M. CASEY RODGERS, District Judge.
Plaintiff John E. Venn, Jr. ("Trustee") filed this action to recover allegedly preferential and fraudulent transfers pursuant to 11 U.S.C. §§ 547 & 548, as an adversary proceeding, John E. Venn, Jr. v. Marion D. Grizzle, Adv. Proc. No. 16-03020-KKS (Bankr. N.D. Fla.), within the Chapter 7 bankruptcy proceeding titled In re Charlie M. Hamrick, Case No. 15-31137-KKS (Bankr. N.D. Fla.). The reference was withdrawn by stipulation of the parties, and now pending is the Trustee's Motion for Summary Judgment on Counts I and IV of the Second Amended Complaint. ECF No. 22. In Count I, the Trustee seeks to avoid an alleged preferential transfer to Defendant Marion D. Grizzle in the amount of $1,000,000, pursuant to 11 U.S.C. § 547(b), and in Count IV, the Trustee seeks to recover the funds, if the transfer is avoided, from any immediate or mediate transferee of Grizzle. Having fully reviewed the record and the parties' arguments, the Court finds that the motion is due to be granted.
In November 2015, three creditors of Charlie M. Hamrick ("Debtor")— namely, James Evans Rice, Jr., Scott P. Lowry, and Austin Laverne Enfinger—filed an involuntary Chapter 7 petition against Hamrick to adjudicate him bankrupt. During the bankruptcy proceedings, the Trustee filed several adversary proceedings, including the present action against Grizzle, to avoid preferential transfers that resulted from the Debtor's conduct, which allegedly amounted to a Ponzi scheme.
In addition to filing actions to avoid preferential transfers to certain investors, the Trustee filed an adversary proceeding against H&H and the Debtor, as President, seeking a declaration that H&H was the alter ego of the Debtor, thus allowing the Trustee to consolidate H&H's assets with the Debtor's property to be used for the benefit of all creditors. See Venn, Jr. v. H&H Constr., Adv. Proc. Case No. 16-03018-KKS (N.D. Fla. Bankr.). H&H and the Debtor defaulted, and on August 2, 2016, while the Grizzle adversary proceeding was pending, the Bankruptcy Judge entered a default final judgment against the Debtor and H&H, with fact findings supporting a conclusion that H&H was the Debtor's alter ego and was used for an improper purpose. The Bankruptcy Court authorized the Trustee to consolidate the corporate assets with those of the Debtor as "property of the estate."
In this adversary proceeding against Grizzle, the Trustee seeks to avoid a transfer in the amount of $1,000,000 from H&H to Grizzle, asserting that the transfer was preferential and the money therefore constitutes property of the bankruptcy estate, which should be made available for the benefit of all creditors. The Trustee moved for summary judgment in Bankruptcy Court, arguing that the Debtor was in control of the funds so return of the payment could be considered property of the Debtor and alternatively that H&H was the Debtor's alter ego. The Bankruptcy Court denied the summary judgment motion, finding that, although the Trustee had proven the Debtor had control over the money in H&H's account, this was insufficient to deem the funds property of the Debtor because the account was owned solely by H&H. On the alternative alter ego theory, the Bankruptcy Court determined it was unclear whether the Trustee was still pursuing the theory, and in any event, the evidence in the record fell short of establishing it.
The parties stipulated to withdrawal of the reference on grounds that Grizzle had demanded a jury trial and did not consent to have the case tried in Bankruptcy Court, and the Bankruptcy Judge recommended that the motion be granted.
The undisputed facts include the following. Grizzle testified by deposition that he was introduced to the Debtor through a friend, and the Debtor offered him an opportunity to invest in the acquisition of an apartment complex in Tuscaloosa, Alabama. The Debtor showed him pictures of the complex. Grizzle said the Debtor explained the transaction would be run through H&H, his construction company, which would be the purchasing agent if he chose to invest. The Debtor told him that H&H had a relationship with several banks (Chase, Bank of America, and Wells Fargo), which gave it the first opportunity to proceed on short sales. Grizzle said the Debtor told him that he already had a buyer lined up, an investment group in California, so the transactions would occur on the same day. The Debtor explained that they would acquire the apartment complex through H&H for $1,350,000, and the California group would purchase it for $2,150,000. The Debtor presented Grizzle with contracts to sign, showing the seller as Chase Home Finance RIO Division and showing H&H as the seller for the resale, as agent for Debtor and Grizzle. Grizzle partially funded the acquisition with an investment of $1,000,000, and understood that in return, he would receive $1,750,000 when the transaction closed. The Debtor assured Grizzle that his $1,000,000 would be placed in escrow and only disbursed at the closing. Grizzle never authorized its use for any other purpose.
Grizzle signed the contracts and paid the money by two separate $500,000 transfers on April 8 and 9, 2015. The closing was to be in May. On April 28, 2015, the Debtor transferred $20,000 to Grizzle from H&H's Wells Fargo Account,
Bank records show that on April 7, 2015—the day before Grizzle transferred his first $500,000 to H&H—the Wells Fargo Account had a balance of only $3,649.85. Immediately after receiving Grizzle's money, the Debtor—with sole signatory authority over the Wells Fargo Account—transferred hundreds of thousands of dollars to various third parties who were not affiliated with the purported bank, Chase Home Finance, or the transaction involving Grizzle. The Trustee presented evidence showing that some of the investors were repaid with funds directly traceable to Grizzle's $1,000,000 payment. See ECF No. 22-10 (investor summary). On April 10, 2015—the day after Grizzle transferred his second $500,000 installment to the H&H Wells Fargo Account—the Wells Fargo Account balance was $79,104.66, due to the Debtror's unauthorized transfers of money to various third parties. In addition, the record shows transactions that raise a reasonable inference that funds from the H&H account were transferred to the Debtor's personal use, with transactions for ATM cash withdrawals, transfers to personal accounts, and transactions with Publix, Best Buy, Google Play, Troy University, restaurants, etc.
The Trustee presented undisputed evidence that the Debtor persuaded other investors to participate in the phony real estate scheme as well, using similar misrepresentations, i.e., that money invested and transferred to accounts in the name of H&H would be used to acquire real estate and would generate a profitable return. The record reflects that during the years 2013-2015, leading up to the involuntary bankruptcy, the Debtor fraudulently induced over a dozen different individuals to collectively transfer millions of dollars to accounts that the Debtor maintained in the name of H&H, which he used to pay some investors and also for his personal benefit. Bank records and other documents are voluminous but are summarized by the Trustee. The Court will not recite the facts of the entire scheme but will incorporate by reference the investor summary, ECF No. 22-10, which establishes the undisputed details of the scheme.
At issue is whether H&H, a Florida corporation, is the alter ego of the Debtor. H&H's Articles of Incorporation identify the Debtor as the sole incorporator, officer, and registered agent and lists the Debtor's residence as H&H's principal place of business and corporate mailing address. H&H filed annual reports each year, the Debtor opened bank accounts in its name, and the Debtor and H&H were issued a general contractor's license. In July 2014, the Debtor applied to register H&H Construction, Inc. as a fictitious entity with the Florida Secretary of State, designating the Debtor and H&H as the owners. However, the company kept no formal corporate business records and did not pay the Debtor a regular salary. The Debtor represented in his sworn bankruptcy schedules that he operated H&H as an individual and sole proprietor, not as a separate legal entity. See Bankr. Proc. No. 15-31137, 224, at 4 (Bankr. N.D. Fla.) (Chapter 7 Petition). The Trustee issued a comprehensive document production subpoena to H&H, seeking a host of documents related to its "General Contractor" business and observance of corporate formalities, including building permits, financial records pertaining to construction jobs performed, tax returns, original share certificates, and minutes from any meeting of H&H directors/shareholders. H&H responded to the H&H Production Subpoena stating that it was not in possession of any responsive documents.
From April 2014 through April 2016, H&H had one salaried employee, the Debtor's son-in-law, William Bagwell. Bagwell worked for H&H as a construction foreman and earned $59,800 annually and received W-2s. Bagwell testified by deposition that he applied for the position after his discharge from military service (but had no copy of the application or an employment contract), the Debtor was his boss, there were no other employees, and he reported to work each morning at the Debtor's house for assignments, and from there, he would do whatever the Debtor needed him to do at job sites all around Pensacola, Florida, and Cantonment, Florida. Bagwell testified that he left this job in April 2016 because he did not like the work of residential remodeling, "framing, drywall, electrical, everything." ECF No. 23-4, at 17. Bagwell later explained that the work was actually performed by subcontractors, stating "everything was subbed out." ECF No. 23-4, at 39. Bagwell could not recall the names of any subcontractors or individuals who worked for H&H or any construction sites in particular. Bagwell remembered only one H&H project with any detail—building a porch for someone named Boyd in 2016. The record includes three building permits issued for H&H projects in 2011, one permit in 2012, two permits in 2014, and one in 2015.
Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving party bears the burden of establishing on the record that there is no genuine dispute of fact and that the plaintiff has failed to establish an element essential of the claim. See Allen v. Bd. of Pub. Educ., 495 F.3d 1306, 1313 (11th Cir. 2007); see also Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). If this burden is satisfied, then the nonmoving party must go beyond the pleadings and "designate specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 324. The Court views all evidence in the light most favorable to the party opposing the motion and draws all reasonable inferences in favor of the non-movant "to the extent supportable by the record." Garczynski v. Bradshaw, 573 F.3d 1158, 1165 (11th Cir. 2009) (quoting Scott v. Harris, 550 U.S. 372, 381 n.8 (2007)). Moreover, "credibility determinations, the weighing of evidence, and the drawing of inferences from the facts" are matters left to the jury. Graham v. State Farm Mut. Ins. Co., 193 F.3d 1274, 1282 (11th Cir. 1999). The non-moving party must demonstrate more than the existence of "some metaphysical doubt" regarding the material facts, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986), and "the mere existence of a scintilla of evidence" or conclusory allegations are insufficient to create a genuine issue of fact, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). Summary judgment is proper if "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Matsushita Elec., 475 U.S. at 587.
A bankruptcy trustee "may avoid any transfer of an interest of the debtor in property" (1) to or for the benefit of a creditor; (2) on account of an antecedent debt owed by the debtor; (3) made while the debtor was solvent; and (4) made within 90 days before the date of the filing of the petition; and (5) the transfer enabled the creditor to receive more than it would have pursuant to a chapter 7 bankruptcy. 11 U.S.C. § 547(b). In the prior summary judgment proceedings before the Bankruptcy Judge, it was determined that the elements listed in subsections (1) through (5) had been proven, and thus they are not at issue here. See ECF No. 22-54 at 5-6; Adv. Proc. No. 16-03020-KKS, ECF No. 142, at 4-5 ("Grizzle does not contest that he received the $1 million check from H&H within 90 days pre-petition" and it is undisputed that Grizzle "was a `creditor' of the Debtor with a claim as of the date of the petition"); Adv. Proc. No. 16-03020-KKS, ECF No. 156, at 2 ("Trustee has sustained his burden to prove that the subject transfer enabled the Defendant Grizzle to receive more than he would in a hypothetical Chapter 7 liquidation had the transfer never been made as contemplated by section 547(b)(5)"). This is the law of the case but also remains true on the undisputed facts before this Court. Therefore, the only issue to be decided is whether H&H is the Debtor's alter ego, such that its bank accounts constitute "an interest of the debtor in property." § 547(b).
The Bankruptcy Code does not define property rights; instead, "[p]roperty interests are created and defined by state law." Butner v. United States, 440 U.S. 48, 55 (1979); see also Title Max v. Wilber, 876 F.3d 1302, 1310 (11th Cir. 2017) (while federal law governs whether a debtor's property interest is property of the estate, state law determines the nature and existence of the debtor's property right or interest). Under Florida law, "[i]t is black-letter law that a corporation is a `separate entity, a legal being having an existence separate and distinct from that of its owners.'" Lort v. Ferguson Enters. (In re Lort), 347 B.R. 909, 910 (M.D. Fla. 2006) (quoting Krivo Indus. Supply Co. v. Nat'l Distillers & Chem. Corp., 483 F.2d 1098, 1102 (5th Cir. 1973
Although the concept of alter ego remains flexible and equitable in nature, see In re Checiek, 492 B.R. 918, 920-21 (Bankr. M.D. Fla. 2013), the party seeking to overcome a corporation's separate existence and pierce the corporate veil faces "a very heavy burden," Hillsbury Holdings Corp. v. The Celotex Corp. (In re Hillsborough Holdings Corp.), 166 B.R. 461, 468 (M.D. Fla. 1994). Courts may disregard the corporate form only in "extraordinary cases." In re Checiek, 492 B.R. at 920-21. When alter ego is proven, "a judgment debtor and an alter ego are treated as the same entity." Longo v. Associated Limousine Servs., Inc., 236 So.3d 1115, 1121 (Fla. 4th DCA 2018) (also stating in proceedings supplementary under Florida law, the statutory phrase, "any property of the judgment debtor," includes property of an alter ego).
To pierce the corporate veil and justify disregarding the separateness of the corporate form, Florida law requires proof of the following:
See Gasparini, 972 So. 2d at 1055; In re Pearlman, 462 B.R. 849, 855 (Bankr. M.D. Fla. 2012) (citing Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d 1114 (Fla.1984)). Grizzle argues that the first and second elements are inherently factual and not appropriate for determination on summary judgment. Without question, these elements are highly fact specific, but courts have determined that, "[w]hile the alter ego inquiry is `heavily fact-specific,' it may be decided on summary judgment." United States v. Peeler, No. 613cv1152-ORL-40-GJK, 2016 WL 7668485, at *4 (M.D. Fla. July 13, 2016). The Court finds this to be the extraordinary case in which each element is established by the undisputed record.
First, the record demonstrates that the Debtor dominated H&H to the extent that it lost its independent corporate existence. The Debtor was not only the sole officer and shareholder of H&H and the sole signatory on the H&H bank accounts, he considered himself a sole proprietor, as shown on his sworn bankruptcy schedule. He observed only the most basic corporate formalities necessary to keep the corporation in existence, such as filing its articles of incorporation and annual reports, filing tax returns (at least for 2013 and 2014), and opening bank accounts in H&H's name. No other formalities were observed in H&H's management, operation, and record keeping. In response to a subpoena requesting records that would show the corporate existence, such as financial books, building permits issued to the corporation, meeting minutes, documents relating to H&H's financial condition or purchase or real estate and salaries paid to employees, the corporation's response was that no such documents existed. The record reflects only 2 building permits issued to H&H in 2014 and only one in 2015, the year of Grizzle's investment. And the Debtor "took the Fifth" when questioned about anything related to the formation, management, operation, or profitability of H&H.
Grizzle argues that a question of fact exists because the bank records, the building permits issued, and the testimony of Bagwell show that H&H conducted some legitimate construction business as a general contractor. The Trustee does not deny that H&H performed some amount of legitimate work but contends that any legitimate business and income was de minimis in comparison to the Ponzi scheme that the Debtor operated using H&H. The Court agrees and finds no material dispute of fact on this issue. The building permits in evidence are few (three building permits in 2011, one permit in 2012, two permits in 2014, and one in 2015). Bagwell's testimony, even if true, adds little because of his inability to recall any details.
The Trustee also presented evidence that the Debtor conducted H&H's business and dealt with the corporation's assets as if it were his personal property, transferring or withdrawing money from the H&H accounts at his discretion and for his personal use and benefit, which, according to the Trustee, supported a "lavish lifestyle." The bank records and summaries confirm this.
Regardless of whether the Debtor's lifestyle could be considered "lavish," which is mere argument, the Trustee has shown by sufficient evidence that the legitimate income of H&H was not sufficient to support the Debtor's personal expenditures, and the account summaries reflect unexplained cash withdrawals and transfers from H&H's account to Debtor's and his ex-wife's personal accounts. The Debtor's ex-wife was not an H&H employee, and the Debtor had no formal salary from the corporation. Even assuming, in the light most favorable to the non-movant, that some of the "personal-sounding" transactions noted in bank records (such as payments to restaurants, Home Depot, or Lowe's) could be construed as legitimate business expenses, as Grizzle suggests, those expenditures still do not account for the fact that the Debtor's personal spending was well above his legitimate, non-Ponzi, income. Nor does it rebut the fact that the vast majority of the non-Ponzi transactions reflected in H&H account records consist of unexplained ATM cash withdrawals, transfers to the Debtor's personal accounts or to his ex-wife, and personal expenses such as home loan payments and other charges reflecting personal use (such as grocery stores, Troy University, Walgreens, etc.). The bank records reflect that transfers to these personal accounts occurred when the personal account balances were low and also close in time to a deposit of money from a victim investor. As a whole, the evidence demonstrates that the Debtor treated H&H's accounts as his own with no regard for the corporation's separate existence. Thus, the Court finds no material question of fact on alter ego.
Second, the Debtor used H&H for the fraudulent and improper purpose of his Ponzi scheme. The evidence of this is not in dispute. The record, including Grizzle's testimony, shows that the Debtor enticed several individuals to transfer money to the H&H bank accounts based on the Debtor's misrepresentations that the funds would be held in escrow and/or used exclusively for real estate investment in return for profit. The undisputed evidence establishes that H&H played an integral role in the Debtor's fraudulent scheme—acting as the "agent" for the Debtor and the particular investor in the particular "buy-and-sell" transaction, and also purportedly serving as the escrow agent. Without exception, the Debtor fabricated these transactions and did not use the investor funds as promised. In sum, the Debtor deliberately used H&H's accounts and its name on fraudulent real estate contracts and escrow agent for the purpose of completing the fraudulent transactions. No doubt, the corporate name leant an air of legitimacy to the scheme as he pitched it to investors. While alter ego and improper purpose ordinarily present questions for the jury, the record of the Ponzi scheme and the Debtor's indiscriminate use of H&H to accomplish it is undisputed in this case.
Finally, the Court agrees with the Trustee that the Debtor caused injury, the third element necessary to pierce the corporate veil under Florida law. See Gasparini, 972 So. 2d at 1055. The transfer of funds to Grizzle using money from the fraud perpetrated on investors left the Trustee with less property in the bankruptcy estate from which to ameliorate the losses to all other creditors. The Trustee's statutory power to avoid a preferential transfer depends in part on its ability to show that the transfer enabled one creditor to receive more than it otherwise would have under bankruptcy, see 11 U.S.C. § 547(b)(5) (an element already established in this case), which necessarily results in injury to all other creditors who will receive less from the estate. See generally In re Ortega T., 562 B.R. 538, 542 (Bankr. S.D. Fla. 2016) (noting that "the focus of veil piercing . . . is the injury to creditors" based on "the abuse of the corporate structure" and that a trustee has authority to bring an alter ego claim). Here, the Debtor's pre-petition transfer to Grizzle took money invested by other victims and decreased the property that would otherwise have been available to the bankruptcy estate by paying it to Grizzle. Thus, the preferential transfer resulted in harm to all other creditors.
Grizzle further argues two affirmative defenses, that is, that the Trustee lacks standing to bring an alter ego claim (Fifth Affirmative Defense) and that questions of fact exist as to the application of the doctrine of in pari delicto (Fourth Affirmative Defense).
Similarly without merit is Grizzle's argument that the in pari delicto defense applies to a preference action, because, again, the Trustee does not bring a preference action as the Debtor's successor in interest. Although "the equitable defense of in pari delicto is available against any claim presented by the estate as a result of the estate obtaining rights of the debtor under section 541[,] . . . the in pari delicto defense may not be raised in response to an action brought by the estate representative under the provisions of the Bankruptcy Code itself, including fraudulent transfer and preference actions." In re D.I.T., Inc., 575 B.R. 534, 536 (Bankr. S.D. Fla. 2017); see also In re Int'l Mgmt. Assocs., LLC, No. 06-62966-PWB, 2016 WL 552491, at *14 (Bankr. N.D. Ga. Feb. 10, 2016) ("[T]he in pari delicto defense cannot be used to bar a trustee's fraudulent transfer and preference actions under 11 U.S.C. §§ 544, 547, and 548."); In re Fin. Res. Mortg., Inc., 454 B.R. 6, 24 (D.N.H. 2011) (holding the defense of in pari delicto not applicable in avoidance actions); Kipperman v. Onex Corp., 411 B.R. 805, 882 (N.D. Ga. 2009) ("[s]ince the trustee's claims are for the benefit of the creditors, the fraud of the bankrupt does not require them to be forfeited" (quoting In re Davis, 785 F.2d 926 (11th Cir.1986)).
The Court concludes that on the undisputed record in this case the alter ego theory has been proved by the Trustee, which justifies piercing the corporate veil. Therefore, the Debtor and H&H are considered one in the same, and H&H's account is properly considered the Debtor's property. The Trustee is thereby allowed to avoid the $1,000,000 payment to Grizzle from H&H as a preferential transfer of an "interest of the debtor in property" under § 547(b). And having established liability on Count I, the Trustee is also entitled to judgment on Count IV in the event Grizzle has transferred the property to another.
Accordingly, the Plaintiff's Motion for Summary Judgment on Counts I and IV, ECF No. 22, is
