WILLIAM E. WEANER & ASSOCIATES, LLC, et al. v. 369 WEST FIRST, LLC, et al.
Appellate Case No. 28399
IN THE COURT OF APPEALS OF OHIO SECOND APPELLATE DISTRICT MONTGOMERY COUNTY
January 10, 2020
[Cite as Weaner & Assocs., L.L.C. v. 369 W. First, L.L.C., 2020-Ohio-48.]
Trial Court Case No. 2017-CV-255 (Civil Appeal from Common Pleas Court)
Rendered on the 10th day of January, 2020.
CRAIG T. MATTHEWS, Atty. Reg. No. 0029215, 320 Regency Ridge Drive, Centerville, Ohio 45459 Attorney for Plaintiffs-Appellants/Cross-Appellees
T. ANDREW VOLLMAR, Atty. Reg. No. 0064033 and ADAM ARMSTRONG, Atty. Reg. No. 0079178, 40 North Main Street, Suite 2010, Dayton, Ohio 45423 Attorneys for Defendants-Appellees/Cross-Appellants
WELBAUM, P.J.
{¶ 2} Plaintiffs appeal from a judgment denying in part their motion for summary judgment against Defendants; the motion was also granted in part. Specifically, the trial court found Defendants jointly and severally liable for a total of $14,000 toward the payment of $60,143 in attorney fees and/or unpaid interest on an attorney fee judgment that was awarded to Plaintiffs in July 2015. The basis for the judgment was that transfers of this amount by a limited liability company (LLC), 369 West First Street, LLC (“369“) to NW and Olympia violated the
{¶ 3} The trial court rejected Plaintiffs’ fraudulent transfer claims concerning January 2013 transfers of $100,000 to Whichard and $123,690 to Ashton Limited, LLC (“Ashton“). Ashton was a defendant in the trial court, and like NW and Olympia, was an LLC owned solely by Whichard. The trial court also refused to pierce the corporate veil of 369 and hold Whichard responsible for the attorney fee judgment against 369. Plaintiffs appeal from this part of the trial court judgment as well.
{¶ 4} After considering the evidence, we conclude that the trial court did not err in
I. Facts and Course of Proceedings
{¶ 5} Plaintiffs’ claims are based on what is now nearly an eleven-year attempt to collect on amounts that 369 owed for work that Plaintiffs performed in 2008. As noted, Whichard was the sole owner of 369, which was formed to purchase property at 369 West First Street, in Dayton, Ohio. In late August 2008, a large rainstorm damaged 369‘s building. At the time, the building was the only property that 369 owned.
{¶ 6} Servpro is a company that provides water remediation services. Whichard‘s assistant, Jeanette Hagood, signed a contract with Servpro, agreeing to pay for any amounts that were not covered by insurance immediately upon receipt of an invoice. The contract imposed interest and finance charges at the maximum allowable by law or at 1.5% per month, whichever was less, on accounts that were over 30 days past due. Further, the contract provided that if legal action were brought, Servpro would be entitled to reasonable legal fees and costs of collection, in addition to any other amounts the customer owed. Finally, the contract provided for the filing of mechanics liens. The total charge for Servpro‘s services was $13,939.04.
{¶ 7} Hagood also signed a contract with Possert for needed property repairs. Although Possert estimated $75,000 in construction costs, only limited repairs were done. Possert‘s contract, like Servpro‘s, imposed 1.5% interest due per month on all past-due
{¶ 8} Both Servpro and Possert filed mechanics’ liens against 369‘s property on West First Street. Subsequently, on December 29, 2008, Whichard signed a general warranty deed, conveying the 369 property to Eufala corporation. Whichard‘s son, Chad Whichard (“Chad“), who was the managing member of another LLC (Northwest Outparcels, LLC), also signed the warranty deed. According to Whichard, 369 owned a 90% interest in the property, and Northwest owned 10%.
{¶ 9} According to the settlement statement, the purchase price was $300,000, and the cash amount due to the sellers was $226,478.98, based on various settlement charges, including payoff of several mechanics’ lien. These liens included $14,103.38 for Possert, $22,612.15 for Servpro, and $28,547.61 to Beerman Realty Company. However, Possert or Servpro were not paid. As a result, Servpro filed suit against 369 in October 2009, seeking $13,939.04, plus interest and reasonable attorney fees. Possert also sued 369 in March 2011, seeking $9,402.25, plus interest and reasonable attorney fees.2 After the cases were consolidated, a magistrate held a joint two-day trial in November 2012. The magistrate found in favor of Servpro and Possert and awarded
{¶ 10} The magistrate‘s April 2013 decision noted that due to the inclusion in the contract of provisions for reasonable attorney fees and costs, the matter of attorney fees would be set for a hearing. April 10, 2013 Amended Magistrate‘s Decision in Montgomery C.P. No. 2009-CV-9715, pp. 11 and 14-15.3 In addition, the magistrate stressed that “[t]he Court is well aware of the extensive procedural history of this case.” Id. at p. 2. Both Plaintiffs and 369 filed objections to the magistrate‘s decision. In October 2013, the case was transferred to another judge.
{¶ 11} In November 2013, Whichard‘s attorney, Lemuel Whitsett, offered to settle both claims for $25,000. According to Plaintiff‘s counsel, the amount of the judgment at that time (prior to the attorney fee award) was $58,601.87. More than five years had elapsed since the work was done on 369. Plaintiff‘s counsel offered to settle the action for $42,250, but no agreement was reached.
{¶ 12} In April 2014, the trial court issued a decision overruling all the objections to the magistrate‘s decision. 369 appealed from the decision, but we dismissed the appeal for lack of a final appealable order. See Weaner & Assocs. v. 369 W. First LLC, 2d Dist. Montgomery No. 26404 (December 8, 2014).
{¶ 13} Another judge was assigned to the 2009 collection case early in 2015 and held a hearing on attorney fees. In July 2015, the judge awarded Plaintiffs a total of
{¶ 14} Our opinion was issued in December 2016, and no further appeal was taken. Plaintiffs then filed an action on January 1, 2017, against 369 and Whichard, as well as three other LLCs that Whichard owned: Ashton, NW, and Olympia. The complaint alleged violation of the UFTA and also asked the court to pierce the corporate veil. Another extensive course of litigation ensued. In May 2017, the court set a trial for July 23, 2018. In February 2018, Plaintiffs filed a motion for summary judgment on all claims. Defendants then filed a cross-motion for summary judgment in April 2018. However, in late May 2018, 369 filed for bankruptcy and then filed a motion on August 1, 2018, asking the trial court to stay the case until the bankruptcy proceeding was complete.
{¶ 15} Although Plaintiffs had dismissed 369 as a party in July 2018 and had opposed a stay, the trial court stayed the action on September 9, 2018. After the bankruptcy case ended in November 2018, the trial court lifted the stay and reactivated the action. Subsequently, in April 2019, the court ruled on Plaintiffs’ motion for summary judgment and Defendants’ cross-motion for summary judgment.
{¶ 16} In its judgment, the court set aside November 2015 transfers from 369 to NW and Olympia, and held Whichard and both entities jointly and severally liable for
II. Piercing the Corporate Veil
{¶ 17} Plaintiff‘s First Assignment of Error states that:
The Trial Court Erred by Granting [Defendants‘] Motion for Summary Judgment as to the [Plaintiffs‘] Claim Regarding Piercing the Corporate Veil of 369 and Holding [Whichard] Personally Liable for the Debt Owed.
{¶ 18} Under this assignment of error, Plaintiffs contend that the trial court erred in refusing to pierce the corporate veil and hold Whichard responsible for 369‘s debts. According to Plaintiffs, the trial court failed to use the well-known test for disregarding corporate entities. They stress that by using this test, the court should have found that 369 was Whichard‘s alter ego and had no separate mind, will, or existence of its own.
{¶ 19} In its decision, the trial court concluded that there has been little discussion in Ohio case law of how the standards of Ohio corporations apply to Ohio limited liability companies. The court then rejected the Plaintiffs’ claims against Whichard because she did not exercise complete control over 369‘s operation. The court also relied on the fact that Whichard used her “personal credit” to pay off the mechanics’ liens.
{¶ 20} The law is well-settled concerning the standards that apply to summary judgment decisions. ” ‘A trial court may grant a moving party summary judgment pursuant to
{¶ 21} “A fundamental rule of corporate law is that, normally, shareholders, officers, and directors are not liable for the debts of the corporation. * * * An exception to this rule was developed in equity to protect creditors of a corporation from shareholders who use the corporate entity for criminal or fraudulent purposes.” Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc., 67 Ohio St.3d 274, 287, 617 N.E.2d 1075 (1993).
{¶ 22} In Belvedere, the Supreme Court of Ohio held that “the corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.” Id. at 289. The party who seeks to impose individual liability under this theory has the burden of proof. Zimmerman v. Eagle Mtge. Corp., 110 Ohio App.3d 762, 772, 675 N.E.2d 480 (2d Dist.1996).
{¶ 23} Subsequently, the Supreme Court of Ohio accepted a certified conflict
{¶ 24} The court, therefore, held that “to fulfill the second prong of the Belvedere test for piercing the corporate veil, the plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act.” Id. at ¶ 29.
{¶ 25} Contrary to the trial court‘s impression, numerous Ohio cases have applied the standard in Belvedere to limited liability corporations. See Denny v. Breawick, LLC, 3d Dist. Hancock No. 5-18-12, 2019-Ohio-2066, ¶ 15 (citing cases from the First, Second, Seventh, Eighth, and Tenth Appellate Districts). The trial court also stressed that LLCs are set up to conduct business in a less formal manner than corporations. See Doc. #90, Decision and Entry on Cross-Motions for Summary Judgment, p. 10. However, this was not a limitation expressed in either Dombroski or Belvedere. In fact, Belvedere
{¶ 26} The same comment would apply to LLCs, which are a hybrid of a close corporation and a partnership. Holdeman v. Epperson, 2d Dist. Clark No. 2004-CA-49, 2005-Ohio-3750, ¶ 33. Close corporations also resemble partnerships. Vontz v. Miller, 2016-Ohio-8477, 111 N.E.3d 452, ¶ 31 (1st Dist.). Both close corporations and LLCs have the advantage, however, of limited liability. Holdeman at ¶ 33; Vontz at ¶ 33. We further noted in Holdeman that because an LLC has “some attributes of a corporation” and also has “some partnership attributes, the logical approach would be to use rules typically applied to these entities.” Holdeman at ¶ 34.
{¶ 27} With these points in mind, we will consider whether summary judgment was appropriate on the question of piercing the corporate veil.
A. Alter Ego
{¶ 28} “The first prong of the Belvedere test ‘is a concise statement of the alter ego doctrine; to succeed a plaintiff must show that the individual and the corporation are fundamentally indistinguishable.’ ” State ex rel. DeWine v. S & R Recycling, Inc., 195 Ohio App.3d 744, 2011-Ohio-3371, 961 N.E.2d 1153, ¶ 30 (7th Dist.), quoting Belvedere at 288. A party‘s sole control of a company is not sufficient to establish that an individual is the alter ego of a company. Springfield v. Palco Invest. Co., 2013-Ohio-2348, 992 N.E.2d 1194, ¶ 83 (2d Dist.) Instead, to decide if a corporation [or LCC, as here,] “is an
{¶ 29} Courts have also considered other factors, including “insolvency at the time of the disputed act“; whether “the individual held himself out as personally liable for certain corporate obligations“; “the entity‘s inability to pay debts due to high salaries or loans to shareholders“; “commingling of individual and entity funds“; “lack of corporate records, especially regarding claimed loans to or from the entity to be pierced“; “common office space“; and “the degree of domination by the person to be held liable, e.g. where the corporation was a mere facade for the operations of the dominant shareholders.” Premier Therapy, LLC v. Childs, 2016-Ohio-7934, 75 N.E.3d 692, ¶ 84 (7th Dist.). These lists are not exhaustive, nor are the factors mandatory considerations. Id. at ¶ 84-85.
{¶ 30} Under the standard for assessing directed verdicts, which is the same for summary judgment motions, reviewing courts consider ” ‘only whether there exists any evidence of substantive probative value that favors the position of the nonmoving party.’ ” Id. at ¶ 62, quoting Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 95 Ohio St.3d 512, 2002-Ohio-2842, 769 N.E.2d 835, ¶ 3. See also Knop v. Toledo, 107 Ohio App.3d 449, 453, 669 N.E.2d 27 (6th Dist.1995) (the same standard applies to both summary judgments and directed verdicts). Therefore, the issue here is not whether Plaintiffs will
{¶ 31} After applying the factors, we conclude there is substantive, probative evidence that Whichard was the alter ego of 369. Whichard was the sole member of 369, which was created to buy the property at 369 West First Street in Dayton, Ohio. See Doc. #57, Ex. C, Deposition of Angela Whichard, pp. 15-16. Whichard also had full control and authority over 369. Id. at p. 27. In addition to NW, Olympia, Ashton, and 369, Whichard was a member or shareholder of other LLCs and corporations, including Branson Commercial Properties, LLC, in Branson, Missouri; Georgetown Village Shoppes in Georgetown, Kentucky; Windsor Richland Mall, LP, which was formed in Texas; Angela Whichard, a Nevada corporation; AT100, LLC, a Nevada LLC; Whichard Family Holdings; and OKO, LLC, an Oklahoma LLC. Id. at pp. 25-26, 71, and 101.
{¶ 32} During its life as an LLC, 369 owned three properties: (1) the 369 building in Dayton, Ohio, which was purchased in 2007 and was sold in January 2009; (2) a Pearl Road property in Cleveland, Ohio, which was purchased in 2012 and was sold in August 2013; and a Boaz, Alabama property, which was purchased in December 2012 and sold in January 2013. Whichard Affidavit at ¶ 3, 10, and 11; Whichard Affidavit, Ex. A-2 and Ex. A-5, pp. 5 and 6. After the August 2013 sale of the Pearl Road property, 369 owned no other properties and did not earn any money.
{¶ 33} 369 did not have any employees. Hagood assisted Whichard with 369, but she was Whichard‘s personal assistant and was paid by Whichard, not 369. Whichard Deposition at pp. 30-31 and 34.
{¶ 34} During her deposition, Whichard presented no evidence that corporate
{¶ 35} As to mingling corporate and personal money, the evidence indicates that this occurred in many instances. As an initial point, Whichard stated that as a sole owner of an LLC, she could take money out of the LLC whenever she needed it; she could also put the money in another LLC, or she could use it for personal matters, like real estate taxes. Whichard Deposition at pp. 96-97.
{¶ 36} As an example of mingling corporate and personal money, the evidence indicates that between 2012 and 2016, 369 paid a total of $26,351.97 in expenses on a 2011 Ford Ranger truck that was titled in 369‘s name, but was kept by Whichard for her
{¶ 37} Whichard‘s home was located in North Carolina, and she stated that the truck was used for whatever she wanted, or by anyone who came by the house and wanted to use it; it was a “community truck.” Whichard Deposition at pp. 92-93. The expenses 369 paid for the truck included car payments, car insurance payments, and license plates for something that was for Whichard‘s personal use, particularly after August 2013. See Ex. A-5.
{¶ 38} In other examples of co-mingling, Whichard used money from 369 to pay expenses of other LLCs she owned, with no evidence that any of these entities were obligated to pay the money back. According to the evidence, 369 purchased a property in Boaz, Alabama, on December 27, 2012, for $25,000. The property was sold to 369 by the Boaz Downtown Redevelopment Authority. See Whichard Affidavit at ¶ 11 and Ex. A-2 attached to the affidavit. According to Whichard‘s affidavit and the attached documents, 369 sold the same property to VFFO Boaz Opportunity, LLC for $633,000 in January 2013. Id. at Ex. A-2. $411,798 was then deposited into 369‘s checking account on January 18, 2013. Id. at ¶ 11 and Ex. A-5 at p. 3.
{¶ 39} The oddities in this transaction abound. As a preliminary point, Ex. A-2
{¶ 40} More importantly, after the money from this sale was deposited, Whichard took a member‘s draw of $100,000. During her deposition, which was taken on August 4, 2016, Whichard stated that she “did not know” why she would have paid herself $100,000 in January 2013. Whichard Deposition at pp. 86-87. However, in her summary judgment affidavit, which was signed on April 16, 2018, Whichard stated that she had taken an owner‘s draw of $100,000 “[i]n good faith, after the sale of the Boaz property and in consideration of the personal risk I accepted in making this purchase, including my personal guarantee of the loan.” Whichard Affidavit at ¶ 11. These statements, made on separate dates, are irreconcilable.
{¶ 41} Moreover, no documents were submitted to substantiate that Whichard personally guaranteed a loan in connection with this purchase. However, even if she had done so, the risk involved in a $25,000 loan that was satisfied by a sale less than a
{¶ 42} 369‘s ledger also indicates a deposit of $107,401.25 on August 9, 2013 from the sale of 369‘s remaining property, the Pearl Road property in Cleveland, Ohio. On August 28, 2013, Whichard took another $100,000 in a member‘s draw. In her affidavit, Whichard again claimed that she took this draw in consideration of the risk she took in making this purchase, including her personal guarantee of the loan. No documents were offered to support this assertion.
{¶ 43} In its decision, the trial court made numerous references to the fact that Whichard personally guaranteed loans. See Doc. #90 at p. 6 (referencing “statements” in Defendants’ memorandum); p. 7 (referencing the fact that Whichard acquired and sold the Boaz and Pearl Road properties with contributions from her other companies and her personal guarantee); p. 8 (referring to Ex. A-3, an open-end mortgage); and p. 10 (concerning piercing the corporate veil, that Whichard used her “personal credit standing to secure the money to pay off the mechanics liens“).
{¶ 44} In their summary judgment motion, Defendants claimed that 369 borrowed money to purchase the Boaz and Pearl Road properties, that the loans were private loans, and that in the case of the Pearl Road loan, a mortgage secured the property. Doc. #63 at p. 6, citing Whichard Affidavit at ¶ 10-11. In the same discussion, and again citing to ¶ 10-11 of Whichard‘s affidavit, Defendants asserted that the loan terms required Whichard to personally guarantee the loans. Id.
{¶ 45} Defendants did not submit any loan documents showing such terms, and
{¶ 46} However, the attached mortgage, Ex. A-3, contradicts Whichard‘s affidavit, the statements that Defendants made in their memorandum, and the trial court‘s reliance on Whichard‘s personal guarantees. Ex. A-3 was an open-end mortgage filed on May 13, 2013 in Cuyahoga County, Ohio. Whichard signed this mortgage the same day, as a member of 369. Id. at p. 3. This was after the Boaz property had been purchased and sold. It was also after the Pearl Road property had been purchased, but was a few months before it was sold in August 2013. Therefore, this mortgage had nothing to do with the financing of either property.
{¶ 47} More importantly, Whichard was not the guarantor on the mortgage. 369 was the mortgagor and granted a North Carolina LLC, Par Enterprises of Pitt County, LLC, an open-end mortgage on the Pearl Road property, which 369 owned at the time.5 The mortgage secured two things. First, it secured a $1,200,000 promissory note between OKO Enterprises and Par Enterprises, so that OKO could purchase property in Oklahoma. During her deposition, Whichard indicated she had another LLC, OKO Properties, LLC, which was located in Oklahoma. Whichard Deposition at p. 101.
{¶ 48} The second provision in the mortgage secured a “future advance deed of trust” in the amount of $500,000 between Whichard, an individual residing in North
{¶ 49} In Ohio, “[a]n open-end mortgage is one which secures unpaid balances of loan advances made after the mortgage is delivered for record, to the extent that the total unpaid loan indebtedness, exclusive of interest, does not exceed the maximum amount of loan indebtedness stated on the mortgage.” Jones v. Jones, 39 Ohio App.3d 73, 74, 529 N.E.2d 475 (10th Dist.1987), citing
{¶ 50} Furthermore, while Whichard stated at ¶ 11 of her affidavit that she personally guaranteed the “loan” on the Boaz property, there were no documents to support that. As noted, the purchase price was only $25,000 and the property was sold less than a month later for $633,000. In addition, there was no evidence that payment of $123,690 to Ashton in January 2013 was to compensate Ashton for loans made to 369. Whichard did not make a statement to this effect in her deposition. To the contrary, she
{¶ 51} Moreover, after both the Boaz and Pearl Road property sales, Whichard continued to co-mingle property. 369 paid Ashton $123,690 on January 23, 2013 to “cover bills.” No evidence was submitted to indicate that 369 received a promissory note or other consideration for this loan. There was also no evidence in the ledger that Ashton ever loaned or paid such a sum to 369.
{¶ 52} 369‘s ledger also shows other large amounts of money being paid between 2013 and 2016 for expenses incurred by Whichard‘s other interests or on behalf of other entities, without corresponding proof of promissory notes or any evidence of obligation to 369. See February 6, 2013 payment of $23,154.84 to Wake County Revenue, for Beacon Plaza property taxes; February 8, 2013 payment of $636.75 to Wake County Revenue, for Beacon Plaza property taxes; February 15, 2013 payment of $24,949.20 for Randolph Springs Mall Taxes; May 15, 2013 payment of $8,752 to Bill McGhee Insurance for new polices6; August 13, 2013 payment of $11,257.93 to Wake County Revenue for taxes7; August 13, 2014 payment of $12,058.73 to Wake County Revenue; November 3, 2015 payment of $8,000 to NW to cover payables; November 24, 2015 payment of $6,000 to Olympia to cover expenses; and December 9, 2015 payment of $12,718 to Wake County Revenue. Whichard Affidavit, Ex. A-5, pp. 3, 4, 6, and 7.
{¶ 54} Under the circumstances, there was substantive probative evidence to support a finding against Whichard vis-à-vis the “alter ego” doctrine pursuant to factors one through four in Palco. Palco Invest. Co., 2013-Ohio-2348, 992 N.E.2d 1194, at ¶ 84. Gross undercapitalization also existed, particularly in light of the $700,000 encumbrance in May 2013 (Palco factor 5). Additional factors existed, including “insolvency at the time of the disputed act“; “the entity‘s inability to pay debts due to high salaries or loans to shareholders“; “commingling of individual and entity funds“; and “lack of corporate records, especially regarding claimed loans to or from the entity to be pierced.” Premier Therapy, LLC, 2016-Ohio-7934, 75 N.E.3d 692, at ¶ 84.
B. Commission of Unlawful Act
{¶ 55} To establish “the second prong of the Belvedere test for piercing the corporate veil, the plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act.” Dombroski, 119 Ohio St.3d 506, 2008-Ohio-4827, 895 N.E.2d 538, at ¶ 29. Disposing of assets in violation of the UFTA has been found to satisfy this requirement. See Flagstar Bank, FSB v. Sellers, 12th Dist. Butler No. CA2009-11-287, 2010-Ohio-3951, ¶ 23 (affirming judgment to pierce the corporate veil of an LLC where a
{¶ 56} As Plaintiffs point out, the trial court concluded that 369 made fraudulent transfers with respect to the 2015 transfers to NW and Olympia, and held Whichard liable. See Doc. #90 at p. 9.8 Therefore, for purposes of the second Belvedere prong, there was substantial probative evidence that Whichard was guilty of exercising control over 369 to commit an unlawful act. Moreover, “[m]ultiple transactions designed to perpetuate a fraud can be considered a single transaction.” Premier Therapy, LLC, 2016-Ohio-7934, 75 N.E.3d 692, at ¶ 119. ” ‘Thus an allegedly fraudulent conveyance must be evaluated in context; where a transfer is only a step in a general plan, the plan must be viewed as a whole with all its composite implications.’ ” Id., quoting Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.1993). The other transactions involving 369 reveal such a course of conduct.
{¶ 57}
(A) A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the claim of the creditor arose before, or within a reasonable time not to exceed four years after, the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation in either of the following ways:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor;
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and if either of the following applies: (a) The debtor 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;
(b) The debtor intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor‘s ability to pay as they became due.9
{¶ 58} Notably, “direct proof of fraud is seldom possible to obtain.” K-Swiss, Inc. v. Cowens Sports Center, Inc., 2d Dist. Greene No. 95-CA-48, 1995 WL 655945, *9 (Nov. 8, 1995). “Due to the difficulty in finding direct proof of fraud, courts of this state began long ago to look to inferences from the circumstances surrounding the transaction and the relationship of the parties involved.” Stein v. Brown, 18 Ohio St.3d 305, 308-309, 480 N.E.2d 1121 (1985). In an action to set aside a fraudulent conveyance, the complainant has to affirmatively satisfy the burden of proof. Id. at 308. Nonetheless, “if the party alleging fraud demonstrates ‘a sufficient number of badges, the burden of proof then shifts to defendant to prove that the transfer was not fraudulent.’ ” Individual Business Servs. v. Carmack, 2d Dist. Montgomery No. 25286, 2013-Ohio-4819, ¶ 27, quoting Baker & Sons Equip. Co. v. GSO Equip. Leasing, Inc., 87 Ohio App.3d 644, 650, 622 N.E.2d 1113 (10th Dist.1993).
{¶ 59}
{¶ 60} These eleven factors are called “badges of fraud.” Carmack at ¶ 26. ” ‘Badges of fraud’ are circumstances so frequently attending fraudulent transfers that the inference of fraud arises from them.” Cardiovascular & Thoracic Surgery of Canton, Inc. v. DiMazzio, 37 Ohio App.3d 162, 166, 524 N.E.2d 915 (5th Dist.1987). Plaintiffs do not need to show evidence of all the badges of fraud to meet
{¶ 61} Here, there were multiple transactions which indicated that from the beginning, when 369‘s sole asset was sold to Eufala in December 2008, 369 intended to hinder collection of the debt. The evidence cannot be viewed in isolation, and there was “evidence of substantive probative value that favors” the position that 369 disposed of assets in an attempt to evade responsibility for the debt incurred to Plaintiffs. Premier Therapy, LLC, 2016-Ohio-7934, 75 N.E.3d 692, at ¶ 62.
{¶ 62} According to Whichard‘s affidavit, when 369 contracted with Plaintiffs in September 2009, the balance in 369‘s checking account was less than $20,000. Doc. #63, Whichard Affidavit at ¶ 3. Despite this fact, 369 contracted for services from Plaintiffs in an amount that 369 did not have funds to pay, and, in fact, did not pay. After Plaintiffs placed mechanics liens on the property, 369 immediately sold the property to Eufala. Whichard clearly knew of Plaintiffs’ liens, which exceeded $36,715.53 at the time, as she signed the settlement statement. See Doc. #63, Defendant‘s Ex. B (settlement statement for 369 West First Street property).
{¶ 63} In her deposition, Whichard claimed that she gave the deed to 369 to Eufala in lieu of foreclosure. Whichard Deposition at pp. 54 and 56. Subsequently, in her affidavit, Whichard stated that in December 2008, 369 fell behind in payments on its promissory note/mortgage for the property and that the lender, Eufala, sued 369. Whichard further said that she was “forced” to sell the building to Eufala in exchange for Eufala forgiving a portion owed on the mortgage, which was greater than $300,000. Whichard Affidavit at ¶ 8. No documentation was provided to support these assertions, other than a general warranty deed from 369 and Northwest to Eufala, filed on January
{¶ 64} Neither document mentions a deed in lieu of foreclosure or any existing encumbrance of Eufala or anyone else who was paid off as a result of the sale. Compare Panagouleas Interiors, Inc. v. Silent Partner Group, Inc., 2d Dist. Montgomery No. 18864, 2002 WL 441409, *3 (March 22, 2002) (warranty deed to be recorded stated that “this is a deed given in lieu of foreclosure by the grantor, in the original principal amount of $577,500, dated September 23, 1998, and recorded in the Montgomery County Clerk‘s office on 9/24/98 in Liber 8–5060 of Mortgage at Page E03“).10 There is also no record of any prior lawsuit or foreclosure action by Eufala against either Whichard or 369 in Montgomery County, Ohio. If these documents existed, they would have supported Whichard‘s account. The lack of any documentation is troubling and casts doubt on Whichard‘s credibility.
{¶ 65} According to the settlement statement, Eufala purchased the 369 building for $300,000 and received a general warranty deed. Again, while certain amounts were required to be withheld for payment of liens, that did not occur, and there was no evidence of an attempt to settle other than an offer made in 2013 – five years later – during subsequent litigation to collect the debt. Moreover, there was no evidence of what happened to the $300,000 that 369 received from the sale.
{¶ 66} As we mentioned, many of the payments reflected in 369‘s ledger were suspicious or questionable. However, the specific transfers at issue in the case before
{¶ 67} All these transfers were to insiders – Whichard and her LLCs.
{¶ 68} On May 13, 2013, Whichard signed a mortgage obligating 369 to pay for loans up to $700,000 if she or her LLC, OKO, defaulted. At that time, 369 had a balance of only $88,219.36, and, therefore, may have been rendered insolvent as a result of the mortgage. Ex. A-5 at p. 5.11 The amount of money reflected in the ledger thereafter
{¶ 69} Given that nine badges of fraud existed, there was substantive probative evidence of an inference of fraud. The burden, therefore, shifted to Whichard to show that these transfers were not fraudulent. Whichard‘s sole offer of proof was her statement in her deposition that she was not aware of the amount of the “Dayton judgment.” Whichard Deposition at p. 109. Of course, Whichard also said that perhaps she did know, but her memory was impaired due to her husband‘s death about a year prior to her deposition. Id. In light of the preceding discussions, here and with respect to alter ego, there are genuine issues of material fact, and substantive, probative evidence existed to satisfy the second prong of the Belvedere test. Dombroski, 119 Ohio St.3d 506, 2008-Ohio-4827, 895 N.E.2d 538, at ¶ 29.
C. Resulting Injury or Loss
{¶ 70} The final prong of the Belvedere test requires that “injury or unjust loss
{¶ 71} In view of the preceding discussion, we agree that the trial court erred in granting summary judgment against Plaintiffs on the issue of piercing the corporate veil. Consequently, Plaintiff‘s First Assignment of Error is sustained.
III. Fraudulent Transfer
{¶ 72} Plaintiffs’ Second Assignment of Error states that:
The Trial Court Erred in Failing to Find All Four Transfers Fraudulent Under
R.C. 1336.04(A) .
{¶ 73} Under this assignment of error, Plaintiffs contend that the trial court erred in failing to find that the transfers to Whichard and Ashton in January 2013 were fraudulent transfers under
{¶ 74} In responding to Plaintiffs’ claims, Defendants first contend that Plaintiffs cannot assert a claim under
{¶ 75} Under notice pleading rules, “a plaintiff is not required to prove his or her case at the pleading stage.” York v. Ohio State Hwy. Patrol, 60 Ohio St.3d 143, 144-45, 573 N.E.2d 1063 (1991). Instead, “the complaint need only put [a party] on notice of the nature of the claim against it.” Richards v. Rubicon Mill Condominium Assn., 100 Ohio App.3d 264, 269, 653 N.E.2d 751 (2d Dist.1995), citing
{¶ 76} The first cause of action in the complaint is labeled “Violation of Ohio Uniform Fraudulent Transfer Act.” Doc. #1, p.1 It is true that the complaint mentions
{¶ 77} As noted, both parties seemingly agree that the trial court should have based its decision on
{¶ 78} While not critical to the issue of intent in January 2013, we note that, according to 369‘s general ledger, 369 had no money in its account as of August 24, 2016, and also did not own any other properties or have any source of income after August 2013. Nonetheless, after this action was filed in January 2017, 369 participated in the case for more than a year, until May 2018, when 369 filed for bankruptcy – almost two years after 369 knew it was insolvent, and shortly after the parties had filed cross-motions for summary judgment.14
{¶ 79} In view of the above discussion, as well as our discussion regarding piercing of the corporate veil, we find genuine issues of material fact with respect to whether the
{¶ 80} As a final matter, Defendants’ contend that this action was barred by the statute of limitations because claims brought under
{¶ 81} Accordingly, the Second Assignment of Error is sustained with respect to the summary judgment granted against Plaintiffs on the January 22, 2013 transfer of $100,000 to Whichard and the January 23, 2013 transfer of $123,690 to Ashton.
IV. Effect of Bankruptcy Discharge of 369
{¶ 82} Defendants’ First Cross-Assignment of Error states that:
The Trial Court Erred by Awarding Judgment for Plaintiffs for Fraudulent Conveyance After the Bankruptcy Court Discharged 369 LLC‘s Debts.
{¶ 83} Under this cross-assignment of error, Defendants contend that the trial court
{¶ 84} ” ‘Core proceedings include, but are not limited to’ 16 different types of matters” that are listed in
{¶ 85} In the trial court, Defendants did not raise this issue in response to Plaintiffs’ summary judgment motion; they raised it in the context of asserting that the case should be stayed until 369‘s bankruptcy was resolved. 369 filed for bankruptcy on May 23, 2018, and Plaintiffs then voluntarily dismissed their claims against 369 on July 18, 2018. In early August 2018, Defendants moved for a stay in the common pleas court case due to the bankruptcy proceedings. In the stay motion, Defendants raised their theory that the issues should be settled in the bankruptcy court. Doc. #78, p. 2. After Plaintiffs responded, the trial court issued a decision in September 2018. See Doc. #82.
{¶ 86} While the trial court did not necessarily agree with Defendants’ position that unusual circumstances existed warranting a stay of claims against non-debtors, the court decided that the bankruptcy court should decide this issue. Id. at p.3. The trial court, therefore, stayed the action.
{¶ 87} After being notified that the bankruptcy action involving 369 had been
{¶ 88} Defendants contend that the trial court erred in granting judgment to Plaintiffs because only a Chapter 7 bankruptcy trustee may prosecute a fraudulent action once a debtor files for bankruptcy. However, that broad assertion is incorrect as applied to the circumstances of this case.
{¶ 89} “The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.
{¶ 90}
Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
{¶ 91} Thus, even where a bankruptcy involves a “core proceeding,” federal courts do not have exclusive jurisdiction and have permission to abstain under
{¶ 92} Federal courts also use a set of factors to decide if they should exercise their discretionary power of abstention. E.g., McDaniel v. ABN Amro Mtge. Group, 364 B.R. 644, 649-650 (S.D.Ohio 2007). “Permissive abstention from core proceedings under
{¶ 93} In support of their position, Defendants cite various cases, including In re Manton, 585 B.R. 630 (Bankr.N.D.Ga.2018). In Manton, a bank had received a deficiency judgment against a woman and her husband. The bank then filed a fraudulent conveyance action in state court against them, contending that they had fraudulently conveyed real property and land to partnerships they owned. The partnerships were also sued. Id. at 633-634. In July 2017, the state court entered a default judgment against the defendants and set a damages hearing for August 9, 2017. Id. at 634.
{¶ 94} Before the default judgment was entered, the debtor (the woman) filed for Chapter 7 relief. She was discharged on July 19, 2017, and on August 3, 2017, filed a notice of removal to the bankruptcy court. Id. After that, the bankruptcy trustee filed a
{¶ 95} At that point, the court considered the debtor‘s motion to substitute the trustee as the real party in interest. The court then said:
As the case law cited above supports,
[11 U.S.C.] §§ 544 and548 provide exclusive standing to a trustee to prosecute a fraudulent conveyance action unless the trustee has abandoned that claim or the automatic stay has been lifted. * * * Neither has occurred in this case.
Id. at 636. As a result, the court granted the debtor‘s motion to substitute the trustee as the real party in interest. Id.
{¶ 96} As noted, 369 filed for bankruptcy on May 23, 2018. 369 remained part of the state court action until July 18, 2018, when Plaintiffs dismissed 369 without prejudice. Unlike the debtor in Manton, 369 did not file a notice of removal to federal court when it had the chance to do so. If 369 wanted the merits of the state action to be determined by the bankruptcy court, it could have filed a notice of removal.
{¶ 97} Furthermore, “[p]roperty of the estate in a chapter 7 case remains property of the estate and protected by the automatic stay until either the property is distributed, abandoned, or the case is closed.” Manton at 639, citing Superior Bank v. Hilsman (In re Hilsman), 351 B.R. 209, 213 (Bankr.N.D.Ala. 2006). According to the documents filed in the trial court, 369‘s bankruptcy trustee filed a report on August 16, 2018, stating that
{¶ 98} After hearing from the parties, the trial court correctly stayed the state court action during the bankruptcy proceeding. See Doc. #82, Decision and Entry Regarding Automatic Stay from Bankruptcy Filing of 369 West First LLC. After the bankruptcy case was closed, the trial court then correctly reactivated the case on March 19, 2019. Doc. #89, Decision and Entry Reactivating Action and Lifting Stay of Proceedings.
{¶ 99} Defendants also complain that Plaintiffs failed to remove the state action to federal court. However, Plaintiffs were not required to file a notice of removal.
{¶ 100} Furthermore, once a case has been removed, the bankruptcy court has the ability to remand the case back to state court on “any equitable ground.”
{¶ 101} Finally, Defendants argue that the trial court should not have awarded judgment for Plaintiffs because the bankruptcy court discharged 369‘s debts. This is incorrect.
{¶ 102} The point here is that even if the fraudulent conveyance were a core proceeding that the trustee was entitled to prosecute, he chose not to do so, and did not initiate adversary proceedings against any party. Instead, the trustee asked to be discharged from further duties and the case was closed. At that time, the transferred property ceased to be the property of the estate, and the trial court could proceed to decide the action.
{¶ 103} Accordingly, the First Cross-Assignment of Error is without overruled.
V. Summary Judgment on November 2015 Transfers
{¶ 104} Defendants’ Second Cross-Assignment of Error states that:
The Trial Court Erred in Awarding Summary Judgment for Plaintiffs/Appellants in the Absence of Evidence of the Transfers or Proof Under ORC § 1336.05(A) or (B).
{¶ 105} Under this cross-assignment of error, Defendants contend that Plaintiffs failed to provide the trial court with sufficient evidence to justify summary judgment against NW and Olympia. According to Defendants, there was no evidence that Olympia and NW failed to provide value for the transfers in November 2005. The trial court found the transfers to Olympia and NW fraudulent under
{¶ 106}
A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
{¶ 107} Under
{¶ 108} On appeal, Plaintiffs state that the trial court erred in making an award under
{¶ 109} As noted, on July 8, 2015, a trial court ordered 369 to pay to Plaintiffs attorney fees of $60,143.25. Previously, on August 28, 2014, the court had also awarded Servpro $13,939, plus 1.5% monthly interest from October 21, 2008, and Possert $9,402.25, plus 1.5% monthly interest from November 7, 2008. Without even considering almost six years of interest, the debt in July 2015 was $83,484.50.
{¶ 110} We disagree that there was insufficient evidence to support summary judgment under
{¶ 111} Under
{¶ 112} Given Whichard‘s course of conduct, which included transferring money to and from various LLCs, it is possible that money was placed into 369 from other sources, including NW and Olympia. However, the ledger that Whichard submitted indicates otherwise.
{¶ 113} Whichard stated in her affidavit that an attached ledger showed all deposits and withdrawals for 369 between 2012 and 2016. Doc. #63, Whichard Affidavit at ¶ 14. However, after September 1, 2013, no more accounts receivable were listed, and there were no undeposited funds listed after August 14. 2013. Ex. A-5 attached to Whichard Affidavit, pp. 10-12. All that occurred was that Whichard continued to drain the account.
{¶ 114} After those dates, there were some other transactions. In November 2015, there were payments to NW and Ashton, respectively, of $8,000 and $6,000. Id. at p. 12. In April 2016, there was an “ATW” contribution by Ashton of $3,000 to pay bills. Property taxes were also paid in 2014 and 2015 on behalf of Beacon Plaza (listed under another LLC of Whichard, AT100 LLC). These amounts totaled $24,877.02. Id. at p. 16.17 Payment of Whichard‘s automobile expenses also continued from August 20, 2013
{¶ 115} These payments were financed by continuing to drain 369‘s bank account. Nonetheless, the ledger that Whichard submitted shows no deposits or payments to 369 by NW or Olympia prior to November 2015. Thus, all the elements of
{¶ 116} Accordingly, Defendants’ Second Assignment of Error is overruled.
VI. Conclusion
{¶ 117} Plaintiffs’ First and Second Assignments of Error having been sustained, and Defendants’ First and Second Assignments of Error having been overruled, the judgment of the trial court is affirmed in part and reversed in part. This matter will be remanded to the trial court for further proceedings.
. . . . . . . . . . . . .
TUCKER, J., concurs.
HALL, J., concurs:
{¶ 118} I concur in my colleagues’ legal analysis regarding the assignments of
{¶ 119} Defendants argue, and I agree, that the case of Lincoln Elec. Co. v. Manahan, N.D.Ohio No. 1:10 CV 00724, 2011 WL 3516201 (Aug. 11, 2011), interpreting federal and Ohio law, stands for the proposition that when bankruptcy is filed, a fraudulent conveyance claim, even against third parties, becomes property of the bankruptcy estate which can only be pursued (or perhaps assigned, distributed or abandoned) by the trustee:
When a bankruptcy petition is filed, a bankruptcy estate is created. The estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.”
11 U.S.C. § 541(a)(1) . Courts broadly construe the phrase “all legal or equitable interests of the debtor in property” to include “rights of action,” such as claims based on state or federal law. See Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir.1988); Am. Nat‘l Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d 1266, 1274 (5th Cir.1983).The bankruptcy trustee‘s role is to manage the estate and gather up all available property, including causes of action, for an eventual pro rata, monetary distribution among the debtor‘s creditors. In addition to representing the rights of the debtor, the trustee represents the interests of the debtor‘s creditors. Under the “strong-arm” provision of the bankruptcy code, the trustee may step into the shoes of a creditor for the purpose of
bringing a cause of action under a state fraudulent conveyance statute. NLRB v. Martin Arsham Sewing Co., 873 F.2d 884, 887 (6th Cir.1989). “The trustee‘s single effort eliminates the many wasteful and competitive suits of individual creditors.” Koch [Refining] v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1342-43 (7th Cir.1987). The trustee has the exclusive right to assert the claims belonging to the estate. Schertz-Cibolo-Universal City, Indep. Sch. Dist. v. Wright (In re Educators Group Health Trust), 25 F.3d 1281, 1284 (5th Cir.1994). However, the bankruptcy trustee has no standing to bring claims that are personal to an individual creditor, since these claims do not belong to the estate. In re E.F. Hutton Southwest Properties II, Ltd., 103 B.R. 808, 812 (Bankr.N.D.Tex.1989). A personal claim is one in which the claimant has been harmed and “no other claimant or creditor has an interest in the cause.” Koch Refining, 831 F.2d at 1348. To determine whether a cause of action belongs to the estate or an individual creditor, the court must “look to the injury for which relief is sought and consider whether it is peculiar and personal to the claimant or general and common to the corporation and creditors.” Id. at 1349. “In the final analysis, whether a right of action exists in the trustee depends on whether the action vests in the trustee as an assignee for the benefit of creditors or, on the other hand, accrues to specific creditors. The latter is the case if the action is not in a fair sense an asset of the bankrupt which passes to the trustee.” Cissell v. American Home Assur. Co., 521 F.2d 790 (6th Cir.1975) (citing In re Associated Oil Co., 289 F. 693 (6th Cir.1923)).
Manahan at *4. Ordinarily then, applying this reasoning, the Plaintiffs should have raised these issues in the bankruptcy court.
{¶ 120} However, the reason for requiring voidable or fraudulent transfer claims to be raised in bankruptcy court is that those transfers, even if in the hands of a third party, are potential assets of the bankruptcy estate recoverable for distribution to all creditors, according to bankruptcy priorities, instead of assets to be cherry-picked by one enterprising creditor. But on this record, the notice of the bankruptcy court transmitted when the bankruptcy case was closed indicates that the only creditors of the estate were the Plaintiffs (William Weaner dba Servpro and Shooter Construction). Therefore, the Plaintiffs’ voidable or fraudulent transfer claims were peculiar or personal to the Plaintiffs because they were the only other parties involved. Moreover, on this record it is apparent that the bankruptcy trustee did not pursue or recover distributable assets, and therefore the trustee did not recover the voidable or fraudulently transferred assets from the third-party defendants in this case. The third-party defendants therefore cannot claim prejudice by Plaintiffs’ pursuit of the claims which the trustee apparently abandoned.
{¶ 121} Accordingly, I agree with the analysis regarding the Plaintiffs’ assignments of error, and I also agree to overrule the Defendants’ first cross-assignment of error and agree the matter should be remanded to the trial court for further proceedings.
Copies sent to:
Craig T. Matthews
T. Andrew Vollmar
Adam Armstrong
Hon. Richard Skelton