from the July, 2001 issue of The Title Insurance Law Newsletter
A title agency that issued escrow checks based on a forged $5 million check was permitted, through a bankruptcy fraudulent transfer action, to recover the money from the people who received the money.
Dayton Title Agency, Inc. closed a series of bridge loans totalling $4.8 million made by White Family Companies, Inc. ("WFC") and Nelson Wenrick to Invesco, LLC. Invesco was made up of Krishan Chari and Michael Karaman. The money was supposed to be used to buy and develop real estate.
When these short-term loans came due, Chari paid the lenders with checks issued on a Texas attorney trust account, which were returned NSF. When that trick did not work, Chari deposited a forged check for $5 million with Dayton Title that was issued on a non-existent bank account. He convinced Dayton Title to issue checks to WFC and Wenrick on the same day it deposited the check at its bank.
The forged check was returned a week later. By that time, Dayton Title's checks to WFC and Wenrick had cleared. Chari gave Dayton not one but two later checks for $5 million each, both of which bounced. At that point, the bank froze Dayton's account. Its account statement said that about $750,000 of other people's money had been used to back the Chari loan checks. The bank made a "provisional loan" to Dayton Title cover the balance of about $4.1 million.
Dayton and its escrow account-holding business trust then filed Chapter 11. The bankruptcy trustee filed adversary proceedings against WFC and Wenrick to recover the loan money as fraudulent transfers. The basis for the action was the Ohio Uniform Fraudulent Transfer Act.
The lenders argued that Dayton Title did not have a property interest in the escrowed funds, and therefore had no right to seek return of the money. The court agreed that, ordinarily, a title company does not own the funds in its escrow account, and is a mere conduit. It said this case was distinguished, however, "by the unfortunate fact that Chari's check was a forgery." The money given to the lenders was partly other people's money that happened to be in the escrow account at the time, and mostly a loan from the bank to the title agent. Also, Dayton Title established that it had control over the money because "Dayton Title made the critical decision to write checks to WFC and Wenrick from the trust account, without waiting for Chari's $5,000,000 deposit to clear." Further, the transfers to the lenders became liabilities of the title agency, "diminishing the amount of assets available to other creditors" of the agency. Therefore, the court concluded that Dayton Title had established that it had an interest in the money.
To prove a fraudulent transfer, Dayton Title also had to show that it did not receive "reasonably equivalent value" in exchange for the transfers of the funds. The lenders argued that the wonderful business Dayton Title got from Chari was an "indirect benefit" heavy enough to balance the $5 million debt it incurred. The court seemed amused:
While goodwill and the continuation of business relationships can be indirect benefits to a business debtor, WFC and Wenrick have not attempted to measure or quantify the economic value of Dayton Title's continued relationship with Chari. Instead, they only speculate
that the value of Dayton Title's ongoing relationship with Chari is reasonably equivalent to the $4,885,000.00 loss experienced by Dayton Title forcing it to close its doors and seek bankruptcy protection. The court finds this assertion too speculative to merit consideration. The court also had no problem finding the final element of a fraudulent transfer, that Dayton Title was left with an unreasonably small amount of remaining assets in relation to the transaction. It noted that the agent's "financial problems did not simply occur as a coincidence after the transfer to WFC and Wenrick."
The court gave the title agent a judgment equal to the transferred amounts, plus prejudgment interest.
In re Dayton Title Agency, Inc., ___ B.R. ___, 2001 WL 589453 (S.D.Ohio).
© Copyright 2001 J. Bushnell Nielsen. All rights reserved. Photocopying or reproducing of this article in any form in whole or in part is strictly prohibited without the publishers consent.
