CATHARINE R. ARON, Bankruptcy Judge.
THIS MATTER came before the Court on January 6, 7, and 8, 2016 for trial on (1) the complaint filed by the Chapter 7 Trustee, John A. Northen (the "Trustee"), against MDC Innovations, LLC ("Innovations"), MDC Inventions, LLC ("Inventions"), Jason McDonald ("Jason"), and Mark Allen Hall ("Mark"); and (2) the cross-claim filed by Mark against Wayne McDonald ("Wayne") and Jason. J.P. Cournoyer appeared on behalf of the Trustee; Peter Juran appeared on behalf of Mark; and Ellis Drew, John Meadows, and Leon Porter appeared on behalf of Innovations, Inventions, and Jason. At the hearing, the Court received testimony from Mark, Wayne, Jason, Wendy McDonald, Natalie Crenshaw Folmar, Scott Randolph, and Robert Pitts. After considering the testimony before the Court, the arguments of counsel, the pleadings, and the record in this case, the Court finds the ownership interests of Mark, Wayne, and Jason in the MDC Companies to be 22.5%, 38.75%, and 38.75%, respectively. The Court further finds that the property at issue constitutes an asset of the MDC Companies and directs Jason to transfer the Patents (as defined below) to the MDC Companies.
This proceeding arises out of the involuntary bankruptcies of C and M Investments of High Point, Inc., C. Wayne McDonald Contractor, Inc., C. Wayne McDonald and Wendy McDonald, initiated by petitioning creditors on May 17, 2013. The complaint seeks: (1) a declaratory judgment determining the ownership rights of Wayne, Jason, and Mark in Innovations and Inventions (collectively, "the MDC Companies"), with an order directing Jason to transfer all intellectual property rights in the Nexcavator and related technologies (the "Intellectual Property") to the MDC Companies; (2) an accounting of the assets held by the MDC Companies; and (3) the avoidance and recovery of a purported transfer of ownership rights in the MDC Companies from Wayne to Jason. The cross-claim similarly requests that Jason be compelled to transfer the Intellectual Property to the MDC Companies, and demands, in the alternative, damages for fraud and unfair and deceptive trade practices, trebled under North Carolina General Statutes Chapter 75. The cross-claim also seeks an award of costs and attorney's fees.
On August 26, 2015, upon consideration of motions for summary judgment submitted by the parties, the Court entered an order declaring Mark to possess no less than a five percent ownership interest in the MDC Companies. The Court explained that an October 17, 2011 agreement among the parties, which employed Mark as the Executive Vice President and Chief Financial Officer ("Executive V.P./C.F.O.") of the MDC Companies in exchange for an immediate five percent ownership interest in the companies, was a valid, unambiguous, and enforceable contract. The Court refrained from making further findings.
The matter again came before the Court for trial on January 6, 2016. At the conclusion of trial, the Court accepted post-trial briefs from the parties and took the matter under advisement.
Wayne is married to Wendy C. McDonald. Jason is Wayne's son by a previous marriage. Wayne has been in the real estate business in North Carolina for over forty years. He would buy homes and commercial properties in various conditions and refurbish and restore the properties for rent and resale. At one time, Wayne had assets in excess of $40,000,000 and debts in excess of $20,000,000.
Wayne was introduced to Mark Hall when Mark served as a loan officer at BB&T. Mark was familiar with several of Wayne's real estate properties and the loans associated with those properties. Mark has an MBA degree from Wake Forest University and experience in equipment financing. Wayne and Mark developed a working business relationship over an extended period of time.
Growing up in the McDonald household, Jason expressed an interest in his father's work and became an experienced heavy equipment user. Those who know Jason testified that he lacks people skills and can be off-putting but that, as a result of his upbringing and abilities, he has a gift for working with mechanical devices. In 2006 to 2007, Jason came up with the idea to build an excavator that could more easily create slopes from a fixed position. He envisioned the addition of a bucket compatible with the operation of heavy equipment that could rotate and swivel. Since that time, his primary focus has been on developing a number of working prototypes for this device, known as the Nexcavator.
In July of 2011, Wayne and Jason (the "McDonalds") formed the MDC Companies to develop and market the Nexcavator and related or derivative technologies. Each made an initial capital contribution of $500 and held a fifty percent ownership interest in the MDC Companies until the fall of 2011, when Wayne approached Mark about joining the companies, expressing an interest in recruiting an individual from the corporate world to help grow the business. Mark was shown videos of the partially completed device and agreed to join the companies as Executive V.P./C.F.O. In exchange for his services, Mark was granted an immediate 5% ownership interest in the companies.
After working full-time for the companies for less than a year, Mark signed an agreement with the McDonalds on May 18, 2012 (the "2012 Agreement"). This agreement provided that in exchange for the temporary foregoing of a salary and a $150,000 investment, Mark would receive an additional 17.5% ownership interest in each of the companies, "including all related intellectual properties". Though not explicitly delineated in the agreement, Wayne and Jason promised that their capital contributions to the companies would be in the form of assignments of intellectual property rights in the Nexcavator
Relying on the 2012 Agreement and assurances with respect to the Intellectual Property, Mark began investing in the MDC companies. Most of the monies spent were for the development of a working prototype for a standard (as opposed to "mini") excavator. The Companies generated no sales or revenue.
Mark served as the uncompensated "face" of the MDC Companies until approximately June of 2013. In this capacity, he introduced the companies to the public as the owners of the Intellectual Property.
By March of 2013, Mark had invested nearly $150,000 into the companies, but they needed additional capital for continued operations, see, e.g., Ex.'s 75, 76. After several unsuccessful attempts to secure outside funding, the McDonalds offered Mark an additional 10.83% ownership interest in the companies for an additional $75,000 investment. See Ex. 106 (acknowledging the existence of an offer and attempting to either discredit or clarify it, "Wayne stated that the $75,000 was never taken and the changes to the documents were never made"); Ex. 107 (stating that Mark "will acquire an additional 10.83% Residual Interest pursuant to the terms of that certain Limited Liability Company Interest Purchase Agreement"). The exact terms of this offer (the "2013 Offer") remain unclear. Compare Ex. 105 (documenting potential terms of the offer in a Limited Liability Company Interest Purchase Agreement and First Amendment to Operating Agreement drafted by Tuggle Duggins, stating that the $75,000 "shall be transferred at closing directly from Purchaser to either the LLC or MDC Inventions, LLC to be used for (A) the operating expenses of the LLC or MDC Inventions, LLC or (B) any remaining amounts in excess of operating expenses to be contributed to either the LLC or MDC Inventions, LLC" (emphasis added)) with Mark Hall, Testimony at the United States Bankruptcy Court for the Middle District of North Carolina (Jan. 6, 2016) (stating that the McDonalds offered him a vested right to this increased ownership interest upon completion of investments equivalent to a total infusion of $225,000 into the companies).
On May 13, 2013, Mark paid an invoice from ProTool Company, Inc. in the amount of $38,380, bringing his total investment in the MDC Companies to $175,793.39. See Ex. 76 (summarizing Mark's official expenditures). Based on a series of emails between Mark, Jason, Wayne and Tuggle Duggins, Mark believed that the MDC operating and purchase agreements were finally complete and ready for signature. Mark arrived at the office of Tuggle Duggins on May 29, 2013. At the meeting which followed, the McDonalds terminated Mark's employment and stated that he would have no further involvement with the companies.
As of his termination—and indeed, as of the May 17, 2013 involuntary petition date in these consolidated proceedings—Mark held a 22.5% ownership interest in the MDC Companies.
The McDonalds' ownership interests in the companies on or around the same date remain unclear. Wayne and Jason introduced documents
It is clear, however, that the Transfer Documents were created in 2013,
In addition to their insistence that the Transfer Documents were created in 2011, the McDonalds were less than candid with the Court on other occasions. The two flatly denied that they promised to transfer any intellectual property rights to the companies throughout the three day trial in this matter, despite ample, unambiguous evidence to the contrary; reluctantly admitted, after several evasive exchanges on the stand, that Mark spent money on behalf of the companies, seemingly hoping that the Court would believe bills had been paid without request; and eventually admitted to submitting false, sworn statements to the Court, without subsequently demonstrating any remorse in so doing.
The McDonalds did appear imminently credible, however, when they represented to the Court that they never intended to transfer any Intellectual Property rights to the MDC Companies. On January 7 and 21, 2014, the United States Patent & Trademark Office issued several patents related to the Nexcavator (the "Patents"). See Ex. 63; Ex. 64 (describing the Patents as "Excavating Apparatus with Swivel Mount Employing Swivel Adapter with Gear Bearings Having Gears with Divergent Thickness" and "Excavating Apparatus Employing Swivel Adapter with Gear Bearings Having Gears with Divergent Thickness"). Jason holds these patents and refuses to assign them to the MDC Companies.
Had the McDonalds been consistently candid with the Court, the proceedings in this case likely would have been significantly curtailed.
The legal issues which now remain concern: (1) the interests of the parties in the MDC Companies, and (2) the interests of the MDC Companies in the Intellectual Property. The Court will determine the ownership interests of the parties in light of the 2013 Offer, the Transfer Documents, and the Trustee's avoidance powers. Then, the Court will assess the claim to the Intellectual Property and evaluate whether Jason should be compelled to transfer the Patents to the MDC Companies. Finally, the Court will consider the remaining requests for relief.
Mark argues that in addition to his 22.5% interest in the MDC Companies, he has the right to claim an additional 10.83% ownership interest in the companies under the 2013 Offer. The Court cannot agree.
On the stand, Mark testified that he was given the option to claim this additional 10.83% interest at any time, after investing the equivalent of $225,000 into the MDC Companies. The best documentary evidence the Court has with respect to the 2013 Offer, likely prepared by attorneys at Tuggle Duggins under Mark's supervision,
Consequently, notwithstanding Mark's total infusion, to date, of $175,793.35 into the companies, the Court cannot determine the terms of the 2013 Offer, and, thus, whether the parties reached a clear and definite agreement. Therefore, the Court cannot enforce the 2013 Offer. See generally Lassiter v. Bank of N.C., 146 N.C. App. 264, 269, 551 S.E.2d 920, 923 (2001) (explaining that the terms of a contract must be definite, such that a meeting of the minds has occurred, in order for a contract to be binding). As such, Mark's interest in the companies is limited by the 2012 Agreement to 22.5%.
A determination of Wayne and Jason's ownership interests in the companies requires a more thorough analysis. Because the Court cannot determine whether the McDonalds held equal shares in the MDC Companies upon the petition date, the Court will consider each of the ownership possibilities at that time in light of the Trustee's request to avoid and recover Wayne's transfers under 11 U.S.C. §§ 548, 549, and 550.
Assuming that Wayne transferred his interests in the MDC Companies to Jason post-petition, then Jason currently holds a 77.5% interest in the companies, and the Trustee seeks to avoid the transfers under 11 U.S.C. § 549. Section 549 states that the trustee may avoid an unauthorized, post-petition transfer of property of the estate. 11 U.S.C. § 549(a). The transfers at issue were unauthorized. No "value" was given in exchange for the transfers, as that term is defined in Section 549(b). See id. (stating that "in an involuntary case, the trustee cannot avoid . . . transfer[s] made after the commencement of such case but before the order for relief to the extent any value . . . is given after the commencement of the case in exchange for such transfer).
Assuming instead that Wayne transferred his interests in the companies pre-petition, then the Trustee seeks to avoid the transfers under 11 U.S.C. § 548. Section 548 allows the trustee to avoid transfers made "with actual intent to hinder, delay, or defraud any entity to which the debtor was or became . . . indebted[.]" 11 U.S.C. § 548(a)(1)(A). This Court infers fraudulent intent from the presence of "badges of fraud." Allman v. Wappler (In re Cansorb Indus. Corp.), No. 07-6072, 2009 WL 4062220, at *8 (Bankr. M.D.N.C. Nov. 20, 2009). These include:
Id. (quoting In re Soza, 542 F.3d 1060, 1067 (5th Cir. 2008)). In this case, most if not all
With respect to the first and second badges of fraud, the Court has already noted that it is unlikely Wayne received any consideration at all in exchange for the transfers to his son. Even assuming that he did, $5,800 for a 47.5% interest in the companies would not have been adequate consideration. Mark, an educated, seasoned businessman, paid $150,000 for a 17.5% interest in the companies in 2012, when the companies were still less than a year old. In 2013, Mark received an offer from Wayne and Jason for another 10.83% interest in the companies for $75,000. All parties must have considered the value of the companies to be well in excess of $75,000 in 2013, when the transfers occurred. Thus, the first and second badges are met.
With respect to the fourth, fifth, and sixth badges of fraud, these factors also indicate that Wayne made the transfers at issue with fraudulent intent. The testimony before the Court established that from 2011 until early 2013, Wayne began transferring properties from himself— or his companies—to his children, for no consideration. Whereas Wayne reported that as of December 31, 2011 he had $42,000,371.00 in assets (including only cash deposit accounts, notes and accounts receivables, real estate, machinery and equipment, and vehicles), Ex. 200, by May 17, 2013, he reported only $518,364.63 in real and personal property, Ex. 117. Though Wayne's liabilities decreased during this time, they did not proportionately drop. Wayne consciously and methodically removed properties with equity from his estate under the auspices of "estate planning." Thereafter, Wayne and his companies could not and did not generate enough income to service their debts. Loans matured. In January of 2012, Wayne and his companies began receiving demand letters. Suits followed, then bankruptcy. Somewhere in the midst of this prolonged series of financially devastating events, Wayne transferred his believed to be valuable interests in the MDC Companies to Jason. Thus, Wayne's financial affairs around the time of the transfers, the series of transactions which occurred around the time of the transfers, and the general chronology of events surrounding the transfers indicate that Wayne conveyed his interest in the MDC Companies with fraudulent intent, meeting the fourth, fifth, and sixth badges of fraud.
Because a consideration of the badges of fraud in this case leads inescapably to the conclusion that the transfers were made "with actual intent to hinder, delay, or defraud any entity to which the debtor was or became . . . indebted[,]" 11 U.S.C. § 548(a)(1)(A), the transfers may be avoided and recovered by the Trustee in the event that they occurred pre-petition, see 11 U.S.C. § 550. As a consequence of the Trustee's ability to avoid and recover the transfers at issue, regardless as to whether they in fact occurred pre- or post-petition, the McDonalds are each deemed to hold a 38.75% interest in the companies.
Having determined the ownership interests of the parties in the companies, the Court must determine whether the MDC Companies possess any rights in the Intellectual Property, including, without limitation, the Patents. The Trustee and Mark argue that Jason should be compelled to execute an assignment of the Patents to the MDC Companies. The Court agrees.
As the United States Court of Appeals for the Federal Circuit has explained, a patent assignment is distinguishable from an agreement to assign a patent. Arachnid, Inc. v. Merit Indus., Inc., 939 F.2d 1574, 1581 (Fed. Cir. 1991) (explaining that while the former vests legal title in the transferee, the latter only vests equitable rights). While a patent assignment must be in writing, 35 U.S.C. § 261, an oral agreement to assign a patent is valid, e.g., Dalzell v. Dueber Watch-Case Mfg. Co., 149 U.S. 315, 320 (1893) ("An oral agreement for the sale and assignment of the right to obtain a patent for an invention is not within the statute of frauds, nor within section 4898 of the Revised Statutes, requiring assignments of patents to be in writing, and may be specifically enforced in equity, upon sufficient proof thereof."); Pressed Steel Car Co. v. Hansen, 128 F. 444 (C.C.W.D. Pa. 1904) (same), aff'd, 137 F. 403, cert. denied, 199 U.S. 608; Cook v. Sterling Electric Co., 118 F. 45 (C.C.D. Ind. 1902) (same), aff'd, 150 F. 766; Searle v. Hill, 73 Iowa 367, 35 N.W. 490, 491 (1887) ("The validity of a parol assignment of a patent, as between the parties, has frequently been determined by the courts."); 71 Am. Jur. 2d Specific Performance § 178 (2016) ("Parol executory contracts to assign patent rights may . . . be enforced in equity although the statutes of the United States provide that the assignment itself must be in writing.").
An agreement to assign a patent, whether oral or written, is the proper subject of an action for specific performance See United States v. Dubilier Condenser Corp., 289 U.S. 178, 187 (1933) ("A patent is property, and title to it can pass only by assignment. If not yet issued, an agreement to assign when issued, if valid as a contract, will be specifically enforced."), amended 289 U.S. 706. Under North Carolina law, "[s]pecific performance will not be decreed unless the terms of the contract are so definite and certain that the acts to be performed can be ascertained and the court can determine whether or not the performance rendered is in accord with the contractual duty assumed." N.C. Med. Soc'y v. N.C. Bd. of Nursing, 169 N.C. App. 1, 11, 610 S.E.2d 722, 727-28 (2005) (citations omitted).
The Patents in this case are registered to Jason and have not been assigned to the MDC Companies. Though no recorded assignments exist, Jason orally agreed to assign the Intellectual Property to the MDC Companies. This promise was reflected in the 2012 Agreement, in which the parties stipulated that Mark would receive a 17.5% ownership interest in the companies, including "related intellectual property" in exchange for a $150,000 investment. By defining the companies to include the Intellectual Property, the parties underscored that such items would be considered Jason's capital contribution to the companies. Because Jason has not transferred the Patents to the companies, he has breached an agreement between the parties.
In light of the Court's determination that Jason must assign the Patents to the MDC Companies, Mark's remaining requests for relief become moot, with the exception of his request for fees. Due to the McDonald's lack of candor to the tribunal and their submission of false evidence to the Court, the Court will allow Mark to submit motions for costs and attorneys' fees under Rule 7054 of the Federal Rules of Bankruptcy Procedure, with relief subject to further review by the Court.
For the above stated reasons, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that:
(1) Mark holds a 22.5% ownership interest in the MDC Companies;
(2) Wayne and Jason each hold a 38.75% ownership interest in the MDC Companies;
(3) the Intellectual Property constitutes an asset of the MDC Companies;
(4) Jason shall assign the Patents to the MDC Companies; and
(5) Mark may submit a motion for costs and attorneys' fees within fourteen (14) days of entry of this Order, with relief subject to further review of the Court. In the event that Mark timely submits such a motion, any responses thereto shall be filed within fourteen (14) days.
