Opinion ID: 2516776
Heading Depth: 5
Heading Rank: 1

Heading: The debt to William Artus

Text: On April 11, 1997, Nerox Power recorded a deed of trust against the Jonesville mine and listed as beneficiaries William Artus and Coal Factors, Inc. Artus himself signed the deed in his role as president of Nerox Power. Debt amounts to Artus and Coal Factors were not separately listed in the deed of trust itself. The 1997 10-K report that Nerox Energy was required to file with the Securities and Exchange Commission lists debts to Artus of: (1) $68,196 for legal services in 1996 and 1997 combined, and (2) $85,432 for a loan that Artus made to Nerox Energy in late 1996 or early 1997. However, Artus testified at trial that he was owed $79,500 for the loan. This amounts to a total debt to Artus of either $153,628 or $147,696. Nerox Energy issued 151,016 shares of stock to Artus in conversion of debt sometime in 1997. The 1997 10-K report does not explain to what extent the debts owed to Artus, both from his loan and for his legal services, were satisfied by the 151,016 shares issued to him. There is no monetary value attached to the shares, although one could reasonably infer that the entire debt was satisfied by the issuance of stock. The 1997 10-K report states that Nerox Energy converted $568,168 in debt to shares of common stock in 1997 at $1.00 per share. There is nothing definitive to say that the issuance of stock to Artus was included in this debt conversion, although converting debt at a dollar per share for the 151,016 shares issued to Artus would closely approximate the combined debt owed to Artus for his loan and for legal services. Judge Hunt concluded that Artus's debt was satisfied by the issuing of the stock. She further found that the loan to Nerox Power by Artus was a capital contribution for which he received the shares of common stock in Nerox Energy. Judge Hunt found that fraud existed in these transactions: Mr. Artus breached his fiduciary duty to the creditors by attempting to place the interests of William D. Artus and Coal Factors, Inc., shareholders in the corporation, over the interests of third-party creditors. The execution of the deed of trust was done at a time when both corporations were grossly undercapitalized. Such conduct constituted a fraudulent conveyance, hindered creditors and was inequitable conduct. Artus contends [15] that because the amount of debt compensated by the 151,016 shares is unclear, the conveyance of the deed of trust cannot be fraudulent. However, we cannot say that the superior court was clearly erroneous in concluding that Nerox Power satisfied any debts Nerox Power owed to Artus. Based on the 1997 10-K statement that certain unspecified debts were converted to common stock at a price of $1.00 per share in 1997, Judge Hunt found that the stock issued in satisfaction of debt in 1997 was issued for a dollar a share. Because the 151,016 shares issued to Artus are roughly equal to the amount of money owed to Artus by Nerox Power ($153,628 based on the figures in the 1997 10-K), there is evidentiary support for the superior court's conclusion that all of Artus's debts had been satisfied, and we cannot say that this factual determination is clearly erroneous. Furthermore, Judge Hunt could have effected the subordination of Artus's interest in the deed of trust independently of whether or not she believed that his debt had been satisfied by the issuance of stock. Appellees M-B, Tope, and Alaska Law Offices focus on Artus's position as an insider in Nerox Power and argue that this status supports a finding of a fraudulent conveyance to Artus's own benefit. Appellees argue that this is sufficient to support equitable subordination of the deed of trust. The law supports this conclusion. Federal courts have recognized three types of misconduct that constitute inequitable conduct: (1) fraud, illegality, or breach of fiduciary duties; (2) undercapitalization; and (3) claimant's use of the debtor as a mere instrumentality or alter ego. [16] Judge Hunt found the first two of these to exist, and her conclusions were not clearly erroneous. The prohibition against fraudulent conveyances has been codified in Alaska law. [17] The intent to defraud through a conveyance is a question of fact usually to be proved by circumstantial evidence. [18] Many circumstantial factors can indicate the existence of fraud. [19] Badges of fraud must be viewed within the context of each particular case. [20] Judge Hunt found that Artus either knew or should have known that many creditors had not been paid at the time the deed of trust was recorded and that these creditors would likely claim a lien against the mining rights. In his role as a director of the company, and in his former role as a lawyer for Nerox Energy, Artus had an obligation to protect the rights and assets of the corporation for its creditors. [21] Judge Hunt further found that by naming himself as a beneficiary of a deed of trust encumbering Nerox Power's only asset for the purpose of repaying a loan and reimbursing the costs of legal services he provided, Artus ignored his fiduciary duty and engaged in inequitable conduct. [22] We have recognized inadequate consideration, the insolvency of the debtor/transferor, and a transfer of assets in anticipation of a pending suit to be among the badges of fraud. [23] All of these existed in the present case. Judge Hunt found that Nerox Power was insolvent; that there was inadequate consideration for the deed of trust; and that Artus knew Nerox Power was likely to be burdened by mechanic's liens in light of its insolvency. These factual findings are not clearly erroneous and satisfy the fraud category of inequitable conduct. Judge Hunt also found that both Nerox Power and Nerox Energy were grossly undercapitalized and that this constituted inequitable conduct. [24] The only asset of Nerox Power was the right to mine coal at the Jonesville mine, which never went into production. Judge Hunt found that Nerox Power had neither the expertise nor the equipment to run a coal mine, hence the need to hire M-B and Tope. All the funding for the expenses of Nerox Power came either directly from Ross or indirectly from Ross via Nerox Energy. Given these facts, it was not clearly erroneous to find that Nerox Power was undercapitalized and that the deed of trust for Artus could thus be equitably subordinated to the liens of M-B, Tope, and Alaska Law Offices.