Title Company Escrow Check: Now You See It, Now You Don’t

White Family Cos., Inc. v. Slone (In re Dayton Title Agency, Inc.), 724 F.3d 675 (6th Cir. 2013) –

The debtor, a title agency, facilitated a series of loans by having both the loans and the loan repayments pass through its trust account. Unfortunately, checks deposited to repay loans totaling $4.8 million bounced, and the $4.885 million check that replaced them was a forgery drawn on a non-existing account. The bank teller did not place a hold on the second check, and before the check cleared, the title company issued checks totaling $4.885 million to the lenders in repayment of the loans. The question for the 6th Circuit was whether the payment to the lenders was an asset of the title company for purposes of making a fraudulent transfer claim against the lenders.

The title company was able to issue the checks to the lenders because the bank issued a "provisional credit" to the title company for $4.885 million while the forged check was clearing, making the funds "available." However, after the bank learned of the forgery it charged back the $4.885 million provisional credit. Since only ~$740,000 was in the account prior to deposit of the forged check, that left a negative balance of ~$4.1 million. The issue was whether the portion of the lender payment made using the provisional credit (i.e., ~$4.1 million) was an asset of the bankruptcy estate, and if so, whether the payment was a fraudulent conveyance that could be avoided.

After the bank froze the title company's account, it was forced to file bankruptcy. The bankruptcy estate sued the lenders seeking to avoid the $4.885 million transfer using fraudulent transfer theories under both Section 548 of the Bankruptcy Code and state law (using the strong arm powers under Section 544). The bankruptcy court held that all but ~$700,000 was fraudulent, while the district court held that all but ~$21,000 was not fraudulent.

Under both federal and state law, a transfer may be voidable as a fraudulent conveyance if (1) the debtor does not receive reasonably equivalent value in exchange for this transfer, and (2) the debtor is left with unreasonably small capital, or it intended or believed that it would be unable to pay its debts as they became due. It was clear that the debtor did not receive reasonably equivalent value from the lenders and that it was left with unreasonably small capital since it was unable to continue in business.

So, the only question is whether there was a "transfer." To be a...