United States 7th Circuit Court of Appeals Reports
BOYER v. BELAVILAS, 05-2764 (7th Cir. 1-5-2007) R. DAVID
BOYER, Chapter 7 Trustee, Plaintiff-Appellee, v. DIMITRIOS
MICHAEL BELAVILAS, et al., Defendants-Appellants. No.
05-2764. United States Court of Appeals, Seventh Circuit.
Argued December 1, 2006. Decided January 5, 2007.
Appeal from the United States District Court for the
Northern District of Indiana, Fort Wayne Division. No.
1:03-CV-480 — Theresa L. Springmann, Judge.
Before EASTERBROOK, Chief Judge, and RIPPLE and MANION,
Circuit Judges.
EASTERBROOK, Chief Judge.
Dimitrios Belavilas and his wife Maria Belavilas each owned
50% of the stock in D-Man, Inc. When that firm received
about $370,000 in insurance proceeds, Dimitrios and Maria
deposited the checks into custodial accounts (under the
Uniform Transfers to Minors Act) for their two children,
Angelo and Nickolas. Maria was the custodian who controlled
these accounts. Instead of using the money for the
children’s benefit, Maria soon transferred it to Gyros
Express and Vlako, Inc., entities that Dimirtios and Maria
had formed and controlled.
Dimitrios then filed a bankruptcy petition. He claimed that
he had owned only 2% of D-Man and that the insurance
proceeds had come to only $2,000. When the Chapter 7
Trustee discovered the truth, he filed an adversary
proceeding under 11 U.S.C. § 548 to undo these
fraudulent conveyances. Dimitrios and Maria maintained,
however, that the Trustee could not recover anything,
because none of the recipients is a transferee within the
scope of 11 U.S.C. § 550(a). The children, as
minors, could not be treated as transferees, they
maintained, because minors do not control UTMA accounts.
And Maria could not be a transferee because she was the
funds’ custodian and had no legal right to the money, and
could not be directed to return the money as custodian
because the children’s accounts were empty. In other words,
Dimitrios and Maria argued that a second unlawful transfer
(the movement of money from the UTMA accounts to Gyros
Express and Vlako) prevented redress of the first unlawful
transfer (the placement of D-Man’s funds in the children’s
accounts).
Bankruptcy Judge Grant had none of this and entered a
judgment making Maria, Angelo, Nickolas, and Vlako jointly
and severally responsible for paying $183,130 to the
bankruptcy estate. (The rest of Dimitrios’s 50% share of
the insurance proceeds was to come from Dimitrios himself,
because he controlled the money in the Gyros Express
account.) District Judge Springmann affirmed. Maria,
Angelo, and Nickolas have appealed; Dimitrios, Vlako, and
Gyros Express have not. We infer that Dimitrios and Maria
have caused Vlako to re-transfer the funds to hide them
from creditors; otherwise the judgment would have been
satisfied by now, and Maria and the children would have no
remaining liability. (Dimitrios has pleaded guilty to two
counts of bankruptcy fraud and is in prison.)
Maria’s situation is straightforward. The initial transfer
was to the UTMA accounts; Maria was the custodian but not
the “transferee.” (One major difference between UTMA
custodial accounts and common-law trusts is that a trustee
acquires legal title to the assets, while title under the
UTMA vests in the beneficiary, though control remains with
an adult custodian under §§ 9 and 12, enacted
in Indiana as Ind. Code § 30-2-8.5-24 and-27.)
Section 550(a)(1) of the Bankruptcy Code allows recovery
from “the initial transferee of such transfer or the entity
for whose benefit such transfer was made”. The bankruptcy
judge did not commit a clear error in determining that
Maria is “the entity for whose benefit” the transfer to the
UTMA accounts was made. Maria demonstrated as much by
treating the funds as her own — for instead of
devoting the money exclusively to the children’s welfare,
as the UTMA requires, Maria routed most of the cash to
Vlako. The whole point of these maneuvers was to keep
Dimitrios’s share of the insurance proceeds out of his
creditors’ hands and devote it to the family’s benefit.
If Maria had removed only 50% of the balances from the UTMA
accounts, she might have been able to demonstrate that this
was her share of the insurance money. (We say “might” not
only because D-Man was the insured entity —
shareholders cannot deal with corporate funds as if they
were their own money — but also because money is
fungible. Bills did not come color-coded for “Maria’s
share” and “Dimitrios’s share.”) But she exercised dominion
over all of the money, in despite of both the creditors’
rights and those of the children under the UTMA. This was
quite enough to incur liability under the “benefit” clause
of § 550(a)(1).
Maria’s argument that the Trustee did not adopt this theory
until late in the litigation is unavailing. Pleadings need
not specify legal theories, see Bartholet v. Reishauer A.G.
(Z??rich), 953 F.2d 1073 (7th Cir. 1992), and courts award
the relief to which the prevailing party is entitled even
if the appropriate theory is not articulated until the last
minute. See Fed.R.Bankr.P. 7054(a) (incorporating
Fed.R.Civ.P. 54(c)); Chicago United Industries, Ltd. v.
Chicago, 445 F.3d 940 (7th Cir. 2006). Maria has not
identified any prejudice that the Trustee’s delay may have
caused; her appeals to the district court and this court
have enabled her to make all appropriate arguments about
the effect of the “benefit” clause in § 550(a)(1).
Making Angelo and Nickolas personally liable for the
balances that passed quickly through the UTMA accounts is
more problematic. They were “transferees” in the sense that
they (rather than Maria) were the legal owners, but they
lacked any effective control over the funds’ disposition.
Section 13 of the UTMA gives the custodian complete
authority over the funds, subject to the fiduciary duty
imposed by § 12 (a duty that Maria violated by
transferring the money to Gyros Express and Vlako). Angelo
and Nickolas rely on Bonded Financial Services, Inc. v.
European American Bank, 838 F.2d 890 (7th Cir. 1988), which
held that a person who lacks authority to control the
disposition of funds cannot be an “initial transferee” for
the purpose of § 550(a). The entity at issue in
Bonded Financial was a bank, which was legally required to
follow its client’s directions about how funds on account
should be used. The bank could not put the money to its own
purposes but had to follow orders. Angelo and Nickolas,
unlike the bank, were beneficial owners of the money in the
UTMA account, so Bonded Financial is not dispositive.
Still, the minors’ lack of control over the custodian does
make it hard to equate them with the prototypical
transferee. See also In re Baker & Getty Financial
Services, Inc., 974 F.2d 712 (6th Cir. 1992).
Once again, however, recovery of a fraudulent conveyance is
not limited to a “transferee”; it is enough if the transfer
is for a person’s benefit. Angelo and Nickolas were
— at least initially — beneficiaries of the
money transferred into the UTMA accounts. The problem is not
so much with the idea that minors can be “beneficiaries”
even though adults control the purse strings as it is with
the consequence of the bankruptcy court’s
joint-and-several-liability judgment. Debts attributable to
actual fraud cannot be discharged in bankruptcy, see 11
U.S.C. § 523(a)(2)(A), so Angelo and Nickolas may be
stuck with this obligation for life and must pay from
income they earn as adults, even though they never saw a
penny of the money from D-Man’s insurance and never had a
chance to prevent their parents’ financial chicanery. (We
say “may be stuck” rather than “would be stuck” because the
effect of § 523(a)(2)(A) on multi-party money
shuffling with intent to defraud a creditor was reserved in
McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000).)
Although no case that we have been able to find addresses
how preference recovery under § 550 relates to
minors’ custodial accounts, § 17(c) of the UTMA
addresses the problem of lifetime liability arising from
events a minor cannot control: “A minor is not personally
liable for an obligation arising from ownership of
custodial property or for a tort committed during the
custodianship unless the minor is personally at fault.” The
children’s obligation to return the fraudulent conveyance
is one “arising from ownership of custodial property”.
Unless a minor is “at fault” — and the bankruptcy
judge held that neither Angelo nor Nickolas bears any fault
— all obligations that relate to the UTMA account
must be satisfied either from the custodial assets under
§ 17(a) or by the custodian. Maria is personally
liable on account of her personal misconduct; that much was
settled above. The obligations of Angelo and Nickolas are
limited to the custodial property under § 17(a). This
means all of the custodial funds — not only what
came from Dimitrios’s 50% of D-Man but also what came from
Maria’s share. Maria’s obligation to repay what she and her
husband jointly stole from their creditors must be
satisfied before anything may be left sheltering for the
children’s benefit. So if any money is retrieved from Vlako
(or wherever it has gone from there), Maria and the
children must satisfy the judgment before they can restore
anything to the UTMA accounts.
The judgment is modified to provide that Angelo and
Nickolas are not personally liable, and that their
obligations are limited to funds in or traceable to the
custodial accounts. As so modified the judgment is
affirmed.