10-06134 Lone Star Pub Operations, LLC,dba KC Public House v. Rainstorm, Inc. et al (Doc. # 41)

Lone Star Pub Operations, LLC,dba KC Public House v. Rainstorm, Inc. et al, 10-06134 (Bankr. D. Kan. Jan. 27, 2012) Doc. # 41

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The relief described hereinbelow is SO ORDERED.
SIGNED this 27th day of January, 2012.


In re:

Debtor. Chapter 7

Chapter 7 Trustee,


v. Adv. No. 10-6134
RAINSTORM, INC., et al.,


The Trustee sued Defendants Rainstorm, Inc., Stephen J. Davis, Silver Tree Gordon, and
Keith Lawyer to avoid a $150,000 transfer as preferential or fraudulent under 11 U.S.C. §§547 or

548. The motion for summary judgment is denied because the property at issue never belonged
to Debtor or its estate. Judgment shall be entered in favor of Defendants.
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Findings of Fact

Before October 17, 2008, Defendants Rainstorm, Inc., Silver Gordon and Stephen Davis
owned Debtor Lone Star Pub Operations, LLC. Defendant Keith Lawyer was Rainstorm’s
president, and Rainstorm was Lone Star’s managing member. On October 17, Defendants
agreed to sell Lone Star to Mary Weingarden for $150,000. The Letter of Agreement between
the parties assigned 100 percent of Defendants’ membership interests in Lone Star to
Weingarden. Weingarden borrowed the purchase money from Mark McLean. The parties
planned for Weingarden to wire the money directly to Rainstorm, which is in Texas. However,
McLean loaned the money to Weingarden in the form of a check drawn on U.S. Bank. McLean
required Weingarden’s name be on the check. Lone Star also banked at U.S. Bank. Since
sending the check via Federal Express to Texas would further delay the closing, the parties
agreed to deposit McLean’s check into Lone Star’s account and then wire the purchase money
out of the account to Rainstorm. The check’s deposit into Lone Star’s account and the wire
transfer out of Lone Star’s account to Rainstorm both occurred on October 23, 2008. The
transfer was overseen by an employee at Western Entertainment Management, Inc., a
management company which handled financial reports for both Lone Star and Rainstorm.

Pinnacle TIC, LLC, one of Lone Star’s largest creditors, filed an involuntary bankruptcy
petition against Lone Star on July 1, 2009. Pinnacle was Lone Star’s landlord. At the time of
the sale, Lone Star owed Pinnacle $34,228.84 for rent.

Conclusions of Law

A. Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates there is no genuine

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issue as to any material fact, and he is entitled to judgment as a matter of law.1 The movant
bears the initial burden of proving the absence of controverted facts.2 All inferences are to be
construed in favor of the nonmoving party.3 Only when reasonable minds could not differ as to
the import of the proffered evidence is summary judgment proper.4

Federal courts may enter summary judgment sua sponte in favor of a nonmoving party if
the losing party is given sufficient notice and an opportunity to come forward with evidence in
opposition.5 The court may enter judgment provided there is no dispute of material fact and the
losing party had an adequate opportunity to address the issues involved, including adequate time
to develop any facts necessary to oppose summary judgment.6 Judgment is still predicated on
Rule 56’s standards, even without a formal motion. If the evidence submitted by a party who
would not have borne the burden of persuasion at trial establishes the plaintiff lacks evidence
supporting an essential element of the claim, the nonmoving party may show he is entitled to
judgment.7 If the nonmoving party carries his initial burden, the plaintiff must come forward
with specific facts showing a genuine issue for trial.8

Plaintiff moved for summary judgment. The Defendants responded, but did not file a
cross-motion for summary judgment. Instead, while defending against Plaintiff’s motion,
Defendants presented evidence showing Lone Star did not have an equitable interest in the


FED. R. BANKR. P. 7056.
2 Whitesel v. Sengenberger, 222 F.3d 861, 867 (10th Cir. 2000); Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 256 (1986).
3 Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000).

4 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-51 (1986).

5 Celotex Corp. v. Catrett, 477 U.S. 317, 326 (1986).

6 David v. City & County of Denver, 101 F.3d 1344, 1358-59 (10th Cir. 1996).

7 Sigmon v. CommunityCare HMO, Inc., 234 F.3d 1121, 1125 (10th Cir. 2000).

8 Spaulding v. United Transp. Union, 279 F.3d 901, 904 (10th Cir. 2002) (citing Matsushita Elec. Indus.

Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).

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$150,000 and that Lone Star momentarily held the purchase money funds for Rainstorm.
Plaintiff was on notice and had sufficient opportunity to show a genuine issue of material fact
with respect to ownership of the transferred funds in order to proceed to trial. Plaintiff failed as

B. The Trustee’s Claims
The trustee must prove six elements by the preponderance of the evidence to avoid a
preferential transfer: (1) a transfer of the debtor’s property, (2) on account of an antecedent debt,

(3) to or for a creditor’s benefit, (4) while the debtor was insolvent, (5) within 90 days prior to
bankruptcy (or one year for insiders), (6) which allowed the creditor to receive more than it
would if the transfer had not been made and the creditor asserted its claim in a Chapter 7
Likewise, to avoid a fraudulent transfer the trustee must prove the debtor transferred his
assets for less than a reasonably equivalent value and was insolvent, undercapitalized, or unable
to pay his debts as they became due at the time of the transfer.10

In this case, the first element is dispositive. The threshold requirement for both causes of
action is the property transferred must have belonged to the debtor. Avoiding preferential and
fraudulent transfers recovers property which would have been available for distribution to
creditors but for the transfers.11 If the debtor’s estate is not diminished by the transfer because
the debtor did not have an equitable interest in the property, the property is not recoverable
under §§547 and 548.12

9 11 U.S.C. § 547(b); ABB Vecto Gray, Inc., v. First Nat’l Bank of Bethany, Oklahoma (In re Robinson

Bros. Drilling, Inc.), 9 F.3d 871, 874 (10th Cir. 1993); 11 U.S.C. § 547(g).

10 11 U.S.C. §548.

11 Begier v. IRS, 496 U.S. 53, 58 (1990).

12 Id. at 58-59.

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C. The Debtor’s Property
A bankruptcy estate cannot succeed to a greater interest in property than the debtor held
prior to bankruptcy. State law determines property ownership.13 Federal bankruptcy law
determines the extent to which a property interest becomes estate property.14 Property of the
estate includes all legal or equitable interests of the debtor in property as of the commencement
of the case.15 Property subject to a trust is not property of the bankruptcy estate.16 The equitable
title or interest held by a nondebtor is neither property of the estate under §541 nor property of
the debtor under §§ 547(b) and 548.17

The trustee has the initial burden to prove the debtor had legal title to a bank account and
unfettered discretion to pay creditors of its own choosing out of the account.18 Generally, funds
in the debtor’s bank account are estate property when the debtor has control over its use,
including paying its own creditors.19 Control means the legal right to use the funds.20 Control
does not mean the ability to steal the money or use it for personal purposes in breach of duty.
Under Kansas law, ownership of funds held in a bank account is not necessarily determined by
the name on the account.21 Creditors may not attach the debtor’s account if the debtor proves the
funds do not belong to the debtor.22 The trustee carries his burden by proving the debtor held
legal title to the account, and the account consists of commingled trust and personal funds.23 If

13 Barnhill v. Johnson, 503 U.S. 393, 398 (1992).

14 Parks v. FIA Card Svcs., N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir. 2008).

15 11 U.S.C. § 541(a)(1).

16 11 U.S.C. § 541(d).

17 Begier v. IRS, 496 U.S. at 59.

18 Amdura Nat’l Distrib. Co. v. Amdura Corp. (In re Amdura Corp.), 75 F.3d 1447, 1451 (10th Cir.1996);
Southmark Corp. v. Grosz (Matter of Southmark Corp.), 49 F.3d 1111, 1116-17 (5th Cir. 1995).

19 See, e.g., Matter of Southmark Corp., 49 F.3d at 1116.

20 Jenkins v. Chase Home Mortg. Corp. (Matter of Maple Mortg., Inc.), 81 F.3d 592, 596 (5th Cir. 1996).

21 LSF Franchise REO I, LLC v. Emporia Restaurants, Inc., 283 Kan. 13, 25 (2007).

22 Id.

23 In re Amdura, 75 F.3d at 1451; Matter of Southmark Corp., 49 F.3d at 1116.

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the trustee carries his burden, the burden shifts to the defendant to show the debtor held only
legal title, and the defendant can trace its equitable interest to the specific property at issue. The
defendant must establish the original trust relationship by proving his title, identifying the trust
fund, and where the fund has been mingled with the general property of the debtor, the claimant
must sufficiently trace the fund.24 Under Kansas law, an express trust of personal property
requires (1) an explicit declaration and intent to create a trust, (2) definite property or subject
matter of the trust, and (3) acceptance and handling of subject matter by a trustee.25 An oral trust
over personalty is valid under Kansas law.26

D. Analysis
Plaintiff failed to carry his ultimate burden to prove the $150,000 transfer diminished the
Debtor’s estate to the detriment of its creditors. Defendants, on the other hand, prove an express
trust under Kansas law. Lone Star owned the bank account into which Weingarden deposited
$150,000, but Lone Star did not own the purchase money. Lone Star did not control the funds
and could not pay its creditors with Weingarden’s deposit. Lone Star did not have a debtor-
creditor relationship with Weingarden and received nothing from the deposit, but rather served
as a mere conduit for facilitating the transfer of funds from the purchaser to the seller. The
Defendants show Lone Star momentarily held legal title to the funds, but Rainstorm was the true
owner. The Defendants successfully trace the funds because the money was immediately wired
out of Lone Star’s account to Rainstorm. The entire transfer was under the supervision and

24 Sender v. The Nancy Elizabeth R. Heggland Family Trust ( In re Hedged-Investments Assoc., Inc.), 48
F.3d 470, 474 (10th Cir. 1995).

25 Shumway v. Shumway, 141 Kan. 835, 842 (1935).

26 Wehking v. Wehking, 213 Kan. 551, 553 (1973).

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control of Rainstorm’s agent - not Lone Star’s. Neither Lone Star nor Lawyer had authority to
exert control over the deposit except to transfer the funds to Rainstorm. Rainstorm explicitly
directed Lone Star to receive the deposit on its behalf because Lone Star banked at the same
institution as the purchaser’s lender. The trust property was defined as the $150,000 deposit to
be received on a particular day from an identified source. Lone Star accepted the duty and
completed its duty by immediately transferring the funds to the equitable owner. Rainstorm then
transferred its entire interest in Lone Star to Weingarden. The evidence establishes the $150,000
satisfied Weingarden’s debt to Rainstorm in exchange for the purchase of Lone Star. The
transfer did not satisfy any debt between Lone Star and Rainstorm.27

Plaintiff met his initial burden to prove Lone Star held legal title to the bank account and
the account contained commingled funds. The burden shifted, and Defendants met their burden
to prove ownership of traceable, specific property. Plaintiff does not controvert Defendants’
evidence in this regard. Accordingly, summary judgment in favor of Defendants is proper as a
matter of law.

E. Conclusion
For the foregoing reasons, Plaintiff’s Motion for Summary Judgment is DENIED. By
separate order, judgment shall be entered in favor of Defendants.

27 The parties briefed whether an antecedent debt existed between Lone Star and Rainstorm, but
Weingarden’s purchase money did not satisfy any debt Lone Star may have owed Rainstorm, whether that debt is
characterized as a capital contribution or a loan.

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