ERIC F. MELGREN, District Judge.
Plaintiff Custom Poultry Processing, LLC ("CPP") brings suit against six defendants asserting claims for successor liability, fraudulent transfer, breach of fiduciary duty, and civil conspiracy. These claims arise out of CPP's bankruptcy proceeding in the Northern District of Iowa. CPP obtained a default judgment for $1,033,992.57 against Diversified Packaging, Inc. ("DP One") in an adversary proceeding. CPP now contends in this lawsuit that six defendants are jointly and severally liable for the amount of the default judgment. There are several motions before the Court. CPP seeks summary judgment on certain elements of its claims against Defendants (Doc. 70). Defendants also seek summary judgment on all claims asserted against them (Docs. 73, 75). Finally, Defendants have filed a Motion to Limit the testimony from CPP's expert witness (Doc. 77). For the reasons stated in detail below, the Court denies CPP's motion, grants in part and denies in part Defendants' summary judgment motions, and grants Defendants' motion to limit testimony.
Plaintiff CPP is a limited liability company organized and existing pursuant to the laws of Iowa. CPP is now a debtor in possession of a bankruptcy case, which will be explained in more detail below. Defendants Kevin J. Burlin and Janelle A. Burlin are married and residents of Stilwell, Kansas. Defendants Sharon M. Abbiatti and Greg P. Abbiatti are married and residents of Lockwood, Missouri. Defendant Diversified Packaging, LLC ("DP Two") was a limited liability company organized in Kansas. It is now dissolved. Defendant KJB Enterprises, Inc. ("KJB") is a corporation organized in Kansas.
DP One was a closely held corporation formed in 2007 and originally owned by the Burlins.
On or about May 1, 2010, Mrs. Abbiatti became a 50 percent shareholder of DP One, and the Burlins each became 25 percent shareholders of DP One. At the time Mrs. Abbiatti became a shareholder, she made an initial capital contribution of $5,000. She later made an additional investment of $15,000. After becoming a shareholder, Mrs. Abbiatti served as a director of DP One, as well as the corporation's secretary. For the purposes of becoming a DP One shareholder, Mrs. Abbiatti used her maiden name. Thus, she was identified on DP One's corporate documents as Sharon Eggerman. The Abbiattis testified that the reason Mrs. Abbiatti used her maiden name was because they did not want other packaging companies to avoid doing business with Mr. Abbiatti's business because of Mrs. Abbiatti's ownership interest in DP One. Mrs. Abbiatti's involvement in DP One was not disclosed to CPP and did not appear in public filings prior to CPP's bankruptcy.
CPP was formed in 2009 for the business purpose of processing antibiotic free and organic poultry. Its members included Duane Bushman, Stacy Bushman, and Greg DeWeese. In early 2009, CPP informed Mr. Abbiatti that it was starting a chicken processing business in Charles City, Iowa and that it was interested in hiring Mr. Abbiatti to help with the prospective business. CPP hired Mr. Abbiatti in June 2009 as the general manager of operations. As general manager, Mr. Abbiatti was in charge of CPP's facility, which included signing checks, marketing, and negotiating contracts.
Mr. Abbiatti suggested that CPP hire DP One to provide packaging and materials. In April of 2010, Duane Bushman and Mr. DeWeese gave Mr. Burlin a tour of the Charles City chicken plant and discussed CPP's prospective business operations and production goals. In early June 2010, DP One entered into a written Business Service and Supply Agreement ("Supply Agreement") with CPP in which DP One agreed to provide packaging equipment to CPP, and CPP agreed to exclusively purchase all of its products from DP One. Under the same agreement, given the amount of supplies necessary to service CPP's operation, DP One also agreed to provide local warehousing for CPP's dry storage supplies one block from CPP's Charles City plant. CPP was scheduled to begin processing chickens in September 2010. Construction delays, however, delayed actual operations. Actual operations began with processing chickens in November and slaughtering chickens in December 2010.
In October 2010, CPP ordered two Cryovac shrink tunnels and made a 50% down payment on the $64,082.50 purchase price. Mr. DeWeese asked Mr. Burlin if DP One would write a check to CPP for the full purchase price in order to reimburse CPP on its down payment and pay the remaining balance due to Cryovac. In exchange for payment, CPP agreed to lease the shrink tunnels back from DP One pursuant to a written lease agreement. DP One made a payment to CPP in the amount of $64,082.50 and entered into the lease agreement on October 6, 2010. Between October 22, 2010 and January 20, 2011, CPP made thirteen payments to DP One for a total of $736,891.07 on account of actual goods and services provided to CPP by DP One.
On January 20, 2011, three creditors, including DP One, filed an involuntary chapter 7 bankruptcy petition for CPP as debtor in the United States Bankruptcy Court for the Northern District of Iowa ("Main Bankruptcy Action"). The petition indicated that CPP owed DP One $555,801.36. On February 1, 2011, the judge for the Main Bankruptcy Action converted it to a chapter 11 voluntary case. On March 1, 2011, CPP filed in the Main Bankruptcy Action its statement of financial affairs and listed that it paid $796,800.46 to DP One within ninety days before the bankruptcy. DP One knew of the potential preference debt in March 2011. In the bankruptcy schedule, CPP also stated that DP One repossessed equipment in breach of contract. On May 2, 2011, CPP filed in the Main Bankruptcy Action a Debtor's Report on Potential Avoidance Actions and listed a debt against DP One in the amount of $796,800.46.
On January 17, 2013, CPP filed a separate action for judgment against DP One in the bankruptcy court in the Northern District of Iowa. It was docketed as an adversary complaint. CPP alleged that it was entitled to repayment of a series of preferential transfers made to DP One and that DP One breached a lease agreement with CPP involving a piece of equipment used by CPP. DP One answered the adversary complaint on March 4, 2013, denying liability. On July 9, 2013, DP One filed an amendment to dissolve itself with the Secretary of State in Kansas.
As of March 18, 2011, DP One's balance sheet showed total shareholder's equity of $1,172,450.89.
KJB was formed on June 19, 2012 by Mr. and Mrs. Burlin. KJB does business as KJB Packaging Solutions. Both DP One and KJB provide packaging services. On April 9, 2013, DP One filed its annual report with the Kansas Secretary of State in which it stated that it had only issued one share of capital stock and that it owned more than 50% of KJB. Mr. Burlin claims that this statement was made in error. Prior to KJB being formed, DP One had SurePoint Medical as a customer. KJB later had SurePoint Medical as a customer.
As noted above, DP One filed an amendment to dissolve itself with the Secretary of State in Kansas on July 9, 2013. An attorney drafted an Asset Purchase Agreement on July 30, 2013, between DP One and DP Two. In this agreement, DP One transferred its only remaining assets to DP Two for $2,000. Mrs. Abbiatti paid DP Two $2,500 of her own funds so that DP Two could afford to purchase DP One's naming rights. On August 2, 2013, DP Two was formed. The business generated little to no business income. On July 21, 2015, it was dissolved.
On April 15, 2015, CPP filed this action. CPP asserts numerous claims. First, it asserts four types of fraudulent transfer claims under the Kansas Fraudulent Transfer Act. It also asserts successor liability, breach of a fiduciary duty, and conspiracy or aiding and abetting claims. CPP seeks damages in the amount of $1,033,993 (the amount of its default judgment against DP One) and also requests punitive damages. All Defendants now seek summary judgment. CPP requests partial summary judgment on several of its claims. Defendants have also filed a motion to limit CPP's expert's testimony.
Summary judgment is appropriate if the moving party demonstrates that there is no genuine issue as to any material fact, and the movant is entitled to judgment as a matter of law.
Though the parties in this case filed cross-motions for summary judgment, the legal standard remains the same.
CPP seeks partial summary judgment on its successor liability, fraudulent transfer, and breach of fiduciary duty claims. It also seeks summary judgment on Defendants' affirmative defenses. With regard to the successor liability and fraudulent transfer claims,
With regard to CPP's breach of fiduciary duty claim, it claims that it has standing to bring this claim against the officers and directors of DP One. CPP's arguments are hard to decipher as they again cite to several legal principles with little to no analysis as to how the facts in this case relate to that law. Defendants attempted to decipher CPP's arguments, but CPP states in its reply that Defendants' representation of its arguments is not accurate. It appears as though CPP is attempting to assert a breach of fiduciary duty claim on behalf of itself and on behalf of DP One against Mr. and Mrs. Burlin and Mrs. Abbiatti.
Generally, an action for a breach of fiduciary duty claim against an officer or director of a corporation is one that is brought derivatively on behalf of the injured corporation.
The first exception CPP attempts to rely upon is the "close corporation" exception. In some instances, Kansas allows a direct action for a breach of fiduciary duty against close corporations.
CPP next argues that separate from the close corporation exception to derivative actions, a creditor of an insolvent corporation can bring suit against officers and directors that have committed tortious acts or caused injury particular to the creditor. CPP does not direct the Court to any law that this "exception" then allows a direct action on behalf of the insolvent corporation. As noted above, it appears that CPP is seeking the Court's approval to sue on behalf of the corporation, DP One. To the extent that CPP is asking the Court to find that it has standing to sue on behalf of DP One, the Court denies CPP's motion.
Finally, with regard to CPP's motion for partial summary judgment on Defendants' affirmative defenses, CPP simply states that no factual or equitable bases for these sixteen affirmative defenses exist. Not all of Defendants' sixteen defenses are "affirmative defenses." Nevertheless, CPP's motion is woefully inadequate as CPP simply asserts one conclusory sentence for its assertion and does not direct the Court to anything in the record to support its contention. Accordingly, the Court denies CPP's motion in its entirety.
Defendants Mr. and Mrs. Abbiatti seek summary judgment on all claims asserted against them by CPP. CPP asserts fraudulent transfer and conspiracy claims against Mr. and Mrs. Abbiatti and a breach of fiduciary duty claim against Mrs. Abbiatti. The Court will address each claim in turn.
CPP contends that two fraudulent transfers occurred with respect to Mr. and Mrs. Abbiatti. First, it alleges that the $65,581.00 shareholder distribution to Mrs. Abbiatti on March 29, 2011 was a fraudulent transfer. Next, CPP asserts that payments in the amount of $11,500 made to Snack-ers, Mr. Abbiatti's business, constitute fraudulent transfers.
There are four provisions under the Kansas Uniform Fraudulent Transfer Act ("UFTA") by which a plaintiff can bring a claim. These are K.S.A. §§ 33-204(a)(1), 33-204(a)(2), 33-205(a), 33-205(b). CPP attempts to use all four provisions. In response to Defendants' assertion that the fraudulent transfer claims brought under §§ 33-204(a)(2), 33-205(a), and 33-205(b) are barred by the statute of limitations, CPP dismisses its claims under these provisions. Thus, there is only one provision, K.S.A. § 33-204(a)(1), for which a fraudulent transfer claim against Mr. and Mrs. Abbiatti is now at issue. This provision provides that a transfer is fraudulent if the debtor made the transfer "with actual intent to hinder, delay or defraud any creditor of the debtor."
The Court will first address the transfer alleged against Mrs. Abbiatti. She contends that the statute of limitations precludes this claim. She also argues that this shareholder distribution does not meet the requirements of a fraudulent transfer.
Pursuant to K.S.A. § 33-209(a), a claim brought under subsection K.S.A. § 33-204(a)(1) must be brought "within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant."
There is a dearth of law as to the statute of limitations contained in K.S.A. § 33-209 and the reasonableness of the discovery of the fraudulent transfer. There is one case from the District of Kansas case addressing the issue. In Dealer Computer Servs., Inc. v. Griffith,
Here, the facts appear similar. Mrs. Abbiatti contends that CPP could have reasonably discovered the alleged fraudulent transfer on or about December 19, 2013, at the very latest. On this date, DP One's President (Mr. Burlin) informed CPP's counsel that DP One dissolved in July 2013 and that DP One had no intention of participating in or defending the adversary proceeding that CPP had brought against DP One earlier that year. Defendants argue that a one-year period would commence on December 19, 2013 and end on December 19, 2014.
CPP, however, contends that it did not have reason to know or inquire into the fraudulent nature of the transfers until March 2015 and that it brought suit within the next month.
Defendants take issue with Mr. DeWeese's affidavit because it does not shed light as to why it was unable to reasonably discover the transactions. Yet, this question appears factual and goes to whether it was reasonable to not discover the transfer until March 2015. Defendants state that Mr. Burlin's December 19, 2013 email included a 2013 balance sheet which should have alerted CPP to the shareholder distributions. Yet, this balance sheet is not included as evidence and thus it is unclear what the balance sheet demonstrated to CPP.
Mrs. Abbiatti also argues that even if CPP's fraudulent transfer claim under K.S.A. § 33-204(a)(1) is considered timely, it fails because CPP does not identify evidence indicating the existence of badges of fraud. "UFTA creates a right of action for any creditor against any debtor and any other person who has received property from the debtor in a fraudulent transfer. A fraudulent transfer occurs when a debtor intends to hinder, delay, or defraud a creditor, or transfers property under certain conditions to another person without receiving reasonably equivalent value in return."
CPP attempts to show Defendants' intent by relying on the existence of eight badges of fraud. Defendants take issue with CPP's reliance on these eight factors and contend that CPP only previously alleged three badges of fraud. Thus, Defendants contend that CPP should not be allowed to assert these additional badges of fraud at this late hour. The Court does not take such a limited view of CPP's claim.
Even considering the three badges of fraud that Defendants initially briefed, there are factual questions remaining. Specifically, the parties disagree on the date of DP One's insolvency. DP One states that insolvency occurred on July 9, 2013, the date of the formal dissolution of DP One with Kansas. CPP relies on an expert opinion which opines that DP One's insolvency date was no later than March 2011. Thus, DP One's insolvency date is disputed for purposes of this motion.
CPP also contends that $11,500 in payments to Mr. Abbiatti and Snack-ers constitute fraudulent transfers. $10,000 was paid to Snack-ers, and $1,500 was paid to Mr. Abbiatti personally. Mr. Abbiatti argues that CPP cannot assert a claim for the $10,000 because Snack-ers is not a party to this lawsuit. In addition, he asserts that the payment of $1,500 to Mr. Abbiatti fails because DP One was not insolvent and DP One received reasonably equivalent value from Mr. Abbiatti.
With regard to the $10,000 paid to Snack-ers, CPP contends that this payment from DP One ultimately went to Mr. Abbiatti. Thus, it is not asserting a specific claim against Snack-ers. Instead, it is asserting that DP One paid money to Snack-ers which in turn transferred it to Mr. Abbiatti. In other words, the transfer began with DP One and ultimately ended up in Mr. Abbiatti's hands.
The scope of UFTA is broad, and liability is not limited simply to direct transfers to insiders.
With regard to the payments in general, as noted above, there are factual questions regarding the existence of the badges of fraud. Because of these factual questions, summary judgment is not appropriate. Accordingly, the Court denies Mr. Abbiatti's motion for summary judgment for claims brought under K.S.A. § 33-204(a)(1).
CPP also brings a conspiracy claim against the Abbiattis. CPP's conspiracy claim is hard to discern. It appears as though CPP contends that the Abbiattis conspired with the Burlins (and possibly DP One or DP Two and KJB) to engage in fraudulent transfers or breach a fiduciary duty. In Kansas, "the elements of a civil conspiracy include: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds in the object or course of action; (4) one or more unlawful overt acts; and (5) damages as the proximate result thereof."
CPP asserts a claim against Mrs. Abbiatti alleging that she breached a fiduciary duty. Again, CPP's claim is hard to decipher but it appears that it asserts that Mrs. Abbiatti breached its fiduciary duty to CPP by breaching her duty to DP One. As noted above, CPP is not bringing a claim on behalf of DP One. Instead, CPP is bringing its claim as a creditor of DP One. As the Kansas Supreme Court has stated, "[a] creditor of an insolvent corporation who sues solely on his own behalf cannot maintain a personal action against directors or officers who, by negligent mismanagement of the corporation's affairs, have breached their duty to the corporation to the consequent damage or injury of its creditors."
In sum, the Court grants in part and denies in part Defendants Mr. and Mrs. Abbiatti's Motion for Summary Judgment. The only remaining claim is the fraudulent transfer claim asserted against Mrs. Abbiatti and Mr. Abbiatti under K.S.A. § 33-204(a). All other claims fail as a matter of law.
Defendants Mr. and Mrs. Burlin, DP Two, and KJB seek summary judgment on all claims asserted against them by CPP. CPP asserts fraudulent transfer and conspiracy claims against Mr. and Mrs. Burlin and DP Two, a breach of fiduciary duty claim against Mr. and Mrs. Burlin, and a successor liability claim against KJB. The Court will address each claim in turn.
CPP contends that several fraudulent transfers occurred with respect to Mr. and Mrs. Burlin. These include: a shareholder distribution on March 29, 2011 in the amount of $65,581 ($32,791 to Mr. Burlin and $32,791 to Mrs. Burlin); wages between April 1, 2011, and August 17, 2012, in the amount of $130,000 to Mr. Burlin; mileage reimbursement between December 31, 2011, and July 12, 2013, in the amount of $67,762.66; telephone expenses between April 12, 2011, and June 29, 2013, in the amount of $7,561 to Mr. Burlin; meals and entertainment between April 2011, and September 20, 2013, in the amount of $12,829 to Mr. Burlin.
As noted above, CPP attempts to bring its fraudulent transfer claims under four provisions of the UFTA. In response to Defendants' assertion that the fraudulent transfer claims brought under § 33-205(b) are barred by the one-year statute of limitations, CPP dismisses transfers brought under this provision. With regard to CPP's claims brought under § 33-204(a)(2) and § 33-205(a), CPP agrees that these claims are governed by a four-year statute of limitations, with no discovery provision, and thus the only actionable transfers are those occurring after April 15, 2011.
Certain transfers, however, remain at issue. Specifically, the Court must determine whether CPP's claim brought under § 33-204(a)(1) regarding the shareholder distribution on March 29, 2011 is timely. In addition, the Court must determine whether any factual disputes exist with regard to claims brought under §§ 33-204(a)(1), 33-204(a)(2), and 33-205(a).
The Court will first address the § 33-204(a)(1) claim. Defendants assert the same argument as the Abbiatti Defendants, that CPP could have discovered the March 29, 2011 shareholder distribution on December 29, 2013 and thus CPP's claim as to this transfer is untimely. As noted above in discussing the § 33-204(a)(1) claim with regard to Mrs. Abbiatti, the Court cannot conclude as a matter of law that CPP could reasonably have discovered the alleged fraudulent transfer in December 2013. Accordingly, there is a factual issue that precludes a finding that CPP's fraudulent transfer claim under § 33-204(a)(1) is untimely. In addition, as noted above, there are other factual issues precluding summary judgment. Two important considerations are the insolvency date and whether reasonably equivalent value was provided for the transfers. Thus, the Court denies summary judgment with regard to the fraudulent transfers brought under § 33-204(a)(1).
Defendants also seek summary judgment on CPP's fraudulent transfer claims brought under K.S.A. § 33-204(a)(2). Under this provision, a transfer is fraudulent if the debtor made the transfer
Defendants argue that CPP cannot produce any evidence that the consideration for the transfer or obligation was not for reasonably equivalent value. As noted above, there are questions of fact regarding whether reasonably equivalent value was provided for the transfers. Thus, the Court denies Defendants' motion on this aspect.
CPP also brought a fraudulent transfer claim under K.S.A. § 33-205(a). Defendants do not discuss this provision. The Court notes that this provision requires a showing of insolvency and reasonably equivalent value, and Defendants make no such effort to demonstrate that CPP cannot meet those elements. Accordingly, Defendants are not entitled to judgment as a matter of law with regard to CPP's claim brought under this provision.
CPP also brings a conspiracy claim against the Burlins and DP Two. As noted above, CPP's conspiracy claim is difficult to discern. Furthermore, CPP fails to direct the Court to any evidence establishing several elements of its claim. Because CPP cannot demonstrate the existence of a factual dispute as to whether there was a meeting of the minds, the Court grants summary judgment on this claim.
CPP asserts a breach of fiduciary duty claim against Mr. and Mrs. Burlin. For the reasons stated above with regard to Mrs. Abbiatti's motion on this claim, the Court grants Mr. and Mrs. Burlin's motion on this claim as well. Thus, CPP's breach of fiduciary duty claim fails as a matter of law.
CPP asserts a claim based on successor liability against KJB. CPP asserts that KJB is responsible for DP One's liabilities.
CPP asserts that the business continuation and fraudulent transaction provisions apply. "In order for the court to find that a company is a successor corporation, substantial continuity must exist between the company and the selling corporation. Substantial continuity is primarily a question of fact and the trier of facts must look at the totality of the circumstances."
Here, there appear to be questions of fact. As noted above, KJB was formed in June 2012 by the Burlins, two of the three officers of DP One. KJB provided packaging services and so did DP One, albeit for different industries. There is evidence that one customer, SurePoint, was a customer of both companies.
In sum, the Court denies in part and grants in part Defendants' motion for summary judgment with regard to the fraudulent transfer claims, grants it with regard to the civil conspiracy and breach of fiduciary duty claims, and denies it as to the successor liability claim.
All Defendants seek to limit or exclude CPP's expert testimony. CPP designated Alex Moglia, an attorney, as an expert. Mr. Moglia serves as a bankruptcy trustee and receiver. He provided an expert report in this case. Defendants set forth three of Mr. Moglia's conclusions in his expert report. They only challenge, however, two of those conclusions.
In Mr. Moglia's expert report, he reviewed DP One's balance sheet and financial statements. He made "adjustments" to (1) write off accounts receivable, (2) reduce DP One's shareholders' equity to include a reserve for DP One's potential liability related to CPP's payment of amounts due DP One within ninety days of CPP's bankruptcy, and (3) change the timing of certain inventory write-offs. After making these adjustments, Mr. Moglia concluded that DP One was balance sheet insolvent in March 2011. Defendants state that they do not take issue with this conclusion at this time in this motion.
Mr. Moglia also stated that Mr. Burlin should have known all the legal consequences associated with CPP's filing of bankruptcy and (1) shut down DP One's operations, (2) liquidate DP One, or (3) file a "Chapter 7 bankruptcy" in March 2011. Mr. Moglia asserts that Mr. Burlin's ignorance of the law is no excuse and that Mr. Burlin breached his fiduciary duties by failing to reserve funds to pay the potential liability to CPP. As a consequence, the March 2011 dividend was outside the ordinary course of business and not for value and the payment of wages and business expense reimbursement to Mr. Burlin after March 2011 was likewise improper. Mr. Moglia also claims that if disinterested managers were running DP One, they would not have allowed DP One to hold such a massive receivable from CPP. Defendants seek to exclude these conclusions.
These opinions are impermissible opinion testimony. What an individual should have known is not an appropriate subject upon which an expert may opine. It is a factual question left to the jury's determination. Thus, the Court grants Defendants' motion.
