Bass, Berry & Sims attorney Chris Lazarini analyzed a case questioning the definition of a “transfer” under §544 and 550 of the Bankruptcy Code and whether the transfer was voidable when made by an unsecured creditor. The court denied the bank’s motion to dismiss, finding the trustee proved that a transfer was made, it was not supported by valuable consideration, and it was made when the debtor was insolvent or rendered him insolvent.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

Runnymede Capital Management, Inc., In Re: Scott vs. SunTrust Bank, N.A., No. 17-61506 (W.D. Va., Bankr., 2/22/19)

*Under §§544 and 550 of the Bankruptcy Code, and applicable state avoidance laws, a bankruptcy trustee may void the debtor’s transfers of its property or interests in its property and recover the property transferred or the value thereof.

**The trustee must show that a transfer was made, it was not supported by valuable consideration, and it was made when the debtor was insolvent or rendered him insolvent.

The Chapter 7 Trustee filed a complaint against SunTrust Bank seeking to avoid and recover transfers made by the Debtor, Runnymede, to the bank. The Trustee alleged that after the untimely death of her husband, Lynne Kinder authorized a family friend, Victor Dandridge, to manage $6.5 million in assets left to her and her children. Dandridge, who was not a licensed investment advisor, formed Runnymede, opened a Runnymede account at SunTrust, and deposited a significant portion of the Kinders’ assets into it. Over time, Dandridge depleted the Runnymede account by moving assets from its account to his personal account and the accounts of other businesses he controlled, all of which were at SunTrust. This left Runnymede with no ability to satisfy its debt to the Kinders. As to SunTrust, the Trustee alleged the bank knew Dandridge had no regular source of income and knew his businesses were failing, yet made significant loans to him and his businesses, taking security interests in all of his deposits and investments at SunTrust. The Trustee alleged that SunTrust watched as the Kinders’ funds were deposited into the Runnymede account and were then moved to Dandridge’s other accounts, after which they were wired out or used to pay tens of thousands of dollars in personal expenses. The Trustee alleged that when SunTrust demanded Dandridge provide additional collateral to secure a defaulted commercial note, Dandridge induced Mrs. Kinder to put up her residence and the bank accepted it as collateral without speaking with Mrs. Kinder. The Trustee alleged that SunTrust terminated its relationship with Dandridge and his businesses only after he deposited $370,000 from Mrs. Kinder’s IRA and her children’s custodial accounts to Runnymede and then moved the money to his accounts. Dandridge opened accounts at other banks and eventually paid SunTrust in full. The Trustee alleged that SunTrust accepted payments from Dandridge on his and his businesses various loans with notice of Dandridge’s intent to use Runnymede to defraud Mrs. Kinder. SunTrust moved to dismiss for failure to state a claim and for failure to plead fraud with particularity.

The Court’s initial focus is whether a “transfer” occurred under §544 of the Bankruptcy Code.  §101(54)(D) of the Code defines “transfer” as “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing or parting with – (i) property; or (ii) an interest in property.” SunTrust argued there were no “transfers” to it relying on settled law that a debtor’s regular deposits into his own unrestricted checking accounts do not meet the “transfer” definition. While the Court acknowledges the case law supporting SunTrust’s argument, it finds the Trustee alleged more than a mere depository relationship between SunTrust and Dandridge.  Among other allegations, the Court highlights those alleging that (a) SunTrust held a security interest in all of Dandridge’s accounts, (b) an interest in the Kinders’ funds was passed from Runnymede to SunTrust when the funds were moved from the Runnymede account to Dandridge’s other accounts, (c) the transfers from the Kinders to Runnymede to Dandridge’s accounts happened when Dandridge and his other entities were indebted to SunTrust, and (d) the funds were ultimately delivered to SunTrust for payment of Dandridge’s loans and those of his other businesses. The Court then asks whether the transfers were voidable by an unsecured creditor under Virginia law. The Court finds the Trustee sufficiently pled that (a) Runnymede made the transfers when it was indebted to the Kinders, (b) at the time, Runnymede was insolvent or the transfers rendered it insolvent, and (c) Runnymede did not receive valuable consideration in return. Accordingly, the Court denies the motion to dismiss for failure to state a claim. The Court similarly denies the motion to dismiss for failure to plead fraud with particularity, noting the Trustee provided facts supporting his allegations and SunTrust knew of the particular circumstances for which it would have to prepare a defense.