656 B.R. 117
Bankr. W.D.N.C.2023Background:
- Ballantyne Brands, LLC (a substantively consolidated Delaware/NC LLC) filed Chapter 11; GreerWalker was appointed Liquidating Agent and brought three consolidated adversary proceedings against former executives John J. Wiesehan, Jr. (CEO), Todd Millard (COO), and Justin Wiesehan (VP Marketing) to recover $617,779.84 in recurrent prepetition payments (variable compensation, tax distributions, consulting fees) made within the four years before the petition.
- The Company was a pass-through entity, majority‑owned and controlled (voting) by Steel Partners; management (the defendants) ran daily operations, reported compensation to the Board, and the Board approved annual budgets and compensation (though records were incomplete).
- The Company experienced sharp revenue declines, mounting returns/discounts, repeated losses, and persistent insolvency from 2014 forward; auditors flagged going‑concern issues and Steel made member loans and a limited funding commitment.
- The Estate alleged the Transfers were actually equity distributions or, alternatively, excessive compensation (thus for less than reasonably equivalent value) and sought avoidance under 11 U.S.C. § 548, North Carolina UVTA, and Delaware LLC distribution law; defendants asserted the payments were arm’s‑length compensation or required tax reimbursements under the Operating Agreement.
- The court allowed the Liquidating Agent’s expert (William Barbee) to testify under Daubert/Kumho but excluded certain QuickBooks audit‑trail exhibits and related expert testimony for failure to disclose in discovery; on the merits the court ruled tax distributions and Millard’s 2017 consulting fees not avoidable, but found portions of each defendant’s variable compensation avoidable as constructively fraudulent and recoverable.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the Transfers avoidable as constructive fraudulent transfers under §548(a)(1)(B) / NC UVTA? | Transfers were distributions or excessive compensation that gave the Debtor less than reasonably equivalent value; company was insolvent/unreasonably undercapitalized. | Payments were reasonable compensation, set/approved by the Board; tax distributions were contractual reimbursements under the Operating Agreement. | Court: Tax distributions and Millard’s consulting fees provided reasonably equivalent value (not avoidable). Portions of variable compensation were excessive and avoided as constructively fraudulent: Wiesehan $63,378.85; Millard $137,551.85; Justin $139,585.42. |
| Are the Transfers avoidable as actual fraudulent transfers under §548(a)(1)(A) / NC UVTA? | Badges of fraud (insider transfers, insolvency, alleged deceptive accounting, paying insiders while creditors unpaid) show actual intent to hinder/defraud. | No concealment; Board/Steel was aware; payments were ordinary course and not made on eve of bankruptcy; no subjective intent to defraud. | Court: Presumption of intent (for insider transfers without value) rebutted; evidence insufficient to establish actual fraudulent intent — §548(a)(1)(A) claims dismissed. |
| Was "reasonably equivalent value" established (methodology and aggregation issues)? | Barbee’s market analysis shows guaranteed compensation exceeded norms and Estate aggregates to show transfers lacked value. | Presumption of reasonableness for salary; Board approval and market acceptance; aggregation and multi‑year lumping improper. | Court: Rejected aggregation across persons/years; applied totality‑of‑circumstances using RCR data at Charlotte market, gave a conservative cushion (used RCR High ranges) and performed year‑by‑year, individual analysis to determine avoidable portions. |
| Expert admissibility and discovery (Barbee + excluded documents)? | Barbee proffered insolvency and compensation opinions and relied on company data; Estate relied on expert for returns/accounting analysis promised in discovery. | Defendants moved to exclude Barbee on qualifications and to exclude evidence not produced in discovery (QuickBooks audit trail). | Court: Barbee qualified and admissible under Rule 702/Daubert/Kumho (bench trial context), but excluded Exhibits 83/89 and Barbee testimony tied to undisclosed audit‑trail analyses for discovery failures. |
| Delaware LLC unlawful distribution claim (6 Del. C. §18-607) | Payments were distributions while LLC insolvent; members who knowingly receive prohibited distributions are liable. | Payments were reasonable compensation or required tax distributions; defendants lacked knowledge of insolvency (or payments were exempt as reasonable compensation). | Court: Delaware claim rises and falls with fraudulent transfer analysis; recoverable to the same extent as avoidable variable compensation (not tax distributions or Millard’s consulting fees); Delaware reach‑back limitations noted. |
Key Cases Cited
- In re Morris Commc'ns N.C., Inc., 914 F.2d 458 (4th Cir.) (reasonably equivalent value requires totality of the circumstances and market comparison)
- Tavenner v. Smoot, 257 F.3d 401 (4th Cir.) (presumption of fraudulent intent for insider transfers without adequate consideration)
- Jeffrey Bigelow Design Grp., Inc. v. Harman, 956 F.2d 479 (4th Cir.) (fraudulent transfer law protects creditors by focusing on diminution of estate)
- Fin. Inst. Funding, Inc. v. Off. Comm. of Unsecured Creditors (In re Buncher Co.), 229 F.3d 245 (3d Cir.) (distributions to equity owners provide no value to the debtor)
- Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (expert‑testimony gatekeeping standards)
- Kumho Tire Co. v. Carmichael, 526 U.S. 137 (expert admissibility applies to all expert testimony)
- Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir.) (initial monetary transferee is first party to put money to its own purposes)
- Rupp v. Markgraf, 95 F.3d 936 (10th Cir.) (initial transferee strict liability for avoided transfers)
- In re TC Liquidations LLC, 463 B.R. 257 (Bankr. E.D.N.Y.) (discussing tax distributions and value in pass‑through entities)