516 B.R. 163
Bankr. E.D. Ky.2014Background
- Debtors formed Meadow Lake Horse Park, LLC (Meadow Lake) in 2007; Meadow Lake purchased a 133-acre farm with bank financing. Debtors later made a large mortgage payment on Meadow Lake’s loan from their personal tax refunds.
- On December 28, 2010 Meadow Lake sold the farm to Beads and Steeds, LLC (Beads), a company newly formed and wholly owned by the Debtors, for $800,000; Beads financed the purchase with a United Bank mortgage.
- After the sale Meadow Lake leased the farm back from Beads for $1,000/month and continued to operate the business.
- Debtors filed Chapter 7 in 2012; Trustee sued (2014) to avoid the 2010 transfer as a fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B) and K.R.S. § 378.020 via § 544(b), alleging the Debtors effectively transferred estate property by treating Meadow Lake and the Debtors as one (reverse veil piercing).
- Beads moved for judgment on the pleadings arguing the Trustee failed to plead a transfer of the Debtors’ property interests (complaint alleges transfer by Meadow Lake only). Trustee sought to proceed under reverse veil piercing or, alternatively, move to amend to pursue substantive consolidation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Trustee may treat the 2010 transfer as a transfer of the debtors’ property by using reverse veil piercing | Trustee: unity of ownership and control supports reverse veil piercing so Debtors and Meadow Lake are the same and the transfer may be avoided | Beads: Complaint alleges transfers by Meadow Lake, not Debtors; reverse veil piercing is not recognized to consolidate entities under Kentucky law | Reverse veil piercing is not an accepted basis here; Kentucky has not adopted reverse veil piercing as a doctrine to treat owner and LLC as one for this purpose |
| Whether Kentucky would adopt reverse veil piercing as a remedy | Trustee: Kentucky’s acceptance of traditional veil piercing supports adoption of reverse veil piercing | Beads: Kentucky has discussed but not adopted reverse veil piercing; courts are speculative or hostile | Court: Kentucky courts have not adopted reverse veil piercing; even if possible, doctrine is an equitable remedy, not an independent cause of action to retroactively merge entities |
| Whether federal bankruptcy equity powers can create reverse veil piercing where state law does not recognize it | Trustee: bankruptcy court’s equitable powers permit recognition for Trustee to proceed to discovery | Beads: bankruptcy court cannot create substantive rights unavailable under state law | Court: Bankruptcy courts cannot create substantive rights under §105 that state law does not provide; reverse veil piercing cannot be judicially created here |
| Whether leave to amend for substantive consolidation should be allowed | Trustee: seeks leave to add count for substantive consolidation and add Meadow Lake as party | Beads: opposes as prejudicial and untimely | Court: Leave to amend not futile per se; Trustee given 14 days to move to amend and Beads 14 days to object; judgment on the pleadings premature pending amendment ruling |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (1979) (bankruptcy estate rights are defined by state law)
- Inter-Tel Tech., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152 (Ky. 2012) (Kentucky treats veil piercing as an equitable remedy used sparingly to prevent injustice)
- Turner v. Andrew, 413 S.W.3d 272 (Ky. 2013) (discussion noting a few jurisdictions accept insider reverse piercing but Kentucky did not adopt or reject it)
- White v. Winchester Land Dev. Corp., 584 S.W.2d 56 (Ky. Ct. App. 1979) (early discussion of veil-piercing theories in Kentucky)
- United States v. Sutton, 786 F.2d 1305 (5th Cir. 1986) (§105 cannot create substantive rights unavailable under applicable law)
- Pertuso v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir. 2000) (same principle limiting bankruptcy court equity powers)