SARAH A. HALL, Bankruptcy Judge.
On August 26 and 27, 2019, the Court conducted a trial on the Complaint [Doc. 1], filed on November 1, 2017 (the "Complaint") by Susan Manchester ("Plaintiff"), Trustee of All Phase Roofing and Construction, LLC ("All Phase LLC"), against Ricky Sharpton ("Defendant"), president and owner of All Phase LLC. Attorney Susan Manchester appeared on behalf of Plaintiff, and Gary Hammond appeared on behalf of Defendant.
The Court has jurisdiction to hear the Complaint pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409. Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a), and this is a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(E) and (H). Additionally, the parties consented to this Court's entry of final orders pursuant to Federal Rules of Bankruptcy Procedure 7008 and 7012.
Defendant previously operated a roofing and construction business in the form of All Phase LLC, a single member limited liability company organized in February 2012. In December of 2016, All Phase LLC allegedly ceased operations, and Defendant began conducting the same roofing business as All Phase Roofing Systems ("All Phase Systems"), a sole proprietorship or D/B/A. All Phase LLC's bank statements and Defendant's income tax returns clearly indicate Defendant had a serious gambling habit during this same time period. All Phase LLC filed its chapter 7 bankruptcy petition on June 18, 2017. Defendant filed his personal chapter 7 bankruptcy petition on December 31, 2017. In her capacity as trustee of the bankruptcy estate of All Phase LLC, Plaintiff filed her Complaint asserting numerous causes of action under 11 U.S.C. §§ 544, 548(a)(1)(A) and (B), 542 and 550(a) and (b),
In making the following Findings of Fact and Conclusions of Law, the Court considered:
1. Defendant filed the Articles of Organization of a Limited Liability Company for All Phase LLC with the Oklahoma Secretary of State on February 16, 2012. Trustee Ex. 5. All Phase LLC was a single member LLC, and Defendant was the sole owner and president thereof.
2. On July 2, 2013, Defendant transferred real property located at 3400 East Airport Road, Stillwater, Oklahoma (the "Real Property") by quit claim deed from himself to All Phase LLC. Trustee Ex. 20. Defendant claims the Real Property was conveyed to All Phase LLC to facilitate All Phase LLC obtaining a loan, but that it was "really" owned by Defendant.
3. At all relevant times, Defendant lived in a mobile home located on the Real Property (the "Mobile Home").
4. In October 2014, All Phase LLC borrowed money from BancFirst and granted a mortgage lien on the Real Property to BancFirst to secure such indebtedness. Trustee Ex. 23. Defendant did not reveal to BancFirst that he, rather than All Phase LLC, "really" owned the Real Property.
5. Defendant personally guaranteed All Phase LLC's indebtedness to BancFirst. Defendant Ex. 3.
6. In October 2016, Defendant, on behalf of All Phase LLC, entered into a Payment Rights Purchase and Sale Agreement ("Funding Agreement") with Everest Business Funding ("Everest"). Defendant personally guaranteed payment under the Funding Agreement. Trustee Ex. 13.
7. In conjunction with the Funding Agreement, and around the time he received funds thereunder during the first week of November 2016, Defendant executed an Affidavit of Confession of Judgment to be filed in the event of default. Trustee Ex. 14.
8. All Phase LLC defaulted under the Funding Agreement with Everest on approximately December 7, 2016. Everest filed Defendant's Confession of Judgment in the Supreme Court for Nassau County, New York, on March 17, 2017. Trustee Ex. 14.
9. According to Defendant, All Phase LLC ceased conducting business on December 9, 2016. Defendant consulted an attorney who advised him to file bankruptcy with respect to All Phase LLC. Defendant planned to file bankruptcy at the beginning of 2017. However, Defendant continued to do business ostensibly as All Phase Systems, a sole proprietorship/D/B/A.
10. Per Defendant, after All Phase LLC shut down, it transferred the Real Property and various other assets — a Trailer, a 2011 Truck, Equipment, and Inventory (all defined below) — on December 12, 2016, to Defendant for no consideration. Defendant testified that he made such transfers on the advice of his late bankruptcy counsel.
11. In March 2017, All Phase LLC entered into a subcontract with Rupe Building Company (the "Rupe Helmer Contract"). The Rupe Helmer Contract was not entered into by Defendant d/b/a All Phase Systems, but by All Phase LLC. Although the Rupe Helmer Contract itself refers simply to "All Phase," the cover sheet clearly reflects "All Phase Roofing and Construction LLC" in three places. Trustee Ex. 30. Additionally, the Notice of Assignment attached thereto, which is dated in April 2017, assigns the payments due to "All Phase Roofing and Construction, LLC" thereunder to BancFirst and is signed by Defendant as Member/Manager of All Phase LLC, BancFirst, and Rupe Helmer. Trustee Ex. 30.
12. Notwithstanding having allegedly ceased business in 2016, All Phase LLC continued to issue invoices to customers in 2017 prior to its bankruptcy filing, directing customers to make checks payable to "All Phase Roofing and Construction, LLC."
13. Similarly, numerous customers issued 1099s to All Phase LLC for 2017 using its employer identification number, totaling $121,925.25. Trustee Ex. 33. Notwithstanding issuance of these 1099s, All Phase LLC reported no income for 2017.
14. Notwithstanding All Phase LLC's alleged cessation of business in December 2016, money continued to move in and out of All Phase LLC's bank accounts up to the bankruptcy filing in June 2017,
15. All Phase LLC filed a voluntary petition under chapter 7 of the Bankruptcy Code on June 18, 2017 ("Petition Date"). Together with the voluntary petition, All Phase LLC filed its Schedules and Statement of Financial Affairs, which were signed by Defendant under penalty of perjury and on the reasonable belief that the information was true and correct. Trustee Ex. 1, pp. 5 and 48.
16. Defendant reviewed the voluntary petition, Schedules, and Statement of Financial Affairs and believed them to be correct. At trial, he was not sure of their accuracy and frequently stated he relied on the advice of his late counsel.
17. Defendant signed the All Phase LLC bankruptcy filings as President/Manager.
18. Plaintiff is the duly appointed chapter 7 trustee assigned to the All Phase LLC bankruptcy case.
19. All Phase LLC's Schedule A/B provides that it owned the following property on the Petition Date:
Trustee Ex. 1, pp. 8-11.
19. Per All Phase LLC's Schedule A/B, the total value of its assets as of the Petition Date was $203,712.28. Trustee Ex. 1, p. 6.
20. All Phase LLC's Statement of Financial Affairs provides that it transferred the following assets to Defendant on December 12, 2016:
Trustee Ex. 1, p. 41.
21. Per All Phase LLC's Schedule D, its assets were subject to liens held by the following secured creditors:
Thus, the Real Property, 2011 Truck, and Trailer transferred from All Phase LLC to Defendant on December 12, 2016, were also subject to liens of creditors at the time of the transfers. Per All Phase LLC's Schedule D, it owed secured creditors a total of $583,425.68. Trustee, Ex. 1, p. 6.
22. Per All Phase LLC's Schedule H, Defendant was identified as a co-debtor with respect to all of the secured debts listed above except Ford Motor Credit with respect to the 2014 truck (which is not an issue in this case). Trustee Ex. 1, pp. 33-41.
23. Per All Phase LLC's Schedule E/F, it owed unsecured creditors a total of $350,103.39 on the Petition Date. Trustee Ex. 1, p. 6.
24. Per All Phase LLC's Schedule H, Defendant was identified as a co-debtor with respect to all of All Phase LLC's unsecured debts except four: 2.11-OESC, 3.6-IRS, 3.16-IRS, and 3.27-Scott Thomas PLLC. Trustee Ex. 1, pp. 33-41.
25. As of the Petition Date, All Phase LLC was insolvent. Additionally, based on a review of Schedule D secured debt alone, All Phase LLC was insolvent at the time it transferred property to Defendant on December 12, 2016.
26. All Phase LLC amended its Schedule G on June 2, 2018, adding the Rupe Helmer Contract thereto. Trustee Ex. 3.
27. Trustee has not sought to avoid any liens held by secured creditors in the All Phase LLC bankruptcy case. Bky. Doc. Sheet 17-12414.
28. More than two years have elapsed since entry of the order for relief in All Phase LLC's bankruptcy case, i.e. the Petition Date of June 18, 2017.
29. Defendant filed a voluntary petition under chapter 7 of the Bankruptcy Code on December 31, 2017, approximately six months after All Phase LLC filed bankruptcy. Together with the voluntary petition, Defendant filed his Schedules and Statement of Financial Affairs signed under penalty of perjury and declared to be true and correct (the "Schedules"). Trustee Ex. 8, pp. 73 and 81.
30. Defendant's Schedule A/B provides that, among other assets, he owns the following:
Trustee Ex. 8, pp. 16-22.
31. On his Schedule D, Defendant identified the claims of all the secured creditors listed on All Phase LLC's Schedule D (at substantially the same amounts), except for Ford Motor Credit Company's claim with respect to a 2014 Ford F250 Truck. However, by the time Defendant filed his voluntary petition, a motion for stay relief with respect to the 2014 Ford F250 Truck had been granted in the All Phase LLC bankruptcy case and, therefore, it is not an issue in this case. Additionally, Defendant's Schedule D includes Century Trucks and Vans as a secured creditor in the amount of $5,348.51 secured by a lien on a 2011 Ford F150. Trustee Ex. 8, p. 26. Century Trucks and Vans is also noted as lien holder on the Certificate of Title issued for the truck on the December 12, 2016, transfer date. Trustee Ex. 16.
32. On his Schedule E/F, Defendant listed each and every unsecured creditor and debt listed on All Phase LLC's Schedule E/F (even those four not included on All Phase LLC's Schedule H — see ¶ 24 above). Trustee Ex. 8, pp. 31-51.
33. In his Statement of Financial Affairs, Defendant listed his income from operating a business as follows:
Trustee Ex. 8, p. 75-76.
34. After the conclusion of Defendant's Section 341 meeting of creditors held on April 25, 2018, Defendant amended Schedule C on May 13, 2018, to reflect that the amount claimed as exempt was 100% of fair market value, up to any applicable statutory limit rather than a stated value. Trustee Ex. 10.
35. On February 27, 2018, Defendant filed the following with the Oklahoma Secretary of State on behalf of All Phase LLC: (i) an Application for Reinstatement, which he signed as manager (and obtained a Certificate of Reinstatement); (ii) an LLC Annual Certificate, which he signed as president (and paid the filing fee to bring the LLC current); and (iii) Articles of Dissolution, which he signed as manager (and obtained a Certificate of Dissolution). Trustee Ex. 36 and 37. Per Defendant, he took these steps on the advice of his late counsel.
36. On April 28, 2018, Trustee objected to Defendant's claims of exemption with respect to the following:
Trustee Ex. 9. The objection was overruled except to the extent that Defendant's exemption in tools of the trade was limited to an aggregate of $10,000. See Order Granting in Part and Denying in Part Trustee's Objection to Debtor's Claimed Exemptions with Notice of Opportunity for Hearing and Notice of Hearing [Doc. 26 in Bky. 17-15219] entered on June 5, 2018.
37. Defendant amended his Schedule G on June 2, 2018, to add the Rupe Helmer Contract which had been inadvertently omitted. Trustee Ex. 11.
38. Defendant further amended his Schedule C on June 19, 2018, to comply with the Court's order dated June 5, 2018, to identify no more than $10,000 in tools of the trade on Schedule C. Trustee Ex. 12.
39. The chapter 7 trustee in Defendant's bankruptcy case did not seek to avoid any liens on estate property. Further, after inspecting the personal property of the estate, the chapter 7 trustee abandoned the "estate's interest in all office equipment and supplies, machinery, and equipment used in business including, but not limited to cargo trailers, and miscellaneous inventory of roofing materials." The trustee's stated reason for abandoning the personal property was that the total liens of BancFirst, Bank of the Lakes, and Fora Financial Business Loans, LLC far exceeded the value of the property.
40. In calendar year 2016, Defendant took withdrawals, received cash, and made internet transfers to his personal accounts from All Phase LLC's 7529 Account as follows (in round numbers):
Trustee Ex. 39. A substantial portion of the withdrawals were made at casinos and other gambling venues.
41. In calendar year 2017, Defendant took withdrawals, received cash, and made internet transfers from All Phase LLC's 7529 Account as follows (in round numbers) notwithstanding All Phase LLC having ceased operations in December 2016:
Trustee Ex. 39.
42. Defendant essentially treated the funds in All Phase LLC's 7529 Account as his own personal funds and used them however he wanted to use them.
43. When All Phase LLC filed bankruptcy, it had $838.24 in the 7529 Account, Trustee Ex. 39, but Defendant never turned such funds over to Plaintiff. Defendant testimony.
44. When Defendant opened a bank account for All Phase Systems, All Phase LLC funds from 7529 Account and 9296 Account were deposited therein. Trustee Ex. 43.
45. At trial, Defendant's oft-repeated mantra was, to paraphrase, that All Phase LLC and Defendant are one and the same, what one owned, the other owned. He was a single member limited liability company and did not understand All Phase LLC was a separate entity.
46. All Phase LLC transferred the Equipment to Defendant but he could not state when or why it was not so identified in the All Phase LLC Statement of Financial Affairs as having been transferred to him. Defendant testified that he paid nothing to All Phase LLC for the Equipment.
47. Defendant has, or at least had during the relevant periods here, a serious gambling habit, as was apparent from his bank account records. Per Form 1040 he filed with respect to tax year 2016, Defendant had income from All Phase LLC of $284,469.94, gains of $1,390,406.00, and gambling losses of $1,052,931.00. Trustee Ex. 28. Per Defendant, the source of his gambling funds was money made through All Phase LLC.
48. On his 2016 Form 1040, Defendant reported $56,957.00 owed to it on contracts not payable until 2017. Trustee Ex. 28. Defendant then testified he took income received in 2017 on All Phase LLC contracts personally. He, however, did not list such income on his Statement of Financial Affairs. Trustee Ex. 8, p. 74-75. Meanwhile, All Phase LLC only reflected $40,000 as having been paid to insiders, i.e. Defendant, in 2016.
49. Defendant's 2017 Form 1040 reflects no income from a business, but gambling gains of $66,850.00. Trustee Ex. 29. When asked for the source of the gambling funds, he first suggested it was from his own "Systems" jobs. However, when it was pointed out that such funds would have been reportable income, he backtracked and said he did not know.
50. Defendant testified that he knows that there was income in 2017 from operation of a business, but does not know why the filed 2017 Form 1040 reflected no income.
51. The filed 2017 Form 1040 also includes an "Affidavit Verification of Dissolution for Tax Reporting" stating that All Phase LLC was dissolved for tax reporting purposes effective December 31, 2016 (the "Affidavit"). Defendant executed the Affidavit on March 18, 2019, on the advice of his accountant. Defendant admitted that All Phase LLC received income in 2017 but could not explain how as it was dissolved in 2016.
52. To say it was difficult for Plaintiff to get full discovery from Defendant would be an understatement. Some documents were only provided to Plaintiff shortly prior to trial. Plaintiff previously had to obtain this Court's assistance in compelling Defendant to comply with her discovery requests. See Doc. 41, 45, 52, and 77 in Adv. 17-01070. Defendant's conduct was simply inexcusable with respect to the delay and trouble imposed on Plaintiff and suggests a lack of candor and a desire to prevent Plaintiff from thoroughly investigating his financial affairs and those of All Phase LLC.
53. Defendant was the primary witness at trial.
54. The Court also struggled with Defendant's repeated excuse that he relied on the advice of his late counsel primarily because, in the Court's opinion, if the advice was, in fact, given, it was poor advice and often required Defendant to swear under oath and under the penalty of perjury to known false facts. Unfortunately, Defendant's counsel passed away in early 2019 and was, therefore, unavailable for confirmation much less examination, making Defendant's scapegoat arguments most convenient. Additionally, as set forth above, Defendant professed his belief was that he and All Phase LLC were "one and the same" numerous times. As unbelievable as that sounds, Defendant never wavered from that position. He never answered any of Plaintiff's questions inconsistently with such position, nor made any statements that would lead the Court to doubt that such position was his genuine, though obviously incorrect, belief. However, as discussed below with respect to Defendant's actual intent to hinder, delay, or defraud creditors, a person's actions and deeds often speak much louder than his words.
Plaintiff seeks to avoid various transfers as actually or constructively fraudulent pursuant to Sections 544 and 548(a)(1)(A) and (B) and Oklahoma's version of the UFTA ("OUFTA").
Generally speaking, fraudulent transfer law allows a creditor, or one standing in a creditor's shoes, to set aside or "avoid" transactions which improperly deplete a debtor's assets.
In order to sustain a cause of action under Section 548(a)(1)(A), a trustee must establish (i) a transfer of an interest of the debtor in property; (ii) made within two years before the debtor filed for bankruptcy; and (iii) done with "actual intent to hinder, delay, or defraud" a creditor.
A trustee's cause of action under Section 548(a)(1)(B) is often referred to as constructive fraud because it omits any element of intent. To sustain a cause of action for a constructively fraudulent transfer, a trustee must also first establish that there was a transfer of a debtor's property interest within two years prior to the petition date, and then show that the debtor received less than reasonably equivalent value in exchange for the transfer. Additionally, the trustee must demonstrate that either (a) the transfer was made when the debtor was insolvent or the debtor became insolvent as a result of such transfer, (b) the debtor was engaged or about to become engaged in a business or a transaction for which its remaining property represented an unreasonably small capital, (c) the debtor intended to incur debts beyond its ability to repay them as they matured, or (d) the debtor made the transfer to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. 11 U.S.C. § 548(a)(1)(B)(ii);
Once a transfer of property has been avoided by a trustee as actually or constructively fraudulent, such property may be recovered by a trustee for the benefit of the bankruptcy estate. Specifically, Section 550 provides:
11 U.S.C. § 550(a). In other words, after a trustee succeeds in avoiding a transfer under Section 548(a)(1) as fraudulent, Section 550(a) provides, with certain limitations or defenses not applicable here, that the transferred property or its value may be recovered from the initial transferee or its subsequent transferees. Thus, if the specific property cannot be recovered, a bankruptcy court may enter a money judgment against the transferee for the value of the property in order "to restore the estate to the financial condition that it would have enjoyed if the transfer had not occurred."
As expressed in Plaintiff's Closing Argument, Plaintiff seeks to avoid and recover three different categories of transfers made to Defendant from All Phase LLC: (i) assets transferred approximately seven months prior to the date All Phase LLC filed its bankruptcy petition,
However, only transfers made within two years
Neither does Plaintiff's Complaint or the Final Pretrial Order refer to transfers from All Phase LLC to Defendant during the period January to June 2017 by way of cash withdrawals and internet transfers (which total $96,479.54). Although Plaintiff introduced evidence of these transfers at trial, Federal Rule of Civil Procedure 16, made applicable by Federal Rule of Bankruptcy Procedure 7016, provides that (i) the pretrial order controls the course of the action unless the Court modifies it
Plaintiff argues transfers made to Defendant may be avoided as constructively fraudulent under Section 548(a)(1)(B) because All Phase LLC was insolvent at the time of the transfers and did not receive reasonably equivalent value in exchange therefore. Plaintiff's Closing Argument at 4-5. Plaintiff bears the burden of proving each element of her claim for avoiding the allegedly fraudulent transfers by a preponderance of the evidence.
The Court concludes Defendant did, in fact, cause All Phase LLC to transfer certain property to Defendant within the two-year look back period of Section 548(a)(1),
But in addition to All Phase LLC's insolvency at the time of these transfers, Section 548(a)(1)(B)(i) requires Plaintiff to prove that All Phase LLC did not receive reasonably equivalent value in exchange for the transfers to Defendant. Reasonably equivalent value is not defined in the Bankruptcy Code, but is intended "to protect creditors against the depletion of a bankruptcy estate."
Courts conduct a two-prong analysis "to determine whether a debtor has received reasonably equivalent value in exchange for its transfer of an interest in its property to another."
In this case, it is undisputed that All Phase LLC received nothing from Defendant in exchange for any of the transferred property. This is where Plaintiff would have the Court stop its analysis, and certainly the undisputed facts of the transfers themselves and the lack of consideration therefor make such an argument seemingly persuasive. But the reasonably equivalent value inquiry does not end there. Rather, a further step is mandated and requires the Court to measure the value of what All Phase LLC received,
Generally speaking, pre-petition liens pass through bankruptcy unaffected and are enforceable against the property to which the lien has attached.
Additionally, a security interest in an asset will continue even after a chapter 7 trustee avoids a transfer by debtor as a preference or fraudulent transfer and recovers it for the benefit of the estate.
The Statement of Financial Affairs filed by All Phase LLC indicates that on December 12, 2016, it transferred Real Property valued at $76,000, the 2011 Truck valued at $7,225, and the Trailer valued at $4,300 to Defendant. However, per All Phase LLC's Schedule D, it appears that all three of those assets were subject to liens in excess of their value. Further, all of All Phase LLC's remaining assets as of the Petition Date, valued in total at $203,712.28, also appear to be subject to liens in excess of their value.
A chapter 7 trustee in bankruptcy represents the interest of the unsecured creditors and not the secured creditors.
Given the complete absence of evidence that All Phase LLC's assets had any economic value that would inure to the benefit of the estate, notwithstanding that such assets were, in fact, transferred by All Phase LLC to Defendant for no consideration, Plaintiff failed to establish that All Phase LLC did not receive reasonably equivalent value therefor as required by Section 548. Because the requirement that the transfers were made for less than reasonably equivalent value is not met, the transfers cannot be constructively fraudulent.
To prevail on her claim that the transfers of property from All Phase LLC to Defendant were actually fraudulent, Plaintiff must prove (i) there was a transfer of an interest of the debtor in property made within two years before the debtor filed for bankruptcy; and (ii) such transfer was done with "actual intent to hinder, delay, or defraud" a creditor.
A debtor rarely admits that he or she acted with fraudulent intent.
In Plaintiff's Closing Argument, she contends that many of the badges of fraud set forth above are present in this case. The Court agrees. Most notably, the transfers were (i) of substantially all of All Phase LLC's assets (in the aggregate) (ii) to an insider (iii) at the time All Phase LLC was insolvent (iv) following default on a debt with respect to which Defendant had signed a confession of judgment. In fact, this case presents a textbook example of fraudulent transfers. Defendant's main defenses to Plaintiff's claim for avoiding the transfers as actually fraudulent are: (i) he relied on advice of counsel to make the transfers; and (ii) he believed All Phase LLC and himself to be one and the same, which allowed him to do whatever he liked with All Phase LLC's assets. Such arguments are lamentably insufficient to overcome the badges of fraud present and the totality of the circumstances in this case.
First, as previously mentioned, counsel who filed All Phase LLC's and Defendant's bankruptcy cases unfortunately died in early 2019 before trial of this case. Therefore, Plaintiff was without direct evidence to impeach Defendant's testimony on this issue. Although Defendant repeatedly asserted that he and All Phase LLC were one and the same, the Court finds it incredibly difficult to believe that previous counsel would completely ignore the distinction between a corporate entity and its sole owner and advise Defendant to transfer All Phase LLC's property to himself. Defendant's argument in this regard falls woefully short of negating his alleged intent to delay, hinder, or defraud creditors, especially in light of the other numerous badges of fraud present.
Moreover, Defendant's asserted belief that there was no difference between himself and All Phase LLC is belied by his actions. If Defendant truly thought that to be the case, there would have been no reason for Defendant to cease doing business as All Phase LLC in December 2016, yet continue operating the same business as a sole proprietorship thereafter. Even if the assets transferred to Defendant remained subject to the liens of secured creditors, All Phase LLC also scheduled unsecured debts of $350,103.39. It requires no leap of thought at all on the Court's part to conclude that by ceasing operations of All Phase LLC and subsequently dissolving it, Defendant, at a minimum, intended to hinder or delay All Phase LLC's unsecured creditors from reaching the assets All Phase LLC used to produce income.
Traditional badges of fraud are not the only indicators of actual fraudulent intent. Instead, "[t]hey are intended to be guideposts — as opposed to ineluctable factors — in a court's analysis of the totality of the circumstances to determine whether a transfer was made with actual fraudulent intent."
First, with respect to the discovery process in this case, Defendant was extremely uncooperative. Plaintiff was forced to obtain this Court's assistance in compelling Defendant to comply with her discovery requests.
Additionally, Defendant's withdrawals of enormous sums of cash from All Phase LLC's bank accounts primarily at gambling venues are illustrative of fraudulent intent. All Phase LLC was obviously in serious financial trouble during the second half of 2016. That Defendant was forced to resort to more extreme financing arrangements to keep the business going, such as the "Payment Rights Purchase and Sale Agreement" with Everest in October 2016 (
Defendant's withdrawals from All Phase LLC's bank accounts for his gambling purposes represent a general pattern of removing and dissipating All Phase LLC's assets that could have been paid to creditors, and are indicative of fraudulent transfers.
Based on the evidence presented, the Court concludes that Plaintiff established, via traditional badges of fraud and other factors, that Defendant caused All Phase LLC to transfer assets to himself with actual intent to hinder, delay, or defraud All Phase LLC's creditors. Therefore, such transfers are subject to avoidance pursuant to section 548(a)(1)(A).
Even though the Court has concluded that certain transfers of All Phase LLC's assets may be avoided as actually fraudulent, recovering those assets from Defendant as transferee pursuant to Section 550 is a separate action that is conceptually different and requires its own analysis.
As one bankruptcy court explained, because Section 550 requires recovery to be for the benefit of the estate, "[a]voidance is always necessary for recovery, but recovery is not always necessary or even useful after avoidance."
Here, there are several reasons that recovery of the avoided transfers would not be "useful." First, Plaintiff did not conclusively establish that any of the transferred assets have value in excess of liens. "And where property transferred has a security interest over and above the value of the property, the weight of authority dictates that a trustee may not recover because the estate would not benefit."
Plaintiff asserts there is value in excess of liens with respect to the Real Property, 2011 Truck, Trailer, Equipment and Inventory. However, in calculating equity, Plaintiff takes into account only: (i) the mortgage held by BancFirst on the Real Property; (ii) the UCC Financing Statement filed by BancFirst with respect to Equipment and Inventory; and (iii) the lien held by Century Trucks and Vans on the 2011 Ford F150. Plaintiff's Closing Argument at 10-11. According to All Phase LLC's Schedule D, there are numerous other creditors with debts secured by liens on all of All Phase LLC's assets that total over $400,000.
Additionally, recovery of the assets is not "useful" in this particular case because Defendant, the transferee, filed his individual chapter 7 petition about six months after All Phase LLC filed bankruptcy. In doing so, he
In sum, it would be pointless to require Defendant to return the assets to Plaintiff as the estate has no equity in the assets "and the return would not benefit the bankruptcy estate and would be a waste of judicial and estate resources."
Mark Twain's quote, "Truth is stranger than fiction," epitomizes this case. Never before has this Court been faced with facts so clearly establishing fraudulent transfers of assets to an insider for absolutely no consideration yet resulting in no recovery for the bankruptcy estate. But, when all of the evidence is analyzed, the transfers by All Phase LLC to Defendant, though avoidable under Section 548(a)(1)(A),
IT IS SO ORDERED.
