MEMORANDUM OPINION on Tekena USA’s “Motion to Vacate TRO and Appointment of Receiver”
Teknek LLC filed a Chapter 7 bankruptcy case on July 12, 2005, 1 disclosing $73.22 in total assets and total liabilities of $3,788,609.57. Over ninety-nine percent of these liabilities, or approximately $3,779,000, belongs to a single unsecured judgment creditor, Systems Division, Inc. (“SDI”). The two members of the debtor are C.J. Kennett (“Kennett”), who holds an 85% interest, and Sheila Hamilton (“Hamilton”), who holds the remaining 15%.
After the Chapter 7 trustee retained as special bankruptcy counsel the law firm that had represented SDI in attempting to collect the money judgment,
see
11 U.S.C. § 327(c), he filed a file-count “Verified Adversary Complaint” on January 19, 2006. The complaint named as defendants six individuals, including Kennett and Hamilton, and two business entities carrying on
On the same day, January 19, 2006, the trustee supplemented the complaint with the “Trustee’s Emergency Motion to Appoint Receiver or, in the Alternative, for a Temporary Restraining Order,” which requested the two identified forms of interim equitable relief with respect to defendant Tekena USA. At the January 23, 2006, hearing on this emergency motion, the trustee presented exclusively documentary evidence, much of which had been authenticated by individual defendants Kennett and Hamilton during depositions. At this
All of the substantive issues concerning both the TRO and the receivership returned when Tekena USA and its four shareholders filed a “Motion to Vacate TRO and Appointment of Receiver,” on which the Court heard argument at a February 21, 2006, hearing. At the conclusion of the hearing, the Court took all issues raised under advisement after announcing that the TRO was vacated effective the same day. Procedurally, this opinion is a ruling on the motion to vacate its orders granting preliminary equitable relief on the Chapter 7 trustee’s emergency motion in the adversary proceeding. To date, only Tekena USA and its four shareholders have appeared to oppose the two forms of preliminary relief, although the nature of this adversary proceeding is such that any finding of a likelihood of success on Count I would require findings of probable success against defendants Kennett, Hamilton, and/or Teknek America/Kenham LLC. Though these last three have not appeared in opposition to the requested preliminary equitable relief, they have filed or plan to file motions to dismiss the underlying complaint.
A. Amended Preliminary Findings Pertaining to the TRO and Creation of an Equity Receiver and to Background Factual Information
Teknek LLC filed a Chapter 7 bankruptcy case on July 12, 2005, disclosing $73.22 in total assets and total liabilities of $3,788,609.57. Over ninety-nine percent of these liabilities, or approximately $3,779,000, belongs to a single unsecured judgment creditor, Systems Division, Inc.
The Chapter 7 debtor Teknek LLC and two of the adversary-proceeding defendants, Teknek America/Kenham LLC and Tekena USA, were each, at some point in time, U.S. distributors for a Scottish company once known as Teknek Electronics and then known, after foreign insolvency proceedings, as Teknek Holdings. These various “Teknek” companies do not have
In 1999, the lone noninsider creditor of this bankruptcy estate, SDI, sued the debtor and the Scottish concern, Teknek Electronics, in a federal district court in California for infringement of its patent rights. After obtaining a jury verdict in its favor on July 12, 2004, SDI was granted a money judgment now worth in excess of $3.7 million on August 18, 2004; the money judgment was affirmed on appeal. On March 25, 2005, SDI registered the judgment from the original federal district court with the U.S. District Court for the Northern District of Illinois, see 28 U.S.C. § 1963, and attempted to collect on the same in Illinois where the debtor’s operation base is located. In the federal collection suit, U.S. District Court Judge Shadur entered a June 2, 2005, order finding Ken-nett and Hamilton and Teknek America/Kenham LLC in civil contempt of court for disobeying the order of the federal district court judge presiding over the patent-infringement suit in California. As a result of this finding, U.S. District Court Judge Shadur enjoined Teknek America/Kenham LLC from trading in the United States, a move Kennett admitted was a prompt for Teknek LLC’s Chapter 7 filing. Four days later, Judge Shadur denied an emergency motion to stay enforcement of the June 2 ruling without prejudice. On June 29, 2005, Teknek America/Kenham LLC filed another emergency motion to stay or modify the June 2 ruling, while SDI filed a July 5, 2005, motion to have Kennett, Hamilton, and Teknek America/Kenham LLC declared in further contempt of the June 2 ruling. The Chapter 7 filing of debtor Teknek LLC followed these two pending countermotions on July 12, 2005. The bankruptcy filing may have caused Judge Shadur to vacate the June 2 injunction effective July 15, 2005, which mooted Teknek America/Kenham LLC’s motion to stay or modify the June 2 ruling. Judge Shadur also denied without prejudice the motion to hold Teknek America/Kenham LLC, Kennett, and Hamilton in contempt of court for their conduct during the injunction’s span from June 2, 2005, to July 15, 2005.
The first set of comprehensive transfers away from the debtor coincided with the impending jury-trial verdict in 2004, beginning in earnest during the fiscal year ending May 31, 2004. These transfers had two primary results: 1) defendants Ken-nett and Hamilton aggregately received $722,967 in profit distributions and returns of capital, and 2) the tangible and intangible business assets passed from the debtor to Teknek Electronics in Scotland and then back to the U.S. defendant herein, Teknek America/Kenham LLC.
For the fiscal year of 2003' and prior to paying Kennett and Hamilton the $722,967, the debtor began taking business-expense deductions from income for “intercompany services fees” paid to an overseas Teknek company in the amount of $400,000, though certain corresponding financial statements did not show the same intercompany payments. Then on
The business assets themselves took a different route. The debtor first transferred them to Teknek Electronics in Scotland, allegedly in repayment of an inter-company loan for approximately $1 million, and then Teknek Electronics transferred the same to the defendant Teknek America/Kenham LLC for no consideration in June 2004. Although this intercompany loan from Scottish Teknek Electronics pertained to start-up costs from 1996, the loan did not appear in the debtor’s books until 2000, at which time Kennett and Hamilton suddenly recorded the loan with no corresponding record of an increase in cash. At a deposition, Kennett gave inconsistent answers regarding the initial purpose of the loan, stating both that the loan was pay for start-up expenses in 1996 and that the loan pertained to a time in 1999 that would not have corresponded with starting the business. The existence of the loan as a justification for the asset transfer is dubious in light of other evidence, as well. At the time the debtor ceased business operations in June 2004 by transferring its business assets to the Scottish concern, one version of the debtor’s own balance sheet showed that the Scottish concern owed the debtor roughly 460,000 pounds, not vice versa. Although the balance of the loan for which the debtor’s business assets provided satisfaction was roughly half a million dollars, and although the debtor had been netting roughly the same amount in profit
each year,
Kennett and Hamilton had the debt- or and Teknek Electronics perform an even swap without any supporting third-party valuation of the business enterprise to ensure that the debtor’s noninsider creditors were not shortchanged. Transferee Teknek America/Kenham LLC continued the same operation beginning in June 2004 with similar levels of profitability, including up to $7 million in gross revenue, subleasing from the now-defunct Teknek Electronics a venue several blocks from the debtor’s business base, which had also been subleased from Teknek Electronics. This defendant served many of the same customers; used the same website, furniture, equipment, employees, and bank accounts; and negotiated checks payable to the debtor. The
debtor
continued to pay the salaries of Teknek America/Kenham LLC’s employees for six months after the debtor ceased operations in May 2004, though the employees rendered these services for defendant Teknek America/Kenham LLC and not for the benefit of the debtor. Other evidence further established the lack of a bona fide, nonfraudulent purpose for the “reorganization” of the debtor into Teknek Amer
Based on the totality of this information, the Court finds that on Count I the trustee has a probability of success in establishing that the money and assets ending up in the hands of defendants Hamilton, Kennett, and Teknek America/Kenham LLC are recoverable as both factually and constructively fraudulent conveyances with respect to the single unsecured judgment creditor, SDI. The debtor likely had an intent to hinder, delay, or defraud SDI. Moreover, the transfer of the business assets was likely in exchange for less than reasonably equivalent if the questionably late entry of loans from Teknek Electronics does not hold up. The monetary transfers to Kennett and Hamilton would also be constructively fraudulent, having been in return for less than reasonably equivalent value. The distribution of assets of a business entity to one of its equity interest holders “without adequate consideration” is deemed constructively fraudulent as to unpaid creditors without regard to actual intent.
Blocker v. Drain Line Sewer & Water Co.,
For some of these transfers, a non-party in Scotland, Teknek Electronics, would be the “initial transferee” under 11 U.S.C. § 550(a)(1), making Teknek America/Kenham LLC an “immediate transferee” with a potential affirmative defense under § 550(b).
3
Because this affirmative defense requires both good faith and lack of knowledge of voidability, and also because the intent of the
transferor
debtor (i.e., Kennett and Hamilton) is nearly identical to the intent of the
transferee
defendant Teknek Ameriea/Kenham LLC, this probability of success against the transferee defendant exists in spite of the good-faith affirmative defense in § 550(b). This conclusion is in accord with the underlying Illinois fraudulent conveyance law: When a debtor/transferor and a transferee are each controlled by the same shareholder who is also a dual-purpose director, officer, and/or manager, the intent of the individual officer/shareholder to hinder, delay, or defraud is imputed to both business entities: the debtor/transferor and the transferee. Sher
win-Williams Co. v. Watson Industries,
The entanglement of the three successive entities at issue cannot be overemphasized. By and large these three have used the same distributor agreements from the Scottish version of “Teknek,” the
Tekena’s entanglement in this enterprise, though highly disputed and not as obvious as that between the debtor and defendant Teknek Ameriea/Kenham LLC, is nonetheless present to a significant degree. A year and a half after the debtor went out of business, “Teknek” customers continued drawing postpetition checks specifically payable to the debtor, which checks Tekena USA negotiated in payment of product invoices that Tekena USA issued. This demonstrates that customers never really understood that they were dealing with different companies, and the
B. Legal Discussion and Analysis of Tekena USA’s Motion to Vacate
A motion filed within 10 days of the entry of an order alleging error will be construed as a “Motion to Alter or Amend Judgment” within the purview of Bankruptcy Rule 9023 and, by incorporation, Federal Rule of Civil Procedure 59(e).
7
Five of the eight defendants directly associated with the receivership previously ordered in this adversary proceeding— Tekena USA and shareholders Rollinson, Sandilands, Gutteriez, and Wilberg — assert that the Court committed legal error in justifying the receivership by applying facts pertaining to the alleged misdeeds of the other three defendants to Tekena USA, which has separate ownership and control from the Chapter 7 debtor and from defendant Teknek America/Kenham LLC. Tekena also asserts that appointment of an Illinois receivership is a “non-core proceeding” that is merely “related to” the bankruptcy case in chief, see 28 U.S.C. § 157(c) & § 1334(a)-(b), because all aspects of such appointment, including the legal standards for initiating the same and for regulating its future course, are governed by Illinois law. Because the isolated receivership controversy does not depend on Title 11 of the U.S.Code for its existence, it supposedly does not “arise under” Title 11 or “arise in” a case under Title 11. As this contention involves subject matter jurisdiction, we begin with it.
C. The Relationship Between Prejudgment Remedies Under Bankruptcy Rule 7064 and Core/Noncore Subject Matter Jurisdiction in Bankruptcy
Unlike the defendants’ view, the law requires a more comprehensive analysis with a broader view of how a state-law receivership fits into the framework of a Title 11 case. To begin, the Bankruptcy Code states, “A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.” 28 U.S.C. § 157(b)(3). As various authorities have recognized, many types of litigation resolving causes of action and motions originating under the Bankruptcy Code encompass subsets of issues resolved under applicable state law.
E.g., In re Marchiando,
Marathon was thought by some to have held that bankruptcy courts cannot constitutionally hear any controversy that is based upon state law, an interpretation that would have made nontenured judges incapable of rendering dispositive orders in almost any dispute arising during a bankruptcy case. Objections to claims almost always involve state law. Illustrations of this concept can be multiplied ad infinitum, and would even include avoidance actions, since the defenses contained in sections 547 and 548 deal, among other things, with when a transfer was perfected, which invariably involves a resort to state law to determine when a transfer is perfected against a lien creditor or bona fide purchaser, as the case may be.
Instead, section 157(b)(3) restricts the use of a state-law rationale as a device to have a particular civil proceeding characterized as related. The nature or source of the cause of action, not the governing substantive law, is to be determinative.
1
Collier On Bankruptcy
¶ 3.02[6][a], at 3-50.1 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.2004) (emphasis added). Count I in this adversary proceeding — the only one implicating defendant Tekena USA and the four other individual defendants pursuing the motion to vacate — is a civil proceeding to avoid a fraudulent conveyance under 11 U.S.C. § 544(b) by having the trustee step into the shoes of an allowed unsecured creditor who could have avoided transfers under state law. Because this special cause of action is defined in the first instance by Title 11, it is, therefore, a “core proceeding” under 28 U.S.C. § 157(b)(2)(H).
See In re Mankin,
In re Memorial Estates,
The Court will not treat the availability of an Illinois receivership as a noncore issue. 10
Tekena USAs latest opposition to the TRO has focused on certain procedural aspects of Federal Rule of Civil Procedure 65. It was Tekena USA’s initial written response on January 23, 2006, though, that raised a valid substantive issue that would block a preliminary injunction in this case. The substantive legal problem originates in the fact that at this point in time, the Chapter 7 trustee is an unsecured creditor without a fraudulent-transfer (or subsequent transferee) judgment against any of the eight defendants. As a result of the Supreme Court’s holding-in
Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund,
Deckert [v. Independence Shares Corporation] is not on point here because, as the Court took pains to explain, “the bill state[d] a cause [of action] for equitable relief.” Id., [311 U.S.] at 288,61 S.Ct. 229 [,85 L.Ed. 189 (1940)]. “The principal objects of the suit are rescission of the Savings Plan contracts and restitution of the consideration paid.... That a suit to rescind a contract induced by fraud and to recover the consideration paid may be maintained in equity, at least where there are circumstances making the legal remedy inadequate, is well established.” Id., at 289,61 S.Ct. 229 . The preliminary relief available in a suit seeking equitable relief has nothing to do with the preliminary relief available in a creditor’s bill seeking equitable assistance in the collection of a legal debt.
Id.,
The fraudulent-transfer claim, in contrast, essentially requests mixed forms of relief: the avoidance of the transfer of an entire business enterprise in addition to a permanent injunction freezing the same asset group from transfer by any defendant. Suits to recover fraudulent conveyances are actions at law if the plaintiff is attempting to recover 1) chattels/personal property, 2) eash/money judgments, or 3) land/real property.
12
Granfinanciera,
In this case, the avoidance of an allegedly fraudulent transfer of an entire business is the final relief requested, and it would likely involve the recovery of all four types of assets described above: chattels; money; land in the form of term-of-years interests under relevant subleases; and intangible assets including going-concern value, goodwill, contract rights, accounts receivable, and possible causes of action. As previously set forth, recovery of the first three is considered legal relief, while recovery of intangibles is considered equitable relief. Even this last available type of final equitable relief, however, is different than the preliminary equitable relief the trustee requests — an injunctive freeze of assets. On the basis of avoiding the transfer of intangibles, then, this preliminary equitable relief is not available under Grupo Mexicano de Desarrollo S.A.
As final equitable relief, the trustee has also requested a corresponding
final
injunctive freeze of all Tekena’s business assets to help effectuate any avoidance pursuant to sec 544(b) and sec 550. This final equitable relief does indeed match the preliminary equitable relief at issue here. However, the final relief necessarily and primarily requests the avoidance and return of business assets — final relief that we have said is legal in nature (in all but one respect). Final equitable relief cannot be awarded if the final legal relief is adequate.
Granfinanciera,
A TRO or preliminary injunction freezing the assets of any of the defendants is furthermore not available under federal law, and the Court’s order of February 21, 2006, effectively reflected this. As the Supreme Court noted in the same case, a federal court must instead look to state prejudgment procedures and remedies under Federal Rule of Civil Procedure 64 (Bankruptcy Rule 7064).
See Grupo Mexicano de Desarrollo S.A.,
E. The State Law Attachment Statute As a Prejudgment Remedy
The threshold requirements for application of the Illinois attachment statute are as follows:
§ 4-101. Cause. In any court having competent jurisdiction, a creditor having a money claim, whether liquidated or unliquidated, and whether sounding in contract or tort, or based upon a statutory cause of action created by law in favor of the People of the State of Illinois, or any agency of the State, may have an attachment against the property of his or her debtor, or that of any one or more of several debtors, either at the time of commencement of the action or thereafter, when the claim exceeds $20, in any one of the following cases:
1. Where the debtor is not a resident of this State.
2. When the debtor conceals himself or herself or stands in defiance of an officer, so that process cannot be served upon him or her.
3. Where the debtor has departed from this State with the intention of having his or her effects removed from this State.
4. Where the debtor is about to depart from this State with the intention of having his or her effects removed from this State.
5. Where the debtor is about to remove his or her property from this State to the injury of such creditor.
6. Where the debtor has within 2 years preceding the filing of the affidavit required, fraudulently conveyed or assigned his or her effects, or a part thereof, so as to hinder or delay his or her creditors.
7. Where the debtor has, within 2 years prior to the filing of such affidavit, fraudulently concealed or disposed of his or her property so as to hinder or delay his or her creditors.
8. Where the debtor is about fraudulently to conceal, assign, or otherwise dispose of his or her property or effects, so as to hinder or delay his or her creditors.
735 Ill. Comp. Stat. 5/4-101 (2004). The evidence presented at the January 23, 2006, evidentiary hearing on the emergency motion implicated three of the eight defendants in the following ways. Cause number one implicates defendants Hamilton and Kennett, as they are not residents of Illinois. Causes number six and seven implicate defendant Teknek America/Ken-ham LLC, and if the corporate veils of the debtor and Teknek Ameriea/Kenham LLC are pierced, then they also implicate Ken-nett and Hamilton. As detailed above, Kennett and Hamilton appear to have orchestrated a series of transfers of the Chapter 7 debtor’s assets which either 1) passed through Teknek Ameriea/Kenham, LLC and landed in defendant Tekena USA’s lap or 2) passed to bank accounts Kennett and Hamilton control. Defendant Kenham, LLC engaged in a final transfer to defendant Tekena USA that may have been for less than reasonably equivalent value if actual revenue before and after the transfer is taken into account. What is crucial under the Illinois statute is that the particular defendant have engaged in the transfer, disposal, or concealment (causes number six and seven) or be in the process of committing such conduct (causes number five and eight); it is not addressed to defendants who have merely received and may currently be holding a fraudulent transfer. While they may ultimately be liable for a money judgment under 11 U.S.C. § 550, the latter are not subject to prejudgment attachment. The evidence presented thus far tends to indicate that Tekena USA may have received a fraudulent transfer, but it did not indicate (and the receiver has not thus far reported) that Tekena’s assets are about to be transferred out of Illinois for less than reasonably equivalent value.
At this point in time then, defendants Rollinson, Sandilands, Guttierez, Wilberg, and Tekena USA are not susceptible to prejudgment attachment as a viable substitute for “freezing” assets under the federal law of equity. Based on the evidence in the record from January 23, 2006, defendants Hamilton, Kennett, and Teknek Ameriea/Kenham LLC appear to be vulnerable to prejudgment attachment. However, a plaintiff must first comply with the state statute’s affidavit requirements, 5/4-104 to -105; mandatory bonding, 5/4-107 to -109; and service requirements after entry of a court order of attachment, 5/4-112 to -114 & -127. 17
Bankruptcy courts do not have general authority under Federal Rule of Civil Procedure 66 to appoint receivers pursuant to federal law; no Federal Rule of Bankruptcy Procedure 7066 exists. Rather, in bankruptcy cases, the U.S. trustee, standing trustees, case trustees, and debtors-in-possession oversee the administration of bankruptcy estates for the collective benefit of creditors, as directed by statute. Bankruptcy receivers, as opposed to equity receivers, would leave trustees and debtors-in-possession with no bankruptcy estates to administer. Furthermore, the Bankruptcy Code provides that “a court may not appoint a receiver in a
case
under this title.” 11 U.S.C. § 105(b) (emphasis added). However, in certain civil proceedings within a bankruptcy case wherein the defendant is not the debtor or the trustee, Federal Rule of Bankruptcy Procedure 7064 and 11 U.S.C. § 105(a) permit a bankruptcy court to award a plaintiff whatever prejudgment remedies are available in the relevant state.
See
10
Collier On Bankruptcy
¶ 7064.01 — .02, at 7064-1 to -3 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.2005);
18
see also In re Memorial Estates,
Prejudgment receiverships are available under Illinois law.
See generally
31A Illinois Law and Practice,
Receivers
(West 1996
&
Supp.2005). An Illinois court of equity has chancery jurisdiction to appoint receivers
pendente lite
in the absence of a statute providing otherwise.
20
Witters v. Hicks,
A receiver is defined to be an indifferent person between the parties, appointed by the court, and on behalf of all parties, and not of the complainant or one defendant only, to receive the thing or property in litigation, pending the suit. Baker v. Administrator of Backus,32 Ill. 79 . The appointment of a receiver is a branch of equity jurisdiction not dependent upon any statute, and rests largely in the discretion of the appointing court. It had its origin in the English Court of Chancery at an early date, and it was incidental to and in aid of the jurisdiction of equity to enable it to accomplish, as far as practicable, complete justice among the parties before it, the object being to secure and preserve the property or thing in controversy for the benefit of all concerned pending the litigation, so that it might be subjected to such order or decree as the court might makeor render. Chicago Title and Trust Co. v. Mack, 347 Ill. 480 ,180 N.E. 412 .
Compton v. Paul K. Harding Realty Co.,
Ordinarily the liability for receiver compensation and legal expenses lies upon the receivership estate being administered, including the income and the
res,
and constitutes a charge upon such property if unsatisfied.
City of Chicago v. Kideys,
Provided the receiver follows court orders, he may only be sued and held liable in his official receiver capacity; this proceeding is similar to an
in rem
proceeding in which judgments may be exclusively collected in the course of the administration of estate property.
22
First Nat. Bank of Vandalia v. Trail Ridge Farm,
2. Legal Standards for Appointment of an Illinois Equity Receiver
Generally the appointment of a receiver for a particular piece of property requires that the defendant hold possession of the property at issue in the main civil action.
First Nat’l Bank v. Gage,
First, other remedies, including remedies at law and injunctions, must be inadequate means for accomplishing the object of the receivership.
Fox v. Fox Valley Trotting Club,
Second, a reasonable probability that the plaintiff/applicant will prevail on the underlying merits must exist.
Fox v. Fox Valley Trotting Club,
Third, the plaintiff must have (1) a lien on the receivership property, (2) a clear right to such property, or (3) a way of showing that the property constitutes a “special fund” from which its claim may be satisfied under the governing substantive law.
Bagdonas v. Liberty Land & Investment Co.,
3. Legal Standards for Appointment of an Illinois Equity Receiver as Applied to Tekena USA
Tekena USA’s primary contention in the motion to vacate is that the Court erred in determining whether an Illinois equity receivership is appropriate on the record presented in this adversary proceeding. The five defendants associated with Teke-na USA appeared by attorney and opposed the requested extraordinary relief, claiming that those five are not responsible for the conduct of transferor companies controlled by Hamilton and Kennett; since Tekena USA purchased assets from the parent company for $38,500, it is an independent distributorship not owned or controlled by Kennett or Hamilton.
First, since 2003, Teknek entities owned and controlled by Kennett and Hamilton have engaged in multiple strategic responses to multiple adverse federal court rulings for the purpose of preventing the Chapter 7 debtor Teknek LLC from paying a patent-infringement judgment. As the patent-infringement verdict was looming near in July 2004, the debtor Tek-nek LLC simply closed shop a month in advance and reopened a few blocks away with a slightly different name but no other legally significant changes. To justify the transfer of money to Kennett and Hamilton and to Teknek Electronics in Scotland and away from creditor SDI, Kennett and Hamilton recorded questionable loans to the Chapter 7 debtor in addition to utilizing questionable intercompany service agreements for which services of unknown market value and benefit to the debtor resulted in fees paid to various affiliated Teknek entities. Then, after creditor SDI registered the judgment for collection in Illinois on March 25, 2005, and after U.S. District Court Judge Shadur enjoined Teknek America/Kenham LLC from continuing U.S. business operations as a civil-contempt remedy, Kennett and Hamilton 1) had the four employees form Tekena USA during June 2005; 2) interrupted the contempt proceeding by having the debtor Teknek LLC file a Chapter 7 case to distribute a mere $73.22 during July 2005; and 3) had Tekena USA formally grab the debtor’s baton during September 2005 for a modest $38,500 once Teknek America/Kenham LLC was free from Judge Shadur’s contempt injunction. It is difficult to imagine why these continued strategic responses to adverse federal court rulings would abate anytime in the near future, given Kennett and Hamilton’s track record. With respect to the receivership defendant Tekena USA, it is also difficult to imagine why they would hesitate to use one of the other Teknek entities to overcharge Tekena USA on a sublease, an intercompany service agreement, or an inventory sale as a means to funnel profits derived from what was once the Chapter ■ 7 debtor’s goodwill overseas. Based on the track record of Kennett and Hamilton’s companies and their relationship with defendant Tekena USA as 1) a business transferor and license holder, 2) a sublessor, and 3) a wholesale seller, some type of monitoring is in order. Fraudulently transferred property itself is gener
A second major consideration must factor into a decision on whether likely irreparable harm due to inadequacy of legal remedies has been shown. In the case at bar, the nature of the assets available for judgment satisfaction under § 544(b) and § 550(a) of the Code makes normal postjudgment monitoring, tracking, and recovery difficult. The defendant Tekena USA’s distributorship license, which is terminable on 30 days’ notice, belongs to Teknek Holdings in Scotland and is thus controlled by its shareholders, defendants Kennett and Hamilton. A source of future recovery would be the future profits derived from Tekena’s use of this license and its associated trade name (Teknek America) and customer lists — intangible assets which essentially carry the goodwill and the going-concern value of the debtor herein, Teknek LLC. These assets — while obviously valuable right now, having produced annual streams of gross revenue worth $4 million, and potentially valuable as future sources of legal recovery — are intangible and highly ephemeral. Should defendants Kennett and Hamilton decide to terminate the license in response to adverse federal court rulings, they could cause business assets such as the earning power and goodwill formerly ascribed to the Chapter 7 debtor to dry up and/or return to the United Kingdom before the Chapter 7 trustee could collect a fraudulent transfer judgment under 11 U.S.C. § 544(b). Additionally, cash and funds in bank accounts are slippery and easily transferred, hidden, and/or commingled; overseas transfers of money would be particularly quick and effective. Once the assets become centered, located, or controlled in the United Kingdom, they would become uncollectible without additional legal proceedings in a foreign court system. The legal remedies in this country, either state or federal, would therefore be inadequate. The only assets remaining for judgment satisfaction would be a lease of real property and personal property consisting of office equipment, both of dubious value when compared to estate claims. Possibly some inventory of unknown value would remain, though a nonparty “Tek-nek” entity in Scotland has enormous de facto control over the supply of inventory in this country, as noted above. For these two stated reasons, then, the trustee/plaintiff has inadequate legal remedies and alternative equitable remedies, leaving significant potential for irreparable harm to the estate.
With respect to a reasonable probability that the plaintiff/applicant will prevail on the merits, an important Bankruptcy Code distinction must be delineated. The Court has previously set forth how the debtor’s members probably caused it to engage in actually and constructively fraudulent transfers avoidable under § 544(b); these transfers left many of the debtor’s business assets in the hands of defendant Teknek America/Ken-ham LLC and vulnerable under § 550(a). Given that the same LLC members gov
The trustee requests that the receivership nevertheless be imposed upon defendant Tekena USA, although Tekena raises two objections: 1) it purchased most of Teknek America/Kenham LLC’s assets, save for the accounts receivable, for $38,500, and 2) its shareholders are not Kennett and Hamilton (as would be required for a finding of successor liability) but are four former employees of the debtor Teknek LLC and defendant Tek-nek America who had neither ownership nor management control over either previous Teknek entity. However, Tekena USA is not a defendant under Count I because of its initiation and transfer of assets; it is a defendant under Count I because it is a “mediate transferee” which ultimately
received,
assets that in all probability had been actually and constructively transferred fraudulently. “The particular theory under which a transfer has been avoided is, for all intents and purposes, irrelevant to the liability of the transferee from whom the trustee seeks to recover the property. Section 550 of the Code enumerates those entities from whom recovery can be had.”
24
Hooker Atlanta (7) Corp. v. Hocker (In re Hooker Investments),
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the void-ability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
(d) The trustee is entitled to only a single satisfaction under subsection (a) of this section.
(e)(1) A good faith transferee from whom the trustee may recover under subsection (a) of this section has a lien on the property recovered to secure the lesser of—
(A) the cost, to such transferee, of any improvement made after the transfer, less the amount of any profit realized by or accruing to such transferee from such property; and
(B) any increase in the value of such property as a result of such improvement, of the property transferred.
11 U.S.C. § 550. Should Tekena USA, a “mediate transferee” in this instance, interpose the complete affirmative defense under subsection (b)(1), it would be required to prove both that it provided value in exchange for the transfer and that it received it in good faith and without knowledge of the voidability of the transfer being avoided. Regarding the latter elements of the affirmative defense, the evidence at this preliminary stage is sufficient for drawing two inferences based on the fact that the four shareholders of defendant Tekena USA were employees of both the Chapter 7 debtor herein, Teknek LLC, and defendant Teknek America/Kenham LLC: 1) they had knowledge of SDI’s $3.7 million judgment against the debtor, and 2) they were aware that while the intellectual-property dispute was brewing and debt collection commencing, the basic American “Teknek” operation was shifting from the first entity to the second one and then again to the third one (owned by them). Thus, a heavy cloud hangs over Tekena USA’s affirmative defense under § 550(b)(1), even if it proves that it took the transfer for value, and the Court finds that the trustee has a probability of success on the merits specifically against defendant Tekena USA on Count I of the adversary complaint. The argument based on lack of successor liability under nonbankruptcy law is irrelevant here, and the one based on the payment of $38,500 is insufficient under applicable law.
Finally, the plaintiff must set forth a lien on the receivership property, a clear right to such property, or a way of showing that the property constitutes a “special fund.” See supra. On first blush, the same problem posed by a preliminary injunction “freezing” assets is posed here: the plaintiff herein, the Chapter 7 bankruptcy trustee, is an alleged unsecured creditor of the eight defendants without a judgment, and right now Tekena USA, Teknek Holdings in Scotland, and Teknek America/Kenham LLC hold formal legal title to most of the business assets and funds in controversy. Nevertheless, the unique nature of bankruptcy law and, specifically, of 11 U.S.C. § 550(a) permits the plaintiff/trustee to meet the “special fund” requirement under Illinois law. As stated above, once the trustee has avoided a transfer, he is not bound to accept satisfaction in the form of money judgments against the “mediate transferees”; the statute explicitly grants the trustee the right and the power to recover the actual property illegally transferred and bring the same into the debtor’s bankruptcy estate for the benefit of creditors. Because the Court has already found a probability of success on the merits of the § 544(b) and § 550(a) claims against the two American “Teknek” entities, the business assets Tekena USA holds are themselves vulnerable to being brought back into the bankruptcy estate to pay creditors. The “special fund” requirement under Illinois equity jurisprudence is satisfied by the unique legal rights that § 550(a) of the Bankruptcy Code creates.
Tekena USA’s response complains that the adversary complaint is not sufficiently specific in its averments of fraud, i.e., that it does not allege which assets of the Debt- or were transferred to which Defendants. This point is not convincing. The Defendants are alleged to have collectively over time shifted the judgment debtor’s assets first to Teknek America/Kenham LLC and then to Tekena USA. The gravamen of the adversary complaint is not just that specif
This Court has exercised great caution in the appointment of a receiver and does so for the forgoing reasons viewed in light of the Court being told at the original hearing that if a receiver is appointed, some of the defendants might set up another company ... the very behavior of which Plaintiff complains. This caution is expressed by calling attention to the legal principle that as officers of the court, receivers have only those powers and duties conferred on them by the appointing court.
Witters v. Hicks,
For the foregoing reasons, the portion of the motion requesting an order vacating the appointment of a receiver for Tekena USA is denied.
ORDER on Tekena USA’s “Motion to Vacate TRO and Appointment of Receiver”
For the reasons stated in the Memorandum Opinion of the same date and as detailed below, Tekena USA’s “Motion to Vacate TRO and Appointment of Receiver” is granted in part and denied in part.
Order Dissolving Temporary Restraining Order
For the reasons stated in the related Memorandum Opinion of the same date and consistent with the order entered on February 21, 2006, the temporary restraining order of January 24, 2006, is dissolved.
Order Maintaining Receiver and Clarifying Receivership Duties
Tekena USA’s motion to vacate the appointment of a receiver in this adversary proceeding is denied. The Court hereby reiterates in apart and modifies in part the original January 24, 2006, “Appointment of Receiver and Assignment of Duties”:
The receiver, as an officer of the court, shall have access to any and all records, books, and computer data of Tekena USA. As an officer of the court, the receiver must keep all information confidential except to the extent that it must be used to report on fulfillment of the duties assigned below. The receiver is to audit and monitor Tekena USA’s conduct as it relates to the debtor Teknek LLC and defendant Teknek America/Kenham LLC.
Specifically, the receiver must cooperate with the trustee’s investigation of the following:
o the extent to which the assets of Tekena USA were purchased for less than fair market value;
• the extent to which the control of Tekena USA is in fact independent of other affiliated “Teknek” entities;
• the extent to which the debtor’s (Teknek LLC’s) assets (including accounts receivable, checks, bank accounts, and vehicles) that are continually identifiable as such have been commingled with Tekena USA’s assets and rightfully belong to the bankruptcy estate.
Further, the receiver must oversee all receipts and disbursements to ensure that fair market value is received for all transfers of money or other property. That is, all business activity must be geared toward enhancing the value of the enterprise.
With regard to business activity within the ordinary course of business (as this term has developed by common-law definition under 11 U.S.C. § 363(b)-(c) & § 364(a)-(b)), the receiver will simply monitor such activities. With regard to business activity outside the ordinary course of business, including extraordinary payments for capital improvements and new leases, the receiver and all parties must consent to the transaction, and failing such consent, the transaction shall be consummated pursuant to an order from this Bankruptcy Court.
Notes
. As it was filed prior to October 17, 2005, the case is governed by the law as it existed prior to Congress’s enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8.
. Uniform Fraudulent Transfer Act: Transfer or obligation fraudulent as to creditor — Claim arising before or after transfer
§ 5. (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
(b) In determining actual intent under paragraph (1) of subsection (a), consideration may be given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
740 Ill. Comp. Stat. 160/5 (2004).
. (a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
11 U.S.C. § 550(a)-(b).
. Tekena USA did not purchase defendant Teknek America/Kenham LLC’s accounts receivable, cash, and certain deposit accounts. Teknek America/Kenham LLC continued in existence to collect the receivables.
. (e)(1) A good faith transferee from whom the trustee may recover under subsection (a) of this section has a lien on the property recovered to secure the lesser of — ■
(A)the cost, to such transferee, of any improvement made after the transfer, less the amount of any profit realized by or accruing to such transferee from such property; and
(B)any increase in the value of such property as a result of such improvement, of the property transferred.
(2) In this subsection, ''improvement” includes — •
(A) physical additions or changes to the property transferred;
(B) repairs to such property;
(C) payment of any tax on such property;
(D) payment of any debt secured by a lien on such property that is superior or equal to the rights of the trustee; and
(E) preservation of such property.
11 U.S.C. § 550.
. At this point, no factual allegations in the complaint and no counts have alleged anything that would indicate that the corporate veil of Tekena USA could or should be pierced as a result of these four individuals' failure to observe corporate formalities and intent to defraud creditors. For three of these individual defendants (Sandilands, Gutteriez, and Wilberg), the trustee's basis for their inclusion is unclear. For individual defendant Rollin-son, Count V appropriately lies against him, because the allegation is that he personally has possession and use of a vehicle to which the Chapter 7 debtor’s bankruptcy estate holds legal title, thereby rendering such vehicle vulnerable to an action for turnover of estate property pursuant to 11 U.S.C. § 542. The receivership at issue in this opinion is based on the trustee's likelihood of success on Count I of the adversary complaint.
In contrast, the complaint does adequately call into issue whether defendants Kennett and Hamilton are entitled to the protection of the veils of the debtor Teknek LLC and defendant Teknek Ameriea/Kenham LLC. Limited liability companies may be subjected to veil-piercing actions in a way similar to the way corporations are deemed alter egos of their shareholders.
GMAC Commercial Mortg. Corp. v. Gleichman,
. Any motion that draws into question the correctness of the judgment is functionally a motion under Rule 9023, whatever its label. Thus a motion to "reconsider,'' "for clarification,” to "vacate,” to "set aside” or to "rear-gue” is a motion under Rule 9023, and under Bankruptcy Rule 8002(b) will postpone the time for appeal if the motion was timely made.
It has also been held that a motion for reconsideration is to be treated as a motion under Rule 9023, rather than, for example, a motion under Rule 9024 ..., since it draws into issue the correctness of the trial court's decision.
. The Court is not addressing whether appointment of an equity receiver is immediately appealable under 28 U.S.C. § 158(a); it only addresses whether it must propose findings of fact and conclusions of law to the U.S. District Court for the Northern District of Illinois for its recommended adoption pursuant to 28 U.S.C. § 157(c)(1).
. The first issue decided was whether a nonfi-nal order appointing an equity receiver was appealable pursuant to 28 U.S.C. § 1292(a)(2) or instead was governed exclusively by 28 U.S.C. § 158(d).
Memorial Estates,
.In the event that the jurisdictional conclusion in Part C of the April 6, 2006, "MEMORANDUM OPINION on Tekena
. Incidentally, Illinois law has come to a similar conclusion in determining whether a court applying Illinois equity jurisprudence may issue an injunction freezing or sequestering assets before an alleged unsecured creditor has obtained a judgment, and it likewise noted the exception for legal claims containing an equitable aspect:
The foregoing cases were cited with approval by Mr. Justice Magruder in Detroit Copper & Brass Rolling Mills v. Ledwidge,162 Ill. 305 ,44 N.E. 751 , and in expressing the reason of the court in that case he said: "In all cases, where resort to equity has been allowed without first obtaining judgment, 'the claim of the complainant has had some equitable element in it, — such as a trust, or the like.’ * * * But we are unableto see that the claim set up in the case at bar has any equitable element in it, being an indebtedness for goods sold and delivered, and, therefore, a purely legal claim.
The law seems to be that where the complainants’ claim is a purely legal demand and has no equitable element in it the bill will not lie. In the instant case, complainants’ claim is merely for commissions. It is true the complainants charge the defendants with a variety of fraud, but that subject only becomes involved when it is determined what, if any, commissions may be due the complainants.
Pearson v. Tucson Farms Co.,
204 Ill.App.276,
. The Supreme Court recognized a controversy concerning whether an action to recover fraudulently conveyed real property was an action at law or in equity, but it continued on to recognize that it had previously held such an action to be one at law,
Whitehead v. Shattuck,
. Rule 7070. Judgment for Specific Acts; Vesting Title
Rule 70 F.R.Civ.P. applies in adversary proceedings and the court may enter a judgment divesting the title of any party and vesting title in others whenever the real or personal property involved is within the jurisdiction of the court.
Fed. R. Bankr.Pro. 7070.
. Rule 70. Judgment for Specific Acts; Vesting Title
If a judgment directs a party to execute a conveyance of land or to deliver deeds or other documents or to perform any other specific act and the party fails to comply within the time specified, the court may direct the act to be done at the cost of the disobedient party by some other person appointed by the court and the act when so done has like effect as if done by the party. On application of the party entitled to performance, the clerk shall issue a writ of attachment or sequestration against the property of the disobedient party to compel obedience to the judgment. The court may also in proper cases adjudge the party in contempt. If real or personal property is within the district, the court in lieu of directing a conveyance thereof may enter a judgment divesting the title of any party and vesting it in others and such judgment has the effect of a conveyance executed in due form of law. When any order or judgment is for the delivery of possession, the party in whose favor it is entered is entitled to a writ of execution or assistance upon application to the clerk.
Fed. R. Civ. Pro. 70. The well-known writ of execution is a legal remedy,
U.S. ex rel. Goldman v. Meredith,
. Though Memorial Estates references a federal court's ability to utilize state-law prejudgment remedies under Federal Rule of Civil Procedure 64 and to appoint a receiver under Federal Rule 66, only one of these rules, Federal Rule 64, has a counterpart in the Federal Rules of Bankruptcy Procedure — Federal Rule of Bankruptcy Procedure 7064.
. By contrast, equitable attachment cannot be maintained under Illinois equity jurisprudence.
See Pearson
v.
Tucson Farms Co.,
. Among other things, the affidavit must state the amount of the claim, facts sufficient to maintain at least one valid cause of action, and facts establishing at least one cause justifying prejudgment attachment. 735 111. Comp. Stat. 5/4-104 (2004). The court may then need to determine whether a cause of action has been stated, and if it states a “tort,” the court must set the amount of damages at a hearing. See id. The amount of the “claim” in this instance is the aggregate relief sought under Counts one through five of the bankruptcy trustees complaint, not SDI’s $3.7 million patent-infringement judgment.
. If an adversary proceeding or contested motion seeks these provisional remedies against the property of either the debtor or the estate administered by the trustee, a violation of the automatic stay provisions § 362(a)(3), (4), or (5) could occur if the stay has not expired by operation of law under § 362(c) or has not been modified under § 362(d)-(e). See 10 Collier On Bankruptcy, supra, ¶ 7064.01, at 7064-1 to -2.
. While Schlein s use of § 105(a) alone is not obviously incorrect, using that section in conjunction with other more specific authority is preferable if such authority exists.
. Unlike the various common-law requirements and characteristics of receiverships, the bonding provisions pertaining to the applicant are governed by a single statutory provision, 735 Ill. Comp. Stat. 5/2-415 (2004).
.
See Powell
v.
Voight,
. The limited exceptions of
in personam
liability have been for breach of fiduciary duty to the receivership estate and for torts such as trespass and conversion that the receiver personally commits without a supporting, valid court order.
Federal Sav. & Loan Ins. Corp. v. PSL Realty Co.,
. See also and compare the previous section on the Illinois attachment statute as applied to Kennett, Hamilton, and Teknek America/Kenham LLC.
. Perhaps this principle would be clearer if one count had named the initial-transferee defendants in the line of succession using § 544(b) and the Illinois Uniform Fraudulent Transfer Act, and then another count had named Tekena USA and the other defendants using § 550. However, when viewed in light of the specific allegations, the evidence presented at preliminary hearings, and existing law, the plaintiff's complaint contemplated this type of conceptual organization, even if not formally delineated.