CHARLES R. NORGLE, District Judge.
After a long period of successfully developing a series of vertically-integrated companies in the direct marketing industry in Illinois and various companies in India, Pethinaidu Veluchamy ("Mr. Veluchamy")—aided by his wife, Parameswari ("Mrs. Veluchamy") and his children Arun and Anu—set his acquisitional sights on a bank. Then his financial troubles began. When state and federal banking regulators investigated the solvency of his bank, Mr. and Mrs. Veluchamy (collectively, "the senior Veluchamys") personally guaranteed two loans that eventually totaled approximately $43 million. They subsequently defaulted on both loans. After the creditor-bank was awarded a judgment for the deficiency and began citation proceedings, the senior Veluchamys petitioned for bankruptcy. It was later revealed that the senior Veluchamys had transferred virtually all of their assets to their children via a series of fabricated transfer forms and indemnity agreements, and the bank (now acting as estate representative) brought an adversary complaint against Arun, Anu, and the senior Veluchamys. After the bankruptcy court found that the Veluchamys conspired to defraud their creditors and awarded a judgment to the bank for over $57 million plus stock and jewelry, Arun and Anu, and the bank filed cross-appeals. For the following reasons, the decision of the bankruptcy court is affirmed in part, reversed in part, and remanded to the bankruptcy court to enter an amended judgment consistent with this opinion.
After coming to the United States from India in the 1970s, the senior Veluchamys amassed a small fortune in the direct marketing industry via the operations of fourteen interconnected entities: Fulfillment Xcellence, Inc; Creative Automation Company; Versatile Card Technology, Inc.; Qualtec, Inc.; Global Card Services, Inc.; Unique Data Services, Inc.; Unique Embossing Services, Inc.; Automated Presort, Inc. VMark, Inc. ("VMark," a holding company that owned the first seven companies); Unique Mailing Services, Inc.; Jayavilas Logistics; Veluchamy DISC
After the Security Bank acquisition, in 1998 the senior Veluchamys purchased First Mutual Bancorp of Illinois, Inc. ("First Mutual"). In 2004, the Veluchamys merged Security Bank into First Mutual. Shortly after that, however, the Veluchamys began to run into trouble. First Mutual began investing heavily in commercial real estate and acquisition, development, and construction loans. To fuel this growth, the bank "depended upon increasingly volatile funding sources, including an extensive reliance on brokered and large time deposits, which became restricted as economic conditions deteriorated." Office of Inspector Gen., Fed. Deposit Ins. Corp., Report No. MLR-10-021, Material Loss Review of Mutual Bank, Harvey, Illinois 2 (Feb. 2010) [hereinafter "OIG Report"],
Beginning in 2007, First Mutual engaged in several bad loan transactions, writing off tens of millions of dollars in uncollectible debt that had been used to secure commercial construction loans and other real estate transactions. Nevertheless, First Mutual continued to leverage itself for its lending activities, taking out another $10 million loan from BoA in February 2008. By June 2008, First Mutual's edifice — papered over with easy credit — showed signs of crumbling, indicated by the increasing percentage of its non-current loans.
At this point, the Federal Deposit Insurance Corporation ("FDIC") and the Illinois Department of Financial and Professional Regulation ("IDFPR"), which had been observing First Mutual since shortly after it had acquired Security Bank, placed First Mutual under a cease and desist order "because its overall condition warranted a corrective program to stabilize the institution and effect necessary improvements." OIG Report 14. In other words, the bank had become undercapitalized. When the BoA loans became due on November 30, 2008, First Mutual defaulted. After entering into forbearance agreements, First Mutual defaulted again on June 30, 2009. When the Veluchamys could not adequately capitalize First Mutual, IDFPR closed First Mutual and named the FDIC as receiver.
On August 19, 2009, BoA filed separate lawsuits against First Mutual and the Veluchamys, which were later consolidated.
On August 16, 2011, approximately one day before the hearing on the status of the Veluchamys' asset disposition took place, the Veluchamys petitioned for bankruptcy. While the senior Veluchamys listed assets on their financial statement of over $500 million as of December 31, 2007, their bankruptcy petition listed a negative net worth of over $50 million. BoA filed an adversary complaint against the senior Veluchamys, Arun, Anu, and various other Veluchamy family members and friends. After a weeklong bench trial, the bankruptcy court found that Arun and Anu had engaged in a pervasive conspiracy with their parents, who had fraudulently transferred over $57 million in cash and property, plus stock and jewelry to their children and other entities. Arun and Anu, and BoA have cross-appealed certain aspects of the bankruptcy court's decision; the facts specific to the appeal are described below.
Arun and Anu contend that the bankruptcy court erred in its findings and conclusions relating to the disposition of the VMark stock (Count III); the real estate located in Downers Grove, Illinois and Chennai, India (Counts VII and XII, respectively); and the disposition of stock in Appu Hotels Ltd. ("Appu") (Count XXIII). BoA, on the other hand, challenges only the court's finding relating to the amount of money ascribed to the Veluchamys in their purchase of Appu stock.
As of July 30, 2009, VMark had issued one million voting shares to its stockholders. 700,002 of those shares were held by Mrs. Veluchamy;
On August 19, 2009—the same day that BoA filed its litigation—VMark's board authorized the issuance of three million new shares of voting stock and thirty-eight million new shares of non-voting stock. The next day, VMark sold one million of these newly-created voting shares to Arun and Anu, 500,000 each, for a total of $630,000.00 ($315,000.00 each). After this transfer, Mrs. Veluchamy owned 66 2/3% (a loss of 3 1/3%), Arun and Anu each owned 16 2/3% (a gain of 1 2/3%), with the shares allocated according to this table:
Less than two weeks later, on September 8, 2009, VMark sold an additional 1,540,000 voting shares to Arun and Anu (770,000 each) for $939,400.00 ($469,700.00 each), and 6,384,610 non-voting shares to Arun and Anu (3,192,300 each) for $3,830,760.00 ($1,915,380.00 each). After this sale, Mrs. Veluchamy owned 48.4% of VMark (a cumulative loss of 21.6%), and Arun and Anu each owned 27.8% of VMark (a cumulative gain of 10.8% each), with the shares allocated according to this table:
In its decision, the bankruptcy court found that VMark was worth $57,767,275.00, and that the "VMark stock was sold to Arun and Anu with the intent to hinder, delay, or defraud creditors."
After finding that $57,767,275.00 was a fair value, the court evaluated the August 20 and September 8 transactions separately. For the August transaction, the court found that each 500,000 share issuance represented 2.381% of the total outstanding shares (500,000 / 21,000,000), and accordingly found that each transfer was worth $1,375,438 (2.381% of $57,767,275). For the September transaction, the court combined the voting and non-voting shares, and found that each 3,962,300 share issuance represented 13.699% of the total outstanding shares (3,192,300/28,924,600), and accordingly found that each transfer was worth $7,913,539 (13.699% of $57,767,275). In sum, the bankruptcy court found Arun and Anu jointly and severally liable for $18,577,954 ($9,288,977 each).
Count VII of BoA's complaint concerns the disposition of three properties located in Downers Grove, Illinois: 5300 Katrine, 1400 Centre Circle, and 5200-5220 Thatcher (the "Downers Grove Properties"). Prior to October 2009, all three properties were held in various land trusts; the senior Veluchamys were each 50% beneficiaries of the trusts.
On October 7, 2009, the senior Veluchamys transferred approximately $2.8 million from their account at the State Bank of India in Chicago, Illinois, to Mrs. Veluchamy's account held at Canara Bank in India. On the same day, Arun and Anu formed "5300 Katrine LLC."
On October 8, 2009, Mrs. Veluchamy transferred $1.36 million from her Canara bank account into both Arun's and Anu's accounts at Canara, for a total of $2.72 million transferred out of her account. Also on this day, Mr. Veluchamy transferred $3,999,890 into an account at E*Trade Financial Corporation ("E*Trade") that was jointly owned by Arun and Anu.
On October 9, 2009, Arun and Anu transferred $2.8 million ($1.4 million each) from their accounts at Canara Bank to their joint account at E*Trade, adding to the $4 million that Mr. Veluchamy had transferred the previous day. Subsequently, on or around October 20, 2009, Arun and Anu, acting through 5300 Katrine LLC, bought the property located at 5300 Katrine Avenue, Downers Grove, Illinois for approximately $4.1 million. To fund the transaction, Arun and Anu transferred $986,000 ($493,000 each) in cash out of their E*Trade account and into their respective checking accounts. They also obtained a loan for $3.1 million secured by a mortgage on the property from Burr Ridge Bank and Trust. The senior Veluchamys used the sale proceeds to release the mortgage that had been encumbering the property; the payoff amount was $3,070,762.89. They used the remainder (the leftover equity) to pay off assorted debt incurred by their other enterprises.
On October 23, 2009, Arun and Anu went on to form two additional real estate LLCs: 1400 Centre Circle LLC and 5200 Thatcher LLC. On December 29, 2009, Arun and Anu, acting through 1400 Centre Circle LLC, bought the property located at 1400 Centre Circle, Downers Grove, Illinois from the senior Veluchamys for $3,350,000. Similar to the Katrine transaction described above, Arun and Anu contributed $875,000 of the purchase price, and obtained a mortgage loan from Inland Bank & Trust for $2,500,000 to finance the balance of the purchase price. The senior Veluchamys paid off the $1,088,394.57 loan that had been encumbering the property and used the remaining equity to pay off debts incurred by their other businesses.
On or about March 3, 2010, Arun and Anu, acting through 5200 Thatcher LLC, bought the property located at 5200-5220 Thatcher Road from the senior Veluchamys for $3,830,000. Arun and Anu jointly contributed $1,052,000 of the purchase price, and obtained a loan from the Northern Trust Company for $2,681,000. As with the other two transactions, the senior Veluchamys paid off the debt that had been encumbering the property in the amount of $2,085,941.71 and used the remaining equity to pay off other incurred debts in connection with the Veluchamys' business activities.
Across the three properties, Arun and Anu contributed approximately $2.9 million toward the purchase of the properties. Ultimately, the bankruptcy court determined that Arun and Anu had paid more than the fair market value of the properties. It found that 5300 Katrine was worth $3,300,000; 1400 Centre Circle was worth $3,200,000; and 5200-5220 Thatcher was worth $2,800,000, for a total of $9,300,000. To determine the amount subject to avoidance by the trustee (i.e. the amount the trustee could recover from Arun and Anu), the bankruptcy judge subtracted the paid off mortgages (totaling $6,245,099.17) from the value of the property, and entered judgment against Arun and Anu, jointly and severally in the amount of $3,054,900.83, or $1,527,450.42 each.
One of the items on the senior Veluchamys' personal financial statement as of December 31, 2007 reflected a 100% ownership of "Two Houses, Madras [now Chennai]," which were valued at $15 million.
Colliers used two fundamental methods to calculate the properties' value: the comparable sales approach and the income approach.
As of December 31, 2007, the senior Veluchamys owned a large quantity of stock (approximately 10,569,473 shares) in Appu Hotels. On or about February 28, 2010, the senior Veluchamys transferred a total of 4,275,777 shares in Appu to Arun and Anu (the "February 2010 Transfers"). The bankruptcy court eventually found that these transfers were fraudulent and awarded a joint and several money judgment in the amount of $3,499,593.
Less than six months later, on August 2, 2010, the senior Veluchamys deposited Rs. 17 million and Rs. 14.6 million in Arun's and Anu's accounts, respectively, which were held at Canara Bank in India. That same day, both Arun and Anu transferred nearly the entire amounts (Rs. 16,880,130 and Rs. 14,529.330) to Appu. Also on August 2, 2010, Mrs. Veluchamy transferred Rs. 14,491,180 (approximately $310,000) to Appu.
Subsequently, on November 24, 2010, Appu released the results of a stock issuance it had conducted. Appu issued the shares for 30 rupees each. Arun received 1,787,524 shares with a total value of Rs. 53,625,720. Anu received 1,709,164 shares with a total value of Rs. 51,274,920. Mrs. Veluchamy was not listed as a subscriber. Noting an imbalance in the amount of shares issued to Arun and Anu when compared to the amount of money they deposited with Appu, the bankruptcy court found that Mrs. Veluchamy had transferred cash to Appu in order for Appu to issue an equivalent amount in shares to Arun and Appu. Accordingly, Arun and Anu were found jointly and severally liable to the estate in the amount of $310,000. While the bankruptcy court noted an imbalance, it did not trace the origin of an extra Rs. 59 million (approximately $1,262,147) used to purchase Appu shares on behalf of Arun and Anu.
This Court has jurisdiction to review the decision of the bankruptcy court under 28 U.S.C. § 158(a)(1). When reviewing the bankruptcy court's decision, the Court reviews all conclusions of law de novo, and reviews all findings of fact for clear error.
Arun and Anu's first five issues on appeal (they raise eleven total) concern the bankruptcy court's findings and conclusions regarding the disposition of VMark stock. Their first set of issues argues that VMark's internal dilution of its own corporate stock cannot, as a matter of law, be an indirect transfer of stock from the senior Veluchamys to their children. Their second set of issues argues that the bankruptcy court incorrectly valued VMark. Their third set of issues argues that the judgment entered against Arun and Anu was too high because (1) the bankruptcy court did not consider the amounts Arun and Anu paid in consideration for the stock issuance and (2) did not consider the equity ownership that Arun and Anu already possessed.
Arun and Anu first argue that the stock that VMark issued to them is not subject to avoidance because VMark, not the senior Veluchamys, transferred the shares. Arun's and Anu's argument is essentially that because the shares did not exist until VMark (not the Veluchamys) created them, they could not be a part of the senior Veluchamys' estate and thus were not subject to avoidance.
The Bankruptcy Code allows trustees to "avoid
From reviewing the parties' briefs and the Court's own research, it appears that the Seventh Circuit has not spoken directly on whether stock dilution by the majority shareholder of a closely-held corporation constitutes a fraudulent transfer. But a district court in Texas and a bankruptcy court in Colorado have found fraudulent transfer liability in such situations.
In
In addition to fraudulent conveyances in a bankruptcy context, and although not an explicit component of bankruptcy jurisprudence, cases interpreting the Uniform Fraudulent Transfer Act ("UFTA") are nonetheless instructive in interpreting the analogous provisions of the bankruptcy code because the "UFTA was an effort to harmonize state law with the Bankruptcy Code."
From what the Court can discern, there is only one case discussing fraudulent transfer liability under the UFTA when a majority shareholder dilutes the stock of a closely-held corporation. In
Synthesizing the dearth of cases that interpret fraudulent conveyances in this context, the courts have consistently ignored the mere number of transferred shares (i.e. the form) in favor of determining the actual percentage of the company that the debtor caused to transfer to a third-party (the substance). These courts have also ignored the fiction that the corporation issued the shares, and have consistently viewed the corporation as the mere alter-ego of the majority shareholder in these types of fraudulent transfers.
Moreover, the cases cited by Arun and Anu are irrelevant at best, and actually appear to cut against their argument. Arun and Anu's discussion of
Arun's and Anu's reliance on
In this case, the undisputed facts show that the senior Veluchamys owned the majority of VMark. The senior Veluchamys used this position of control to cause VMark to issue enough new stock to Arun and Anu (who happened to be the only minority shareholders of the corporation) to make them the new majority shareholders, effectively removing the bulk of the corporation from the Estate's assets. The bankruptcy court correctly concluded that this was a fraudulent transfer transaction.
Arun and Anu next argue that the bankruptcy court incorrectly valued VMark. Specifically, they argue that the senior Veluchamys did not transfer a majority position because the two transactions each separately transferred a minority interest. Because, they argue, the transfers were of a minority interest, a 35% marketability discount should apply, instead of the 15% discount that the court ordered. This higher discount would then result in a lower effective valuation of VMark. Arun and Anu cite no case law in support of their argument.
"[C]ourts generally do not elevate form over substance[, and w]here an allegedly fraudulent transfer is merely one step in a general plan, the plan must be viewed as a whole with all its composite parts taken into consideration."
Arun's and Anu's argument would require the Court to reward scheming and deceptive behavior. The undisputed facts show that the senior Veluchamys conducted two transfers approximately nineteen days apart. The bankruptcy court found, and Arun and Anu do not challenge the fact, that the senior Veluchamys transferred their shares in an effort to remove VMark's ownership from the Estate, and therefore, its creditors. The apparent lack of case support by Arun and Anu only further dissuades the Court of the merits of their argument. The senior Veluchamys fraudulently transferred a controlling stake in VMark, and the valuation of the company correctly encompassed the transfer of control. The Court does not find any error, let alone clear error, in the bankruptcy court's findings on this issue.
The final argument that Arun and Anu make concerns the value of the stock transfers themselves. They argue (1) that the bankruptcy court improperly ignored the consideration they paid for their VMark shares, and (2) incorrectly valued the shares issued to Arun and Anu.
Notwithstanding the rule permitting trustees to avoid fraudulent conveyances, a transferee is entitled to a setoff for the consideration paid in connection with the conveyance, where the transferee took the interest "for value and in good faith."
Without discussing the presence of good faith, Arun and Anu argue that denying the setoff is tantamount to allowing BoA a double recovery, in violation of the single satisfaction rule. But Arun and Anu appear to misunderstand the interplay between the single satisfaction rule under § 550(d) and the inability to receive an offset from a knowing participation in a fraudulent transfer scheme under § 548(c). Section 550(d) of the Code provides that "[t]he trustee is entitled to only a single satisfaction" when recovering an avoided transfer under § 550(a). 11 U.S.C. § 550(d). This rule means that for every source of funds, the trustee may only recover the entire amount once. Section 548(c), on the other hand, does not allow funds used in a fraudulent transfer to offset the fair market value of the transfer unless the transferee made the transfer for value and in good faith.
An illustration is helpful to understand the difference. Debtor D fraudulently transfers $100 to transferee T; T is aware of the transfer's fraudulent nature and gives no consideration for the $100. T proceeds to distribute $80 to his four friends ($20 each); each one knows of the transfers' fraudulent nature and provides no consideration for the exchange. A week later, D petitions for bankruptcy protection. Pursuant to § 550(d), the eventual trustee is only entitled to recover $100, but may recover that $100 from T and his four friends. The trustee cannot recover $180 from the five.
But D also "sold" his priceless Picasso to T for $20. Under §§ 548(c) and 550(b)(1), the trustee would be entitled to avoid and recover the full value of the Picasso; T could not deduct the $20 he paid for the painting because he did not engage in the transaction "in good faith."
Arun and Anu have shown that they did indeed give value for the issued shares. But that is not why their contention fails. They cannot receive a setoff because they did not enter into the transactions "in good faith."
Last, Arun and Anu claim that the bankruptcy judge improperly calculated the value of the transferred shares from VMark. While their argument is mathematically sound, it ignores the good faith required of a fraudulent transferee that seeks to reduce an avoided transfer by the amount of an in-kind exchange.
Before the August 2009 transfer, Arun and Anu owned 30% of VMark, while the senior Veluchamys owned 70%. On August 19, 2009, VMark issued 500,000 new shares to both Arun and Anu (1,000,000 total). The effect of this transfer reduced the senior Veluchamys' interest in VMark by 3 1/3%, and correspondingly raised Arun's and Anu's interests by the same amount. The bankruptcy court, however, found the value of that transfer was 4.762% of the total value, or $2,750,876. The bankruptcy court calculated this amount from dividing the number of issued shares (1,000,000) into the total number of issued shares (21,000,000). Arun and Anu argue that the bankruptcy court should have only awarded the bank the lower 3 1/3% of the value because that was the effective interest that actually transferred from the senior Veluchamys to Arun and Anu.
While they are correct that the effect of the transfer moved 3 1/3% from the parents to the children, it glosses over the series of transactions that, when collapsed, yielded the 3 1/3% figure. Had the senior Veluchamys simply transferred 3 1/3% of their interest to Arun and Anu, they would be correct. But the corporation itself (acting on behalf of the senior Veluchamys) issued the new shares, which diluted the outstanding shares. All of VMark's shareholders passively paid for this dilution, including Arun and Anu. By accepting the newly-issued shares, Arun and Anu paid value in the form of the dilution of their stock in the amount of the difference between the issued shares as a percentage of the total outstanding shares, and the actual increase in ownership they experienced (in this case, 1.429%).
So another way of looking at this transaction reveals that not only did Arun and Anu pay cash for the newly-issued shares, but that they paid in stock as well. Because their knowing participation in their parents' fraudulent scheme disentitles them to receive a setoff for the value they paid for the shares,
The September 8, 2009 transaction is different only in numbers. On that day, VMark issued 7,924,600 shares to Arun and Anu (3,962,300 each). This transaction effectively transferred 18.265% of the interest in VMark from the senior Veluchamys to Arun and Anu. The bankruptcy court again looked only at the shares issued as a percentage of the total, ignoring the net interest transfer. The bankruptcy court found that Arun and Anu received 27.398% of VMark (7,924,600/28,924,600), and entered judgment against them in the amount of $15,827,078 ($7,913,539 each). Here too, in consideration for the newly-issued shares Arun and Anu not only paid cash, but diluted their own shares as consideration for the transfer. Because they knowingly participated in the scheme, they are not entitled to setoff. The bankruptcy court correctly determined that the value of VMark stock issued to Arun and Anu was $18,577,954.
Arun and Anu next challenge the bankruptcy court's findings and conclusions regarding the transfer of certain real estate held by the Veluchamys that is situated in Downers Grove, Illinois and Chennai, India.
Arun and Anu argue that, because they paid more than the fair market value for the Downers Grove Properties, they could not receive a benefit as a matter of law, claiming — without support—that overpayments "in the normal course [are] prima facie evidence that no benefit was received by the purchaser." Appellants' Opening Br. 34. But this argument does not address why the transfer of the Downers Grove Properties to Arun and Anu was not fraudulent. If anything, their argument appears to suggest that the properties were undervalued and that therefore the bankruptcy court's damages finding on this count was too low.
Section 550 of the Code allows the trustee to avoid any transfer intended to defraud the transferors' creditors. 11 U.S.C. § 550(a). A subsequent transferee can dodge the avoidance of the transfer if he can show that he took the property for value with good faith and lack of knowledge of the fraudulent nature.
Neither of these defenses is applicable here. The undisputed facts show that the senior Veluchamys transferred the Downers Grove Properties to Arun and Anu. While Arun and Anu paid value for the properties, the fact remains that they had full knowledge of what their parents were seeking to accomplish by transferring the properties. These facts, alone, are enough to defeat their proffered defense.
Arun and Anu also raise the issue that the bankruptcy court erred in "refus[ing] to consider all of the mortgage indebtedness that encumbered the Downers Grove Real Estate at the time of purchase by Arun and Anu." Appellants' Opening Br. 6. But Arun and Anu did not develop the argument any further in their brief. Consequently, the Court finds that Arun and Anu have waived whatever argument they may have made regarding this issue.
Arun and Anu next contend that the bankruptcy court (1) erred in ordering the payment of the Chennai Properties' fair market value instead of title to the properties and (2) incorrectly valued the Chennai Properties by finding Arun and Anu liable for the entire value of the property.
If the trustee is able to successfully avoid a fraudulent transfer of property, "the trustee may recover, for the benefit of the estate, the property transferred,
Here, Arun and Anu claim that the bankruptcy court incorrectly awarded a money judgment instead of ordering a turnover of the property because they did not receive a benefit from the transfer. Arun and Anu do not explain why they did not receive a benefit, and do not explain how the bankruptcy court abused its discretion in awarding a money judgment instead of a turnover of property. Accordingly, the Court finds that the bankruptcy court did not abuse its discretion in awarding money, instead of the properties themselves, to the Estate.
Arun and Anu next argue that BoA's valuation expert impermissibly relied on the Colliers Report when determining the value of the Chennai Properties. They argue that the Colliers Report is unreliable because it "makes several assumptions critical to their valuation which are not substantiated in fact, and result in overwhelming uncertainty as to the actual value of the Chennai [Properties]." Appellants' Opening Br. 36. Arun and Anu chose not to delve into the substance of the Colliers Report's apparent assumptions, other than to say that the Report assumed that ownership (i) "was held undisputed with clear and marketable title and without any encumbrances; and (ii) that, without any verification, the Chennai Property was in a condition suitable for redevelopment." Appellants' Opening Br. 16 (internal citations omitted). Aside from challenging the assumptions, Arun and Anu broadly claim deficiencies in the report's methodology, claiming that the appraisers "failed to: (i) ascertain the actual ownership of the Chennai Property; (ii) perform a physical inspection of the Chennai Property; or (iii) have an environmental survey or analysis performed on the Chennai Property."
Fatal to their argument is Arun's and Anu's failure to rebut the Colliers Report's assumptions. For example, Arun and Anu claim that they only own (or were transferred) 67% of the Chennai Properties. But their claim stops there; they do not explain who the mystery thirdparty owner is or provide the Court (or the bankruptcy court below) with any proof that the third-party actually owned the land. Moreover, as the bankruptcy court noted:
Both Bank of America and Arun and Anu cross-appeal the bankruptcy court's decision regarding the fraudulent transfer to Appu that led to its issuance of shares to Arun and Anu. Arun and Anu first claim that there could be no fraudulent transfer because Mrs. Veluchamy transferred the $310,000 to Appu, not themselves, while Appu (not Mrs. Veluchamy) issued the shares. According to Arun and Anu, this defeats BoA's claim for a fraudulent transfer of that $310,000.
Bank of America, on the other hand, believes that the $310,000 awarded by the bankruptcy court for Mrs. Veluchamy's role in the Appu transfers was too low. Specifically, BoA points to evidence (namely Appu's subscription report) showing that Arun and Anu actually received Rs. 104,900,640 worth of stock, Rs. 59 million (approximately $1.3 million) more than what Arun, Anu, and Mrs. Veluchamy transferred to Appu. BoA seeks a higher judgment amount consistent with the full value of the issued Appu stock. Each of the parties' arguments will be discussed in turn.
Arun and Anu argue that the bankruptcy court improperly held that Mrs. Veluchamy's $310,000 transfer to Appu was a fraudulent transfer to them because, while Mrs. Veluchamy transferred the money directly to Appu, the number of shares linked to that $310,000 went undetermined. But when asked if their parents gave them funds to purchase Appu stock, Arun and Anu asserted their privilege against self-incrimination. Because of the negative inference drawn from such an assertion,
"The trustee may recover, for the benefit of the estate, the property transferred, or if the court so orders, the value of such property, from the initial transferee of such transfer . . .; or any immediate or mediate transferee." 11 U.S.C. § 550(a)(2). While Mrs. Veluchamy originally made her transfer to Appu, Appu then transferred the value — in the form of Appu stock—to Arun and Anu. Appu is not properly characterized as a transferee because it never exercised control over the funds.
Next, Bank of America argues that the bankruptcy court did not account for the full value of the Appu stock that was issued to Arun and Anu. BoA contends that Rs. 59 million (approximately $1.3 million) was not addressed by the bankruptcy court. Further, it says, the Veluchamys were the source of the unaccounted-for Rs. 59 million; accordingly, BoA seeks an amended judgment that awards BoA the full value of the Appu stock issued to Arun and Anu.
The record shows that on August 2, 2010, Arun, Anu, and Mrs. Veluchamy each made separate transfers to Appu. Specifically, Arun transferred Rs. 16,880,130, Anu transferred Rs. 14,529,330, and Mrs. Veluchamy transferred Rs. 14,491,180. In total, the three transferred Rs. 45,900,640. But on November 24, 2010, when Appu released its subscriber list, it stated that Arun received 1,787,524 shares and Anu received 1,709,164 shares.
None of the Veluchamys provided an answer as to the source of the extra Rs. 59 million. For their part, Arun and Anu invoked the Fifth Amendment when they were asked about the source of the extra money. In their post-trial brief, Arun and Anu did not contest BoA's assertion that the entire subscription was purchased with fraudulently-transferred money. Despite her role in transferring the Estate's money to purchase Appu stock, Mrs. Veluchamy claimed that she did not know if her and her husband "provided all the money for Arun and Anu to get [the] shares." Pl. App. 360 at 401:2-5.
On appeal, Arun and Anu do not contend that the Appu subscription list is wrong, and they also cannot trace the source of the extra money used to purchase the shares. While not their burden to prove the money was not fraudulently transferred, their assertion of the privilege against self-incrimination, combined with the subscription list, permits the Court to draw the negative inference that the balance of shares that Arun and Anu did not pay for was paid for with fraudulently-transferred property.
Although the bankruptcy court found that "the amounts for which [Arun and Anu] were credited substantially exceeded the amounts that can be traced to their own deposits," the court only awarded the Estate Mrs. Veluchamy's transfer to Appu, and never made a finding regarding the disposition of the full value of the issued stock.
The judgment entered in Count XXIII is amended to $1,572,147 jointly and severally against Arun and Anu. For the foregoing reasons, the judgment of the bankruptcy court is affirmed in part and reversed in part.
IT IS SO ORDERED.