the "Able Body Entities"). The Summary Judgment Motions relate to four of the Able Body Entities: Rotrpick, LLC ("Rotrpick"), YJNK XI CA, LLC ("YJNK XI"), YJNK VIII, Inc. ("YJNK VIII"), and Training U, LLC ("Training U") (together, "Debtors").

A. The Regions Bank Transactions and Subject Transfers

Many of the Mongelluzzi Entities maintained bank accounts at Regions. These accounts (the "Mongelluzzi Accounts") included Debtors' bank accounts at Regions (the "Debtor Accounts"). Regions also made loans to the Mongelluzzis and some of the Mongelluzzi Entities. Regions' loans included a $7.5 million revolving line of credit between Regions and some of the Mongelluzzi Entities and two of the Able Body Entities,² as well as ten other loans (together, the "Regions Loans"). Debtors were not borrowers on any of the Regions Loans and did not guaranty any of the Mongelluzzis' or other Mongelluzzi Entities' obligations under the Regions Loans.

Prior to the transfers that are the subject of these adversary proceedings, the unpaid balance on the Regions Loans was approximately $15 million.³ The assets of the Mongelluzzi Entities were also encumbered by loans made by Synovus Bank, which totaled approximately $42 million.⁴

Starting in 2009, Regions became concerned about the frequency and amount of overdrafts within the Mongelluzzi Accounts.⁵ On June 28, 2010, Regions' fraud prevention department flagged some of the Mongelluzzi Accounts as suspicious for a possible check-kiting scheme and issued a check-kiting report.⁶ That same day, the fraud prevention department sent an email to Regions' management notifying them of the suspicious activity.⁷

Two days later, on June 30, 2010, Regions' monitoring and reporting operations department confirmed the fraudulent check-kiting activity.⁸ Regions' investigation revealed that within the six days prior to June 30, 2010, suspect deposits totaling $6,065,702.30 had been made to the Mongelluzzi Accounts.⁹

On June 30, 2010, Regions decided to terminate its banking and lending relationship with the Mongelluzzis and the Mongelluzzi Entities. Over the next two days, Regions froze all the Mongelluzzi Accounts, including the Debtor Accounts.¹⁰ On the date of the freeze, funds on deposit in the Mongelluzzi Accounts totaled approximately $12.4 million, including over $7.4 million in the Debtor Accounts.¹¹

Regions wanted to apply the funds in the Mongelluzzi Accounts, including the funds on deposit in the Debtor Accounts, to the outstanding balances on the Regions Loans. On July 12, 2010, Regions' employees engaged in a remarkable set of emails with its outside attorneys (the "Emails"). One of Regions' attorneys advised Regions that it could be liable for fraudulent transfers if it took funds from the Debtor Accounts:

We are facing a real Hobson's Choice here. Based upon our discussions, we understand that Regions wants to [be] paid off. The problem is that some of the funds to be used for the Preferable People payoff may be coming from some of Borrower's affiliates ("Transferors") instead of Borrower. If the Transferors end up in bankruptcy, Regions may be liable to give some or all of the payoff amount back to the Transferors as a voidable transfer (i.e., a fraudulent transfer).¹²

The attorney explicitly told Regions that it would be difficult to rebut the voidability of the transfer, stating:

One critical component is whether Regions had "knowledge of the voidability of the transfer" at the time of the payoff. A transfer is voidable if (a) the transferor is insolvent at the time the transfer is made and (b) the transferor does not receive reasonably equivalent value for the transfer. Given our current circumstances, it may be difficult to argue that Regions didn't have knowledge of the voidability of the transfer because assuming the Transferors are insolvent it may be difficult to rebut that Regions didn't have any knowledge that these funds didn't come from the Transferors (which would be used by the chapter 7 trustee or chapter 11 debtor as evidence of the Transferors not receiving reasonably equivalent value).¹³

The attorney went on to suggest that Regions structure a proposed forbearance agreement with the obligors on the Regions Loans so as to strengthen Regions' defense to a potential avoidance action, stating:

However, the problem with this is the more specific we are with respect to the voidable transfer defenses in the document (e.g., requiring delivery of the intercompany notes as a CP), the easier it is for a bankruptcy trustee to show that we had knowledge of the voidable transfer . That is, by requiring delivery of the intercompany notes might simply draw more attention to the issue than necessary.

....

1. A more subtle way of dealing with this issue might be to add a condition precedent to the Payoff Letter that Regions receive satisfactory evidence that the Borrower's funds have been used for the payoff. That way, we will preserve the argument that we didn't have knowledge of the voidability of the transfer without making the issue too obvious .

....

I think it's important to understand, however, that there is no way I can think of insulating Regions from this risk. Its knowledge of the borrowers, and the bank accounts make this a tough issue on the question of knowledge .¹⁴

In that same July 12, 2010 email chain, another of Regions' outside attorneys suggested that for purposes of Regions' good-faith defense, it was better that Regions not "know too much:"

I do read 550(b)(1), as it might apply to a claim against the Bank on behalf of the hypothetical bankruptcy estate of any M-related deposit holder that hereafter files, as creating a safe harbor so long as we do not know too much. Of course the more we get into the situation and find out what they are doing, the more we may develop knowledge that we don't now have . And if we engineer the other side of the deal by drafting or directing them to get notes then we end up in 510(c) territory for manipulating debt in order to pay of our own.¹⁵

The attorney then advised Regions:

And as covered earlier when we were discussing the matter, it is better to take the money and have a challenge than not get any of it .¹⁶

On July 15, 2010, just three days after the exchange of the Emails, Regions entered into a forbearance agreement with the Mongelluzzis and some of the Mongelluzzi Entities (the "Forbearance Agreement).¹⁷ Despite the fact that Debtors were neither parties nor signatories to the Forbearance Agreement,¹⁸ and notwithstanding Regions' attorneys' advice that transfers from the Debtor Accounts could be voidable as fraudulent transfers, the Forbearance Agreement provided that funds in the Debtor Accounts would be applied to Regions' outstanding loans.¹⁹ That very same day, Regions applied more than $7.4 million from the Debtor Accounts²⁰ to the Regions Loans (the "Subject Transfers"). As agreed upon in the...