Party That Received Checks From Debtor, But Did Not Have Right To Payment, Who Then Forwarded Checks To Party With Right To Payment From Debtor, Held Not To Be "Transferee" For Purposes Of Preference Complaint
Broadway Advisors, LLC v. Hipro Elecs., Inc. (In re Gruppo Antico, Inc.), 359 B.R. 578 (Bankr. D. Del. 2007) (Judge Kevin J. Carey)
Vendor Hipro Electronics, Ltd. of Taiwan sold computer parts to the debtor prior to the commencement of the debtor’s bankruptcy case. However, in the period running up to the petition date, the debtor sent payments for Hipro Taiwan invoices to another Hipro entity, Hipro Electronics, Inc., in Texas. Hipro USA forwarded those checks to Hipro Taiwan, who deposited the checks into their own account. The debtor, however, commenced a preference action against Hipro USA. Hipro USA filed a motion for judgment on the pleadings. The court held that, because Hipro USA never deposited the funds, it was not a transferee of the debtor, and therefore could not be liable for the avoidance of the payments that the debtor sent to Hipro USA.
Prior to the bankruptcy of Gruppo Antico, Inc., the debtor was a computer hardware provider. Hipro Electronics, Ltd. (“Hipro Taiwan”), a Taiwanese entity, sold power sources to the debtor. Hipro Taiwan was based in Taiwan, but had a California business office and bank account. During the preference period, the debtor paid Hipro Taiwan with wire transfers to Hipro Taiwan’s bank account. Shortly before the petition date, the debtor began remitting payment by check, in payment of invoices for sales by Hipro Taiwan, to Hipro Electronics, Inc. (“Hipro USA”). Hipro USA was based in Texas. Hipro USA advised the debtor not to send payment to them, but instead to render payment directly to Hipro Taiwan. The debtor, however, continued to mail checks to Hipro USA. Hipro USA did not deposit into its account any of the checks it received from the debtor. Instead, it forwarded them to Hipro Taiwan, who deposited the checks.
The debtor commenced an adversary proceeding against Hipro USA, seeking to avoid and recover allegedly preferential payments. Hipro USA answered the complaint, admitting that it was a vendor of the debtor, and that it received the transfers, but denied that the alleged transfers could be avoided as preferences.
The plaintiff thereafter amended its complaint. Hipro USA then filed an amended answer in which it denied being a vendor to the debtor, and claimed that it did not receive the alleged transfers. The same day that Hipro USA filed its amended answer, the plaintiff also received Hipro USA’s answers to the plaintiff’s discovery requests, in which Hipro USA contended that it was not a vendor to the debtors, but only assisted with servicing Hipro Taiwan’s account with the debtor, and that Hipro USA was a mere conduit for payments from the debtor to Hipro Taiwan.
The plaintiff then filed a motion to file a second amended complaint, which the court granted, over Hipro USA’s objection. The second amended complaint added Hipro Taiwan as a defendant.
Hipro USA filed a motion for judgment on the pleadings (treated as a summary judgment motion at the hearing), arguing that it did not receive a transfer of an interest of the debtor in property, and that it was a mere conduit, rather than an initial transferee. The plaintiff objected, contending that Hipro USA’s action in first admitting it was a vendor and received the transfers, then denying such allegations, estopped it from denying liability, and that such “bad acts” estopped it from asserting a conduit defense.
The court held that, under the standard set forth by the Supreme Court in Barnhill v. Johnson, a transfer does not occur until payment is honored. Therefore, there was no transfer until Hipro Taiwan deposited the checks into their bank account. A transfer did not occur when Hipro USA received the checks. Thus, Hipro USA was not a “transferee.”
The court also rejected the plaintiff’s argument that Hipro USA was not permitted to assert the conduit defense. Because Hipro USA filed an amended answer to the first amended complaint, any admissions made in the first answer were superseded by the answer to the first amended complaint. Thus, the admissions of being a vendor, and having received the transfers, were not binding on Hipro USA.
Also, any “bad faith” conduct, if any, which might have estopped Hipro USA from asserting the equitable defense of being a conduit occurred, if at all, after the litigation commenced. Equitable estoppel only operates as to conduct occurring pre-litigation. Moreover, the behavior of Hipro USA that the plaintiff asserted rose to the level of bad faith, was not, in fact, bad faith conduct. Accordingly, the court granted judgment on the pleadings in favor of Hipro USA and against the plaintiff.
