603 B.R. 336
Bankr. E.D. Ky.2019Background
- U.S. Coal and nine affiliated debtors (the "Debtors") entered multiple financing transactions (JMB, ECM, ECM II) between 2008–2013; Goggin and Goodwin were directors/insiders and investors in ECM/ECM II.
- ECM (2009) purchased JMB's credit and a related Value Right; ECM and Debtors executed the ECM Credit Agreement consolidating liabilities.
- ECM II (2011) loaned ~$6.73M (two tranches) and obtained guarantees and all-asset liens from multiple Debtors; proceeds paid antecedent lender obligations.
- Goodwin and Goggin’s personal 2008 bridge notes were amended into secured 2013 Amended Notes, with guarantees and all-asset liens by several Debtors.
- Trustee (Phaedra Spradlin) brought suit asserting recharacterization (debt→equity), equitable subordination, avoidance of constructive and actual fraudulent transfers (state law and 11 U.S.C. §548), and preference claims; defendants moved for summary judgment on many counts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Recharacterization of ECM debt (Count 12) | The Value Right component was really equity; the rolled-up ECM claim should be recharacterized | The ECM Credit Agreement and contemporaneous documents are conventional debt (fixed interest, maturity, security); AutoStyle factors favor debt | Court: DENIED for Trustee / GRANTED for ECM — objective loan terms and most AutoStyle factors show debt |
| Recharacterization of ECM II debt (Count 12) | Same theory: ECM II’s advances were practical equity due to insider involvement and debtor distress | ECM II points to standard loan documentation, security, repayment schedule; only capitalization disputed | Court: GRANTED for ECM II — AutoStyle factors weigh for debt; capitalization alone insufficient |
| Equitable subordination (Count 11, 16) | Trustee: insiders and related entities advantaged themselves; claims should be subordinated | Defendants: no inequitable conduct (or insufficient as to non-insiders); some actions approved by board/minutes | Court: Claims proceed against ECM and against Goodwin/Goggin in part; GRANTED summary relief for ECM II; Count 16 proceeds only vs. Goggin (Goodwin dismissed on Count 16) |
| Avoidance — Constructive fraud re ECM II guarantees/liens (Counts 5, 6) | LR and JAD subsidiaries received no (or insufficient) consideration for assuming large secured obligations; payments within lookback should be avoided | ECM II: whole enterprise benefited; payments used to refinance maturing debt; U.S. Coal centralized cash management justified use of funds | Court: Trustee wins partial summary judgment re: LR Debtors’ guarantees and liens to ECM II (avoidance of ~$5.407M); genuine issues remain for JAD guarantees and other aspects; payments to ECM II cannot be avoided because U.S. Coal (not subsidiaries) made them |
| Avoidance — USCM transfer & related payments (Counts 8,9) | $800,000 paid by U.S. Coal to USCM (management vehicle) lacked valuable consideration and favored ECM investors | ECM: payment satisfied accrued bonuses or was valid retention/incentive; subsequent payments to ECM tied to that transfer | Court: Genuine disputes of material fact exist re consideration and intent; summary judgment denied to ECM on Count 8/9 |
| Avoidance — payments for counsel (Count 10) | Payments by U.S. Coal to Nelson Law Firm for ECM/Goggin defense were not reasonably equivalent value | ECM and Goggin: loan docs indemnify lender and directors for such fees; payment equated to debtor incurring debt (dollar-for-dollar) | Court: GRANTED for ECM and for Goggin — indemnity obligations rendered payments non-avoidabl e at summary judgment |
| Avoidance — Claims paid to ECM/ECM II (Count 13) | If recharacterized/equitably subordinated, payments on those claims are avoidable | Defendants: recharacterization dismissed and subordination does not invalidate claims; payments therefore valid | Court: GRANTED for ECM and ECM II — Count 13 fails because recharacterization was denied and subordination would not void claims |
| Avoidance — 2013 Amended Notes guarantees/liens (Counts 14,15) | JAD and LR Debtors received no reasonably equivalent value when they guaranteed/encumbered assets for Goodwin/Goggin | Goodwin/Goggin: subsidiaries and parent benefitted (indirect benefits, payment holidays, interest concessions) | Court: DENIED summary judgment for Goodwin/Goggin on Counts 14 and 15 — genuine issues re consideration, insolvency, and badges of fraud require trial |
| Avoidance — payments to Goodwin/Goggin on 2013 Notes (Count 17) | Payments within two years are avoidable if underlying obligations invalidated | Defendants: Trustee’s bases (recharacterization, subordination) failed; payments were from U.S. Coal, not the subsidiaries whose obligations might be avoided | Court: GRANTED for Goodwin/Goggin — Trustee failed to present a viable basis to avoid those payments |
| Preference — payments on 2013 Notes (Count 18) | Payments to insiders within preference period avoidable | Defendants: some transfers are ordinary course; Goodwin challenges insider status; solvency contested; secured-interest/hypothetical Chapter 7 analysis defeats avoidance | Court: Goodwin entitled to summary judgment as to insider 90–365 day transfers (not an insider of affiliate); Trustee not entitled to full summary judgment — genuine disputes remain (solvency, ordinary course) |
Key Cases Cited
- AutoStyle Plastics, Inc. v. Bayer Corp., 269 F.3d 726 (6th Cir.) (recharacterization test; eleven-factor AutoStyle/Roth analysis)
- Roth Steel Tube Co. v. Commissioner of Internal Revenue, 800 F.2d 625 (6th Cir.) (factors for debt vs. equity characterization)
- Indmar Prod. Co. v. Commissioner, 444 F.3d 771 (6th Cir.) (economic-substance focus; intent to create unconditional obligation)
- Celotex Corp. v. Catrett, 477 U.S. 317 (Sup. Ct.) (summary judgment burden allocation principles)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (Sup. Ct.) (genuine issue standard for summary judgment)