In rе: JAMES A. FISHER, Debtor RHONDA BRENNAN, JAMES A. FISHER, Appellants Cross-Appellees, v. RUTH A. SLONE, Trustee, Appellee Cross-Appellant.
Nos. 07-3319, 07-3320
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
October 10, 2008
NOT RECOMMENDED FOR FULL-TEXT PUBLICATION File Name: 08a0612n.06 On Appeal from the United States District Court for the Southern District of Ohio at Dayton
RALPH B. GUY, JR., Circuit Judge. Bankruptcy trustee Ruth A. Slone brought this adversary proceeding seeking to avoid certain pre-petition transfers of money and property between James A. Fisher, the debtor, and Rhonda Brennan. The bankruptcy court rejected the trustee‘s claims with respect to transfers of money between defendants Fisher and Brennan, but found in favor of the trustee with respect to the sale of inventory by Fisher, as the alter ego of Fisher Data Products, Inc. (FDP), to Brennan. Both the trustee and the defendants appealed, and the district court affirmed. Slone v. Brennan, et. al. (In re Fisher), 362 B.R. 871 (S.D. Ohio 2007).
Defendants appeal to this court, challenging the trustee‘s standing, the finding that FDP was Fisher‘s alter ego, and thе determination that the sale of inventory to Brennan was fraudulent under
I.
In 1994, James A. Fisher, an engineer, formed Fisher Data Products (FDP) as a “subchapter S” corporation. Fisher was the sole shareholder of both FDP and JR Properties, LLC, which owned the property where FDP was located. Fisher and FDP were both in financial trouble by 1999. FDP had borrowed money from several financial institutions, including National City Bank. Fisher not only borrowed money in his own name, but also personally guarantеed most of the loans to FDP. FDP began defaulting on its loans in 2000, and National City obtained judgment against FDP in November 2002. FDP was dissolved, its patents were sold to Globe Products, Inc., and Fisher began working for Globe on a contract basis in January 2003. Fisher filed for personal bankruptcy on April 16, 2003.
A. Monetary Transfers
Fisher met Rhonda Brennan in 1998, when she started working for FDP in sales and
Examining the financial rеcords, the bankruptcy court found that there were 87 transfers of money between Fisher and Brennan from December 2000 through April 16, 2003. Eight transfers occurred more than a year before the bankruptcy filing—three from Fisher to Brennan totaling $15,000, and five from Brennan to Fisher totaling $15,000. In the year preceding the bankruptcy filing, there were 16 transfers from Fisher to Brennan totaling $33,233.11 and 63 transfers from Brennan to Fisher totaling $34,600.98. The bankruptcy judge found these transfers did not represent loans, but were simply the transfer of funds between cohabitating persons with shared financial responsibilities. Finding that the sums were expended for ongoing household expenses and that Fisher received reasonably equivalent value for the sums he transferred to Brennan, the bankruptcy court concluded that the transfers were not fraudulent under the bankruptcy cоde or Ohio law.
B. Sale of Inventory
Although FDP was no longer a viable business as of November 2002, it still had assets in the form of patents, outstanding orders, and inventory specifically designed for use with certain patents. When Fisher approached Globe about purchasing FDP, the discussions
Fisher and Brennan recognized that the inventory, appraised for National City at a liquidation value of $3,000, represented a business opportunity because it had substantially greater value to Globe. If Fisher took the inventory personally, however, it could be lost to the trustee when he filed for bankruptcy. Instead, the inventory would be sold to Brennan. In January 2003, Brennan wrote to National City offering to purchase certain FDP inventory and shelving for $3,800. National City responded that although it held a security interest in the inventory, the property was owned by FDP and any offer to purchase should be directed to Fisher. On January 23, 2003, Brennan sent a letter to Fisher offering to purchase the inventory for $3,850. The evidence showed that National City approved the sale to Brennan, that Fisher аccepted her offer, and that Brennan paid by check dated February 3, 2003. The proceeds of the sale went to National City, which released its security interest in the inventory purchased by Brennan.
Brennan moved the inventory to Globe‘s facility. On February 7, 2003, less than a
C. Procedural History
The trustee brought this “core” adversary proceeding seeking to avoid the transfers of money and inventory as preferential or fraudulent under the bankruptcy code and Ohio law. Trial was conducted over two days, and the bankruptcy court issued a written memorandum decision in January 2006. While rejecting the trustee‘s claim with respect to the monetary transfers, the bankruptcy court nonetheless found that FDP was Fisher‘s alter ego and that Fisher‘s transfer of the inventory to Brennan could be avoided for actual or constructive fraud under
Damages were awarded to the trustee in the amount of $99,128.65—the proceeds of Brennan‘s sale of the fraudulently transferred inventory. Brennan was also ordered to provide an accounting and to turn over any remaining inventory to the trustee. The district court affirmed, and these appeals followed.3
II.
Although the parties raised the same issues in the district cоurt, this court reviews the bankruptcy court‘s decision directly rather than the district court‘s review of that decision. Stevenson v. J.C. Bradford & Co. (In re Cannon III), 277 F.3d 838, 849 (6th Cir. 2002); see also Corzin v. Fordu (In re Fordu), 201 F.3d 693, 696 n.1 (6th Cir. 1999). Accordingly, we review the bankruptcy court‘s findings of fact for clear error, and its conclusions of law de novo. Behlke v. Eisen (In re Behlke), 358 F.3d 429, 433 (6th Cir. 2004).
Both the appeal and cross-appeal arise from the trustee‘s authority under Section 548 of the Bankruptcy Code to avoid “any transfer of an interest of the debtor in property” made within one year before the filing of the bankruptcy petition
. . . if the debtor voluntarily or involuntarily—
(A) made such transfer . . . with actual intent to hinder, delay, or defraud any entity to which the debtor was or became . . . indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii) (I) was insolvent on the date that such transfer was made . . . , or became insolvent as a result of such transfеr . . . ;
The bankruptcy judge found at the outset that the defendants’ testimony was
A. Monetary Transfers
The bankruptcy court characterized the trustee‘s claims with respect to the transfers of money as resting entirely on evidence that the defendants “clearly knew that a bankruptcy was close at hand and planned for it.” Although more than $45,000 in transfers were challenged at trial, the trustee restricted her appeals, both here and in the district court, to a subset of transfers from Fisher to Brennan that occurred between November 2002 and the bankruptcy filing in April 2003. Those eleven transfers totaled $18,749.97. As the district court noted, the trustee has not articulated any basis for distinguishing these transfers from the rest. We infer from the trustee‘s arguments that the distinction lies in the manner in which Fisher made these transfers. Specifically, the evidence showed that Fisher stopped using his own bank account in November 2002 and deposited almost all of his paychecks from Globe directly into Brennan‘s account until after the bankruptcy petition was filed in April 2003.
The bankruptcy court was not persuaded that those transfers should be treated differently, and found with respect to all of the monetary transfers that Fisher and Brennan
1. Constructive Fraud
With respect to constructivе fraud, the trustee argues that the bankruptcy court erred by “netting” the transfers between Fisher and Brennan to conclude that Fisher received “reasonably equivalent value” in exchange for such transfers. The trustee argues specifically that our decision in Chomakos requires that each transfer be analyzed separately. Chomakos v. Flamingo Hilton (In re Chomakos), 69 F.3d 769, 771 (6th Cir. 1995). The trustee, however, overstates the holding in that case.
The transfers at issue in Chomakos were bets placed at a regulated gambling casino, and the question presented was when the value of those transfers should be determined. It was in this context that we found the value of the rights obtained by placing the bets should be determined at the time the transfer was made—not after it was known that the debtors had lost those bets. The court explained that the fact that the debtors lost more than they won did not establish that they had not received reasonably equivalent value for the transfers. That
“[T]he test used to determine whether a transfer was supported by reasonably equivalent value focuses on whether there is a reasonable equivalence between the value of property surrendered and that which was received in exchange.” Corzin, 201 F.3d at 708. Although the bankruptcy court found reasonable equivalence in the amounts transferred between Fisher and Brennan, the trustee is correct that there was no explicit finding that the transfers from Fisher to Brennan were “in exchange for” the transfers from Brennan to Fisher. Nonetheless, what is explicit is the bankruptcy court‘s factual finding that the challenged transfers were for Fisher‘s share of the ongoing expenses of running their household. As this court recently explained,
the greater weight of authority holds, in cases applying state statutes comparable to the [Fair Debt Collection Procedures Act (FDCPA)] as well as in bankruptcy cases applying a similar fraudulent transfer provision [in § 548(a)(1)(B)] that a debtor does indeed receive “reasonably equivalent value” when he/she makes payments to his/her spouse (or cohabitant) that are used for household expenses.
United States v. Goforth, 465 F.3d 730, 736 (6th Cir. 2006) (footnote omitted) (citing cases).
This is sufficient to defeat the trustee‘s claim of constructive fraud, and distinguishes this case from those in which the transfer was not for “value” bеcause it was in exchange for an “unperformed promise to furnish support to the debtor or a relative of the debtor.”
2. Actual Fraud
Next, the trustee argues that the bankruptcy judge confused “actual” and “constructive” fraud by concluding that actual fraud could not be established if reasonably equivalent value was given. Although the two theories were discussed together, we read the bankruptcy court‘s decision to reflect distinct conclusions with respect to actual and constructive fraud based on a common set of facts. In fact, emphasizing that the transfers to Brennan were used to pay the bills that the defendants shared as cohabitants, the bankruptcy court specifically found that none of the evidence presented at trial showed that the challenged transfers were made with “intent to hinder, delay, or defraud” any of the debtor‘s creditors.
The trustee also argues that the bankruptcy court erred by failing to recognize that the presence of several “badges of fraud” was sufficient to shift the burden to the defendants to show that the transfers were not fraudulent.5 Under Ohio law, although the ultimate burden
of proof in an action to set aside a fraudulent conveyance rests with the creditor, consideration of the relevant factors may give rise to an inference of fraudulent intent that shifts the burden to the defendant to show that the conveyance was made for fair consideration. Cardiovascular & Thoracic Surgery of Canton, Inc. v DiMazzio, 524 N.E.2d 915 (Ohio Ct. App. 1987) (syllabus). Although a few of the factors were certainly present—including that Fisher was or became insolvent and that the transfers were to an insider—the focus of the trustee‘s argument was that Fisher stopped using his own bank account in November 2002 and deposited nearly all of his paychecks from Globe directly into Brennan‘s bank account. Asked about that during his deposition, Fisher testified that he did so in part because he was concerned about possible garnishment for child support that he later learned had already been collected out of a tax refund.
Despite Fisher‘s abandonment of his bank account during this period, the bankruptcy court specifically found that the transfers to Brennan both before and after November 2002 were in fact used to pay the debtor‘s share of the ongoing expenses of maintaining their combined household. It was not clear error for the bankruptcy court to conclude that these monetary transfers were not made with actual intent to hinder, delay, or defraud any of Fisher‘s creditors. See Bennett & Kahnweiler Assocs. v. Ratner (In re Ratner), 132 B.R. 728, 733 (N. D. Ill. 1991) (holding that debtor‘s depositing of funds into spouse‘s separate account did not establish actual intent to hinder, delay, or defraud creditors for purposes of denial of discharge under Chapter 7); Glaser v. Glaser (In re Glaser), 49 B.R. 1015, 1019 (S.D.N.Y. 1985) (finding no actual fraud in transfer of commission check to wife who deposited it into her own account, retained $200 per week for household expenses, and returned the remainder to the debtor to finance business operations).6
Accordingly, we affirm the judgment in favor of defendants with respect to the monetary transfers between Fisher and Brennan.
B. Transfer of Inventory
The judgment in favor of the trustee rested on the bankruptcy court‘s finding that the pre-petition transfer of FDP‘s inventory to Brennan constituted a fraudulent transfer. That is, the bankruptcy court found that Fisher was FDP‘s alter ego; that the recovered inventory and the proceeds Brennan received from the sales to Globe were property of the estate under
Issues raised for the first time on appeal are generally not considered. Poss v. Morris (In re Morris), 260 F.3d 654, 663 (6th Cir. 2001). To the extent that defendants’ argument is a challenge to standing, however, it presents a jurisdictional question that may be raised at any time. Stevenson, 277 F.3d at 852. Whether a plaintiff has standing is a legal question, which we review de novo. Id. at 853.
In an effort to bolster their arguments on standing, defendants seek to supplement the record with documents that were filed in the bankruptcy court but not made part of the record before the district court. While there may be limited discretion to supplement the record under
Defendants rely heavily on this court‘s decision in Melamed to support the argument that the trustee was without standing to seek to avoid the transfer of the inventory. Melamed v. Lake County Nat‘l Bank, 727 F.2d 1399 (6th Cir. 1984). This reliance is misplaced. Defendants quote from Melamed in a way that misrepresents the court‘s holding concerning standing, which pertained not to the fraudulent transfer claim but to a separate claim for tortious interference under state law. In that claim, the trustee argued that the bank, a secured creditor, imposed such strict controls on the debtor that it destroyed the debtor‘s business and injured the other creditors. The court in Melamed аgreed with the bank that the trustee did not have standing to assert claims belonging to the creditors under former
When the trustee in this case responded that she was not asserting a claim belonging to National City, defendants denied that this was their contention and accused the trustee of constructing a “straw man” argument. Plainly, the trustee‘s avoidance action did not assert a claim belonging to National City, but rather sought to avoid a transfer for the benefit of the estate. Hatchett v. United States, 330 F.3d 875, 886 (6th Cir. 2003) (noting that only trustee has exclusive authority to bring avoidance action during bankruptcy proceedings).
Reframing the argument, defendants direct attention to the portion of Melamed in which the court concluded that the fraudulent transfer claim failed because the transfer did not diminish the assets of the debtor. Aside from the not insignificant fact that this was not a finding as to standing, the holding is inapplicable to the transfer at issue in this case. The debtor in Melamed received a down payment of $30,000 to order equipment for a customer. When the down payment was deposited with the bank, which held a security interest in the debtor‘s accounts receivable, the bank applied the deposit to the secured debt. The bankruptcy trustee sought to avoid the transfer of the $30,000 from the debtor to the bank, but this court held that “because of the Bank‘s valid security interest in accounts receivable, the transfer did not diminish the assets of the debtor which were available to its creditors.” Melamed, 727 F.2d at 1402.8
Defendants argue next that the trustee lacked standing because the bankruptcy estate would not benefit from the recovery of the transferred property or its proceeds. Avoidance and recovery are distinct, with the former a necessary precondition for the latter. Surhar v. Burns (In re Burns), 322 F.3d 421, 427 (6th Cir. 2003). Section 550 provides, in part, that to the extent a transfer is avoided under other provisions, including
In a similar vein, defendants argue that the recovery was not for the benefit of the
Critical to that determination, however, was the stipulation that the creditor‘s security interest had attached to the inventory transferred to the pawnbroker and that the security interest continued in the inventory after the transfer. Id. at 764-65. It was for this reason that the court found the recovery was not for the benefit of the estate. Id.; see Mellon Bank, N.A. v. Dick Corp., 351 F.3d 290, 293 (7th Cir. 2003) (clarifying that
Finally, defendants argue in their third brief in this court that the trustee lacked standing to bring an alter ego claim even on behalf of general unsecured creditors. In
Concluding that the trustee had standing to pursue the fraudulent transfer claim with respect to the inventory, we turn to the defendants’ arguments with respect to the merits.
2. Alter Ego
The bankruptcy court recognized that FDP was a separate legal entity from its sole shareholder, James Fisher. Zimmerman v. Eagle Mortgage Corp., 675 N.E.2d 480, 485 (Ohio Ct. App. 1996). Under Ohio‘s alter ego doctrine, “where the stock of a corporation is owned entirely by one party, and the party in interest is the stockholder, the fiction of the separate entity of the corporation may be disregarded where the ends of justice require it.” Knight v. Burns, 154 N.E. 345, 346 (Ohio Ct. App. 1926).
In Ohio, the courts may consider a number of nonexclusive factors in deciding whether to disregard the corporate fiction under the alter ego theory. Those factors include:
“(1) grossly inadequate capitаlization, (2) failure to observe corporate formalities, (3) insolvency of the debtor corporation at the time the debt is incurred, (4) shareholders holding themselves out as personally liable for certain corporate obligations, (5) diversion of funds or other property of the company property for personal use, (6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the dominant shareholder(s).”
Taylor Steel, Inc. v. Keeton, 417 F.3d 598, 605 (6th Cir. 2005); see also Carter-Jones Lumber Co. v. LTV Steel Co., 237 F.3d 745, 749 (6th Cir. 2001). The
The parties did not specifically argue these points at trial and the Trustee inexplicably presented no evidence regarding Fisher‘s actions with regard to the corporate formalities required for the separateness of FDP. FDP is an Ohio “S” corporation meаning that the tax liabilities of the corporation flow directly through to Fisher. Fisher was always the sole shareholder of FDP.
The Trustee presented evidence regarding Fisher‘s mismanagement of FDP. Fisher frequently commingled his funds with FDP‘s and treated FDP‘s debts as his own. He put FDP cash into his accounts and paid FDP expenses. He paid his own expenses from the commingled funds. One of the Trustee‘s experts, Robert Bowman, a former vice president of NCIC [an FDP lender], testified that Fisher literally bled the corporation of capital prior to its demise.
Even Fisher had a difficult time remembering to distinguish between himself and his corporation during testimony. The documentary evidence regarding the potential sale and inventory transfer to Globe also supports the conclusion that Fisher and FDP were one and the same. Although the memorandа from Globe mention that FDP is a corporation, it is apparent that Fisher treated FDP as an alter ego when discussing [] Fisher‘s financial problems. The memorandum dated December 14, 2002 states that Fisher “is now prepared to go into bankruptcy as he feels he is doomed.” Notably, the memorandum does not state that Fisher felt that FDP was doomed or that Fisher was contemplating bankruptcy for FDP, but only for himself.
Based on that evidence and the total lack of evidence regarding Fisher‘s treatment of FDP as a separate entity, the court finds that FDP was Fisher‘s alter ego. The transfer of FDP‘s inventory in January 2003 to Brennan was a transfer from Fisher to Brennan.
Defendants do not contend that these findings were clearly erroneous, but argue that they suggest an improper shifting of the burden of proof to the defendants. We cannot agree that the bankruptcy court‘s statement that the trustee presented no evidence regarding the corporate formalities was anything more than a comment on the evidence. Nor are we persuaded that the bankruptcy court erred in finding that FDP was Fisher‘s alter ego.
Finally, defendants appeal from the finding that inventory was transferred to Brennan with “actual intent to hinder, delay, or defraud” any of Fisher‘s creditors.
This transfer reeks of actual fraud. There is abundant evidence that Fisher undertook careful pre-bankruptcy planning. Part of that planning was clearly the removal of the inventory out оf FDP and into Brennan‘s hands. At deposition, Fisher testified to that simple fact[,] stating that he did not purchase the inventory himself because he knew that a future bankruptcy trustee would take the inventory. Although Fisher directly refuted that testimony at trial, the court is sufficiently convinced that Fisher‘s deposition testimony was true. The court‘s impression of Fisher is that he is an adept business person who was both capable of and willing to reap every possible benefit from FDP prior to its demise—even if that required him to hatch a potentially fraudulent scheme to move the inventory to the person he was living with prior to filing bankruptcy.
The Globe memoranda detailing Fisher‘s employment negotiations support this conclusion. The memorandum dated December 24 and updated on December 26, 2002 states that Fisher “is arranging to take the raw stock” and that he “will get this deal done” without requiring Globe to purchase the inventory. It is clear from the memoranda that Fisher is working on a deal to get the inventory to Globe at a reduced price and without requiring Globe to purchase the inventory directly.
In addition to the above, it is also compelling that Fisher knew the inventory had a much greater value than National City Bank placed on it. In his deposition, he testified that the value of the inventory was between $200,000 and $300,000, yet National City valued the inventory at just $3,000. Fisher clearly indicated in his deposition and his trial testimony that the inventory was a money-making opportunity.
Finally, it is simply too convenient that the person Fisher was living with eventually purchased the inventory. Fisher actually testified in court that
he was against Brennan‘s purchase, but given the deposition tеstimony and the remaining evidence before the court, this seems improbable. Given all the circumstances involved, the court finds that Fisher intentionally created a plan to keep the value of the inventory for himself by having Brennan purchase it. For her part, Brennan was clearly a knowledgeable accomplice in Fisher‘s plan. Once again, the court does not question Brennan‘s business acumen and was impressed with both the testimony regarding her professionalism and her knowledge of the inventory. But, both Brennan and Fisher‘s testimony regarding the transfer was unbelievable. Not only did Brennan indicate that she was not aware of Fisher‘s financial status, but she also steadfastly claimed that it was her idea to purchase the inventory.
Brennan‘s testimony in this regard directly contradicts the Globe memoranda which indicate Fisher was planning on getting the inventory in some manner or another well before Brennan showed any interest. In addition, the Trustee produced evidence and Brennan verified that although she purchase the inventory [and shelving] for only $3,850, she immediately sold a portion of it for $10,326.11. Although Brennan went so far at trial as to testify that she was concerned over whether she would be able to get rid of the inventory, this testimony is also directly contra[di]cted by the Globe memoranda as well as common sense.
As of October 28, 2004, Brennan had sold inventory to Globe for the total amount of $99,128.65. There was no testimony on the exact portion of the inventory now on hand, but it is clear that some portion remains for Brennan to sell in the future. Brennan has not sold the inventory to any other purchaser and there is no indicatiоn that she will need to because Globe‘s needs are not abating.
All of these facts indicate to the court that Fisher and Brennan not only devised, but executed, a[n] effective plan to move the inventory from FDP for their benefit without having to sacrifice any of the inventory‘s value in Fisher‘s bankruptcy. The final piece of evidence regarding the inventory transfer that the court finds relevant is the information regarding Brennan‘s use of the proceeds from the sale of the inventory. Although a good portion of the proceeds were used for typical expenses, Brennan also used some of the money to pay former employees of FDP. Brennan insisted at trial that the payments were gifts and the court acknowledged that fact. But the amounts of the payments look very similar to payroll expenses. Although that was not proven at trial, there is enough evidence that supports the conclusion that Fisher and Brennan had empathy with the former employees who went unpaid
when FDP closed.
Based on the evidence, the bankruptcy court found that the sale of inventory to Brennan was fraudulent under
Defendants argue that this finding was based upon speculation and surmise, and defied the evidence presented at trial. Specifically, defendants insist that the Globe memoranda actually showed that Globe did not want to buy the inventory directly and that Fisher was simply attempting to negotiate a deal between National City and Globe. That is only part of what was shown, however. After Globe decided it did not want to buy it and National City did not want to take it, Globe understood that Fisher would arrange to secure the inventory so that it would be available for Globe to purchase “as needed.” Yet, despite being the sole shareholder of FDP, Fisher did not take the inventory because he knew it would become part of the bankruptcy estate and the revenue expected from this money-making opportunity would be lost to his creditors. This is indeed indicative of actual fraud under
Next, defendants take issue with the bankruptcy court‘s statement that Fisher valued the inventory at $200,000 to $300,000, emphasizing that he actually testified the acquisition cost of the inventory was a “couple hundred thousand dollars.” In that exchange, however, Fisher also acknowledged that Globe was given a balance sheet that showed raw materials valued at $230,000. Defendants claim that the appraisal was the only evidence as to the value of the inventory at the time of the transfer. On the contrary, the bankruptcy court could infer the value from the circumstances, including that Globe purchased more than $10,000
Finally, defendants suggest that there could be no fraud because, as National City‘s representative testified, Fisher revealed that the inventory would be worth more than the liquidation appraisal value. Also, National City confirmed that it was willing to approve the sale of the inventory to any buyer for the appraised value. This, defendants argue, shows that Fisher did not make a misreprеsentation or omission of material fact to National City. No misrepresentation is required for the trustee to avoid the transfer. The bankruptcy court did not clearly err in finding that Fisher and Brennan acted in concert to take advantage of the difference between the appraised value and the unique value to Globe—a patent holder—and that, in doing so, the inventory was transferred away from Fisher/FDP with actual intent to hinder, delay, or defraud Fisher‘s creditors.
Accordingly, the judgment of the bankruptcy court is AFFIRMED.