Joseph N. Callaway, United States Bankruptcy Judge.
The trial of this adversary proceeding was conducted on July 30 and 31, 2019, in Greenville, North Carolina. The parties requested an opportunity to submit post-trial briefs on two discrete issues, which was allowed, and the matter is now ready for determination.
Randy P. Coley filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on April 30, 2018. On July 16, 2018, a consent order was entered appointing Richard D. Sparkman as chapter 11 trustee (the "Trustee), BR D.E. 81.
This court has jurisdiction over the subject matter of this adversary proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and is authorized to hear this matter pursuant to the General Order of Reference entered August 3, 1984 by the United States District Court for the Eastern District of North Carolina. This matter is a core proceeding within the meaning of 28
Since the early 1990's, Mr. Coley has been in the business of installing the infrastructure for cable television systems throughout the country. One such project was for the Massanutten Resort in Virginia,
Unable to collect the Judgment from Mr. Coley or East Coast Cablevision, LLC, DIRECTV filed a supplemental proceeding in the Virginia Litigation seeking to reverse-pierce the corporate veils of three entities owned by Mr. Coley: Thundertime, East Coast Sales LLC, and South Raleigh Air LLC. Ex. 2. A hearing was conducted on November 19, 2015, Ex. 3, and on July 18, 2016, a memorandum opinion, order, and amended judgment were entered by the district court in the Virginia Litigation holding Thundertime, East Coast Sales LLC and South Raleigh Air LLC jointly and severally liable on the Judgment as alter egos of Mr. Coley. Exs. 24, 25, and 6 (the "Amended Judgment"). The Amended Judgment was appealed to and affirmed by the United States Court of Appeals for the Fourth Circuit in a published opinion dated March 28, 2018, Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375 (4th Cir. 2018), Ex. 41, with the final mandate issued on July 16, 2018. Ex. 42. The district court found, and the appellate court confirmed, that based on the testimony of both Mr. and Mrs. Coley, Mrs. Coley had no interest in Thundertime.
When Mr. Coley filed his petition for relief in this court, he conceded that the assets and liabilities of Thundertime and the other entities were assets and liabilities of the bankruptcy estate. See BR D.E. 42 at 1, ¶ 8. Within his Report Regarding Assets, Liabilities and Financial Affairs of Entities in which the Debtor Holds a Substantial or Controlling Interest, BR D.E. 34 (the "Related Entities Report"), Mr. Coley submitted "mock schedules" for Thundertime and the other companies subject to the Amended Judgment. Ex. 11.
Prior to 2008, Mr. and Mrs. Coley jointly and individually owned several investment parcels of real property (both residential and commercial). According to Mrs. Coley, they intended to resell (or "flip") the properties immediately, but the area real estate market declined and the properties could not be sold at a gain. As a result, she said, they created Thundertime in 2008 and transferred the properties to it to manage the real estate as rental properties. At the same time, she testified, they decided to transfer their own residence at 202 Brittany Place, Cary, North Carolina (the "Residence") to Thundertime to protect themselves from tort liability should a guest be injured at their home.
Address Grantor 8146 McGuire Drive, Raleigh Mrs. Coley 505 Gooseneck Drive, Cary Mrs. Coley 315 Jones Franklin Road, Raleigh Mr. and Mrs. Coley 210 Concannon Court, Cary Mr. and Mrs. Coley 4336 Island Drive, N. Topsail Beach Mr. and Mrs. Coley 3004 Air Park Road, Fuquay Varina Mr. and Mrs. Coley 1405 Highview Court, Raleigh Mr. and Mrs. Coley 1150 Executive Circle, Unit 1, Cary Mr. and Mrs. Coley 1441 W. Market Street, Smithfield Mr. and Mrs. Coley 202 Brittany Place, Cary Mr. and Mrs. Coley 114 Drummond Place, Raleigh Mr. Coley 1408 Highview Court, Raleigh Mr. Coley 3006 Air Park Road, Fuquay Varina Mr. Coley 3008 Air Park Road, Fuquay Varina Mr. Coley 3001 Air Park Road, Fuquay Varina Mr. Coley 51 Poppy Trail, Durham Mr. Coley
On November 8, 2010, Mr. and Mrs. Coley purchased property at 310 Harbor Drive, Macon, North Carolina (the "Lake House"), which they almost immediately transferred to Thundertime by deed of December 10, 2010. As with the Residence, Mrs. Coley testified that they transferred the Lake House to Thundertime primarily to create protection from tort liability from guests staying at the Lake House. At all times, the Coleys treated the Residence and the Lake House as their own properties —they continued to reside in the Residence and used the Lake House frequently, neither property was rented to others, and the Coleys made the mortgage payments on both properties from their personal bank accounts.
The testimony with respect to the operations of Thundertime was inconsistent, but is best summarized as follows: Mrs. Coley was responsible for locating, purchasing, and renovating properties to be flipped —and maintaining and renting the properties that could not be sold quickly—while Mr. Coley handled the financial part of the business.
R. Coley test., AP D.E. 48 at 38:4-12. On the other hand, he repeatedly testified that operating Thundertime became too much for Mrs. Coley to handle as described below.
On July 14, 2015 and November 6, 2015, the mortgages on the Residence and the Lake House were refinanced by Branch Banking & Trust Co. ("BB & T"), with Thundertime as the borrower and the Coleys as guarantors of the new debt. See Exs. 12, 13, and 14. Proceeds from the refinance were also used to satisfy the mortgages on most of Thundertime's rental properties (including the house on North Topsail Island), making "ITT more healthy" by unencumbering most of its rental properties and reducing its debt by shifting it to the Coleys. R. Coley test., D.E. 48 at 92:17-93:1; 93:24-14.
On February 18 and 19, 2016, after the hearing on piercing the corporate veil in the Virginia Litigation in November 2015 and before the district court ruling issued in July 2016, the Coleys attempted to have Thundertime to issue two deeds transferring the Lake House and the Residence to them jointly as tenants by the entireties (the "Transfers"), Exs. 4 and 5. The deed to the Lake House, Ex. 4, appears to be legally sufficient to effectuate that transfer; the deed to the Residence, however, is executed by the Coleys as grantors without reference to their representative capacity for Thundertime. Ex. 5. In other words, it is signed by the Coleys individually rather than as a manager, member, or officer of Thundertime, which is a limited liability company.
At the time of the Transfers (or purported transfer with respect to the Residence), it is undisputed that there was $250,000 of equity in the Residence and $300,000 of equity in the Lake House. Pursuant to his authority to administer assets of Thundertime to satisfy Mr. Coley's debts, and assuming that the deed for each property conveyed it from Thundertime to the Coleys as tenants by the entireties, the Trustee seeks to avoid the Transfers pursuant to 11 U.S.C. § 544 and North Carolina General Statutes §§ 39-23.4(a)(1) and (2).
Section 544(b) of the Bankruptcy Code gives a bankruptcy trustee the authority to avoid transfers that are voidable under applicable law by a creditor holding an allowable unsecured claim. The Trustee here seeks to avoid transfers under North Carolina law that would be voidable by DIRECTV, which holds an allowable unsecured claim in this chapter 7 case that extends to Thundertime due to the consent judgment referenced above.
DIRECTV was a creditor of Mr. Coley at the time of the Transfers, but because the July 2016 Amended Judgment had not yet been entered, it was not a creditor of Thundertime on the date the Transfers were made. Therefore, in order to avoid the Transfers under § 544, the Trustee relies on North Carolina General Statutes § 39-23.4(a), which provides:
N.C. Gen. Stat. § 39-23.4(a).
Thus, to prevail, the Trustee must show that the Transfers were made with actual intent to hinder, delay or defraud a creditor of Thundertime,
The first question before the court is whether the deed purporting to transfer the Residence from Thundertime to the
Ex. 5 at 2. The notary block indicates that the Coleys personally appeared before the notary and "acknowledged that they are Managers of It's Thundertime, LLC and that they as Managers, being duly authorized to do so, acknowledged, on behalf It's Thundertime, LLC, the due execution of the foregoing instrument." Id. (errors in original).
Coleys actually conveyed that property. If it did not, then there was no transfer to avoid and the Residence remains titled to Thundertime rather than Mr. and Mrs. Coley. In that event, the Trustee may administer the Residence as an asset of Thundertime without regard to Mr. and Mrs. Coley's claims of ownership. If the deed is valid, then there was a legally effective transfer, and the court must consider whether that transfer is voidable under § 39-23.4(a).
The deed in question is a Quitclaim Deed executed on February 18, 2016, identifying the grantor as "It's Thundertime, LLC" and the grantees as "Randy P. Coley and Kimberli M. Coley, a married couple." Ex. 5. The signature block in the Quitclaim Deed reads:
The issue is that the Coleys signed the deed individually, and not in their representative capacity as managers or members of Thundertime. Accordingly, the deed was not executed by the Grantor. Whether the error in execution is fatal to the conveyance was the subject of post-trial briefing by the Trustee and Mrs. Coley.
The Trustee further contends that to the extent the deed is ambiguous, the ambiguity cannot be resolved in favor of conveyance because the deed is a quitclaim deed, not a warranty deed. Because of the inconsistency in the singular and plural use of Grantor(s) and Grantee(s), and the use of "her" referencing the signer of the deed, at best each alternative reading is equally plausible. As a result, the Trustee maintains, the deed is void. See Mason v. Crescent State Bank (In re Deuce Invs.), Adv. Pro No. 10-155-8-RDD, 2011 WL 5902885 at *4, 2011 Bankr. LEXIS 4627 at *9-11 (Bankr. E.D.N.C. May 27, 2011) (patent ambiguity exists and voids deed where "there is such uncertainty on the face of the document that a court by reading the language in light of all the facts and circumstances referred in the instrument, is unable to derive therefrom the intention of the parties as to what land was to be conveyed").
In contrast, Mrs. Coley maintains that (1) the parties stipulated that the Residence was transferred from Thundertime to the Coleys, and (2) under North Carolina law, the deed is to be construed on the basis of the intent of the parties as it appears from all provisions of the instrument, see N.C. Gen. Stat. § 39-1.1(a), and it is clear that the intent was to transfer the Residence from Thundertime to the Coleys. Specifically, Mrs. Coley contends that the definitions of Grantor and Grantees in the recital combined with the notary acknowledgment that indicates Mr. and Mrs. Coley were the managers of Thundertime demonstrate the intent, and that the inconsistent provisions have no effect. Mrs. Coley maintains that the ambiguity of the capacity in which she and Mr. Coley signed the deed is clarified in the notary acknowledgment, which "describes the Coleys as signing the instrument in their capacity as ITT Managers." AP D.E. 52 at 4-5.
The deed, however, does not reflect that the Coleys executed it in any capacity on behalf of Thundertime. The signatures are not qualified, and the notary block does not state or provide that they signed or executed the deed in their capacities as managers of Thundertime, but only that they "acknowledged" on behalf of Thundertime the execution of the deed. There is simply no signature by Thundertime as grantor on the deed, and thus no transfer ever occurred under North Carolina law.
The fact that the parties entered a stipulation as to the validity of the deed does not change that the deed on the public record says what it says and is ineffective to convey title. Finally, even if the deed and the erroneous signatures were found to be valid, the transfer of the Residence to the Coleys is avoided for the reasons stated below.
North Carolina General Statutes § 39-23.4(a)(1) provides that a transfer made by a debtor is voidable as to a transferee if the transfer was made "with intent to hinder, delay, or defraud any creditor of the debtor." N.C. Gen. Stat. § 39-23.4(a)(1). Actual intent is inherently difficult to determine. However, "[b]ecause a debtor is not likely to testify that he had the requisite intent to defraud creditors, the intent to hinder, delay, or defraud can be inferred from extrinsic evidence and the presence of badges of fraud." In re Clarkston, 387 B.R. 882, 887 (Bankr. S.D. Fla. 2008). The statute itself "provides a non-exhaustive list of badges of fraud to be considered in determining intent under subsection (a)(1)." Id. at 889 (citing N.C. Gen. Stat. § 39-23.4(b)). "When analyzing these factors to make a determination of the debtor's intent, a court should evaluate the entirety of the circumstances surrounding the transaction at issue and `may appropriately take into account all indicia [negating] as well as those suggesting fraud.'" In re Schofield-Johnson, LLC, 462 B.R. 539, 543 (Bankr. M.D.N.C. 2011) (quoting N.C. Gen. Stat. § 39-23.4(b) cmt. 6). Badges of fraud may be considered by the court in evaluating the debtor's intent: "[A] determination concerning fraudulent intent depends largely upon an assessment of the credibility and demeanor of the debtor." Mercantile Peninsula Bank v. French (In re French), 499 F.3d 345, 353 (4th Cir. 2007) (quoting Williamson v. Fireman's Fund Ins. Co., 828 F.2d 249, 252 (4th Cir. 1987)).
The thirteen most common factors used in determining whether a transfer was made with the actual intent to hinder, defraud, or delay a creditor are listed in the statute:
N.C. Gen. Stat. § 39-23.4(b). "The presence of a single badge of fraud is not sufficient to establish actual fraudulent intent; however, the confluence of several can constitute conclusive evidence of an actual intent to defraud, absent significantly clear evidence of a legitimate supervening purpose." Whitaker v. Mortgage Miracles, Inc. (In re Summit Place, LLC), 298 B.R. 62, 70 (Bankr. W.D.N.C. 2002). The presence of several badges of fraud leads to a presumption of fraudulent intent. Kelly v. Armstrong, 206 F.3d 794, 798 (8th Cir. 2000). The debtor can overcome the presumption by showing a "legitimate intervening purpose" for the transfers. Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 806 (9th Cir. 1994).
It is undisputed that the Transfers were to insiders, and that control of the Residence and Lake House never changed from the time the properties were transferred to Thundertime to the time they were transferred back to the Coleys or thereafter. The evidence established that the February 2016 Transfers took place after the Coleys were on fair notice that Thundertime might become subject to the Judgment: DIRECTV had already filed a motion to pierce the corporate veil of Thundertime, and a lengthy hearing on the matter was held on November 19, 2015, during which the presiding judge made clear that he found the testimony of both Mr. and Mrs. Coley to lack credibility and forecasted that he was likely to pierce Thundertime's corporate veil. See, e.g., Ex. 3 (Hearing Transcript) at 32-33.
The Coleys testified that they made the Transfers after a tax audit, contending that they had never indicated on their tax returns that the properties were transferred to Thundertime, and they were simply trying to "clean up" their taxes. R. Coley test., AP D.E. 48 at 167:5-8. However, the Coleys presented no evidence from their accountant or tax auditor to buttress their explanation, nor does it appear from the evidence that there was any effort to "clean up" the taxes of the other various entities that would be reflected on Mr. Coley's individual tax returns as the single member of the LLCs.
While not involving the properties at issue, other actions taken around the same time inform the determination of the intent behind the Transfers. In addition to the Transfers, after the November 19, 2015 hearing and including through and after the date that the Amended Judgment was
Address Date of Sale Sale Price
315 Jones Franklin Road, Raleigh December 29, 2015 $172,000
8146 McGuire Drive, Raleigh January 8, 2016 $74,000
1408 Highwood Court, Raleigh January 15, 2016 $140,000
114 Drummond Place, Cary February 5, 2016 $78,000
210 Concannon Court, Cary February 16, 2016 $117,000
2016 Henniker Street, Apex July 11, 2016 $350,000
1441 W. Market Street, Smithfield August 19, 2016 $45,000
BR D.E. 34 at 16 (reordered by date of sale).
After the sale of these properties and the Transfers, the following assets remained titled to Thundertime as of Mr. Coley's petition date:
Address Scheduled Value
5917 Meadowlark Lane, Raleigh $127,987
3101 Air Park Road, Fuquay Varina $218,067
3008 Air Park Road, Fuquay Varina $331,554
2441 Waco Commercial Court, Fuquay Varina $75,141
3006 Air Park Road, Fuquay Varina $101,620
505 Gooseneck Drive, Cary $87,548
2431 Waco Commercial Court, Fuquay Varina $45,084
3004 Air Park Road, Fuquay Varina $250,119
3006 Air Park Road E, Fuquay Varina $101,620
3006 Air Park Road F, Fuquay Varina $101,620
4336 Island Drive, N. Topsail Beach $565,250
707 Grove Street NE, Wilson $60,020
Ex. 11 at 6-7. The properties at 3101 and 3008 Air Park Road were subject to mortgages of $155,000 and $145,000, respectively, while the other properties were unencumbered. Id.
In addition to the real property transfers, several significant cash transactions took place between Thundertime and the Coleys. Specifically, the following checks were written from Thundertime's account:
Payee Check Number Date Amount
Kim Coley 1219 July 15, 2016 $300,000
Kim Coley 1224 August 9, 2016 $65,000
Cash Counter Check 7047256 July 26, 2016 $400,000
Cash Counter Check 7061668 March 31, 2016 $245,470.89
BB&T (Memo line Counter Check 8727627 June 9, 2016 $100,000
reads "Cashiers Ck")
Ex. 19. In a separate adversary proceeding pending before this court, Sparkman v. Kimberli M. Coley et al. (In re Randy Coley), Adv. Pro. No. 19-0111-5-JNC, Mrs. Coley admitted that she received $765,000 from Thundertime in 2016, some of which was used to purchase real property.
R. Coley test., AP D.E. 48 at 81:16-82:2. He noted that they kept the most valuable property, the beach house in North Topsail Island, in Thundertime. However, the "tremendous amount of revenue in rentals" earned from the beach house was paid to East Coast Sales, LLC, another Coley entity, not to Thundertime.
With respect to the cash, Mr. Coley testified, "She [Mrs. Coley] wanted her funds out of the — out of Its Thundertime and I had no problem." R. Coley test., AP D.E. 48 at 64:6-7.
R. Coley test., AP D.E. 48 at 67:10-16.
Id. at 70:3-9.
As noted, Mrs. Coley admitted to receiving $765,000 in cash from Thundertime, and that some of it was used to purchase real property in the name of Coley Investments, LLC.
K. Coley test., AP D.E. 48 at 139:1-16. With respect to the rest of the cash, she testified that "the money that was coming out of Its Thundertime was to pay me.... I do not know exactly where that money went [after that]." K. Coley test., AP D.E. 48 at 138:8-11.
At the same time, Mrs. Coley suggested that she believed she was leaving enough assets in Thundertime to satisfy DIRECTV: "
Id. at 141:9-12. Therefore, while Mrs. Coley suggested that she calculated the amount of assets needed to satisfy the judgment in an effort to negate intent to hinder, delay or defraud, her testimony confirms that the Coleys were aware at the time of the various transfers that the assets of Thundertime were subject to DIRECTV's claims and that Mr. Coley had no plans to satisfy DIRECTV's judgment. The Coleys' actions speak louder than Mrs. Coley's self-serving testimony.
Two of the factors for determining actual intent pursuant to § 39-23.4(a)(1) overlap with the factors for determining whether a transfer is voidable under § 39-23.4(a)(2): reasonably equivalent value and insolvency. Indeed, whether or not the assets remaining in Thundertime were actually sufficient to satisfy DIRECTV's claim largely answers the insolvency question.
Parties presented competing evidence to demonstrate the solvency or insolvency of Thundertime at the relevant time. Each created a "demonstrative exhibit" Thundertime Balance Sheet about which Mr. and Mrs. Coley answered questions. Based on the exhibits and testimony, the parties agree that Thundertime had the following liabilities as of February 16, 2016 (the date of the Transfers, used by the Coleys on their demonstrative Balance Sheet) and as of August 31, 2016 (the date used by the Trustee on his demonstrative Balance Sheet, representing a date shortly after the Transfers and after the order to stop transferring assets):
DIRECTV Judgment $2,687,870.96 Michael D. Canup $149,099.50 Clyde W. Canup $115,629.97TOTAL $2,952,600.45
In addition, Mrs. Coley contends that she is owed $800,000 by Thundertime, and she includes that amount in her balance sheet analysis. However, Mrs. Coley's only claim filed in the bankruptcy case, Claim No. 8-1, is a claim against Mr. Coley for negligence and breach of fiduciary duty due to his losses in the Virginia Litigation, resulting in what she contends is the "loss of her interest in ... the assets of" Thundertime
The parties disagree on the specific assets to be included in the balance sheet determination as well as the value of those assets. The parties agree that the following properties were owned by Thundertime on the date of the Transfers:
Mrs. Coley maintains that there are three other properties that were acquired shortly after the Transfers that should be included among Thundertime's assets:
Apparently Thundertime no longer held those assets as of the Trustee's demonstrative Balance Sheet date of August 31, 2016.
The parties also disagree as to the proper value of the various real estate assets. The Trustee notes that all of the properties that were owned by Thundertime as of the Petition Date have been sold by him (or were under contract as of the trial date) in court-approved transactions made
In addition to the three valuation categories listed above, the Coleys' demonstrative Balance Sheet includes an "Owner's Estimate" of value for each property to support their solvency analysis. Mr. Coley testified about these values of the various properties, while expressing doubt as to Mrs. Coley's ability to give such opinions.
R. Coley test., D.E. 49 at 7:15-8:2 (emphasis added). Mr. Coley further questioned Mrs. Coley's inclusion of an encumbrance listed on one of the assets in Exhibit D, a document provided in discovery: "If my wife prepared this, again, that is one of the issues that I think that my wife gets conflicted because she doesn't do the banking work. She just doesn't do it." Id. at 10:16-18. At the same time, Mr. Coley repeatedly testified that he is in the cable business, and his wife handles the real estate. See, e.g., R. Coley test. AP D.E. 48 184:4-6 ("I'd have to almost confer with my wife. She knows real estate better than I do."); Id. at 109:24 ("I'm no real estate guy.").
As noted, the Coleys' demonstrative Balance Sheet lists the tax value, "owner's estimate," Schedule A value, and ultimate sale price of each property. The total values, including cash on hand as of the date of the Transfers of $446,869.02 and the sale prices for the three properties that were purchased and sold between February 16 and August 31, 2016,
Of the proposed values, only the "Owner's Estimate" values result in asset values greater than the agreed liabilities of $2,952,600.45. Thus, the court need only evaluate the trustworthiness of those purported values to determine whether Thundertime was balance sheet solvent on either February 16, 2016 or August 31, 2016.
Address Tax Value Owner's Estimate Schedule A Purchase Price
707 Grove Street $60,020 $60,000 $60,020 $26,000
5917 Meadowlark $127,987 $186,000 $127,987 $120,000
505 Gooseneck $87,548 $200,000 $87,548 $111,000
2431 & 2441 Waco Comm'l Ct. $75,141 $150,000 $120,225 $134,000
(2431 only)
4336 Island Drive $565,250 $1,000,000 $282,62523 $437,000
3101 Air Park Rd. $218,067 $558,000 $218,067 $240,000
3008 Air Park Rd. $331,554 $539,800 $331,554 $150,000
3006 Air Park Rd. $101,620 $369,000 $255,000 $359,747
3004 Air Park Rd. $250,119 $580,800 $125,059.50 $215,000
Total $1,817,306 $3,643,600 $2,015,770 $1,688,000
While it is not clear who created the demonstrative Balance Sheet or determined the values, Mr. Coley testified about the "Owner's Estimate" values. See R. Coley test., AP D.E. 47 173:18-184:16. He admitted that he was not as familiar with a "cap rate" in Wilson County, so he used the tax value for the property that was his parents' home on Grove Street. He testified that Mrs. Coley had been renovating the Meadowlark property and stopped mid-renovation, but it had previously generated "good rental income." He valued the Gooseneck property at $200,000 because other properties in the area had sold for that amount, noting that he had "heard from Kim" and from his "real estate guy" that properties on Gooseneck were selling. For the Waco Commercial Court properties, Mr. Coley testified that he used the price the Coleys paid of $75,000 per lot.
Mr. Coley further testified that Mrs. Coley received an offer to purchase the property on Topsail Island in the amount of $1.2 million. R. Coley test., AP D.E. 48 at 82:5-8. He also testified that the tax value was "particularly low," because there was litigation over the tax assessments in Onslow County resulting in a reduction in tax values with an increase in the tax rate. Id. at 111:2-17. In fact, he testified that the value of just the "dirt is $450,000." Id. At the same time, he scheduled the value as $565,250 in the Related Entities Report, based on the tax value.
The Air Park properties are part of an airport. There are hangars on the properties, each of which has an office that is air-conditioned and carpeted. Thundertime's office is in one of the buildings. The Coleys contend that they paid $150,000 for each of the buildings that they constructed after purchasing the properties, and Mr. Coley orally amended the value he placed on the 3006 Air Park Road property to $600,000. In explaining his determination of the values of the other Air Park properties, Mr. Coley testified:
R. Coley test., D.E. 48 at 182:17-183:8.
On cross-examination, Mr. Coley acknowledged that there were no appraisals to support his estimates, contending that "we've always owned the property. There's no need in doing an appraisal." R. Coley test., AP D.E. 49 at 7:10-14. In addition, Mr. Coley used the tax values for his Schedule A and Related Entities Report, both of which were submitted under penalty of perjury, without any indication that he believed the values were significantly higher.
Mrs. Coley also testified concerning the asserted real estate values, contending that property values are "a mathematical equation where it's so much per square footage that you use," then consider "whether there is hardwood floors or granite or tile," and the neighborhood. K. Coley test., D.E. 49 at 24:16-25:2. She, too, reviewed the "Owner's Estimate" values on the demonstrative Balance Sheet and confirmed that she believed those values to be accurate. Mrs. Coley maintains that the tax value is a baseline, and square footage and location are used to add to the value. Id. at 34:4-40:5.
On cross-examination, the Trustee showed Mrs. Coley Exhibit 43, which was a schedule of values she provided for the Thundertime properties as of February 1, 2016 in response to written discovery. For each property, Mrs. Coley listed the corresponding ad valorem tax value.
K. Coley test., AP D.E. 49 at 68:6-9. In addition, with respect to the Air Park Road properties, Mrs. Coley admitted that the properties had flooded three times in recent memory, that there is an underground storage tank at the facility with some cost to remove and remediate, that five properties are serviced by only one well, and that some of the airplane hangars do not have any water access. With respect to the water access issue, she testified:
Id. at 70:4-7.
The problem for the Coleys is that throughout this eight-year saga beginning in 2011 when DIRECTV filed the Virginia Litigation, their only consistency has been their varying and entirely incredible testimony and written positions. Every deposition, live court testimony, and discovery answer considers first and foremost, "what is in my current best interest?" Both habitually give the testimony that is convenient for them at the time without concern for earlier or later inconsistent and at times wholly opposite positions and statements.
Further, neither Mr. Coley nor Mrs. Coley gave a detailed and independently verifiable basis for the asserted values. While Mr. Coley referenced a "capitalization rate" (a term with which this court has much familiarity after valuing numerous properties based on the testimony of certified appraisers), he never explained what rate he used or how he derived it. Instead, he summarily said "there's a capitalization rate you can use." R. Coley test., D.E. 48 at 183:4. The Coleys did not produce even a sliver of independent evidentiary demonstrable support for the sudden change in values. Accordingly, the court finds that the "Owner's Estimate" values on the demonstrative Balance Sheet submitted by the Coleys are without sufficient basis.
Based on the rejection of the "Owner's Estimate" values, under any other calculation of real property values, plus the value of cash on hand of $446,869.02 and exclusive of the asserted liability of Mrs. Coley in the amount of $800,000, Thundertime was balance sheet insolvent on the date of the Transfers. If the BB & T mortgages on the Residence and Lake House are also included in the liabilities, Thundertime is pushed even further into the red. And, to the extent equity in the Residence and the Lake House may have rendered Thundertime solvent prior to the Transfers under any method of valuation, the Transfers themselves shifted Thundertime's balance sheet into the negative as contemplated by the "badge of fraud" reading, "The debtor was insolvent or became insolvent shortly after the transfer was made ...."
The other factor that is considered in both § 39-23.4(a)(1) and § 39-23.4(a)(2) is whether Thundertime received reasonably equivalent value for the Transfers. Value is defined as having been given when, "in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied." N.C. Gen. Stat. § 39-23.3. It is undisputed that no cash changed hands for the Transfers, and no excise taxes were paid. The Trustee maintains that there was no reasonably equivalent value given for the Transfers, while the Coleys maintain that the Transfers were in satisfaction of the (undocumented) debt that was incurred when the Coleys transferred the properties to Thundertime in the first place. This issue was also included in the parties' post-trial briefing.
The Trustee maintains that the Transfers were distributions of capital to the Coleys, which are not value to Thundertime and are not considered given in exchange for antecedent debt. Specifically, capital contributions and membership interests are not debt; thus, the return of capital is not in payment of debt. See AP D.E. 51 at 8-9 and cases cited therein.
The Coleys, on the other hand, contend that "the proper focus is on the net effect of the transfers on the debtor's estate, the funds available to the unsecured creditors. As long as the unsecured creditors are no worse off because the debtor, and consequently the estate, has received an amount reasonably equivalent to what it paid, no fraudulent transfer has occurred." See AP D.E. 52 at 11, quoting Harman v. First American Bank of Maryland (In re Jeffrey
With respect to Mrs. Coley, the defendants contend that her interest in Thundertime "was effectively stripped away" in the Virginia Litigation.
AP D.E. 52 at 12.
With respect to Mr. Coley, they contend that the veil-piercing resulted in a zero net-impact on his bankruptcy estate:
Id.
Several problems exist as to both of the Coleys' arguments. With respect to Mr. Coley, the "net effect on the estate" argument ignores that the Coleys purported to take the Transfers as tenants by the entireties, which would shield the assets from all of Mr. Coley's individual creditors and thus remove it from the bankruptcy estate. Had the Transfers not taken place, all of the equity in the Residence and the Lake House would be available for distribution to Mr. Coley's creditors through the pierced veil of Thundertime — a $550,000 net impact on the estate.
With respect to Mrs. Coley, the argument that her claims against the estate have been reduced by the value of the Transfers and thus have a zero-net effect on the estate also fails to recognize the true impact of the Transfers. As an initial matter, and as discussed above, Mrs. Coley's claim against the estate as filed does not reflect any debt owed to her by Thundertime; instead, it is an unliquidated and disputed claim based on her potential loss of interest in the "assets of Thundertime" due to Mr. Coley's negligence and breach of fiduciary duty. If Mrs. Coley contends that her contributions of property to Thundertime created a debt that could be satisfied through the return of those properties to her name, she would have a monetary claim for all of the other properties that she and Mr. Coley contributed to Thundertime at its formation without resort to a claim for negligence or breach of fiduciary duty. Further, there is no evidence that she reduced her claim by the value of the Residence and the Lake House, and there is no evidence that the contributions of those or any other properties were treated as debt by Thundertime or that Thundertime's books showed that the Coleys expected to be repaid. All of the evidence shows that the properties were contributed as equity, and the transfers were distributions.
Based on the evidence presented at trial, the court finds that Thundertime did not receive reasonably equivalent value for the Transfers. The Transfers were a return of capital, which as a matter of law is not value to the transferor. See Hayes v. Palm Seedlings Partners-A (In re Agricultural Research and Technology Group, Inc.), 916 F.2d 528, 540 (9th Cir. 1990) (distributions on account of equity security interests are not value because any other definition would not further protection of creditors as contemplated by the stated purpose of the Uniform Fraudulent Transfer Act).
As noted above, not all of the "badges of fraud" must be present to determine that the Transfers are avoidable. Here, the factors weigh heavily against the Coleys. The court rejects the proffered reason for the Transfers because, as discussed above, the Coleys' testimony simply is not credible. Further, no independent evidence was offered to support their claim that they transferred the properties for tax reasons, and no corroborating evidence of other efforts to "clean up" their taxes was presented.
To the Coleys, the trial of this adversary proceeding revealed the efforts of the Coleys to shield assets from creditors, particularly DIRECTV. The claim of DIRECTV arises from the multi-year resale of pirated satellite television programing that resulted in a $2,393,000 final and nonappealable judgment in the Virginia Litigation for what is, at its core, a claim for fraud and larceny. The Transfers were made in a bald effort to avoid paying the DIRECTV judgment and in direct defiance of the district court in Virginia. The Transfers themselves and incredible testimony given at this trial demonstrate that the Coleys have not accepted and never will accept
North Carolina General Statute § 39-23.4(a)(2) provides that a transfer may be avoided if the transfer was made
N.C. Gen. Stat. § 39-23.4(a)(2).
The first element of this provision is that the transferor did not receive reasonably equivalent value as nothing was paid for the Transfers. As discussed in conjunction with § 39-23.4(a)(1), above, the court has concluded that Thundertime did not receive reasonably equivalent value for the Transfers.
The second element of this provision, which is in the disjunctive, is the equivalent of the insolvency analysis detailed above. Specifically, Thundertime (through Mr. Coley) understood at the time of the Transfers that it was about to be held liable for the DIRECTV judgment, which was beyond its ability to pay based on the assets remaining in Thundertime.
As a result, the court concludes that the Trustee may avoid the Transfers pursuant to North Carolina General Statutes § 39-23.4(a)(2).
Based on the foregoing findings of fact and conclusions of law, the court determines as follows:
A separate judgment will be entered.
Ex. 4 at 2. The notary block in that deed indicates that the Coleys came before the notary and "acknowledged that they are Member-Managers of Its Thundertime, LLC, and that by the authority duly given and as the act of the corporation the foregoing instrument was executed in its name by them as its Member-Managers." Id.
