KSB

Judge Somers

09-06011 Northern Capital, Inc., v. The Stockton National Bank et al (Doc. # 191) - Document Text

SO ORDERED.
SIGNED this 19th day of December, 2011.

 

For on-line use but not print publication.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:
BROOKE CORPORATION,
a Kansas Corporation, et al.,
Debtors.,
NORTHERN CAPITAL, INC. ,
Plaintiff,
v.
THE STOCKTON NATIONAL BANK,
et al.,
Defendants.,
CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation,
Third-Party Plaintiff,

CASE NO. 08-22786
CHAPTER 7

ADV. NO. 09-6011

Case 09-06011 Doc# 191 Filed 12/19/11 Page 1 of 6


v.
NORTHERN CAPITAL, INC., et al,
Third-Party Defendants.

MEMORANDUM OPINION AND ORDER GRANTING
THIRD-PARTY DEFENDANT FARLEY INVESTMENTS’
MOTION FOR SUMMARY JUDGMENT


In this adversary action, the Trustee for Brooke Corporation,1 as third-party
plaintiff,2 asserts, among other things, a preferential transfer claim to avoid and recover
prepetition payments made by Debtor to Stockton National Bank, a lead bank on a
secured loan that is the subject of loan participation agreements with the third-party
defendants, including movant Farley Investments, LLC (Farley Investments).3 This Court
has previously held that Stockton National Bank, the lead bank who forwarded the
payments made by Brooke Corporation to the participants in accord with the participation
agreements, was not an initial transferee under 11 U.S.C. § 550(a)(1), but acted as a
conduit for the participants, who were the initial transferees.4

Defendant Farley Investments moves for summary judgment, arguing that it
became the holder of the participation interest after the allegedly preferential payments

1 The Trustee appears by John J. Cruciani and Michael D. Fielding of Husch Blackwell LLP.
2 Dkt. 125, Second Amended Third-Party Complaint.
3 Farley Investments appears by William B. Sorensen, Jr., and Ryan M. Peck of Morris, Lang,


Evans, Brock & Kennedy, Chartered.
4 In re Brooke Corp., 458 B.R. 579 (Bankr. D. Kan. 2011).
2

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were made and therefore has no liability to the Trustee under § 550(a)(1). The Court
agrees and grants Farley Investment’s motion for summary judgment.

FINDINGS OF FACT.

The facts are uncontroverted. The transfers that the Trustee seeks to avoid are a
total of $54,000 received by Farley State Bank between August 5 and August 29, 2008, as
its share of payments made by Brooke Corporation to Stockton National Bank on a note
that was subject to a participation agreement between Stockton National Bank and Farley
State Bank. Brooke Corporation filed for relief under Chapter 11 on October 28, 2008.

On March 31, 2008, Farley State Bank and BankLiberty had entered into an
Amended and Restated Bank Merger Agreement which provided for the merger of Farley
State Bank into BankLiberty, to be effective upon satisfaction of certain conditions. On
November 6, 2008, before the effective date of the merger, Farley State Bank assigned,
conveyed, and transferred to Farley Investments all of its right title and interest in four
loan participation certificates related to Brooke Corporation, including the participation in
Brooke Corporation’s liability to Stockton National Bank. The assignment documents do
not include any provisions whereby Farley Investments assumed liability for any claims
relating to the participation certificates.

One day later, on November 7, 2008, the merger of Farley State Bank into
BankLiberty was effective. BankLiberty is the surviving institution. The merger
agreement provides that after the merger, BankLiberty “shall be liable for all liabilities of
[Farley State Bank] which were in existence immediately prior to the” merger.

3

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POSITIONS OF THE PARTIES.

Farley Investments contends, assuming that the Trustee can avoid the transfers in
issue under 11 U.S.C. § 547, it has no liability to the Trustee under § 550 because it did
not receive the funds and was not the holder of the participation interest on the date of the
transfers. The Trustee responds that when Farley Investments became the holder of the
participation interest it, as a matter of contract law, assumed all liabilities relating to that
interest, including the Trustee’s claim.
THE COURT GRANTS SUMMARY JUDGMENT TO FARLEY INVESTMENTS.

The Trustee seeks to recover from Farley Investments under § 550(a)(1), which
provides:

(a) Except as otherwise provided in this section, to the
extent that a transfer is avoided under section . . . 547 . . . , the
trustee may recover, for the benefit of the estate, the property
transferred or, if the court so orders, the value of such
property, from —
(1) the initial transferee of such transfer
or the entity for whose benefit such transfer was
made.
Because Farley Investments became the owner of the participation certificates after
the allegedly preferential transfer, it is not a transferee within the meaning of the statute.
The Bankruptcy Code does not define transferee. Black’s Law Dictionary defines a
transferee as “[o]ne to whom a property interest is conveyed.”5 It is uncontroverted that
Farley State Bank, not Farley Investments, received the payments from Brooke. Farley

5 Black’s Law Dictionary (9th ed. 2009).
4


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Investments is not an “initial transferee” of those payments for purposes of § 550(a)(1).

In addition, Farley Investments did not benefit from the transfers at issue. After
the payments, the face value of the participation (the amount owed by Brooke to the
holder of the certificate) was reduced.

The Court finds the Trustee’s reliance on contract law misplaced. The Trustee
argues that as a matter of contract law when Farley Investments acquired the loan
participation interest, it acquired all of Farley State Bank’s unperformed liabilities with
respect to the participation, including obligations under federal law. But this position, if a
valid statement of contract law, is irrelevant to the Trustee’s claim against Farley
Investments. The Trustee is not seeking to enforce a liability under the participation
agreement. He is seeking recovery under the Bankruptcy Code, § 550(a)(1), which makes
liable only the initial transferee of an avoided transfer or the entity benefitting from the
transfer. Under the statute, an initial transferee has personal liability for the value of the
transfer. And nothing in the statute suggests that the liability follows ownership of the
obligation on which payment was made.

As a final argument, although conceding that there is no document in which Farley
Investments assumed liability for the transfer, the Trustee suggests there are material
controverted facts because the assignment documents are ambiguous as to whether Farley
Investments was to retain all duties and obligations to be performed under the loan
participations. Even if the assignment documents are ambiguous, this argument fails
because it is based upon the erroneous view that contract law is relevant to Farley

5

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Investments’ liability to the Trustee. The liabilities assumed by Farley Investments would
be relevant if this were a dispute between BankLiberty and Farley Investments, but that is
not the matter before the Court.

CONCLUSION.

For the foregoing reasons, the Court grants third-party defendant Farley
Investments’ motion for summary judgment. Assuming that transfers to Farley State
Bank will be avoided, the Trustee may not recover the avoided transfers from Farley
Investments under § 550(a)(1).

IT IS SO ORDERED.
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