Glassman v. Heimbach, Spitko & Heckman

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re 	: 	Chapter 7
CARL SPITKO and 	:
ELIZABETH GOETZ SPITKO
Debtors 	: 	Bankruptcy No. 04-18836bif
____________________________________
HOWARD T. GLASSMAN, trustee 	:
Plaintiff 	:
v. 	:
HEIMBACH, SPITKO & HECKMAN 	:
Defendant 	: 	Adversary No. 05-0258
____________________________________
.................................................
OPINION
.................................................
The plaintiff trustee, Howard T. Glassman, filed an adversary proceeding
against the defendant law firm, Heimbach, Spitko & Heckman (hereinafter “HSH”),
asserting three causes of action. Count I seeks to avoid prepetition transfers to HSH as
preferential under 11 U.S.C. § 547, totaling $68,500. Count II asserts a fraudulent
conveyance claim based upon those same prepetition transfers under federal law, 11
U.S.C. § 548(a)(1)(A), in the amount of $68,500. Count III also raises a fraudulent
conveyance claim but under state law, Pennsylvania’s Uniform Fraudulent Transfer Act
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And, although not expressly mentioned in the complaint, to the extent the trustee1
can set aside these prepetition transfers under either section 544, 547 or 548, the trustee
presumably seeks judgment against the defendant pursuant to 11 U.S.C. § 550. See generally In
re Burns, 322 F.3d 421, 427-28 (6th Cir. 2003).
2
(“PUFTA”), 12 Pa. C.S.A. §§ 5150 et seq., via 11 U.S.C. § 544, in the amount of
$93,500. 1
HSH filed an answer opposing any relief and now has filed an amended
motion for partial summary judgment. Included with that motion are various affidavits
and exhibits. HSH seeks to dismiss the preference count and count II, as well as strike a
portion of the state law fraudulent conveyance count. (The defendant concedes that, for a
component of the constructive fraudulent conveyance claim in count III, there are
material facts in dispute rendering summary judgment inappropriate.)
The trustee opposes any summary judgment and believes himself entitled to
trial on all three claims. He contends that there are material facts in dispute as to all
counts, and offers his own affidavit in support thereof.
I.
Upon my review of the admissions in the pleadings, the undisputed facts
identified in the parties’ pretrial statement, as well as the affidavits and exhibits submitted
by HSH, along with the trustee’s affidavit, I conclude that the following material facts are
not disputed.
The chapter 7 debtors are Carl Spitko and Elizabeth Goetz Spitko, husband
and wife. They filed a joint chapter 7 bankruptcy petition on June 29, 2004. At the time
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of their bankruptcy filing, Carl Spitko was the sole shareholder and president of
Maintech, Inc., a subchapter S corporation. Carl and Elizabeth Spitko also were, at the
time of filing, the sole shareholders of Sentek, LLC, with Carl serving as its president.
David Spitko is Carl’s brother. David Spitko earned a law degree in 1985,
worked for a Philadelphia law firm as an associate attorney, and then was one of the
founding partners in 1992 of HSH, located in Allentown, Pennsylvania. HSH specialized
in labor and employment law on behalf of employers. On June 29, 2004, when the
Spitkos’ bankruptcy case was filed, the law firm had four partners.
From its inception, HSH represented Maintech in employment matters. In
2002, Maintech engaged HSH to represent it in various commercial disputes, as the
corporation was experiencing financial difficulties involving claims against it by
Wachovia Bank. Indeed, in May 2003, Wachovia confessed judgments against Maintech
and the debtors, as Carl and Elizabeth Spitko were guarantors of Maintech’s loans held by
Wachovia. Carl Spitko was also a guarantor of Maintech’s obligations to a creditor
known as De Lage Landen, which purportedly was also pressing Maintech for payment.
In May 2003, the debtors engaged Albert Ciardi, III, Esquire, to represent
them as “workout” counsel. Mr. Ciardi avers that he recommended to the debtors that
they use HSH for certain legal matters related to Mr. Ciardi’s representation, because
HSH’s hourly rate was “substantially” lower than his. He also swears that he
recommended to the debtors that they establish escrow retainers with HSH to pay for such
services.
Sometime during the spring of 2003, the debtors received an income tax
refund on Maintech’s behalf (since it was a subchapter S corporation) in the amount of
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$379,456 for tax year 2002. Beginning on June 5, 2003, the debtors commenced a series
of payments to HSH that are the subject of the instant adversary proceeding. These
payments, which are undisputed, were made as follows:
Date of Payment 	Amount Paid to HSH
6/5/2003 	$25,000
8/5/2003 	$15,000
9/1/2003 	$20,000
1/28/2004 	$15,000
3/22/2004 	$18,500
See Joint Pretrial Statement, Uncontested Facts ## 6-10.
Attached as an exhibit to HSH’s motion for summary judgment is a hand-
written account of HSH’s “IOLTA Trust Account for payments made by Carl & Lisa
Spitko (‘Debtors’) to the Trust Account.” See Exhibit ‘A’ to Defendant’s Amended
Motion for Partial Summary Judgment. In addition, HSH billed either Maintech or
Sentek for legal services rendered, and attached redacted copies of those billings records
as exhibits to the affidavit submitted by David Spitko. Those bills were paid by the
debtors through the transfers just listed. The defendant provides the following accounting
for those payments:
Date Payment
Applied to
Invoice
Payments
Into Escrow
Invoice
Amount
For Billable Time In 	Balance in
Escrow
6/6/03 	$25,000.00 	$25,000.00
6/10/03 	($10,965.30) 	Maintech Bill # 84 ~
May 2003
$14,034.70
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7/24/03 	($5,075.00) 	Maintech Bill # 85 ~
June 2003
$8,959.70
7/24/03 	($8,466.50) 	Sentek Bill # 01 ~ June
2003
$493.20
8/5/03 	$15,000.00 	$15,493.20
8/7/03 	($5,146.50) 	Maintech Bill # 86 ~
July 2003
$10,346.70
8/7/03 	($7,380.00) 	Sentek Bill # 02 ~ July
2003
$2,966.70
9/30/03 	($2,846.95) 	Maintech Bill # 89 ~
August 2003
$119.75
9/30/03 	($532.50) 	Sentek Bill # 04 ~
August 2003
($412.75)
10/2/03 	$20,000.00 	$19,587.25
10/2/03 	($5,112.26) 	Maintech Bill # 90 ~
September 2003
$14,474.99
10/02/03 	($120.00) 	Sentek Bill # 05 ~
September 2003
$14,354.99
11/25/03 	($6,252.73) 	Maintech Bill # 91 ~
October 2003
$8,102.26
11/25/03 	($120.00) 	Sentek Bill # 06 ~
October 2003
$7,982.26
12/31/03 	($5,279.00) 	Maintech Bill # 93 ~
November 2003
$2,703.26
12/31/03 	($480.00) 	Sentek Bill # 07 ~
November 2003
$2,223.26
1/30/03 	$15,000.00 	$17,223.26
2/3/04 	($5,835.00) 	Maintech Bill # 94 ~
December 2003
$11,388.26
2/3/04 	($30.00) 	Sentek Bill # 08 ~
December 2003
$11,358.26
2/27/04 	($6,975.00) 	Maintech Bill # 95 ~
January 2004
$4,383.26
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At argument, HSH asserted that it needs to protect the information redacted2
because Carl Spitko has been criminally indicted. The defendant agrees to provide the trustee
with unredacted copies of its billing records so long as the trustee signs a confidentiality
agreement; the trustee apparently has declined to enter into such an agreement.
6
3/29/04 	$18,500.00 	$22,883.26
4/5/04 	($8,825.51) 	Maintech Bill # 99 ~
February 2004
$14,057.75
4/5/04 	($2,729.00) 	Maintech Bill # 100 ~
March 2004
$11,328.75
4/5/04 	($60.00) 	Sentek Bill # 10 ~ March
2004
$11,268.75
5/14/04 	($692.00) 	Maintech Bill # 101 ~
April 2004
$10,576.75
5/14/04 	($105.00) 	Sentek Bill # 11 ~ April
2004
$10,471.75
6/3/04 	($874.50) 	Maintech Bill # 102 ~
May 2004
$9,597.25
6/3/04 	($60.00) 	Sentek Bill # 12 ~ May
2004
$9,537.25
See Defendant’s Reply to Trustee’s Response to Summary Judgment Motion at 7-8.
Finally, I note that in opposing partial summary judgment, the trustee
offered his own affidavit in support. In it, Mr. Glassman contends that he cannot evaluate
the reasonableness of the fees charged by HSH due to the redacted nature of certain
exhibits: HSH’s billing records. 	And, to the extent the redaction is based upon the2
assertion of attorney-client privilege, he (Mr. Glassman) waives that privilege. He also
believes that the debtors previously agreed to permit him to see unredacted billing
information.
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II.
Federal Rule of Bankruptcy Procedure 7056 incorporates Fed. R. Civ. P.
56, the summary judgment rule, into bankruptcy adversary proceedings. Summary
judgment avoids the expense and delay of an unnecessary trial when no material facts are
in dispute and one of the parties is entitled to prevail on the merits. See, e.g., Goodman v.
Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir. 1976), cert. denied, 429 U.S. 1038
(1977). The standard for determining the applicability of summary judgment under Rule
56 is well established. As the Third Circuit Court of Appeals observed:
Summary judgment is appropriate when the moving party is
entitled to judgment as a matter of law and there is no genuine
dispute of material fact.... In order to defeat “a properly
supported summary judgment motion, the party opposing it
must present sufficient evidence for a reasonable jury to find
in its favor.” Groman v. Township of Manalapan, 47 F.3d
628, 633 (3d Cir. 1995) (citing Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 250-52, 106 S.Ct. 2505, 2511-12, 91
L.Ed.2d 202 (1986)). In essence, the non-moving party must
demonstrate a dispute over facts that might affect the outcome
of the suit. Id. Moreover, in reviewing the record, we must
give the non-moving party the benefit of all reasonable
inferences....
Hampton v. Borough of Tinton Falls Police Dept., 98 F.3d 107, 112 (3d Cir. 1996).
The application of these general principles is affected by the allocation of
the evidentiary burden of persuasion were the dispute to proceed to trial. That is, a trial
court’s approach to summary judgment is influenced by whether the party seeking
summary judgment would have the burden of persuasion at trial. See generally
Coquellette, et al. 11 Moore’s Federal Practice 3d, §§ 56.03[4], 56.13[3] (2006). This
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approach was well summarized in Adams v. Consolidated Rail Corp., 1994 WL 383633,
at *1-*2 (E.D. Pa. 1994):
The Supreme Court articulated the allocation of burdens
between a moving and nonmoving party in a motion for
summary judgment in Celotex Corp. v. Catrett, 477 U.S. 317
(1986). The Court held that where the movant is the
defendant, or the party without the burden of proof on the
underlying claim, the movant still has the initial burden of
showing the court the absence of a genuine issue of material
fact, but that this does not require the movant to support the
motion with affidavits or other materials that negated the
opponent’s claim. Id. at 323. In contrast, where, as here, “the
party moving for summary judgment is the plaintiff, or the
party who bears the burden of proof at trial, the standard is
more stringent.” National State Bank v. Federal Reserve
Bank, 979 F.2d 1579, 1582 (3d Cir. 1992). To sustain its
initial burden under such circumstances, the movant must:
“support its motion with credible evidence . . .
that would entitle it to a directed verdict if not
controverted at trial. In other words, the moving
party must show that, on all the essential
elements of its case on which it bears the burden
of proof at trial, no reasonable jury could find
for the non-moving party.”
Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.
1993). . . . If the movant makes such an affirmative showing,
it is entitled to summary judgment unless the nonmoving
party, in response, comes forward with significant, probative
evidence demonstrating the existence of a triable issue of fact
. . . .
(citations omitted); accord In re White, 243 B.R. 498, 501 n.4 (Bankr. N.D. Ala. 1999).
Here, defendant HSH is the party seeking summary judgment. Insofar as
Count I is concerned, the trustee has the evidentiary burden of establishing all of the
elements found in section 547(b), while the defendant would only have the burden of
persuasion to demonstrate affirmative defenses under section 547(c). See 11 U.S.C. §
547(g). With Count II, under section 548, the trustee also has the burden of proof to
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demonstrate that the transfers were actually fraudulent. See, e.g., In re Fruehauf Trailer
Corp., 444 F.3d 203 (3d Cir. 2006). However, the defendant/transferee would have the
evidentiary burden to establish good faith under section 548(c). See In re Hannover
Corp., 310 F.3d 796, 799 (5th Cir. 2002).
The allocation of the evidentiary burdens under Pennsylvania law for
purposes of Count III is not clear, as will be discussed below. Some decisions impose the
burden of persuasion upon the plaintiff to demonstrate all of the elements of constructive
fraud under PUFTA. Other decisions opine that, in certain instances, there is a shifting of
the evidentiary burden back to the transferee to demonstrate reasonably equivalent value.
If a fraudulent conveyance is established, then a transferee would have the burden to
demonstrate a good faith defense under state law. See In re Burry, 309 B.R. 130, 135
(Bankr. E.D. Pa. 2004). For purposes of this summary judgment motion, I conclude that
HSH has at least an evidentiary burden of production, if not one of persuasion, in
demonstrating reasonably equivalent value.
As noted earlier, in applying the above-mentioned standard for summary
judgment, “[the court must] view the underlying facts and all reasonable inferences
therefrom in the light most favorable to the party opposing the motion.” Pennsylvania
Coal Ass’n v. Babbitt, 63 F.3d 231, 236 (3d Cir. 1995); see also Helen L. v. DiDario, 46
F.3d 325, 329 (3d Cir.), cert. denied sub nom. Pennsylvania Secretary of Public Welfare
v. Idell S., 516 U.S. 813 (1995); Valhal Corp. v. Sullivan Associates, Inc., 44 F.3d 195,
200 (3d Cir. 1995); Goodman v. Mead Johnson & Co., 534 F.2d at 573. Moreover, the
moving party bears the burden of proving that no genuine issue of material fact is in
dispute. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 n.10
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(1986). Once the movant has carried its initial burden, however, the nonmoving party
“must come forward with ‘specific facts showing that there is a genuine issue for trial.’”
Id. at 587 (quoting Fed. R. Civ. P. 56(e)). As explained by the Third Circuit:
At the summary judgment stage of proceedings, if the movant
—in this case the Defendants—can point to the absence of
any factual support for one of [the] essential elements [of the
complaint], then the non-movant, bearing the burden of
persuasion at trial, must introduce specific facts showing a
need for trial, pursuant to Fed. R. Civ. P. 56(e). See Celotex,
477 U.S. at 322-24, 106 S. Ct. 2548. If the non-moving party
fails to go beyond conclusory allegations in its pleadings and
to produce specific facts indicating that there is a genuine
issue for trial, summary judgment will be granted in favor of
the moving party.
Annulli v. Panikkar, 200 F.3d 189, 198-99 (3d Cir. 1999) (overruled on other grounds by
Rotella v. Wood, 528 U.S. 549 (2000)) (citations omitted).
In essence, defendant HSH argues that the trustee has failed to “go beyond
conclusory allegations” in support of his claims that the prepetition payments made by the
debtors to the law firm were avoidable transfers under federal or state law.
III.
A.
I turn first to the preference claim, Count I. Therein, the trustee seeks to
avoid as preferential all payments made by the debtors to HSH between August 5, 2003
and March 29, 2004, totaling $68,500. The only issue raised by the defendant for
purposes of summary judgment is whether the undisputed facts demonstrate that the
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trustee could prove at trial all of the elements found in 11 U.S.C. § 547(b). HSH
acknowledges that material facts would be in dispute regarding any affirmative defenses
under section 547(c).
The concept of an avoidable preferential transfer represents a longstanding
congressional determination that creditors should not be permitted, either intentionally or
unintentionally, to recover more from the debtor than other creditors with similar claims
by virtue of transfers made in their favor just prior to the debtor’s bankruptcy filing. At
the time the preferential transfer is made, there may be nothing improper about it under
state law. See Matter of Nelson Co., 959 F.2d 1260, 1266 (3d Cir. 1992). However, once
the bankruptcy petition is filed, a trustee may avoid or set aside the transfer as preferential
pursuant to 11 U.S.C. § 547.
Congress envisioned two overriding policies which would be enhanced by
the trustee’s ability to avoid preferential transfers. First, similar creditors would be
treated equally in their receipt of distributions from the debtor’s assets. Second, creditors
would be discouraged from racing against each other to dismember the debtor, since an
earlier recovery could later be set aside as preferential. H.R. Rep. No. 95-595, 95th
Cong., 1st Sess. at 177-78 (1977).
The scope of a preferential transfer, as it is defined by section 547,
embodies the balancing of a number of policy choices. See generally Thomas H. Jackson,
Avoiding Powers in Bankruptcy, 36 Stan. L. Rev. 725 (1984). These are initially
articulated by the provisions of section 547(b), which contain the essential elements of a
preference as Congress chose to define it. Congress then recognized additional policy
considerations by virtue of section 547(c). Certain transfers which might at first appear
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preferential, because they meet all the requirements of section 547(b), should not be so
viewed for various reasons.
While section 547 identifies those transfers which may be avoided, section
550 governs the trustee’s ability to recover, for the benefit of the debtor’s estate, transfers
so avoided. Section 547(b) provides as follows:
(b) Except as provided in subsection (c) of this section, the
trustee may avoid any transfer of an interest of the debtor in
property-
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt
owed by the debtor before such transfer was
made;
(3) made while the debtor was insolvent;
(4) made-
(A) on or within 90 days before the
date of the filing of the petition; or
(B) between ninety days and one
year before the date of the filing of
the petition, if such creditor at the
time of such transfer was an insider;
and
(5) that enables such creditor to receive more
than such creditor would receive if-
(A) the case were a case under
chapter 7 of this title;
(B) the transfer had not been made;
and
(C) such creditor received payment
of such debt to the extent provided
by the provision of this title.
Section 550(a) provides in pertinent part that:
[e]xcept 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 -
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(1) the initial transferee of such transfer or the
entity for whose benefit such transfer was made;
or
(2) any immediate or mediate transferee of such
initial transferee.
HSH raises two separate challenges to the elements required by section
547(b). First, it maintains that the undisputed facts demonstrate that none of the pre-
bankruptcy payments the law firm received from the debtors were for or on account of
antecedent debts, as mandated by section 547(b)(2). Second, it argues that all of the
transfers occurred more than 90 days before the debtors’ bankruptcy filing, and that HSH
is not an “insider” subject to the one-year reach-back period found in section 547(b)(4).
B.
Although the term “antecedent debt” is not defined by the Bankruptcy
Code, see generally 11 U.S.C. §101, a debt is defined as a “liability on a claim.” 11
U.S.C. § 101(12). A debt is generally characterized as antecedent “when the debtor
becomes legally bound to pay before the transfer is made.” In re CVEO Corp., 327 B.R.
724, 728 (Bankr. D. Del. 2005) (quoting In re The Fonda Group, Inc., 108 B.R. 956, 959
(Bankr. D.N.J. 1989); see also In re First Jersey Securities, Inc., 180 F.3d 504, 510-11 (3d
Cir. 1999). In other words, the preference statute does not apply to prepetition transfers
made to an entity that was not a creditor of the debtor at the time the transfer was made.
In arguing that none of the transfers involved payment for or on account of
antecedent debts, HSH contends that all of the debtors’ payments were intended as
retainers, to be held in escrow by the law firm and applied to payment for future services.
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See generally In re Armstrong, 234 B.R. 899, 906 (Bankr. E.D. Ark. 1999); In re Baltic
Associates, L.P., 1994 WL 791634, at *4 (Bankr. E.D. Pa. 1994). The trustee counters
that material facts are in dispute because HSH has not produced any escrow or retainer
agreements made by the Spitkos. HSH responds that the trustee never sought production
or discovery of any such documents, the discovery period has long since expired, and the
trustee has the burden of proof to demonstrate the preference element established by
section 547(b)(2). Therefore, it had no obligation to incorporate such agreements in its
motion for summary judgment.
Apparently, Pennsylvania law recognizes two general types of retainer
agreements, with the second category containing two subcategories:
[N]umerous authorities have noted the existence of two broad
categories of retainer agreements. The first is sometimes
referred to as the classic retainer. In a classic (or general)
retainer agreement a client agrees to pay a fixed sum in
exchange for the attorneys promised availability to perform
legal services that may arise during a specific period of time.
An essential characteristic of the classic retainer is that it is
earned entirely by the attorney upon payment, with the client
retaining no interest in the funds thereafter. . . .
In contrast to the classic retainer is the special retainer, which
itself comes in two varieties: a security retainer and an
advance fee retainer. In the case of the security retainer, the
attorney holds the same to secure payment of fees for future
services. The funds do not constitute a present payment but
instead remain the property of the Debtor until the attorney
applies it to charges for services actually rendered . . . . In the
advance fee retainer arrangement, the attorney receives
payment in advance for contemplated legal services and
depletes the prepaid fund as services are rendered. Advance
fee retainers differ from security retainers in that ownership of
the funds is intended to pass to the attorney at the time of the
payment.
In re Renfrew Center of Florida Inc., 195 B.R. 335, 338-39 (Bankr. E.D. Pa. 1996).
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Of course, transfers that constitute a “security retainer” may not be avoidable as3
preferential by virtue of section 547(b)(5), but that issue is not presently before me.
15
HSH’s assertion that it received only retainer payments from the debtors
would not, even if unrebutted, establish a per se absence of a transfer for or on account of
an antecedent debt. A “security retainer” could well represent a transfer for an antecedent
debt. 3
The affidavit of Mr. Ciardi that he “advised Carl and Lisa to make advance
payments [to HSH]” does not, by itself, establish the type of retainer agreement entered
into by the debtors. The billing information provided as exhibits to HSH’s amended
motion suggests that the payments may have been designed as security retainers. HSH
avers that it held funds in escrow for the debtors, and as services were rendered by HSH it
subtracted the amounts charged from the debtors’ funds.
Moreover, even without deciding the type of retainer received by the
defendant, the facts offered by HSH in support of summary judgment, and those noted in
the chart included above in the factual recitation, suggest that at least a portion of the
payments from the debtors could be interpreted as applied by HSH against antecedent
debts. For example, a portion of the debtors’ $25,000 June 2003 payment clearly was
applied by HSH against services provided by the firm in May 2003. And a small portion
of the August 5, 2003 payment clearly was applied for services billed before that date.
Moreover, if I give the trustee the benefit of inferences on this issue, it
appears that some services were provided by HSH but simply were not billed before
additional payments were received. This could possibly constitute payment of antecedent
debt. See In re Enivid, Inc., 345 B.R. 426, 457 (Bankr. D. Mass. 2006). And, if the funds
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As a general rule, in tracing the origins of funds withdrawn from a bank account,4
Pennsylvania applies the rule established in Clayton’s Case, 1 Merivale 572 (Ch. 1816), that the
funds first deposited are the funds first withdrawn. See City of Pittsburgh v. Rhodes, 230 Pa.
397, 399 (1911).
The last challenged payment was made on March 22, 2004 and the Spitkos filed5
their bankruptcy petition on June 29, 2004. The 90-day reachback period ended on March 31st.
Accordingly, the trustee acknowledges that he cannot seek to avoid the June 6,6
2003 transfer to HSH as preferential, because it occurred more than one year prior to the debtors’
bankruptcy filing on June 29, 2004.
16
held in escrow are treated as withdrawn on a first-in first-out basis, then there would be4
payments that would be credited against those earlier services.
A retainer used to pay for prior, unpaid services, is a transfer for an
antecedent debt. See In re Hennings Feed and Crop Care, Inc., 2000 WL 33961389
(Bankr. C.D. Ill. 2000). Accordingly, considering the affidavits and documents provided
by HSH, and giving the trustee the benefit of all inferences, I cannot now conclude that
the trustee would be unable to meet his burden at trial under section 547(b)(2).
C.
The defendant’s second challenge to Count I concerns section 547(b)(4),
and that contention is more persuasive. None of the transfers sought to be avoided by the
trustee as preferential occurred during the 90-day period prior to the debtors’ bankruptcy
filing. 	Thus, the trustee can only prevail if HSH is deemed an “insider,” thereby5
extending the reach-back period under section 547(b)(4) to one year. 6
Under the statutory definition, whether an individual or entity will be
considered an “insider” for the purpose of preference analysis depends upon the legal
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Section 101(45) defines “relative” as an “individual related by affinity or7
consanguinity within the third degree as determined by the common law, or individual in a step
or adoptive relationship within such third degree.”
My use of the phrase “entity separate and distinct” is not intended to imply that8
David Spitko would not be personally liable for any judgment rendered against HSH. The
trustee’s complaint seeks to avoid transfers made to HSH. It does not name any partner or
employee of the firm in an individual capacity. Nor does the complaint allege that HSH is the
alter ego of David Spitko. Compare In re Weddle, 353 B.R. 892 (Bankr. D. Idaho 2006).
Pleadings and documents filed in the proceeding refer to David Spitko as a partner in HSH. It is
not clear whether HSH was organized as a general partnership or some other form allowable
under Pennsylvania law. If HSH is a general partnership, its four partners could be individually
liable for claims against the law firm.
17
status of the debtor. See 11 U.S.C. § 101(31). Here the debtor is an individual, therefore
section 101(31)(A) applies. That section of the Code states that the term “insider” of an
individual includes: (1) relatives of the debtor or general partners of the debtor; (2) a
partnership in which the debtor is a general partner; (3) a general partner of the debtor; or
(4) a corporation in which the debtor is an officer, director, or person otherwise in
control. See 11 U.S.C. § 101(31)(A)(i)-(iv).
HSH does not fall within any of the statutorily defined categories of insider
provided under section 101(31)(A). While David Spitko is a relative of the debtor Carl
Spitko, as that term is defined in the Code, and is thus an insider, the trustee’s preference7
action seeks to avoid payments made to HSH, an entity apparently separate and distinct
from David Spitko. 8
As the definition of insider uses the term “including,” the statutory
examples of insiders would not be all-inclusive. See 11 U.S.C. § 102(3) (“‘includes’ and
‘including’ are not limiting”); see also Matter of Krehl, 86 F.3d 737, 741 (7th Cir. 1996);
Butler v. David Shaw, Inc., 72 F.3d 437, 443 (4th Cir. 1996); In re Schuman, 81 B.R.
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583, 585-86 (B.A.P. 9th Cir. 1987); In re Newcomb, 744 F.2d 621, 625 n.4 (8th Cir.
1984). For this reason, application of the term “insider” has some flexibility and should
consider all relevant facts. See In re Polk, 125 B.R. 293, 296 (Bankr. D. Colo. 1991).
However, simply because David Spitko is an insider of the debtors and (assuming that
HSH was a general partnership) HSH would be considered an insider of David Spitko, it
does not follow that an insider of an insider of the debtor should be treated as an insider
of the debtor for purposes of section 547(b)(4):
Had Congress wanted to extend per se insider status to
insiders of insiders, it knew how to do it. Section 101(31)(E)
provides that an “affiliate” of a debtor is an insider, as is an
“insider of an affiliate as if such affiliate were the debtor[.]”
Thus, the statute specifically includes insiders of insiders,
when that is the intent of Congress. That Congress did not
include such language in § 101(31)(B) shows its intent not to
expand per se insiders to include insiders of relatives of
insiders. See BFP v. Resolution Trust Corp., 511 U.S. 531,
537 . . . (1994) (presumed that Congress acted intentionally
when it included particular language in one part of a statute
but omitted it from another).
Particularly in light of the conclusive presumption of
preferential treatment that arises from a determination that an
entity is a per se insider, there is no justification for expanding
the definition of per se insider beyond what is plainly
contained in the statute. To do so would result in adding
language to the statute that is not there, which it is not within
the province of the court to do. See Lamie, 540 U.S. at 537,
124 S. Ct. at 1032.
In re Enterprise Acquisition Partners, Inc., 319 B.R. 626, 632 (B.A.P. 9th Cir. 2004).
When the term “insider” first appeared in the Bankruptcy Code, as part of
the 1978 Bankruptcy Reform Act, the legislative history described the term as “one who
has a sufficiently close relationship with the debtor that his conduct is made subject to
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closer scrutiny than those dealing at arms length with the debtor.” H.R. Rep. No. 95-595,
95th Cong., 2d Sess. 312 (1977), reprinted in 9 Bkr-L Ed § 82:15 (1979).
Given that legislative history, it is appropriate to consider whether the
undisputed facts demonstrate whether HSH’s dealings with the debtors were not at arm’s
length. See In re Demko, 264 B.R. 404, 408 (Bankr. W.D. Pa. 2001). “The emphasis [for
insider determination] is on the nature of the relationship between debtor and the other
person, especially on whether their relationship gave the other person the power or
influence to have a debt owed to it repaid.” Id. Thus, when seeking to determine non-per
se statutory insider status, a court should consider the closeness of the relationship
between the parties and decide whether that closeness affected the arm’s-length nature of
the transaction, or provided some level of control that the transferee had over the debtor.
See In re Holloway, 955 F.2d 1008 (5th Cir. 1992); In re Enterprise Acquisition Partners,
Inc., 319 B.R. at 633. A mere debtor-creditor relationship, by itself, is insufficient to find
that the transferee is an insider of the debtor. Demko, 264 B.R. at 408. Thus, non-
statutory insider status is a fact-intensive inquiry that must be determined on a case-by-
case basis. Id.
Decisional law examining insider status in those instances not specifically
provided for in section 101(31) can generally be divided into two groups: “(1) those cases
that involve a business or commercial relationship; and (2) those that involve a personal
or pseudo-familial relationship.” In re Phongsavath, 328 B.R. 895, 897 (Bankr. N.D. Ga.
2005). In order to impose insider status in the personal context, the debtor and the
transferee typically must have a close relationship that is familial in nature. See
Phongsavath, 328 B.R. at 897. Courts are less likely to impose insider status in a non-
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business context when the relationship is based solely upon friendship. See id. at 898
(and cases cited therein).
A creditor in a business relationship with the debtor, as occurred in this
proceeding, may be considered an insider when that creditor had the ability to assert more
control than other creditors, made management decisions for the debtor, directed work
performance, and directed payment of the debtor’s expenses. See In re Winstar
Communications, Inc., 348 B.R. 234, 279 (Bankr. D. Del. 2005). “There must be
day-to-day control, rather than some monitoring or exertion of influence regarding
financial transactions in which the creditor has a direct stake.” Id. (emphasis removed);
see also In re Radnor Holdings Corp., 353 B.R. 820, 841 (Bankr. D. Del. 2006).
Attorneys have not generally been considered insiders of their debtor-
clients. See In re Sullivan Haas Coyle, Inc., 208 B.R. 239, 244 (Bankr. N.D. Ga. 1997);
In re Lemanski, 56 B.R. 981 (Bankr. W.D. Wis. 1986); In re Durkay, 9 B.R. 58 (Bankr.
N.D. Ohio 1981). Whenever an attorney has been found to be an extra-statutory insider,
that status has been imposed because of a relationship with the debtor that transcended the
normal attorney-client boundaries. Compare In re Broumas, 135 F.3d 769 (Table), 1998
WL 77842 (4th Cir. 1998) (attorney is an insider) with In re Oliver, 142 B.R. 486 (Bankr.
M.D. Fla. 1992) (attorney is not an insider); In re Lemanski, 56 B.R. 981 (Bankr. W.D.
Wisc. 1986) (same); In re Durkay, 9 B.R. 58 (Bankr. N.D. Ohio 1981) (same).
For example, in Broumas, the debtor had engaged the same attorney for 15
years. During that time, the debtor acted as the banker for his attorney. Broumas, 1998
WL 77842 at *1. The debtor was given signature authority and access to the attorney’s
bank accounts and the law firm’s accounts. Id. The attorney and the debtor made loans
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to one another and pledged each other’s credit. Id. They were also investigated by the
Securities Exchange Commission for their joint participation in a stock purchasing
scheme. Id. During their 15 year attorney-client relationship, the court found that the
parties also were close friends, principal and agent, and landlord and tenant. Id. at *8.
Thus, given the peculiar nature of their relationship, that attorney could properly be
classified as an insider for preference purposes under the Code. Id.
In In re Oliver, a chapter 11 case, the debtor brought an adversary
proceeding against his former attorney to avoid purportedly preferential transfers under
section 547 of the Code. See Oliver, 142 B.R. 486. After years of representing the
debtor, the attorney had brought suit against it in state court to collect past due fees. Id. at
487-88. Pre-bankruptcy judgment was entered for the attorney against the debtor, and the
state court ordered that all shares in a corporation controlled by the debtor were to be
transferred to the attorney in satisfaction of the judgment. Id. The debtor filed for
bankruptcy and then claimed that the prepetition transfer of shares was a preferential
transfer to an insider and should be avoided accordingly. Id. In rejecting this contention,
the bankruptcy court reasoned that:
To accept the proposition urged by the Debtor, one might
contend that any attorney who represented a debtor
pre-petition for several years, and became intimately involved
with and privy to the debtor’s affairs, would be vulnerable to
a preference attack when bankruptcy intervenes by a Trustee
who would, no doubt, seek to recover all payments made to
the attorney during the preceding year under the insider
provision of the Bankruptcy Code. To carry the interpretation
of the term “insider” to its logical extreme, as urged by the
Debtor, would be clearly absurd and illogical, and lacks any
support either in the Code or in the legislative history of the
Section by case law.
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Id. at 490.
In Matter of Lemanski, chapter 7 debtors executed a partial assignment of
their mortgage to the defendant law firm in order to “collateralize” an unsecured balance
of $1,914.33 owed to the law firm for legal services previously rendered and to provide
security for services to be rendered in the future. See Lemanski, 56 B.R. at 982-83. The
trustee sought to avoid the transfer (i.e., mortgage assignment) as a preference to an
insider under section 547(b) of the Code. The court reasoned that “[a]n attorney is an
insider if as a matter of fact, he exercises such control or influence over the debtor as to
render their transactions not arms-length.” Id. at 983. The evidence in Lemanski showed
that the firm had represented the debtors for at least ten years, and even though it had
encouraged the debtors to grant it security for an unpaid debt, the transactions were at
arm’s length and at no time did the firm “exercise the requisite ‘high degree of influence
or control’ necessary for insider status.” Id. Accordingly, the court held in favor of the
defendant law firm.
In In re Durkay, the debtor and the defendant-attorney knew each other for
more than 25 years. See Durkay, 9 B.R. at 59. The defendant represented the debtor, the
debtor’s wife, and several of the debtor’s companies for many years. Id. During this
representation, the debtor conveyed a quit-claim deed for his residence to a corporation
owned and controlled by the attorney. Id. The transfer was intended to repay delinquent
counsel fees. Id. After the transfer, the debtor remained in the residence and was
obligated to pay rent to his attorney. Id. When the debtor failed to pay rent, the
defendant initiated eviction proceedings, which were settled for $5,000. Id. at 60. The
attorney no longer represented the debtor at the time of the bankruptcy filing. Id. at 59.
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The trustee sought to avoid the $5,000 settlement payment as a preferential transfer. Id.
at 60. Focusing on the relationship between the parties at the time of the transfer, the
court held that the attorney was not an insider because of the arm’s-length nature of their
relationship. Id. at 61.
In the present matter, the trustee contends that as David Spitko, a partner in
HSH, is the brother of the debtor, HSH should be considered an insider for preference
purposes. The trustee alleges that the challenged transfers were not a series of arm’s-
length business transactions between HSH and the debtor; rather they were transfers
between brothers in contemplation of a bankruptcy filing. The trustee further observes
that HSH holds an unusual relationship with the Spitkos because it represented Carl
Spitko as well as his corporations, and is also representing Carl Spitko’s father in another
adversary proceeding brought by the trustee.
HSH counters that it had been engaged to represent Maintech in labor
matters for many years, that appropriate agreements securing the firm’s representation
were executed, and that Maintech was billed for these services in the usual manner of the
firm’s business. When Maintech and the debtors began to experience financial
difficulties, HSH started to represent the debtors and their companies, Maintech and later
Sentek, in negotiations and litigation with creditors because of its low hourly rate. On the
advice of the debtors’ workout attorney, HSH began to charge retainer fees for its
services. Bills were prepared and the fees deducted from the retainers held in escrow by
HSH. The retainer funds were replenished by the debtors when the funds held in trust
diminished.
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In response to HSH’s motion for summary judgment on Count I, the trustee
has offered no documents, deposition transcripts, admissions, answers to interrogatories
or affidavits suggesting that HSH exerted control over the debtors to hire it, or to pay its
fees, or that the payments were not arm’s-length transactions. While it is undisputed that
there is a familial relationship between David Spitko and the debtor, as they are brothers,
and that HSH is involved in other adversary matters connected to the debtors’ bankruptcy
case, the trustee has not presented any evidence suggesting that, at trial, HSH would be
found to have the requisite degree of control over the debtors that would enable it to be
categorized as an insider.
HSH was a four partner law firm, in existence for more than 12 years at the
time of the Spitkos’ bankruptcy filing. There is no inference that the debtors, or their
corporations, were its main clients. There is no inference that David Spitko controlled the
law firm. There was no inference that HSH charged the debtors or their corporation more
than it charged other clients for similar services. Thus, it is not sufficient for the trustee
to maintain that the entire firm should be considered an “insider” simply because one
partner is related to the debtor and because he believes that the challenged payments were
made in contemplation of bankruptcy, rather than for actual legal services rendered.
Indeed, the trustee has not referred to any reported decision in support of this contention.
As the trustee’s opposition to summary judgment on Count I relies upon his
pleadings, bare assertions, conclusory allegations, or suspicions to support his claim of
insider statuts, HSH is entitled to summary judgment as to preference Count I.
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That is the sum of the transfers from August 4, 2003 through March 29, 2004.9
This is the sum of the transfers made to HSH between June 6, 2003 and March10
29, 2004.
25
IV.
Although the trustee raises two fraudulent conveyance claims (Counts II
and III) concerning overlapping transfers, his complaint relies upon two discrete theories.
In Count II he alleges, pursuant to 11 U.S.C. § 547(a)(1)(A), see Complaint, ¶ 26, that the
debtors transferred $68,500 	to HSH within one year of their bankruptcy filing “with9
actual intent to hinder, delay, or defraud Debtors’ other creditors.” Complaint, ¶ 28. In
Count III, however, he avers that the “[d]ebtors paid at least . . . $93,500 	to [HSH]10
without receiving a reasonably equivalent value in exchange . . . .” Complaint, ¶ 32. This
claim is based upon Pennsylvania’s Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa.
C.S.A. §§ 5150, et seq. Complaint, ¶¶ 33-34.
I turn first to whether HSH is entitled to summary judgment on the trustee’s
claim of actual fraud under section 548(a)(1)(A).
A.
As I noted earlier, the plaintiff trustee has the burden to demonstrate a
fraudulent transfer under section 548(a)(1) by a preponderance of the evidence. See In re
Fruehauf Trailer Corp., 444 F.3d 203, 210-11 (3d Cir. 2006). Because rarely will a
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transferor or a transferee acknowledge that a transfer was intentionally fraudulent,
circumstantial evidence is sufficient to meet this burden:
Courts often look to “badges of fraud” as circumstantial
evidence. . . . These “badges” include: whether the debtor
retained possession or control of the property after the
transfer, whether the transferee shared a familial or other
close relationship with the debtor, whether the debtor received
consideration for the transfer, whether the transfer was
disclosed or concealed, whether the debtor made the transfer
before or after being threatened with suit by creditors,
whether the transfer involved substantially all of the debtor’s
assets, whether the debtor absconded, and whether the debtor
was or became solvent at the time of the transfer.
Frierdich v. Mottaz, 294 F.3d 864, 870 (7th Cir. 2002) (citations omitted); accord In re
Rickard, 2006 WL 3859239, at *2 (Bankr. E.D. Pa. 2006). Some courts focus upon
slightly different indicia:
The record also supports the avoidance of the transfer
pursuant to 11 U.S.C. § 548(a)(1)(A) as having been made
with actual intent to hinder, delay, or defraud creditors. Intent
to hinder, delay, or defraud creditors is rarely admitted by a
debtor. Therefore, a court may consider circumstantial
evidence establishing badges of fraud. . . . Relevant factors
include whether the transfer was to an insider; whether the
debtor retained possession or control of the property after the
transfer; concealment of the transfer; pending or threatened
litigation against the debtor at the time of transfer; a transfer
of substantially all of the debtor’s assets; absconding by the
debtor; removal or concealment of assets; reasonably
equivalent value in exchange for the transfer; the debtor’s
insolvency at the time of the transfer; the proximity in time of
the transfer to the incurrence of a substantial debt; and a
transfer of substantial business assets to a lienor followed by a
subsequent transfer of such assets to an insider of the debtor. .
. . Transfers to family members are subjected to particularly
close scrutiny. The relationship of the parties in conjunction
with other circumstances often provides compelling evidence
of fraud.
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Pennsylvania fraudulent conveyance law establishes a slightly different mix of11
indicia as relevant to a determination of actual fraud:
In determining actual intent under subsection (a)(1), consideration
may be given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the
property transferred after the transfer;
(3) the transfer or obligation was disclosed or
concealed;
(4) before the transfer was made or obligation was
incurred, the debtor had been sued or threatened
with suit;
(5) the transfer was of substantially all the debtor’s
assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the
debtor was reasonably equivalent to the value of the
asset transferred or the amount of the obligation
incurred;
(9) the debtor was insolvent or became insolvent
shortly after the transfer was made or the obligation
was incurred;
(10) the transfer occurred shortly before or shortly
after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the
business to a lienor who transferred the assets to an
insider of the debtor.
(continued...)
27
In re Kelsey, 270 B.R. 776, 782 (B.A.P. 10th Cir. 2001) (citations omitted); see also In re
Fetla’s Trading Post, Inc., 2006 WL 538802, at *12 (Bankr. N.D. Ill. 2006). 11
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(...continued)11
12 Pa. C.S.A. § 5104(b).
28
Although issues of fraudulent intent are not readily amenable to summary
judgment, a plaintiff who asserts an actual fraudulent conveyance and opposes summary
judgment must come forward with some evidence to demonstrate that material facts are in
dispute:
Although denominating the claim as one under § 550, the
underlying theory of Claim # 2 is § 548, seeking to avoid the
truck’s transfer as actually and/or constructively fraudulent.
As to actual fraud (§ 548(a)(1)(A)), Debtor’s affidavit
specifically denies intent to hinder, delay or defraud,
explaining the purpose of the grant of the security interest was
to secure future fees. The other affidavits support this.
Although questions of intent are usually inappropriate for
disposition on summary judgment . . ., this does not mean that
such questions must be left to the trier of fact when the
nonmoving party presents no evidence to support her claim. . .
Plaintiff has presented no countervailing evidence of actual
intent to hinder, delay or defraud, and there is not “significant
probative evidence,” Anderson, supra at 249, 106 S.Ct. at
2510, in the record to raise a genuine issue of fact on this
issue. Summary judgment is thus appropriate in favor of
Defendants on the “actual fraud” count of Claim # 2.
Trunnell v. Brookshire, 2007 WL 963337, at *2 (Bankr. D. Or. 2007); accord In re J.R.
Deans Co., Inc., 249 B.R. 121, 139 (Bankr. D.S.C. 2000):
Pursuant to § 548, a transfer of interest of Debtor’s property
may be avoided if it occurred within one year of the filing of
the petition, and if one of two requirements is met. First, the
transfer may be set aside if it was made “with actual intent to
hinder, delay, or defraud” any creditor. The Trustee has
presented no evidence of fraudulent intent to sustain a
conclusion that the rental payments constituted a fraudulent
transfer. To the contrary, the evidence establishes that Debtor
occupied the premises for which payments were made and
even continued to occupy said premises when it began
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defaulting on the rent beginning in November of 1996.
Therefore, it is clear that Debtor was not fraudulently
dispersing its money; rather, it was paying rent for the
premises that HRE leased to it. Furthermore, as discussed
earlier in the Order, there was no fraudulent motive in
connection with the transfer of real estate from Debtor to
HRE; and, the fact that the spin-off concluded in HRE’s
owning the premises and leasing them to Debtor was for a
good business reason. Therefore, the Court grants summary
judgment in favor of Defendant as to 548(a)(1)(A).
See In re Ameri P.O.S. Inc., 355 B.R. 876, 885 (Bankr. S.D. Fla. 2006); In re Trace
Intern. Holdings, Inc., 287 B.R. 98, 106 (Bankr. S.D.N.Y. 2002); see also In re Main
Poly, Inc., 317 B.R. 1 (Bankr. D. Me. 2004).
In connection with this summary judgment motion, HSH offered sworn
statements and documents that demonstrate the following: HSH, prior to June 2003, was
an established law firm specializing in labor law, with a long-standing client known as
Maintech; Maintech was in serious financial trouble; the Spitkos were guarantors on
certain loans; a confessed judgment had been entered against both Maintech and the
Spitkos; the Spitkos engaged a workout attorney to represent them and to negotiate on
their behalf; that attorney recommended that they continue to employ HSH for certain
matters as it would be less expensive and to pay them via retainer; and the Spitkos then
used a portion of a tax refund to tender five payments over a ten-month period, which
payments were used to pay for legal services billed to Maintech and to another debtor-
owned corporation known as Sentek. HSH argues that it was not fraudulent for the
debtors to engage this law firm to represent them in their disputes with creditors.
The trustee offers no evidence to contradict that offered by the defendant.
Instead, he counters that a principal of HSH was the debtor’s brother, that the debtors
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were likely insolvent, and that HSH concedes that the use of retainer payments was
intended, at least in part, to prevent avoidance of such transfers. Trustee’s Memorandum
at 12-13. This, the trustee concludes, is sufficient to infer that the payments made to HSH
were intended to hinder, delay and defraud the debtors’ creditors.
I respectfully disagree. Even with the benefit of all reasonable inferences, I
cannot conclude that the trustee has offered sufficient indicia of fraud to warrant a trial on
this issue. Accordingly, summary judgment will be entered on Count II in favor of the
defendant.
B.
I reach a different conclusion as to Count III.
Under Pennsylvania law, “[a] transfer made or obligation incurred by a
debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the
obligation was incurred if the debtor made the transfer or incurred the obligation without
receiving a reasonably equivalent value in exchange for the transfer or obligation and the
debtor was insolvent at that time or the debtor became insolvent as a result of the transfer
or obligation.” 12 Pa. C.S.A. § 5105; see generally In re Fidelity Bond and Mortg. Co.,
340 B.R. 266, 285-86 (Bankr. E.D. Pa. 2006).
By virtue of 11 U.S.C. § 544(b), a chapter 7 trustee may assert the state law
rights of a creditor to set aside a conveyance that is constructively fraudulent. See, e.g.,
In re Walter, 261 B.R. 139, 141-42 (Bankr. W.D. Pa. 2001); In re Allegheny Health,
Education and Research Foundation, 253 B.R. 157, 164 (Bankr. W.D. Pa. 2000) (“11
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U.S.C. § 544(b)(1) allows the Trustee to pursue his action under 12 Pa. C.S.A. §
5104(a)(2) and 5105 against PHCT for the avoidance of the conveyances alleged by the
Trustee to have been made provided that a creditor of Centennial exists, or creditors of
Centennial exist, as of Centennial’s petition filing date who then possessed identical
causes of action against PHCT . . . .”); In re Nam, 257 B.R. 749, 760 (Bankr. E.D. Pa.
2000). Moreover, the statute of limitations under PUFTA is four years. 12 Pa. C.S.A. §
5109; see In re Cowden, 337 B.R. 512, 521-22 (Bankr. W.D. Pa. 2006). (Therefore, the
trustee’s Count III claim under PUFTA includes the June 2003 payment.)
In this adversary proceeding, the transfers made to HSH occurred after
judgment was confessed by Wachovia Bank against the debtors. As PUFTA defines
insolvency as a balance-sheet calculation (i.e., liabilities exceed assets), 12 Pa. C.S.A. §
5102(a), along with a presumption of insolvency when the debtor is generally not paying
his debts as they become due, 12 Pa. C.S.A. § 5102(b), the trustee may be able to prove at
trial that the debtors were insolvent when they made these transfers. Accordingly, the
issue posed by HSH’s present summary judgment motion focuses upon whether the
debtors received reasonably equivalent value for their payments of $93,500 to the
defendant.
Some courts have noted that while the trustee has the initial evidentiary
burden under his PUFTA claim, under Pennsylvania law he can meet that burden simply
by demonstrating the debtors’ insolvency. At that point, the evidentiary burden shifts to
HSH, the transferee, to demonstrate that the transferors/debtors received reasonably
equivalent value:
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Furthermore, although not necessary for our result, we note
that the bankruptcy court erred in its “constructive fraud”
analysis by incorrectly placing on Arch Street the burden of
proving that reasonably equivalent value was not given for the
transfer: “[W]e believe that lack of ‘reasonably equivalent
value’ for the transfer is not proven . . . .” Main III, 1997 WL
626544, at *6. In fact, if the grantor is in debt at the time of a
transfer PUFTA places on the grantee the burden of proving
by clear and convincing evidence either that the grantor was
solvent at the time of the transfer or that the grantee had given
reasonably equivalent value for the conveyance.
In re Blatstein, 192 F.3d 88, 98 (3d Cir. 1999) (dicta); see Tiab Communications Corp. v.
Keymarket of Nepa, Inc., 263 F. Supp. 2d 925, 937 (M.D. Pa. 2003) (“As Crystal (the
grantor) was insolvent at the time of the Crystal-Keymarket transaction and had assumed
Tiab’s debt’s [sic], the burden falls on Keymarket (the grantee) to show that it gave
reasonably equivalent value for the station and license.”); see generally Koffman v. Smith
453 Pa.Super. 15, 26-27 (1996) (applying a shifting burden standard under the former
Uniform Fraudulent Conveyance Act).
Other decisions, relying upon non-uniform Comment 6 to 12 Pa. C.S.A. §
5102, cf. Apple Storage Co. v. School Dist. of Philadelphia, 4 Pa. Cmwlth. 55, 59 (1971)
(comment made by governmental commission is considered when construing a state
statute), hold that Pennsylvania law on this issue changed with the enactment of PUFTA,
and (consistent with section 548) the plaintiff has the burden of persuasion on all
elements of fraudulent conveyance, including reasonably equivalent value. In re C.F.
Foods, L.P., 280 B.R. 103, 113-15 (Bankr. E.D. Pa. 2002); see In re Kartman, 354 B.R.
70, 79 (Bankr. W.D. Pa. 2006); In re Dawley, 2005 WL 2077074, at *13-*14 (Bankr.
E.D. Pa. 2005). If so, for purposes of summary judgment, it would be the trustee who
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must establish that, at trial, he will prove that the Spitkos did not receive reasonably
equivalent value for their payments to HSH.
No Pennsylvania appellate court has considered whether rulings under the
repealed Pennsylvania Uniform Fraudulent Conveyances Act, holding that the evidentiary
burden can shift to the transferee/defendant, were incorporated or altered by PUFTA.
Compare Mussetter v. Lyke, 10 F. Supp. 2d 944, 961-62 (N.D. Ill. 1998) (California
decisions under the Uniform Fraudulent Conveyance Act, shifting the evidentiary burden
to transferees to demonstrate reasonably equivalent value, remain valid California law
under the Uniform Fraudulent Transfer Act). In this proceeding, however, I need not
resolve that issue in order to adjudicate the present summary judgment motion.
It is undisputed that all of the invoices issued by HSH for legal services
purportedly rendered and paid for by the Spitkos were directed either to Maintech or
Sentek and not to the Spitkos. These corporate invoices were paid from funds transferred
by the individual debtors and held in escrow by HSH. That fact alone would not preclude
the defendant from demonstrating that the Spitkos received an adequate benefit from the
legal services provided. See generally In re National Century Financial Enterprises, Inc.,
341 B.R. 198, 214-15 (Bankr. S.D. Ohio 2006).
For example, when considering the question of constructive fraudulent
conveyance under section 548(a)(1)(B), courts have recognized that the benefit provided
to the transferor may be either direct or indirect:
[I]n evaluating whether reasonably equivalent value has been
given the debtor under section 548, indirect benefits may also
be evaluated. If the consideration Metro received from the
transaction, even though indirect, approximates the value it
gave TCI, this can satisfy the terms of the statute. See Rubin
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v. Manufacturers Hanover Trust Co., 661 F.2d 979, 991 (2d
Cir.1981) (although transfers solely for the benefit of third
parties do not furnish fair consideration, the transaction’s
benefit to the debtor need not be direct and may come through
a third party). These indirect economic benefits must be
measured and then compared to the obligations that the
bankrupt incurred.
Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646-47 (3d Cir. 1991).
This analysis was applied to resolve a similar PUFTA claim. See In re Fidelity Bond and
Mortgage Co., 340 B.R. 266, 287 (Bankr. E.D. Pa. 2006).
However, since the undisputed facts demonstrate that the debtors paid for
bills issued to a third party, at least a burden of production (if not persuasion) shifts,
requiring defendant HSH to demonstrate that the transferees received a reasonably
equivalent indirect benefit:
In a three-way transfer like this one, once the plaintiff has
shown that the transfer was for the benefit of a third-party, as
Plaintiff here has done, courts place the burden on the
defendant to prove that the debtor received “reasonably
equivalent value” indirectly as a result of the transfer.
In re National Century Financial Enterprises, Inc., 341 B.R. at 216 (citation omitted).
In connection with the instant motion, HSH concedes that there would be
disputed factual issues concerning whether, solely by dint of the Spitkos’ connection with
Maintech and Sentek, the benefits derived from legal services rendered to those
corporations indirectly constitute reasonably equivalent value to the debtors. See
generally In re R.M.L., Inc., 195 B.R. 602, 618 (Bankr. M.D. Pa. 1996) (“Generally
transfers made or obligations incurred (including guarantees) solely for the benefit of
third parties do not furnish reasonably equivalent value. . . . However, exceptions to the
general rule can be found where the debtor receives the benefit of the original
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consideration . . . , or where the debtor and third party ‘are so related or situated that they
share an identity of interests because what benefits one will, in such case benefit the other
to some degree.’”) (quoting In re Pembroke Development Corp., 124 B.R. 398, 400
(Bankr. S.D. Fla. 1991)) (citations omitted); 5 Collier on Bankruptcy, ¶ 548.05, at 5-548
(15th ed. rev. 2006):
Whether the transfer is for “‘reasonably equivalent value’” in
every case is largely a question of fact, as to which
considerable latitude must be allowed to the trier of the facts.
In order to determine if a fair economic exchange has
occurred in a case of a suspected fraudulent transfer, the
bankruptcy court must analyze all the circumstances
surrounding the transfer in question. Moreover, even if there
was consideration for the transfer given to some entity,
section 548(a)(1)(B) requires a transfer to be set aside if the
debtor did not receive reasonably equivalent value. Because
the ultimate issue is the impact of the transfer on the debtor’s
estate, the court must thus determine whether the debtor, as
opposed to some other entity, received such value. The
analysis in such cases is similar to that of cases under the
UFCA which held that a debtor did not receive reasonably
equivalent value if its transfer was in exchange for a benefit
to a third party.
(footnotes omitted).
Despite recognizing the disputed nature of the question of reasonably
equivalent value in this factual context, HSH contends that because the Spitkos were
guarantors of claims made by Wachovia and De Lage Landen, any legal services it
rendered in connection with those creditor claims must benefit the debtors and thus
constitute reasonably equivalent value. See generally In re Nirvana Restaurant Inc.,
337 B.R. 495, 502-03 (Bankr. S.D.N.Y. 2006); In re R.M.L., Inc., 195 B.R. at 618
(“[P]ayments on an existing guarantee generally are considered to be for reasonably
equivalent value.”). Thus, the defendant reasons, summary judgment as to a portion of
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count III is warranted: the invoices involving services concerning Wachovia and De
Lange Laden.
The defendant’s contention overlooks, however, that it has redacted
information concerning the nature of the services provided in copies of some billings,
including the legal services purportedly attributable to the Wachovia and De Lage Landen
claims. See, e.g., Ex. D, Bill dated February 27, 2004, lodestar entry 1/30/04 (“Research
the [redacted] 6.50 hrs. $1007.50"). The trustee complains that, even if HSH provided
the services on the dates found in the billings, and even if these services were properly
apportioned to Wachovia or De Lage Landen litigation, he needs access to unredacted
billing records to assess the reasonableness of those services. I agree:
Counsel’s time entries are heavily redacted. For example,
many of the entries for telephone conferences and
correspondence are redacted so that there is no indication of
the subject of the communication. Many of the research
entries are redacted so that there is no indication of the topic.
Synagro stated that the redactions were necessary to prevent
disclosure of attorney-client privilege or work product
material. GMP objected, arguing that the redactions made it
impossible for GMP to evaluate the reasonableness of the
fees. This Court agrees that the redactions significantly
hampered review of the Motion.
Synagro Technologies, Inc. v. GMP Hawaii, Inc., 2007 WL 851271, at *13 (D. Haw.
2007); see also Essex Builders Group, Inc. v. Amerisure Ins. Co., 2007 WL 700851, at *2
(M.D. Fla. 2007):
Amerisure contends that it should have access to the
unredacted billing statements to determine the reasonableness
of the fees sought by Essex. The Court finds that it would be
manifestly unfair to Amerisure to require it to defend against
the sizeable fee award claimed by Essex without the benefit of
the full record upon which the fees are based.
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This lack of uniformity stems from Commodity Futures Trading Commission v.12
Weintraub, 471 U.S. 343 (1985). Although holding that a chapter 7 trustee controls the attorney-
client privilege of a debtor-corporation, the Court stopped short of extending its holding to
individual debtors, saying: “[O]ur holding today has no bearing on the problem of individual
bankruptcy, which we have no reason to address in this case.” Id. at 356.
37
Given that HSH has some evidentiary burden concerning the reasonableness
of its corporate billings, as they related to the benefit received by the debtors who paid for
those services, it would be inappropriate to grant it summary judgment on Count III
without affording the trustee an opportunity to examine unredacted documents. See also
In re Porras, 312 B.R. 81, 103 (Bankr. W.D. Tex. 2004) (summary judgment denied
where defendant has not revealed all information about the value received by the
transferor).
In connection with a prior adversary proceeding in this bankruptcy case, I
noted that not all courts agree that a chapter 7 debtor may assert the attorney-client
privilege in bankruptcy matters. Some courts conclude that the privilege belongs to the
chapter 7 debtor; others maintain that the trustee controls the privilege; and still others
hold that the trustee controls the privilege for some types of bankruptcy litigation and the
debtor for others. Compare Labovitz, Attorney-Client Privilege in Individual Bankruptcy
Cases . . . An Emerging Oxymoron?, 104 Com. L.J. 301 (Fall 1999) with Thomas, Note,
Fifteen Years After Weintraub: Who Controls The Individual’s Attorney-Client Privilege
in Bankruptcy?, 80 B.U. L. Rev. 635 (April 2000). 	As one bankruptcy court12
summarized:
A Chapter 7 trustee’s ability to waive the attorney-client
privilege of an individual debtor is an issue of first impression
before this Court. Several courts have struggled with the
question. The most numerous, and most recent cases have
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held that, at least under some circumstances, a trustee may
waive the attorney-client privilege in an individual bankruptcy
case. Foster v. Hill (In re Foster), 188 F.3d 1259 (10th Cir.
1999) (holding that determination of trustee’s control over
privilege should be based upon a comparison of the harm to
the debtor against the trustee’s need for information); Ramette
v. Bame (In re Bame), 251 B.R. 367 (Bankr. D. Minn. 2000)
(holding that the trustee succeeded to privilege regarding all
communications that were in regards to estate administration
and that took place while the debtor was a debtor in
possession); French v. Miller (In re Miller), 247 B.R. 704
(Bankr. N.D. Ohio 2000) (holding that whether the trustee has
the power to waive an individual debtor’s privilege must be
made on a case-by-case basis); Moore v. Eason (In re
Bazemore), 216 B.R. 1020 (Bankr. S.D. Ga. 1998) (holding
that trustee may waive privilege where no harm would come
to the individual debtors and where waiver would not have a
chilling effect on the attorney-client relationship); Whyte v.
Williams (In re Williams), 152 B.R. 123 (Bankr. N.D. Tex.
1992) (holding that trustee had the power to waive privilege
in the case of an individual debtor where the trustee sought to
pursue avoidance causes of action). But see In re Silvio De
Lindegg Ocean Developments of America, Inc., 27 B.R. 28
(Bankr. S.D. Fla. 1982) (holding that a trustee could not
waive an individual debtor’s privilege).
In re Eddy, 304 B.R. 591, 598 (Bankr. D. Mass. 2004).
I appreciate that, in this proceeding, the chapter 7 trustee is seeking to avoid
prepetition transfers made by the debtors as constructively fraudulent. The Williams
decision, 152 B.R. 123, held that a bankruptcy trustee under a liquidating chapter 11 plan
should control the attorney-client privilege in order to prevent the insulation of fraudulent
transfers from avoidance. See id. at 129-30. The Tenth Circuit Court of Appeals later
analyzed Williams and noted that its reasoning would not apply in all individual
bankruptcy disputes:
The trustee in Williams was investigating pre-petition
transfers to the debtor’s family. . . . In letting the trustee
control the privilege, the court stressed the fiduciary duty to
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the bankruptcy estate Williams had voluntarily assumed by
becoming a debtor-in-possession. . . . It also noted that losing
control of the privilege “[could] have no adverse effect on
[him], although there [was] a potentially adverse effect on
[his] family members.” Id. at 129. It discounted the latter
effect, noting bankruptcy law not only “does not protect a
debtor’s insiders or affiliates from . . . avoidance litigation,”
but specifically creates “causes of action to avoid transfers to
insiders.” Id. at 129. Williams thus relies on lack of harm to
the debtor, a consent rationale based on his voluntary
assumption of a fiduciary duty, and an anti-insider-fraud
rationale. None of those rationales applies in this case . . . .
In re Foster, 188 F.3d at 1268 (citations omitted).
Recently, a district court concluded that whether a bankruptcy trustee
controlled an individual debtor’s attorney-client privilege required a balancing of the
benefit and harm under the given circumstances:
There is no doubt that access to Mr. Marker’s individual
attorney-client privilege could aid the Receiver significantly
in uncovering hidden assets and carrying out her other duties.
However, this does not end the inquiry. Several courts, when
confronted with a trustee’s request to waive the
attorney-client privilege of an individual debtor, have adopted
a balancing approach: weighing the potential for harm to the
individual debtor with the trustee’s duty to maximize the
value of the debtor’s estate. [FN9] See Foster v. Hill (In re
Hill), 188 F.3d 1259, 1268 (10th Cir.1999) (holding that
determination of trustee’s control over privilege should be
based upon a comparison of the harm to the debtor against the
trustee’s need for information).
FN9. In cases where courts found that a trustee
does not have the power to waive the
attorney-client privilege of the individual, the
court focused on the potential for personal harm
to the debtor and the risk of chilling
attorney-client communication. See, e.g., In re
Silvio, 27 B.R. 28 (Bankr. S.D. Fla. 1982)
(where an individual who owned all the stock of
bankrupt corporation also filed for bankruptcy,
trustee could waive privilege of corporation
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because only fiscal loss of assets could arise,
but could not waive for the individual because
disclosure could involve criminal conduct).
Courts that found that the trustee may waive the
privilege of an individual debtor focused on the
absence of any adverse effects on the debtor.
See, e.g., In re Bazemore, 216 B.R. 1020, 1024-
25 (Bankr. S.D. Ga. 1998) (holding that trustee
may waive privilege where no harm would
come to individual debtors and where waiver
would not have chilling effect on attorney-client
relationship).
In the present case, Mr. Marker is currently serving a sentence
of one hundred and ten months in federal prison as a result of
criminal convictions for securities, mail and wire fraud. It is
very likely that Mr. Hamlet’s files could contain information
that would expose Mr. Marker to additional criminal charges.
Therefore, after balancing the risk of harm to Mr. Marker
against the Receiver’s need for information, it is clear that this
balancing test does not favor a finding that the Receiver
controls Mr. Marker’s individual attorney-client privilege.
Thus, Mr. Hamlet does not have to disclose any confidential
communications relating to his individual representation of
Mr. Marker to the Receiver.
S.E.C. v. Marker, 2006 WL 288426, at *4 (M.D.N.C. 2006).
At oral argument, counsel for HSH represented that Carl Spitko was under
indictment, and HSH feared that certain redacted information could affect any criminal
charges brought against the debtor. Given that potential harm, and given the willingness
of HSH to provide unredacted billing information to the trustee upon a promise of
confidentiality, the acceptance of that offer would balance the trustee’s need for complete
information in order to prosecute his avoidance claim with protection of the
husband/debtor’s interests.
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Accordingly, HSH’s demand for summary judgment as to Count III will be
denied. In addition, the trustee will have access to complete billing information upon his
signing of an appropriate confidentiality agreement.
An appropriate order shall be entered.
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re 	: 	Chapter 7
CARL SPITKO and 	:
ELIZABETH GOETZ SPITKO
Debtors 	: 	Bankruptcy No. 04-18836bif
____________________________________
HOWARD T. GLASSMAN, trustee 	:
Plaintiff 	:
v. 	:
HEIMBACH, SPITKO & HECKMAN 	:
Defendant 	: 	Adversary No. 05-0258
____________________________________
.................................................
ORDER
.................................................
AND NOW, this 11th day of June 2007, for the reasons stated in the
accompanying memorandum, it is hereby ordered that defendant’s amended motion for
partial summary judgment is granted as follows:
Summary judgment is entered in favor of the defendant and against the
plaintiff as to Counts I and II. Summary judgment is denied as to Count III.
It is further ordered that, within 20 days from the date of this order, the
defendant shall provide the plaintiff with unredacted copies of its invoices to Maintech
and Sentek for the period of time beginning in June 2003 and ending in July 2004,
conditioned upon the plaintiff signing a confidentiality agreement as to those unredacted
invoices.
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Finally, it is also ordered that trial on Count III shall take place on August
16, 2007 at 9:30 a.m. in Bankruptcy Courtroom #2.
____________________
BRUCE FOX
United States Bankruptcy Judge
copies to:
David M. Spitko, Esquire
Law Office of David Spitko
124 Drake Lane
North Wales, PA 19454
Kenneth J. LaFiandra, Esquire
Jacobs Law Group, P.C.
1800 JFK Blvd. Suite 404
Philadelphia, PA 19103
Ms. Barbara Townsend, Courtroom Deputy
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