HELEN E. BURRIS, Bankruptcy Judge.
The parties submitted, inter alia, copies of available loan documents and agreements, e-mail correspondence between Larry and a creditor of Genesis, a purchase and sale agreement for the purchase of a membership interest in Genesis, a complaint filed against Genesis in Florida, certain proofs of claims filed in Genesis' bankruptcy case, the recalculations of interest and principal owed conducted by Robert E. Faulkner, CPA ("Faulkner"), and deposition testimony from Larry, Christopher, Bruce, Michael, Faulkner, and Bryan Jeter.
Genesis, a South Carolina corporation with its principal place of business in Greenville, South Carolina, was in the business of printing books primarily regarding healthcare and religion. Larry was the Chief Executive Officer and a shareholder; Bruce was the Chief Financial Officer and a shareholder; Michael was a shareholder; and Christopher was an employee.
Prior to 2008, Genesis experienced financial difficulties and Larry, Christopher, and Michael loaned money to Genesis. Pursuant to a memorandum drafted by Bruce and dated December 31, 2007 (the "2007 Memorandum"), Genesis recognized in writing that these loans existed and they were due fifteen (15) months from that date on March 31, 2009.
In a deposition, Bruce testified that the parties held a meeting in his office to discuss the terms of the 2007 Memorandum. He testified that his understanding of the 2007 Memorandum and the parties' intent was that Larry, Christopher, and Michael would defer collecting interest during the 15-month period therein, interest would accrue during that period at the LIBOR rate, and the parties were to meet later at the end of the 15-month period to discuss the repayment of interest and the interest going forward. However, that anticipated meeting never occurred. Michael's deposition testimony indicated that he did not believe the 2007 Memorandum waived his right to collect interest.
In 2008, Genesis' printing facility was damaged by a series of fires. Genesis notified its insurer, Hartford Casualty Insurance Company ("Hartford"), of its losses and Hartford began an investigation into the origin of the fires. Hartford ultimately refused to make payments to Genesis for its losses. As a result, Genesis filed a lawsuit against Hartford in June 2008 alleging it breached the parties' insurance contract and made a bad faith denial of the losses claimed. Larry, Christopher, and Bruce were then arrested and charged with arson, but the charges were later dismissed.
While the litigation with Hartford was pending, Genesis was in need of additional operating capital and sought commercial loans, but was unable to find a lender. As a result, Larry and Christopher loaned additional money to Genesis in various amounts and at different times in an effort to sustain the business through the litigation. Some, but not all, of these loans are evidenced by promissory notes. With regard to Larry, a total of $242,978.00 subsequently loaned is evidenced by promissory notes dated April 28, 2008 through October 15, 2009.
Bruce also made loans to Genesis while the litigation with Hartford was pending. Although Bruce's loans are not evidenced by any writing or promissory notes, it is undisputed that his loans were made in April 2010 in the principal amounts of $25,000 and $12,000.
On May 20, 2010, a jury returned a verdict awarding $14,500,000.00 in favor of Genesis against Hartford. The case was appealed and settled shortly thereafter for $18,000,000.00.
Genesis received approximately $12,000,000.00 from the settlement proceeds. Disbursements from this amount included paying vendors and satisfying outstanding loans, including those owed to Defendants. On July 6, 2010, Genesis transferred a sum of $1,110,069.21 to Larry, a sum of $435,326.45 to Christopher, and a sum of $193,362.00 to Bruce. On July 13, 2010, Genesis transferred a sum of $390,010.00 to Michael.
At that time, Genesis was indebted to the following creditors whose debts were not satisfied: (1) the Internal Revenue Service ("IRS") in the amount of $21,737.46; (2) Realty Associates in the amount of $120,246.86; and (3) Barbara Levin in the amount of $863,658.41 (collectively, the "Existing Creditors").
Genesis filed a voluntary petition for Chapter 11 relief almost three years later on March 6, 2013. On June 11, 2013, the case was converted to Chapter 7 and Trustee was appointed.
The Existing Creditors filed proofs of claims in the bankruptcy case and those obligations remain unpaid. The IRS's proof of claim asserts an unsecured priority claim for unpaid taxes owed during the December 31, 2005 tax period and assessed on August 17, 2009.
Trustee employed Faulkner, an accountant, to review Genesis' books and records and Trustee conducted discovery prior to these adversary proceedings. From information available, Faulkner reconstructed and recalculated the principal and interest due on the loans from Larry and Christopher and concluded that they were overpaid. Faulkner determined that based on his calculations, Larry was overpaid $154,822.00 for principal and $136,717.00 in interest, for a total of $291,539.00, and Christopher was overpaid $45,000.00 for principal and $23,471.45 in interest, for a total of $68,471.45. Generally, Faulkner's calculations differed from the actual payments made in July 2010 because he and Trustee concluded as follows: (1) pursuant to the 2007 Memorandum, Larry and Christopher waived the payment of interest on these loans for the 15-month period set forth therein and interest for these loans was incorrectly calculated by using a rate of 7.5% compounded annually when the 2007 Memorandum did not authorize compounding interest; (2) loans evidenced by promissory notes were incorrectly computed by compounding the interest instead of calculating simple interest;
Faulkner also reconstructed and recalculated the interest due on the loans from Bruce and Michael and concluded that they were also overpaid. Faulkner determined that based on his calculations, Bruce was overpaid interest by $73,442.00, and Michael was overpaid interest by $34,090.00. Faulkner's calculations differed from the actual payments made to Bruce in July 2010 because he and Trustee concluded Bruce was repaid interest for his loans at exorbitant rates.
Based on these calculations and the information available to Trustee, he initiated the above captioned proceedings on February 27, 2015, seeking to recover some of the July 2010 transfers as alleged fraudulent transfers pursuant to 11 U.S.C. § 544(b)
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157, and Local Civ. Rule 83.IX.01 (D.S.C.). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (H) and the parties have consented to this Court's entry of a final order.
"After the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings." Fed. R. Civ. P. 12(c).
Fed. R. Civ. P. 56(a) provides "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
If the movant provides evidence sufficient to establish its right to judgment, "the non-movant must proffer countering evidence sufficient to create a genuine factual dispute." In re Proveaux, C/A No. 07-05384-JW, slip op., at 5 (Bankr. D.S.C. Mar. 31, 2008) (quoting In re Dig It, Inc., 129 B.R. 65, 66 (Bankr. D.S.C. 1991)). Rule 56 provides the following framework for the parties to support the motion for summary judgment or any challenge thereto:
Fed. R. Civ. P. 56(c)(1).
"A genuine issue of fact exists when there is sufficient evidence on which a reasonable jury could return a verdict for the non-moving party." Orgain v. City of Salisbury, Md., 305 F. App'x 90, 97 (4th Cir. 2008); see also Ross v. Commc'ns Satellite Corp., 759 F.2d 355, 364 (4th Cir. 1985) abrogated by Price Waterhouse v. Hopkins, 490 U.S. 228, 109 S.Ct. 1775 (1989) ("Genuineness means that the evidence must create fair doubt; wholly speculative assertions will not suffice."). An issue of fact is considered material if it "might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248, 106 S. Ct. at 2510. Therefore, the non-movant "must do more than simply show that there is some metaphysical doubt as to material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986) (internal footnote and citations omitted). However, "summary judgment is seldom appropriate in cases wherein particular states of mind are decisive as elements of a claim or defense. Resolution of questions of intent often depends upon the credibility of the witnesses, which can best be determined by the trier of facts after observation of the demeanor of the witnesses during direct and cross-examination." Ross, 759 F.2d at 364 (internal citations omitted); see also Swanson v. Fields, 814 F.Supp. 1007, 1010 (D. Kan. 1993), aff'd, 13 F.3d 407 (10th Cir. 1993) ("At the same time, a summary judgment motion is not the chance for a court to act as the jury and determine witness credibility, weigh the evidence, or decide upon competing inferences.").
Trustee seeks to avoid the transfers from Genesis to Defendants under the Statute of Elizabeth on the ground that they were constructively fraudulent because Defendants were substantially overpaid the principal and/or interest on their loans. Trustee asserts that any overpayment of principal and/or interest was not supported by valuable consideration.
The Statute of Elizabeth provides, in relevant part:
S.C. Code Ann. § 27-23-10(A).
"Section 544(b)(1) allows [Trustee] to `step into the shoes' of creditors and assert their rights under the Statute of Elizabeth, provided there is a `creditor with a valid unsecured claim in the bankruptcy case who could assert a claim to avoid the transfer.'" In re Hanckel, 512 B.R. 539, 546 (Bankr. D.S.C. 2014) (quoting Hovis v. Ducate (In re Ducate), 369 B.R. 251, 258 (Bankr. D.S.C. 2007)). "The trustee's power to set aside transfers is for the benefit of all creditors." Id. (citing Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3 (1931)). A transfer of cash may be within the purview of the Statute of Elizabeth. See Fabrica la Estrella S.A. de C.V. v. Banda, C/A No. 6:06-466-HMH, 2007 WL 39428 at *3 (D.S.C. Jan. 4, 2007) (voiding a cash transfer of $300,000.00 under the Statute of Elizabeth and holding that "[b]ased on the broad language and equitable nature of the Statute . . . the transfer of funds . . . is a `transfer' under the broad and plain language of section 27-23-10(A)." (internal citation omitted)); see PCS Nitrogen, Inc. v. Ross Dev. Corp., 127 F.Supp.3d 568, 592-93 (D.S.C. 2015) ("the South Carolina Supreme Court does not view the listing of various specific types of property in the statute as prohibitive." (citing Avery v. Wilson, 47 S.C. 78, 25 S.E. 286, 294 (1896) (holding that the omission from the Statute of Elizabeth as then written "of the words `goods and chattels' did not enable debtors to practice frauds as to `goods and chattels' any more than they could as to any other property."))).
A transfer made without valuable consideration is a "voluntary conveyance" or gratuitous conveyance. Royal Z Lanes, Inc. v. Collins Holding Corp., 337 S.C. 592, 594-95, 524 S.E.2d 621, 622 (1999). Under South Carolina law, a voluntary (or gratuitous) conveyance may be avoided without proving actual intent to defraud creditors. In re Hanckel, 512 B.R. 539, 549 (Bankr. D.S.C. 2014), order aff'd, appeal dismissed sub nom. In re Richardson Miles Hanckel, III, No. 2:14-CV-2898, 2015 WL 7251714 (D.S.C. Mar. 10, 2015) (citing Royal Z Lanes, Inc., 337 S.C. at 595, 524 S.E.2d at 622). Trustee does not assert that actual fraud occurred here, rather he asserts that these were voluntary transfers made without valuable consideration.
In re Derivium Capital, LLC, 380 B.R. 407, 420 (Bankr. D.S.C. 2006) (quoting J.R. Deans Co., 249 B.R. at 130). This cause of action does not require Trustee to plead and prove actual intent to defraud and the other heightened requirements for pleading fraud under Fed. R. Civ. P. 9(b).
"Valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit, accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other." Hanckel, 512 B.R. at 549 (quoting Furman Univ. v. Waller, 124 S.C. 68, 117 S.E. 356, 358 (1923)). On the other hand, "grossly inadequate consideration" has been defined as "a consideration so far short of the value of the property as to arouse a presumption in the mind that the person who takes that property takes it under some kind of secret trust." McGhee v. Wells, 57 S.C. 280, 35 S.E. 529, 531 (1900). In Royal Z Lanes, on a question certified by the Sixth Circuit Bankruptcy Appellate Panel, the South Carolina Supreme Court clarified that "grossly inadequate consideration" and "without valuable consideration" are not synonymous in the law. 337 S.C. at 595, 524 S.E.2d at 622 (quoting Jeffords v. Berry, 247 S.C. 347, 147 S.E.2d 415, 418 (1966)). "Grossly inadequate consideration does not render a conveyance voluntary; rather, the inadequacy of the consideration is treated as a `badge of fraud,' and actual intent to defraud must be proven." Hanckel, 512 B.R. at 549 (citing Royal Z Lanes, 524 S.E.2d at 622-23).
To determine whether Defendants were indeed overpaid interest, the Court must weigh the competing evidence to determine the appropriate calculation. Thereafter, the Court would need to consider the facts surrounding the transfers to determine whether any overpayment was a "voluntary" transfer under applicable law and made without any valuable consideration. The parties have different views of the evidence in the record and after a thorough search of the record and consideration of applicable law, the Court finds that genuine disputes of material fact remain. Weighing the evidence is not appropriate at the summary judgment stage and, therefore, Defendants' Motions must be denied as to any alleged overpayment of interest.
Trustee's Complaint asserts Larry and Christopher were overpaid principal on the loans to Genesis at the time of the July 2010 transfers.
However, the Court notes that Larry and Christopher contend they were not overpaid principal because they continued to loan money to Genesis after the July 2010 transfers and those loans were never repaid. Accordingly, they claim any overpayment of principal owed would be offset by their subsequent loans to Genesis. This theory offers no effective defense to any overpayment of principal. See In re Singh, 434 B.R. 298, 308 (Bankr. E.D.N.Y. 2010) (Chapter 7 trustee sought to avoid the transfer of proceeds from the sale of real property to the defendant as a preferential or fraudulent transfer pursuant to §§ 547 and 548 and the court rejected the defendant's argument that even if the transfer was avoided as a fraudulent conveyance it should be setoff by subsequent loans he made to the debtor); see also In re Acequia, Inc., 34 F.3d 800, 817 (9th Cir. 1994) (noting that "setoffs . . . do not apply to actions by the Trustee to recover fraudulent transfers"); Bustamante v. Johnson (In re McConnell), 934 F.2d 662, 667 (5th Cir. 1991) ("Section 553(a) setoffs . . . do not apply to actions by the Trustee to recover fraudulent transfers: `It would defeat the purpose of the Bankruptcy Act's provisions relating to fraudulent transfers to allow creditors to offset the value of the property thus transferred to them by the amount of their unsecured claim against the debtor.'" (quoting Mack v. Newton, 737 F.2d 1343, 1366 (5th Cir. 1984))); In re Brooke Corp., 485 B.R. 650, 664 (Bankr. D. Kan. 2013) (recognizing that "[c]ourts generally hold that a prepetition claim against the debtor may not be set off against a trustee's preferential transfer or fraudulent transfer claim" and granting chapter 7 trustee's motion to dismiss defendant's counterclaim for setoff to be applied to any funds recovered under trustee's action for fraudulent conveyance pursuant to § 544 and state law (internal citations omitted)); In re JSL Chem. Corp., 424 B.R. 573, 583 (Bankr. S.D. Fla. 2010) (finding that a creditor may not defend against a preference action by asserting a right to setoff against the preference amount because allowing this would defeat the purpose of the Code's preference provisions); In re Vaughan Co., C/A No. 10-10759, 2014 WL 1347481, at *4 (Bankr. D.N.M. Apr. 4, 2014) ("a fraudulent transfer claim cannot be offset against a general unsecured claim against the debtor"); 4 NORTON BANKR. L. & PRAC. 3d § 73:4 ("Defendants have from time to time argued that fraudulent transfer (or preference) liability should be reduced by a prepetition claim. The courts have mostly uniformly rejected that effort." (citing various cases)).
The statute of limitations to bring a claim under the Statute of Elizabeth is three (3) years. S.C. Code Ann. § 15-3-530(7). Trustee is provided two (2) years from the order of relief to bring an action under § 544. 11 U.S.C. § 546(a)(1)(A). Defendants assert each of the Existing Creditors' claims under the Statute of Elizabeth are barred by the applicable statute of limitations. Thus, there are no creditors for whom Trustee can "step in the shoes of." See Ducate, 355 B.R. at 542-43.
According to Defendants, because Levin knew about the settlement proceeds as of May 2010, had she been reasonably diligent by requesting Genesis' financial information pursuant to the Share Purchase Agreement, she would have known about the transfers to Defendants as early as when they occurred in July 2010.
Ducate, 355 B.R. at 543 (internal citations omitted). "The standard is objective and the Court must look to whether the facts and circumstances would put a person of common knowledge and experience on notice that a claim may exist." In re Wellman, C/A No. 97-80304-W, 1998 WL 2016787, at *3 (Bankr. D.S.C. June 2, 1998) (citing Burgess v. Am. Cancer Society, 386 S.E.2d 798 (S.C. App. 1989); Austin v. Conway Hosp., Inc., 356 S.E.2d 153 (S.C. App. 1987)). The facts in the record are not so clear as to support a finding on summary judgment that Levin or the other Existing Creditors discovered or should be charged with knowledge sufficient to put them on notice of any cause of action at a date early enough to bar Trustee's actions here.
Defendants further assert that Genesis' filing for bankruptcy relief did not toll the limitations period because such an action in state court would be properly brought against them individually, not Genesis. Trustee brings this action on behalf of Genesis and its creditors. 11 U.S.C. § 544(b). Applicable law requires only that "in order for the trustee to maintain a Statute of Elizabeth action there must be at least one creditor with a valid unsecured claim in the bankruptcy case." Ducate, 355 B.R. at 542-43. "As long as the applicable statute of limitation has not expired prior to the filing of the bankruptcy petition, the trustee may bring an avoidance action under the powers bestowed upon him by § 544(b) within the time constraints imposed by § 546(a) of the Bankruptcy Code." In re Ambulatory Med. & Surgical Health Care, Inc., 187 B.R. 888, 901 (Bankr. W.D. Pa. 1995) (citing In re Sverica Acquisition Corp, Inc., 179 B.R. 457, 466 (Bankr. E.D. Pa. 1995); In re Topcor, Inc., 132 B.R. 119, 123-24 (Bankr. N.D. Tex. 1991); 4 Collier on Bankruptcy (15th ed. 1995) ¶ 544.03[2] at 544-22-544-23)); see also 11 U.S.C. § 546(a)(1)(A) (providing trustee two (2) years from the order of relief to bring an action under § 544).
Genesis filed for bankruptcy relief in March 2013—approximately four months prior to the earliest time Defendants claim the statute of limitations could have expired in July 2013. Therefore, Defendants failed to show that the record supports summary judgment in their favor based on the statute of limitations.
Defendants argue Levin waived her right to initiate an action against them when she filed a lawsuit against Genesis for breach of the Share Purchase Agreement in Florida and did not also assert claims for recovery of fraudulent conveyances.
In re Workman, 373 B.R. 460, 465 (Bankr. D.S.C. 2007) (citing federal and South Carolina case law). Similarly, South Carolina law provides "[w]aiver is the voluntary and intentional relinquishment of a known right. It may be implied from circumstances indicating an intent to waive. Acts that are inconsistent with the continued assertion of a right may also give rise to a waiver." Provident Life & Accident Ins. Co. v. Driver, 317 S.C. 471, 478-79, 451 S.E.2d 924, 929 (Ct. App. 1994) (internal citations omitted). "Generally, the party claiming waiver must show that the party against whom waiver is asserted possessed, at the time, actual or constructive knowledge of his rights or of all the material facts upon which they depended." Janasik v. Fairway Oaks Villas Horizontal Prop. Regime, 307 S.C. 339, 344, 415 S.E.2d 384, 387-88 (1992). The record submitted by Defendants in support of this theory is insufficient to find waiver by Levin as a matter of law at the summary judgment stage.
In re J.R. Deans Co., Inc., 249 B.R. 121, 130 (Bankr. D.S.C. 2000) (quoting Mathis v. Burton, 319 S.C. 261, 264-65, 460 S.E.2d 406, 408 (Ct. App. 1995)).
11 U.S.C. § 553(a) (emphasis added).
