Surety Case Law Note: Greedy Grabby Bank
July 12, 2022
In this Surety Today blog post we will provide a Case Law Note to consider the issue of when a bank may be guilty of fraudulent conveyance.
HANOVER INS. CO. V. FIRST MIDWEST BANK OF POPLAR BLUFF
No. 1:20 CV 192 ACL, 2022 WL 2208945, at *1–2 (E.D. Mo. June 21, 2022)
Hanover Insurance Company (“Hanover”) issued payment bonds and performance bonds to Harding Enterprises, LLC (“Harding”) for multiple public construction projects. In consideration of the issuance of these bonds, the individual husband and wife owners each executed the General Agreement of Indemnity in favor of Hanover.
When Harding began to struggle financially, the Indemnitors requested that Hanover provide Harding with financial assistance to complete the performance of the work on the bonded projects. Hanover and the Indemnitors entered into a Financing Agreement. Pursuant to the terms of that Agreement, Hanover paid claims and advanced funds to Harding in the total amount of $3,807,673.03. These funds were to be used by Harding for the sole purpose of paying labor and material costs incurred by it to perform work on the bonded contracts.
Harding ultimately failed to complete performance or pay its subcontractors and suppliers. As a result, Hanover’s obligations under the bonds were triggered. Hanover completed Harding’s performance obligations on the bonded projects and paid payment bond claims of subcontractors and suppliers. Hanover suffered losses exceeding $5,000,000. Hanover demanded collateral and reimbursement from the Indemnitors in the amount of $4,975,000, pursuant to its rights under the GAI, no collateral was posted.
Hanover discovered that the Indemnitors were misappropriating large sums of money they received from the bonded projects and from Hanover. Those funds were expressly required to have been used for Harding’s performance obligations on the bonded projects and payment to bonded subcontractors and suppliers. After nearly all of the bonded proceeds had been paid by the bonded project owners to Harding and then misappropriated, Hanover discovered the extent of the scheme. Specifically, Hanover discovered that the Indemnitors had used cashier’s checks and other forms of transfer to move the bonded proceeds through the financial system, ending in payments to the Indemnitors and family and the lender, First Midwest Bank of Poplar Bluff (the “Bank”).
The Indemnitors and Harding filed a Chapter 7 Bankruptcy. During a hearing in the bankruptcy proceedings, the Indemnitors testified that they engaged in cashier’s check transactions to prevent the funds from being garnished or seized by creditors. Over the course of six months the Bank issued over one hundred cashier’s checks totaling $2,871,957 to the Indemnitors. Hanover alleged that the Bank knowingly received and benefited from the transfer of bonded proceeds.
In Count I of the First Amended Complaint (“Complaint”), Hanover asserted a fraudulent transfer claim against the Bank under Missouri’s Fraudulent Transfers Act. Hanover sought to void and attach payments received by the Bank that Harding allegedly made with the intent to hinder, delay and defraud its creditors, including Hanover. In Count III, Hanover alleged a civil conspiracy to commit tortious act claim against the Bank. The Bank moved to dismiss Hanover’s claims against it.
Under the Missouri Uniform Fraudulent Transfer Act (“MUFTA”) (§§ 428.005 to 428.059) “A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) With actual intent to hinder, delay, or defraud any creditor of the debtor….” § 428.024.1. Under MUFTA, Courts will look to a number of “badges of fraud” to infer intent to defraud from the factual circumstances. Birkenmeier v. Keller Biomedical, LLC, 312 S.W.3d 380, 389 (Mo. Ct. App. 2010). Generally, “[f]or a transfer to be found fraudulent, several indicia of fraud must be shown. More than one badge of fraud must be present.” Id.
Hanover argued that Harding had contracts with various government entities and that the bonded proceeds represented accounts receivable owed to and collected by Harding for work performed on the bonded projects. These receivables were an “asset” and constituted “property” within the meaning of the MUFTA. Under Missouri law, a creditor is a person who has a claim, defined as “a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Mo. Rev. Stat. § 428.009(3)-(4). A “debtor” is “a person who is liable on a claim.” Mo. Rev. Stat. § 428.009(6). Further, a “transfer” is defined by the statute broadly as “every mode … of disposing of or parting with an asset or an interest in an asset …” Id. § 428.009(12). Finally, an “asset” is defined as “property of a debtor.” Id. § 428.009(2).
The Court noted that:
A fraudulent conveyance is … a transaction by means of which the owner of real or personal property has sought to place the land or goods beyond the reach of his creditors, or which operates to the prejudice of their legal or equitable rights. To recover on a fraudulent conveyance claim, a plaintiff-creditor must first show that the transferor actually owned the property that it allegedly fraudulently transferred. Moreover, the plaintiff-creditor must show that it was prejudiced by a transfer of assets. Prejudice requires the creditor to show that [it] would have received something which has become lost to [it] by reason of the conveyance.
Grand Laboratories, Inc. v. Midcon Labs of Iowa, 32 F.3d 1277, 1281-82 (8th Cir. 1994).
In this case, the Court walked through the analysis: Harding received revenue for work performed on the bonded projects that was to be used for the payment of subcontractors and suppliers pursuant to the bonded contracts. These receivables were obtained lawfully by Harding and constituted an asset. When Harding failed to pay its obligations under the bonded contracts and Hanover provided financial assistance to Harding, Hanover became a creditor. Hanover alleged that the assets were fraudulently transferred to the Bank, and that the Bank benefitted financially from the transfers when the Indemnitors paid down their line of credit using those assets. Hanover was defrauded by the transfers to the Bank. The Court noted the broad definition of transfer under the statute which included the conveyance of any asset or any interest in an asset. “Fraudulent conveyance doctrine … is a flexible principle that looks to substance, rather than form, and protects creditors from any transactions the debtor engages in that have the effect of impairing their rights.” Boyer v. Crown Stock Distribution, Inc., 587 F.3d 787, 793 (7th Cir. 2009). Thus, the Court denied the Bank’s motion to dismiss the fraudulent conveyance count.
On the other hand, the Court denied Hanover’s conspiracy count because applicable law required that at least two co-conspirators must be parties to the action and only one party had been sued.
Fraudulent conveyance can be difficult to prove because of the intent requirement, but when the facts are present and the “badges of fraud” exist, it can be a viable cause of action. Over 100 cashier’s check issued in a six month period should have been a red flag to any bank.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (firstname.lastname@example.org) or any member of the Surety and Fidelity Practice Group.
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