ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE.
In this adversary proceeding, the Plaintiff Robert Holber, the chapter 7 trustee ("the Trustee"), seeks to avoid certain transfers under 11 U.S.C. § 548 and recover the value of the transferred property under 11 U.S.C. § 550 from both the initial transferee, several alleged subsequent transferees, and the debtor.
The Trustee contends that Debtor Edward Pocius ("the Debtor") and several other defendants orchestrated an intricate scheme to fraudulently transfer real property, a related oil and gas lease and certain cash payments the Debtor received under the lease to various insider entities as well as the individual defendants.
On March 4, 2015, I granted the Trustee's motion for default judgment and, pursuant to 11 U.S.C. § 548, avoided three (3) specific transfers made by the Debtor (collectively referred to as "the Transfers").
Presently before the court is the Trustee's motion for summary judgment ("the Motion"). Through the Motion, the Trustee seeks to recover the value of the Transfers under 11 U.S.C. § 550(a) in the form of two (2) money judgments against all of the defendants: one (1) for $990,000.00 and the other for $799,000.00.
For the reasons set forth below, the Motion will be granted in part, and denied in part.
The Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code on October 2, 2012. The bankruptcy case was converted to chapter 7 on December 12, 2012.
On October 1, 2014, the Trustee, filed a complaint, initiating this adversary proceeding, against: the Debtor, Ruth Pocius (the Debtor's deceased wife) ("Mrs. Pocius"),
In the adversary complaint, the Trustee seeks to avoid the Transfers and recover their value for the benefit of the bankruptcy estate.
The Transfers consist of:
On November 17, 2014, T. Flaherty filed an Answer and New Matter as "pro se attorney," on behalf of himself, as well as A. Flaherty, Endless and Evergreen. (Doc. # 7). On December 22, 2014, I granted the Trustee's motion to strike that Answer as to all defendants, except T. Flaherty. (Doc. #s 9, 12). A. Flaherty filed her own Answer and New Matter on December 18, 2014. (Doc. # 11). Defendants Endless and Evergreen filed no response to the Complaint.
On January 13, 2015, the Trustee moved for a default judgment against Defendants Endless and Evergreen. On March 4, 2015, I entered an order granting the Trustee's motion and avoiding the Transfers. (Doc. # 21).
On September 9, 2015, the Trustee filed the Motion seeking,
The parties filed supplemental submissions, the last of which was filed on June 28, 2016. (Doc. #s 48-51, 53).
As of May 6, 2008, the Debtor and Mrs. Pocius owned the Doty Hill Property, which consists six (6) parcels of land consisting of over 470 acres with access to oil and gas rights in two (2) different townships of Pennsylvania. For ease, I will refer to the four (4) parcels located in Ridgebury Township as Parcels 1 through 4 and the two (2) parcels located in South Creek Township and Parcels 5 and 6.
On August 6, 2009, a little more than a year after receiving the initial payment under the O/G Lease and about a year and one half before the $799,000 Lease Payment was due to be paid, the Debtor and his wife transferred the entire Doty Hill Property (all six parcels) and assigned the O/G Lease to Endless. (Exs. P-4 & P-5).
The exact details of the Pocius-Endless transaction in 2009 are not entirely clear, but the documents in the summary judgment record suggest that:
After acquiring the Doty Hill Property, Endless granted a mortgage on the property to Select Properties, Inc. ("SPI") on December 11, 2009 to secure a note in the amount of $282,000.00 ("the SPI Mortgage"). (Ex. P-28).
The SPI Mortgage was assigned to Mountain View Financial, LLC ("Mountain View") on May 13, 2011. (Ex. P-28).
On August 13, 2012, about three (3) years after the Pocius-Endless transfers of the Doty Hill Property and the O/G Lease, and a little more than one (1) year after Mountain View took the assignment of the SPI Mortgage, Endless transferred title of Parcels 2 and 6 of the Doty Hill Property to Mountain View. This transfer was effected through a deed, purportedly given in lieu of foreclosure by Mountain View on the mortgage that SPI assigned to it. (Ex. P-24).
In March 2011, the Debtor received the $799,000 Lease Payment in the form of a check. When the check was issued, the Debtor had already transferred his rights in the O/G Lease to Endless. Nonetheless, for some unexplained reason, the oil and gas lessee issued the check to the Debtor and Mrs. Pocius. (Ex. P-10).
On March 9, 2011, the Debtor and his wife endorsed the $799,000.00 check and deposited it into a bank account owned by Evergreen, not Endless. (
After the Debtor deposited the check into the Evergreen account, there were several withdrawals from the account.
First, on April 16, 2011, the Debtor withdrew $500,000.00 in the form of two (2) checks:
(Ex. P-27).
As to the remaining $299,000.00, the Trustee claims that the Flahertys are liable under 11 U.S.C. § 550, an issue that will be discussed below.
The legal standard for the entry of summary judgment under Fed. R. Civ. P. 56, incorporated into bankruptcy adversary proceedings by Fed. R. Bankr. P. 7056, is well established.
Summary judgment is appropriate only when, drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.
In evaluating a motion for summary judgment, the court's role is not to weigh the evidence, but to determine whether there is a disputed, material fact for resolution at trial.
Proper resolution of a motion for summary judgment also requires consideration of the parties' respective burdens. The moving party's initial burden is to demonstrate that there are no disputed issues of material fact.
Where, as here, the movant is the plaintiff and has the burden of proof at trial, the movant must show that no reasonable jury could find for the non-moving party. The movant must "support its motion with credible evidence ... that would entitle it to a directed verdict if not controverted at trial."
On March 4, 2015, I entered judgment by default against Endless and Evergreen on the Trustee's motion, thereby avoiding the Transfers. Through the present Motion, the Trustee seeks to recover the value of the Transfers from the defendants pursuant to 11 U.S.C. § 550.
A deconstruction of § 550(a) instructs that the trustee may recover fraudulent transfers of the debtor made to recipients of either the (1) initial transfer or (2) subsequent transfers.
Subsection 550(a)(1) pertains to the
Subsection 550(a)(2) pertains to
The Trustee seeks recovery of transfers of the Debtor under all of these legal theories.
The Trustee alleged in the Complaint that the Transfers were fraudulent and that the Debtor and T. Flaherty orchestrated the transfers to prevent certain creditors of the Debtor, including UPS Capital,
I will discuss each defendant separately below.
There is no dispute that Endless was the initial transferee under § 550(a)(1) of the Doty Hill Property.
The Trustee's request for summary judgment against Endless under § 550(a) creates certain conceptual difficulties.
The Trustee seems to treat the transfer of the real property as entirely distinct from the O/G Lease. To some extent, this is understandable insofar as the owner of real property can carve out components of the "bundle rights" included in fee ownership and transfer certain components (like the right to receive the payments due after the conveyance of a leasehold interest) to third parties. Yet, the trail of transfers here suggests that title to the real property and the leasehold rights remained united (perhaps subject to an assignment of the O/G Lease to Susquehanna). Or, at least that seems to be the case with respect to the initial transfer from the Debtor and his wife to Endless. Nevertheless, in the Motion, the Trustee focuses separately on the transfer of the Doty Hill Property to the exclusion of the O/G Lease.
This Trustee's approach creates an issue in evaluating his right to recover the value of the transferred property.
In the Complaint, the Trustee acknowledged that the Debtor received $1.2 million in the Pocius-Endless transfer,
Given the state of the record, certain questions immediately come to mind. How
In deciding how to resolve these questions, I am influenced by two (2) considerations.
First, while a majority of the reported cases hold that in calculating a trustee's entitlement to recover "the value" of the property transferred under § 550(a), a transferee is entitled to a credit or a setoff of the value given to the transferor in the avoided transaction,
Second, not only has Endless failed to appear and contest the Trustee's claim, but also, by all indications, Endless is nothing more than a corporate shell. Thus, the entire controversy between the Trustee and Endless under § 550(a) has the appearance of an academic exercise.
These two (2) considerations lead me to conclude that it is appropriate to grant the Trustee the relief requested against Endless. I will grant summary judgment against Endless under 11 U.S.C. § 550(a) in the amount of $990,000.00 for the value of the Doty Hill Property that the Debtor transferred to Endless.
The Trustee also seeks recovery from the Debtor. This claim fails on the basis of a plain textual reading of the statute.
Section 550(a) provides for recovery from
A more complex analysis is necessary with respect to the Trustee's § 550(a)(1) claim against the Flahertys. Endless, not the Flahertys was the record "initial transferee" of the Doty Hill Property and the O/G Lease. Faced with this fact, the Trustee offers two (2) alternative legal theories for recovery against the Flahertys under § 550(a)(1).
The Trustee first puts forward an alter ego theory of liability.
Alternatively, the Trustee seeks to recover under the "beneficiary" theory of liability. He asserts that the Flahertys are liable for the transfers because they benefitted for a debt paid, even though they did not receive the money. The Trustee argues that, even though neither the Doty Hill Property nor the O/G Lease were transferred to the Flahertys, they are liable under § 550(a)(1) because the transfers effected a satisfaction of other debts they owed, thereby benefitting them.
Both theories fail at the summary judgment stage.
There is case law supporting the use of an alter ego theory of liability under 11 U.S.C. § 550.
Under Pennsylvania law, there is a strong presumption in favor of respecting the veil of an artificial entity.
Generally speaking, alter ego liability on an individual may be imposed "whenever one in control of a corporation uses that control, or uses the corporate assets, to further his or her own personal interests."
Alter ego liability requires proof establishing two (2) elements:
To some extent, the first element bleeds into the second. It is not satisfied by the mere fact that an individual is responsible for the actions for the artificial entities. Entities such as corporations and LLC's necessarily act through the actions of natural persons, typically, their officers, directors and members. Thus, an individual's status as an officer, director or manager, standing alone, does not establish dominion and control under the alter ego doctrine.
Nor does complete stock ownership or "the presence of interlocking boards and officers" suffice, by themselves, to establish a viable alter ego claim.
The second element, which focuses on the inequity of respecting the separateness of the artificial entity, requires that courts apply a "totality of the circumstances" test in determining whether to impose alter ego liability.
The Trustee's evidence of amounts to nothing more than the facts that
This evidence is insufficient, not even come close to meeting the requisite evidentiary standard.
As his alternative legal theory for recovery against the Flahertys, the Trustee contends that they were "beneficiary transferees" of the transfers within the meaning of 11 U.S.C. § 550(a)(1).
"The key to pegging the entity for whose benefit the initial transfer was made has two sides: 1) the entity must be the intended beneficiary and 2) the intended benefit must originate from the initial transfer."
The evidence in the record supporting the Trustee's "beneficiary transferee" argument is virtually non-existent.
To the extent the Trustee seeks to apply the theories described above to recover against the Flahertys as subsequent transferees based on their interest in and relationship to Mountain View (the record subsequent transferee), the Trustee's case again comes up woefully short.
Any recovery against the Flahertys as subsequent transferees is based on 11 U.S.C. § 550(a)(2). Unlike § 550(a)(1), § 550(a)(2), by its plain language, limits liability to the subsequent transferees themselves; it does not provide for liability of a person for whose benefit a transfer was made. Thus, the "beneficiary" liability does not even come into play under § 550(a)(2).
This leaves only the "alter ego" theory as a possible basis for recovery. It is not even clear that the Trustee has even made alter ego type allegations as to the Endless-Mountain View transfers. To the extent that he as, just as his evidence on "alter ego" was inadequate to support the § 550(a)(1) claim, it is equally inadequate under § 550(a)(2). Consequently, the Trustee's request for summary judgment against the Flahertys as subsequent transferees under § 550(a)(2) for the transfer of the Doty Hill Property and the O/G Lease to Mountain View will be denied.
The March 5, 2015 Order avoided the Debtor's transfer to Evergeen of the $799,000 Lease Payment. The Trustee contends that the Debtor and the Flahertys withdrew virtually of all of that money from the Evergreen account and spent it on themselves, either directly or through the various entities. Consequently, the Trustee seeks to recover the $799,000 (or a portion thereof) under § 550(a) against the Flahertys, the Debtor and Endless, as well as Evergreen.
There is no dispute that Evergreen was the initial transferee under § 550(a)(1) of the $799,000.00 deposit made by the Debtor. Therefore, I will grant summary judgment in favor of the Trustee and against Evergreen for the value of that transfer: $799,000.00.
In his supplemental brief, the Trustee identified a total of $38,690.58 paid from the Evergreen account that he claims indirectly benefitted Endless.
To recover from Endless, the Trustee must establish that Endless was a subsequent transferee under § 550(a)(2). He failed to do so. Perhaps these payments were made for Endless' benefit (
Although the Trustee seeks recovery from the Debtor for this transfer, the Trustee has not articulated any legal theory for doing so or quantified any transfers to the Debtor. Therefore, I will deny the Trustee's request for summary judgment against the Debtor.
A liberal reading of the Trustee's supplemental brief suggests that he is attempting to establish liability against the Flahertys as initial transferees (or beneficiary transferees) of the entire $799,000.000 under § 550(a)(1). He claims that T. Flaherty had "sufficient control" over the Evergreen account because he was identified as the manager of Evergreen in an Agreement of Sale submitted by the Defendants (Ex. D-2) (
Based on the Trustee's comments, I interpret his argument to be the same as the one the he offered as to T. Flaherty's relationship with Endless —
To establish that T. Flaherty was the "initial transferee" using an alter ego theory under § 550(a)(1), the evidence of control and domination must amount to far more than that offered by the Trustee. Therefore, for the same reasons I articulated above in Part VI.C.1, I will deny the Trustee's request for summary judgment.
Alternatively, the Trustee seeks to recover from the Flahertys certain
In his brief, the Trustee itemizes approximately $377,000.00 in transfers that he claims the Flahertys received either directly or indirectly from the Evergreen Account:
Amounts directly paid to/for Flahertys: Total Checks $17,913.00 Total Wires $26,500.00Total Visa Account $12,164.40 __________Total $56,577.40Indirect transfers paid to Endless and extinguishment of personal guaranty: Endless Total $38,960.58Mountain View Financial Guaranty $282,000.00 ___________Total $320,960.58
Of the $56,577.40 the Trustee claims the Flahertys
With respect to the indirect transfers from Evergreen to the Flahertys, (
This leaves for consideration the evidence that Evergreen transferred $39,400.00 directly to the Flahertys. To
In response, the Flahertys invoke the good faith defense under § 550(b). They claim they were creditors of Evergreen, based on loans they made directly or indirectly to Evergreen. (Def. Supp. Br. at 8).
To support their defense, the Flahertys have offered a promissory note for $75,000.00 dated June 19, 2008 between Evergreen and the Debtor, as the makers, and VAI, Inc. ("VAI"), as the payee. (
VAI is the creditor on the note, not the Flahertys. And, although A. Flaherty's name is mentioned in the promissory note, it is only for purposes of giving notice to VAI, when required under the note. From this evidence, I infer only that A. Flaherty likely is an officer, director and/or shareholder of VAI. This evidence does not establish that the Flahertys,
The Flahertys cannot have it both ways. They cannot enjoy the protection of the corporate shield when the Trustee tries to hold them responsible for transfers to an entity in which they have an interest and then ask the court to disregard the corporate distinction to support a good faith defense when the Trustee proves the existence of subsequent transfers made to them personally.
Accordingly, there is no evidentiary foundation for the Flahertys' argument that they accepted payment from Evergreen in satisfaction of Evergreen's liability to them and in good faith. On this record, they have fallen short of their goal of establishing the existence of a disputed issue of material fact as to their good faith. Therefore, I will grant summary judgment against the Flahertys in the amount of $39,400.00 pursuant to § 550(a)(2).
This case involves a labyrinth of entities with overlapping boards, as well as transactions that facially appear to have been used to shelter from creditors a valuable property. At a minimum, the convoluted series of transfers among the Debtor, the various entities and the Flahertys raises red flags. But the fabric is complicated to unravel and the Trustee has not done so in a manner sufficient to impose liability on all the parties to the extent he has requested at the summary judgment stage. Consequently, of the potential recovery the Trustee seeks under 11 U.S.C. § 550(a), I will grant only partial summary judgment against Endless in the amount of $990,000.00 for the value of the Doty Hill Property, against Evergreen in the amount of $799,000.00 and against the Flahertys in the amount of $39,400.00. All of the remaining claims for summary judgment will be denied.
An appropriate order follows.
Mrs. Pocius died on October, 6, 2014, just five (5) days after the Trustee filed his Complaint in this adversary proceeding. The Trustee took no action to substitute a representative of her decedent's estate as a party. Therefore, I will not further consider or discuss the Trustee's claims against her.
(
The two (2) located in South Creek Township are:
(
The Trustee's representation is not entirely factually accurate. While a sale to Endless was not contemplated in Mrs. Pocius' confirmed chapter 11 plan, the plan did not propose to sell the Doty Hill Property to Evergreen Land Development, LLC. Rather, Article 6.1 of the plan provided that she and the Debtor were supposed to sell the Doty Hill Property to Mountain View Sportsmen, LLC for $500,000.00 on or before August 22, 2008. (Ex. P-6). This discrepancy, while perhaps interesting, is irrelevant, for purposes of the Motion.
What matters is that the transfer to Endless was avoided pursuant to the March 4, 2015 Order in this adversary proceeding. The issue now is to what extent the Trustee can recover the value of the property for the benefit of the estate from the parties named as defendants in this adversary proceeding.
The SPI Mortgage describes itself as a "first position" mortgage. This raises some question whether Endless granted Susquehanna Bank a mortgage back in August 2009.
Specifically, the Trustee explained how the Flahertys and the Debtor actively engaged in selling investment participation in the Doty Hill Property. Their action later became the subject of a complaint filed against them by Richard B. and Catherine P. Carpenter ("the Carpenter Complaint"). In the Motion, the Trustee attached certain exhibits from the Carpenter Complaint to support his contention that, notwithstanding who held record title, the Flahertys controlled the disposition the Doty Hill Property (discussed in Part VI. C.). (
In the end, however, the Trustee argues that the best evidence of the value of the Doty Hill Property is Endless' admission in the proposed bankruptcy schedules, stating the value was $990,000.00, independent of the oil and gas rights.
The Trustee presses the same request and legal theory against the Flahertys, seeking a $990,000.00 judgment against them as subsequent transferees of the Doty Hill Property. However, as explained below in Part VI.C., I am denying the Trustee's request for summary judgment against them on other grounds, making it unnecessary to decide the "credit/setoff" issue at this time. However, the issue remains for trial. At trial, if the Trustee overcomes the shortcomings in his "case" against the Flahertys that have resulted in the denial of his request for summary judgment and if the Flahertys defend on the ground that they are entitled to a credit or a setoff, I am prepared to decide the issue on the merits.
The Trustee's evidence is inadequate under this variant as well.
The Trustee says only that the transfers provided the Flahertys with the opportunity "to exploit the anticipated oil and gas boom that would make significant profits for all participants." (
838 F.2d at 895-96.
Check Date Amount Payee 934 4/11/11 $2,000.00 A. Flaherty 935 4/28/11 $10,900.00 A. Flaherty Wire 3/17/11 $10,000.00 A. & T. Flaherty Wire 3/18/11 $10,000.00 A. Flaherty Wire 3/28/11 $ 6,500.00 A. Flaherty
I did not include the following checks, despite the notations, because it is not evident that the transfer went directly to either T. or A. Flaherty.
Check Date Amount Payee Notation 933 4/11/11 $3,703.00 William Tuma T. Flaherty 850 5/6/11 $1,310.00 Eagles Tom & Audra-dated 12/23/10
I also did not include the $12,164.40 worth of transfers from the visa debit card because (1) there is no evidence they went directly to the Flahertys; and (b) even if they benefitted from those debits, they cannot be the "beneficiary transferees" as subsequent transferees under § 550(a)(2).
