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In re Personal and Business Insurance Agency

June 26, 2003


On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Civil No. 01-cv-0092E) District Judge: Honorable Sean J. McLaughlin

Before: Becker, Chief Judge,*fn1 Scirica, Circuit Judge *fn2 and SHADUR,*fn3 District Judge.

The opinion of the court was delivered by: Becker, Circuit Judge.


Argued February 24, 2003


This appeal from an order of the District Court affirming the Bankruptcy Court's dismissal of a fraudulent conveyance claim brought against Premium Finance Specialists ("PFS") on behalf of the debtor, The Personal & Business Insurance Agency ("PBI"), by the bankruptcy trustee, James K. McNamara (the "Trustee"), poses the question whether a court may consider post-bankruptcy petition events, in this case the appointment of the Trustee, in evaluating a claim brought under § 548 of the Bankruptcy Code.

PBI was used as a pawn in an illegal scheme perpetrated by its CEO and sole owner, Emil Kesselring, who caused PBI to make payments totaling $580,000 to PFS in putative repayment for loans that Kesselring had fraudulently obtained from PFS. The Trustee now seeks to recover those funds, arguing that the payments were a fraudulent conveyance under § 548 of the Code. The District Court determined that despite the fact that Kesselring's actions were adverse to PBI's interests, under the "sole actor exception" detailed in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 359-60 (3d Cir. 2001), Kesselring's fraud must be imputed to PBI because he was its sole representative. On this basis, the District Court reasoned that PBI owed PFS a debt, that the payments made to PFS were made in partial satisfaction of that debt, and therefore that PBI received a reasonably equivalent value for these payments, meaning that the transfers to PFS were neither constructively nor actually fraudulent.

The Trustee responds that even if Kesselring's fraud was properly imputed to PBI pre-petition, it cannot be imputed to the Trustee, who is bringing this claim on behalf of innocent creditors. He asserts that we must consider his claim in light of a post-petition event, namely his appointment as Trustee in place of the "bad actor" Kesselring, in determining whether the transfers were fraudulent under § 548. The Trustee urges that when we take his appointment into account, the imputation of Kesselring's fraud to PBI would lead to an inequitable result — loss to innocent creditors. He cites persuasive caselaw which holds that the invocation of the doctrine of imputation against a trustee should not be allowed when a bad actor has been removed and the defense is serving only to bar the claims of an innocent successor.

We find nothing in the language of § 548 that prevents a court from considering post-petition events, and so we may consider PBI's claim in light of the appointment of the Trustee. Because we agree that imputing Kesselring's fraud (and his debt) to the Trustee would lead to an inequitable result, we conclude that Kesselring's fraudulent acts (and the debts he incurred) cannot be imputed to the Trustee, and therefore that the District Court erred in affirming the Bankruptcy Court's dismissal of the Trustee's fraudulent conveyance claim. We will therefore reverse the judgment of the District Court and remand the matter for further proceedings.


The Debtor, PBI, was an insurance brokerage firm in the business of obtaining coverage for trucking companies and their cargo by placing such coverage with various insurers.

Between March 1997 and November 1998, Kesselring, the sole owner and chief executive officer of PBI, took advantage of PBI's operating procedures to use the company in an illegal money-making scheme. As a standard part of its business, PBI would sometimes obtain for its clients financing for the insurance premium payments necessary to secure coverage. PFS was one of two financing companies that PBI used for this purpose. Usually, when a client requested financing, PBI would prepare an application and Kesselring would either sign the application on behalf of the client, or obtain the client's signature by delivering it a copy of the application. PBI would then send the application to PFS (or the other finance company) for approval. Upon such approval, PFS would arrange to bill the borrower. PFS would transmit the loan monies to PBI by wire transfer or check and, normally, PBI would then transfer the funds, less its commission, to the insurer.

Beginning in March 1997, Kesselring began to take advantage of this established procedure as a way to illegally obtain funds for himself. He prepared false applications for finance company loans in the name of actual PBI clients or fictitious entities, either forging the borrower's signature or signing as the borrower's agent/broker. He then submitted the applications to PFS and obtained the loan proceeds. Rather than paying for insurance coverage with these funds, however, Kesselring pocketed the money. To avoid detection, Kesselring caused PBI to make payments on the fraudulent loans using PBI funds. Kesselring made a total of $580,000 in such payments to PFS.

Kesselring's malfeasance was nonetheless uncovered and he was indicted by a grand jury for mail and wire fraud. In August 1999, PBI's Chapter 7 bankruptcy trustee, James McNamara, filed a complaint against PFS, seeking to recover the funds Kesselring had transferred to PFS pursuant to his illegal scheme. The Trustee then filed an amended complaint, alleging a claim for fraudulent conveyance under 11 U.S.C. § 548 and the Pennsylvania Uniform Fraudulent Conveyance Act, 12 Pa. C.S.A. § 5104 et seq., and a second amended complaint, which added a claim of preference. PFS filed an answer to the second amended complaint and then moved to dismiss the fraudulent conveyance count of the second amended complaint. The Bankruptcy Court granted this motion on October 24, 2000. The Trustee voluntarily dismissed the ...

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