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In re Canopy Financial, Inc.

United States District Court, N.D. Illinois, Eastern Division

June 2, 2015

In re CANOPY FINANCIAL, INC., Debtor.
v.
FIFTH THIRD BANK, FIFTH THIRD INVESTMENT COMPANY, and CHARLES DRUCKER, Defendants. GUS A. PALOIAN, not individually but solely as trustee for Canopy Financial, Inc., Plaintiff, No. Bankruptcy 09-44943

MEMORANDUM OPINION AND ORDER

Andrea R. Wood United States District Judge

Plaintiff Gus Paloian, as trustee of the bankruptcy estate of Canopy Financial, Inc. (“Canopy”), has brought this lawsuit to recover funds from one of Canopy’s bankers, Fifth Third Bank (“Fifth Third”), one of its shareholders, Fifth Third Investment Company (“FTIC”), and one of its board members, Charles Drucker, (together, “Defendants”) for their alleged roles in a fraud committed against Canopy by two of its officers. The fraud involved the officers’ use of a corporate credit card for personal spending sprees. Fifth Third, the issuer of the credit card, also held Canopy’s operating accounts and took payment for the outstanding credit card balances from the company’s operating funds. In this action, Paloian seeks to recover the payments under the U.S. Bankruptcy Code and the Illinois Fraudulent Transfer Act, 740 ILCS 160/5. He also seeks damages for unjust enrichment and breach of fiduciary duty. Now before the Court is Defendants’ motion for summary judgment. (Dkt. No. 67.) For the reasons stated below, the motion is granted in part and denied in part.

BACKGROUND FACTS

Canopy was founded by Vikram Kashyap, Jeremy Blackburn, and Anthony Banas in 2004. (Kashyap Decl. ¶ 4, Defs.’ Stmt. of Undisputed Facts (“DSOF”) Ex. 7, Dkt. No. 67-2 at 94 of 299.) Canopy developed software that tracked employee health care savings accounts. (Id. ¶ 6.) Kashyap was the sole member of the company’s original Board of Directors, Chairman of the Board, and Chief Executive Officer. (Pl.’s R. 56 Resp. ¶ 8, Dkt. No. 77.) In July 2006, Kashyap elected Blackburn as the company’s Secretary and Treasurer, and Banas as its Chief Technology Officer. (Id. ¶ 12.) Both Blackburn and Banas were elected to the company’s Board of Directors at that time. (Id. ¶ 11.)

In December 2006, Canopy sold shares to FTIC, an affiliate of Fifth Third. (Id. ¶ 30.) FTIC’s ownership interest allowed it to designate a Canopy Board member, and it nominated Drucker. (Id. ¶ 31.) Although the parties dispute when Drucker actually joined the Board, there is no disagreement that, as of the FTIC stock purchase, Canopy’s Board was intended to consist of five members. (Am. and Restated Bylaws § 3.1, DSOF Ex. 4, Dkt. No. 67-2 at 27 of 299.) Another outside director, John Powers, served on Canopy’s Board during Drucker’s tenure. (Pl.’s R. 56 Resp. ¶ 34, Dkt. No. 77.)

In January 2007, Blackburn signed a credit card agreement with Fifth Third Bank. (DSOF Ex. 21, Dkt. No. 67-2 at 215 of 299.) The terms of the agreement gave Fifth Third an interest in all of “Client’s now existing and hereafter arising accounts” to secure the payment of debts under the agreement. (Terms and Conditions § 4, DSOF Ex. 22, Dkt. No. 67-2 at 217 of 299.) Canopy maintained its general operating account at Fifth Third. (Pl.’s R. 56 Resp. ¶¶ 62, 73, Dkt. No. 77.) In the signature block space designated for “Client’s Legal Name” in the credit card agreement, Blackburn printed his own name; below that space, he added his signature. (DSOF Ex. 21, Dkt. No. 67-2 at 215 of 299.) He wrote “J. Blackburn” on another “Name” line, and “President” on a line for “Title.” (Id.) Fifth Third then issued credit cards to Blackburn and Banas. There is no dispute that Blackburn and Banas used the credit cards for extravagant personal spending. The parties also agree that Fifth Third received payments from Canopy or took debits from its operating account in a total amount of $3, 257, 076.58 for card charges. (Pl.’s R. 56 Resp. ¶ 73, Dkt. No. 77.)

Canopy filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. The case was subsequently converted to a Chapter 7 proceeding and Paloian was appointed trustee of Canopy’s estate. In the action now before this Court, Paloian seeks to recover the transfers to Fifth Third and to receive damages from the bank for unjust enrichment and from Drucker and FTIC for alleged breach of fiduciary duty. The action came to this Court as a result of the grant of Defendants’ motion to withdraw the bankruptcy court reference. For their part, Defendants contend that the credit card account balances were debts properly charged to Canopy and properly paid from the company’s funds, and that these facts defeat Paloian’s claims to recover the funds and for unjust enrichment damages. Defendants also assert that Drucker breached no fiduciary duty owed to Canopy. Defendants seek summary judgment on nine of the ten claims of Paloian’s complaint.[1]

DISCUSSION

A district court must grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law. Blue v. Hartford Life & Acc. Ins. Co., 698 F.3d 587, 595 (7th Cir. 2012). All facts are construed and all reasonable inferences drawn in the light most favorable to the non-moving party. Id. But in response to a summary judgment motion, the non-moving party must show the evidence it has that would convince a trier of fact to accept its version of events; in the absence of such a showing, the non-moving party fails to establish the existence of a genuine issue of material fact. Koszola v. Bd. of Ed. of City of Chicago, 385 F.3d 1104, 1111 (7th Cir. 2004).

I. Fraudulent Transfer Claims

Five counts of Paloian’s complaint seek to recover payments or transfers to Fifth Third from Canopy as fraudulent transfers under the U.S. Bankruptcy Code, 11 U.S.C. §§ 548(a)(1)(A) and 548(a)(1)(B), and its state statutory analogue, the Illinois Fraudulent Transfer Act, 740 ILCS 160/5. Defendants’ motion first addresses Paloian’s claims in Counts 4, 5, and 6 of the complaint, which allege constructive fraudulent transfers-i.e., transfers that may be avoided by the estate without regard for the transferee’s intent in part because the debtor did not receive reasonably equivalent value in exchange for the transfers. Defendants assert that the company received value in the form of satisfaction of its credit card debt. Paloian contends in response that the debt belonged to Blackburn and Banas, that Canopy was not obliged to pay it, and that satisfaction of the debt therefore did not benefit the company. Thus, the parties dispute whether the actions of Blackburn and Banas were sufficient to obligate Canopy to pay the card debt.

In an earlier motion for partial summary judgment (Dkt. No. 50), Paloian sought a determination that Defendants had insufficient evidence to present to the jury their theory that Blackburn and Banas had actual or inherent authority to bind Canopy to the credit card agreement. The Court granted Paloian’s motion (Dkt. No. 96) and adheres to its ruling on those issues here. Now, however, Defendants raise the related issue explicitly left unresolved by Paloian’s motion and its disposition: whether Blackburn possessed the apparent authority to bind Canopy to the agreement.

Apparent authority to bind a principal exists where the principal, through words or conduct, creates a reasonable impression that the agent has been granted the authority to perform certain acts. Wells Fargo Business Credit v. Hindman, 734 F.3d 657, 668 (7th Cir. 2013) (interpreting Illinois law). When the principal is a corporation-and legally able to act only through persons-other parties may consider the actions of a corporate officer to be binding on the corporation when it is reasonable to do so. Zahl v. Krupa, 850 N.E.2d 304, 312 (Ill.App.Ct. 2006). Whether a person has apparent authority to bind a principal is a question of fact properly reserved for the factfinder unless the relationship is so clear as to be undisputed. Petrovich v. Share Health Plan of Ill., Inc., 719 N.E.2d 756, 766 (Ill. 1999); see also Orix Credit Alliance, Inc. v. Taylor Mach. Works, Inc., 125 F.3d 468, 474 (7th Cir. 1997).

The parties dispute whether Blackburn actually held the position of Canopy’s President and whether anyone at Fifth Third was told that he had that position. But apparent authority to act on behalf of a corporation may extend to officers below the rank of President. See Corn Belt Bank v. Lincoln Sav. and Loan Ass’n., 456 N.E.2d 150, 154-55 (Ill.App.Ct. 1983) (executive vice president and vice president both had apparent authority). Defendants have presented evidence that Canopy’s bylaws established the company’s Secretary as a corporate officer and that Blackburn was duly appointed to that position by its board. (DSOF Ex. 3 at 1, Dkt. No. 67-2 at 24 of 299; Ex. 4 at 13, Dkt. No. 67-2 at 27 of 299.) Defendants have also presented evidence ...


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