Opinion ID: 73194
Heading Depth: 4
Heading Rank: 1

Heading: The transfer was to an insider;

Text: (2) The debtor retained possession or control of the property transferred after the transfer; 16 Both parties acknowledge that courts should look to the badges of fraud in analyzing actual fraud pursuant to § 548(a)(1). The Spangler entities contend, however, that this court does not have to reach a badges of fraud inquiry. The Spangler entities argue that a legitimate business purpose successfully rebuts any showing of actual fraud. See In re Sherman, 67 F.3d 1348, 1354 (8th Cir.1995) (stating that badges of fraud are sufficient to establish actual fraudulent intent, absent significantly clear evidence of a legitimate supervening purpose.). The basis for this assertion centers on the legitimacy of First Phoenix's claim to the BNL letter of credit. The Spangler entities contend that it was a reasonable business decision for XYZ to turn the entire proceeds from the Atlanta litigation over to First Phoenix because XYZ had no hope of dealing with its other creditors while First Phoenix stood waiting at its front door. However, in light of the circumstances of this case, we conclude that the Spanglers have not shown evidence of a legitimate business purpose sufficient to overcome the reasonable inferences of fraud. In addition to the inferences of fraud discussed below, at the time of the settlement negotiations, the Spanglers' security interest was not perfected because XYZ had retained possession of the BNL letter of credit. See infra n.20. Thus, the validity and priority of the Spangler security interest was vulnerable. As we will discuss in greater detail, the structure of the settlement agreement left XYZ with almost no assets. Furthermore, assets originally slotted for creditors were funneled off for other uses. 17 Although the presence of one specific badge will not be sufficient to establish fraudulent intent, the confluence of several can constitute conclusive evidence of an actual intent to defraud. Sherman, 67 F.3d at 1354 (quoting Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir.1991)); see also In re Kranich, 53 B.R. 821 (Bankr.M.D.Fla.1985). 17 (3) The transfer was disclosed or concealed; (4) Before the transfer was made 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; (9) The debtor was insolvent or became insolvent shortly after the transfer was made; (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. Alabama Code, § 8-9A-4(b)(Supp.1996); see also Arizona Revised Statutes, § 44-1004(b)(1990).18 After a careful review of the briefs and the summary judgment record, and after oral argument, we readily conclude that the evidence adduced creates genuine issues of material fact as to whether or not there was an actual intent to hinder, delay, or defraud creditors. We find genuine issues of fact with respect to actual fraud on the part of XYZ and its principal, Muscarella, and also on the part of the Spangler entities. In this opinion, we focus on the transfer of the approximately $2,300,000 (proceeds from the BNL letter of credit, which the Atlanta judgment awarded to XYZ) by XYZ to the Spangler entities. 18 The parties acknowledge that the appropriate analysis of actual fraudulent intent under § 548(a) would look to the badges of fraud. The parties also assume the applicability of the badges of fraud itemized in the text, which are substantially the same under the laws of Alabama and Arizona. Thus, this appeal presents no choice of law issues. 18 Our focus is on the initial $2,300,000 transfer19 to the Spangler entities in satisfaction of the Arizona consent judgment, and on the subsequent flow of this money pursuant to the implementation of the settlement agreement. We turn our attention first to the evidence suggesting that Muscarella and the Spangler entities fixed the amount of the Arizona consent judgment in favor of the Spangler entities at approximately $2,300,000, notwithstanding the fact that all parties intended at the time that the Spangler entities would actually receive a substantially lesser sum, with the balance thereof to be diverted primarily to Muscarella personally or to persons or family designated by him. Evidence to the foregoing effect includes: (a) the affidavit filed by the Spangler entities in the Atlanta litigation indicating that the Spangler entities were owed approximately $1,250,000, approximately 6 months before the Arizona consent judgment; (b) a draft of the settlement agreement, reflecting the status of the settlement negotiations just a few days before the final settlement agreement was 19 There is evidence that virtually all of the assets of XYZ were dissipated as a result of the settlement agreement between Muscarella, as owner of XYZ, and the Spangler entities. Thus, other assets that a fact finder might deem to have been transferred, in addition to the $2,300,000 include: (a) XYZ's potential interest in the $1,000,000 certification of deposit, to the extent of the excess of same over any potential liability to Northern Trust. This certificate of deposit was lost to XYZ as a result of the implementation of the settlement agreement; (b) Real estate which XYZ had at one time owned, subject to a bank mortgage; and (c) The usury claims which XYZ was asserting against the Spangler entities both in the Houston litigation and in the Arizona litigation. The Trustee asserts that a fact finder could find that the usury claim had the potential of eliminating or reducing substantially the value of any claim the Spangler entities had against XYZ. The usury claim was abandoned as part of the settlement agreement which dismissed the Houston litigation, and finalized the Arizona litigation with the Arizona consent judgment. 19 reached, indicating that the Spangler entities were owed $1,200,000, and the testimony of Muscarella that during the negotiations leading up to the Arizona consent judgment the Spangler entities only claimed they were owed $1,250,000; (c) the testimony of Muscarella that the Arizona consent judgment was intended to be in the precise amount of the Atlanta judgment, despite the fact that Muscarella did not know whether XYZ owed the Spangler entities anything close to $2,000,000 at the time; and (d) most importantly, in the actual disbursement of the monies as part of the implementation of the settlement agreement, the fact that the Spangler entities actually ended up with substantially less than the $2,300,000 amount of the consent judgment, with approximately $550,000 (plus the $1,000,000 certificate of deposit) being diverted either to Muscarella personally or to persons or family designated by him. Based on the foregoing evidence, the fact finder could reasonably find that Muscarella, in control of XYZ, and the Spangler entities artificially inflated the amount of the Arizona consent judgment, notwithstanding the intent on the part of all parties that the Spangler entities would actually end up with a substantially lesser amount and that $550,000 would be diverted to either a corporation owned by Muscarella's mother or to persons or organizations benefitting Muscarella's business interests, to the exclusion of XYZ's creditors. We also conclude that there is evidence from which a fact finder could reasonably find that the above-mentioned artificial inflation of the amount of the Arizona consent judgment was intended by Muscarella and the Spangler entities as part of a collusive scheme to hinder, delay, or defraud the creditors of XYZ. The following evidence would support such a finding: (a) Shortly before the finalization of the settlement agreement, Birenbaum, one of the attorneys for the Spangler entities, wrote a letter to Scott Spangler noting that Spangler had told the attorneys that one of the arguments that Muscarella intended to use in negotiating with his creditors 20 was that the Spangler entities had a first-priority security interest in the proceeds of the BNL letter of credit, and, consequently, that the other creditors of XYZ could ultimately receive little or nothing even after the Atlanta litigation was resolved. The letter also noted Muscarella's request that the settlement agreement be structured so as to ensure the priority security interest of the Spangler entities. The letter also noted that the Spangler entities were certainly taking the position that they had a first-priority security interest in the BNL letter of credit, but acknowledged that it did not appear that the Spangler entities would be entitled to all of the proceeds, then estimated to be approximately $2,100,000, thus possibly leaving a significant portion for the other creditors. Finally, the letter noted the possibility that the security interest of the Spangler entities might be successfully attacked. With regard to the latter, the evidence in this record indicates that possession of the BNL letter of credit was not delivered to the Spangler entities until late November 1993, shortly after the date of the Birenbaum letter. During the settlement negotiations, the fact that the Spangler entities did not have possession of the letter of credit was known to both sides, and both sides thus were aware of the legal vulnerability of the Spangler security interest.20 (b) Muscarella testified in his deposition that he needed to have the Spangler lien remain in place so that he could use it as leverage in negotiating with other XYZ creditors. He had advised Spangler of this. 20 In the companion case, No. 96-7035, this court has held that the Spanglers' security interest in the BNL letter of credit first became perfected in late November 1993, on the date the Spangler entities took possession of the BNL letter of credit. The opinion in No. 96-7035 is being published simultaneously with this opinion. 21 (c) Muscarella's attorney, Chamberlin, testified in deposition that he had discussed with Muscarella the need to make sure that the Spangler entities had a lien on the BNL letter of credit proceeds before settlement negotiations. (d) Shortly after the foregoing, XYZ, in November 1993, delivered possession of the BNL letter of credit to the Spangler entities, thus perfecting the security interest of the Spangler entities. (e) If the fact finder concludes that the Arizona consent judgment was in fact artificially inflated, that in itself would add support for a finding of intent on the part of Muscarella, XYZ, and the Spangler entities to hinder, delay, or defraud creditors, at least in the absence of other credible explanation. In other words, the most reasonable explanation for artificially inflating the amount of the judgment may be an intent to use the judgment as a shield to make assets unavailable to other creditors of XYZ. (f) Finally, the fact finder could reasonably find that, of the $2,300,000 initially transferred to the Spangler entities, at least $550,000 was ultimately diverted to Muscarella's mother's corporation or otherwise for Muscarella's benefit. The fact finder could reasonably find that this diversion, and also the transfer of the $1,000,000 certificate of deposit which ended up in Muscarella's mother's corporation, occurred with the knowledge and participation, not only of Muscarella, but also of the Spangler entities. On the basis of all the evidence, the fact finder could reasonably find that the Arizona consent judgment was artificially inflated with the intent on the part of the parties to use the judgment as a shield against creditors to protect the diversion of funds to Muscarella, or persons or family influenced by him. 22 Looking at the foregoing evidence through the prism of the badges of fraud, we readily conclude that a reasonable trier of fact could find that most of the badges of fraud are established by the evidence in the summary judgment record. We turn first to discuss the eighth badge of fraud, i.e., the issue of whether or not the value of the consideration received by the debtor, XYZ, was reasonably equivalent to the value of the assets transferred. The primary asset transferred by XYZ was the approximately $2,300,000 representing the proceeds of the BNL letter of credit which were awarded to XYZ by the district court in Atlanta.21 The primary value received by XYZ was the satisfaction of the consent judgment in the Arizona litigation.22 The Spangler entities argue that their claims, which were thus settled, greatly exceeded the $2,300,000 received, and thus amounted to equivalent value. We readily conclude that a reasonable fact finder might find otherwise.23 Thus, we conclude that the fact finder could reasonably find the existence of the eighth badge of fraud. There is ample evidence from which a reasonable fact finder could find that the transfers in connection with the implementation of the settlement agreement transferred substantially all of the debtor's assets, and left the debtor insolvent, thus satisfying the fifth and ninth badge of fraud. With 21 See supra n. 19 (listing other assets that a reasonable fact finder may find were transferred by XYZ as a result of the settlement agreement and ensuing transactions). 22 Also settled were any claims by the Spangler entities against XYZ in the Atlanta litigation and the Houston litigation. 23 As is often the case when genuine issues of material fact preclude summary judgment, it is true that the Spangler entities have adduced evidence from which a jury might find equivalent value. However, they have not persuaded us that they had claims equaling or exceeding a realistically perceived value of $2,300,000, thus eliminating genuine issues of fact in this regard. This is especially true in light of the ample evidence suggesting that the Spangler entities never intended to receive the full $2,300,000. Moreover, there are genuine issues of material fact as to the realistic value of several of the Spangler claims. For example, there is very little evidence that the Spangler entities realistically perceived that they had a viable claim for $875,531 for any remaining liability on the Northern Trust letters of credit. The evidence suggests that those letters of credit were amply collateralized by the $1,000,000 certificate of deposit. 23 respect to the fourth badge of fraud, it might reasonably be found that the debtor, XYZ, was subject to judgments and threatened suits by creditors immediately before the transfer. A reasonable fact finder could also find that the first, second, seventh, and eleventh badges of fraud are satisfied. All deal with retention of possession or control by the debtor or insiders. There is ample evidence from which it could reasonably be found that essential assets of the debtor, XYZ, were transferred to a lienor, the Spangler entities, who then transferred assets to an insider. For example, the fact finder could reasonably find that $550,000, plus XYZ's residual interest in the $1,000,000 certificate of deposit, ended up in the hands of insider Muscarella, or persons or family controlled by him. Finally, there are reasonable inferences in this summary judgment record from which it might reasonably be found that the third badge of fraud is satisfied, namely, that the transfer was concealed. The fact finder might reasonably infer, from the fact that the implementation of the settlement agreement was delayed approximately 90 days, that there was an intent to conceal the transfer for a sufficient length of time until the bankruptcy preference period expired. Moreover, an intent to conceal might reasonably be inferred from the complex and convoluted nature of the transfers by which the settlement agreement was implemented. While it is true that mere complexity would not give rise to an inference of fraud or intent to conceal, in this case, the record wholly fails to provide any reasonable explanation for a considerable number of the convoluted transactions involved. After careful consideration of the evidence discussed above in light of the badges of fraud, we readily conclude that there is ample evidence from which a fact finder could reasonably find an 24 actual intent on the part of both the debtor, XYZ, and the Spangler entities to hinder, delay, or defraud creditors.24 The district court's contrary conclusion was error.