Opinion ID: 2977034
Heading Depth: 2
Heading Rank: 2

Heading: Transfer of Inventory

Text: The judgment in favor of the trustee rested on the bankruptcy court’s finding that the pre-petition transfer of FDP’s inventory to Brennan constituted a fraudulent transfer. That is, the bankruptcy court found that Fisher was FDP’s alter ego; that the recovered inventory and the proceeds Brennan received from the sales to Globe were property of the estate under 11 U.S.C. § 541(a)(3) and (a)(6); and that the transfer was made with “actual intent to hinder, delay, or defraud” any entity to which the debtor was or became indebted under 11 U.S.C. § 548(a)(1)(A). The district court affirmed, addressing the same arguments made here and rejecting the defendants’ contention that the trustee lacked standing to avoid this transaction because she did not have any financial interest in the outcome. Slone, 362 B.R. at 884-86. 6 Defendants assert in a footnote that Fisher’s deposition testimony was only admissible for impeachment purposes and not as substantive evidence. As both the bankruptcy court and the district court found, however, since Fisher testified at trial and was subjected to cross-examination, his deposition testimony was admissible both for impeachment and as substantive evidence. FED . R. CIV . P. 32(a)(1); FED R. BANKR . P. 7032; FED . R. EVID . 801(d)(1). No. 07-3319 13
Issues raised for the first time on appeal are generally not considered. Poss v. Morris (In re Morris), 260 F.3d 654, 663 (6th Cir. 2001). To the extent that defendants’ argument is a challenge to standing, however, it presents a jurisdictional question that may be raised at any time. Stevenson, 277 F.3d at 852. Whether a plaintiff has standing is a legal question, which we review de novo. Id. at 853. In an effort to bolster their arguments on standing, defendants seek to supplement the record with documents that were filed in the bankruptcy court but not made part of the record before the district court. While there may be limited discretion to supplement the record under Fed. R. App. P. 10(e)(3), the documents do not support the defendants’ contention that National City retained a security interest in the inventory. Defendants emphasize, as Fisher explained in an accompanying affidavit, that National City took a broad security interest in all of FDP’s assets and their proceeds in connection with loans made to FDP totaling $850,000. That security interest was recorded in a UCC-1 Financing Statement filed in June 2000, and a “continuation” of the UCC-1 was filed post-petition in January 2005. Defendants also point to two claims National City filed in the bankruptcy proceeding reflecting debt of $665,287.78, but those claims were listed as unsecured. These documents show National City was undersecured—a fact that was never in dispute—but they do not establish that National City retained a security interest in the inventory after the transfer to Brennan. Indeed, defendants conceded that National City approved the sale of and released its security interest in the inventory such that Brennan held the inventory free of National No. 07-3319 14 City’s lien. As a result, we need not decide whether to recognize an inherent authority to supplement the record. See, e.g., United States v. Husein, 478 F.3d 318, 336 (6th Cir. 2007) (noting that some courts, but not the Sixth Circuit, have relied on inherent authority to supplement the record). Defendants rely heavily on this court’s decision in Melamed to support the argument that the trustee was without standing to seek to avoid the transfer of the inventory. Melamed v. Lake County Nat’l Bank, 727 F.2d 1399 (6th Cir. 1984). This reliance is misplaced. Defendants quote from Melamed in a way that misrepresents the court’s holding concerning standing, which pertained not to the fraudulent transfer claim but to a separate claim for tortious interference under state law. In that claim, the trustee argued that the bank, a secured creditor, imposed such strict controls on the debtor that it destroyed the debtor’s business and injured the other creditors. The court in Melamed agreed with the bank that the trustee did not have standing to assert claims belonging to the creditors under former 11 U.S.C. § 110(a). Id. at 1404. That conclusion is consistent with the general principle that a bankruptcy trustee does not have standing to assert claims that belong to specific creditors. Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972); see also Stevenson, 277 F.3d at 853 (explaining that “the prudential principles of standing under Article III and the trustee’s powers under the bankruptcy code are coextensive . . . [such that] ‘if a trustee has no power to assert a claim because it is one not belonging to the bankruptcy estate, then he also fails to meet the prudential limitation that the legal rights asserted must be his own’”) (citation No. 07-3319 15 omitted).7 When the trustee in this case responded that she was not asserting a claim belonging to National City, defendants denied that this was their contention and accused the trustee of constructing a “straw man” argument. Plainly, the trustee’s avoidance action did not assert a claim belonging to National City, but rather sought to avoid a transfer for the benefit of the estate. Hatchett v. United States, 330 F.3d 875, 886 (6th Cir. 2003) (noting that only trustee has exclusive authority to bring avoidance action during bankruptcy proceedings). Reframing the argument, defendants direct attention to the portion of Melamed in which the court concluded that the fraudulent transfer claim failed because the transfer did not diminish the assets of the debtor. Aside from the not insignificant fact that this was not a finding as to standing, the holding is inapplicable to the transfer at issue in this case. The debtor in Melamed received a down payment of $30,000 to order equipment for a customer. When the down payment was deposited with the bank, which held a security interest in the debtor’s accounts receivable, the bank applied the deposit to the secured debt. The bankruptcy trustee sought to avoid the transfer of the $30,000 from the debtor to the bank, but this court held that “because of the Bank’s valid security interest in accounts receivable, the transfer did not diminish the assets of the debtor which were available to its creditors.” Melamed, 727 F.2d at 1402.8 7 In Stevenson, we held that the trustee lacked standing where the property—funds deposited into escrow accounts in express trust for the debtor’s clients—never belonged to the debtor and any recovery would be for the benefit of the debtor’s clients and not the bankruptcy estate. 8 The customer, however, successfully sued the bank for misrepresentation, and that judgment was affirmed in a separate appeal. Id. No. 07-3319 16 The trustee concedes, as she must, that this holding would have application if she had challenged the transfer of the proceeds between Fisher and National City because National City retained a security interest in the proceeds of the sale of the inventory to Brennan. Here, the trustee did not seek to avoid a transfer to a secured party, but rather sought to avoid the sale of the inventory to Brennan. The fact that National City released its security interest in the inventory distinguishes this case from Melamed. Defendants argue next that the trustee lacked standing because the bankruptcy estate would not benefit from the recovery of the transferred property or its proceeds. Avoidance and recovery are distinct, with the former a necessary precondition for the latter. Surhar v. Burns (In re Burns), 322 F.3d 421, 427 (6th Cir. 2003). Section 550 provides, in part, that to the extent a transfer is avoided under other provisions, including § 548, the trustee may recover the property transferred, or the value of such property, “for the benefit of the estate.” 11 U.S.C. § 550(a). In Wellman, on which defendants rely, the debtor-in-possession gave certain creditors conditional non-recourse notes to be paid out of any recovery or settlement in actions under § 550. The district court found that the debtor gave these notes in an attempt to create a claim in the estate in order to bring avoidance actions to secure a “massive surplus recovery.” Finding that the debtor brought the avoidance action on his own behalf, and not for the benefit of the estate, the court concluded that the debtor had no standing. Wellman v. Wellman, 933 F.2d 215, 218-19 (4th Cir. 1991). The same cannot be said of the trustee in this case. In a similar vein, defendants argue that the recovery was not for the benefit of the No. 07-3319 17 estate because the property that was the subject of the avoided transfer was fully encumbered. Defendants rely specifically on Barber v. McCord Auto Supply, Inc. (In re Pearson Indus., Inc.), 178 B.R. 753 (Bankr. C.D. Ill. 1995), for the proposition that the trustee may not recover when the property was encumbered by liens that exceeded the value of the property. Not articulated as an Article III standing issue, the court held that the trustee could not prevail on the recovery action because the property remained subject to a security interest. Id. at 765. Critical to that determination, however, was the stipulation that the creditor’s security interest had attached to the inventory transferred to the pawnbroker and that the security interest continued in the inventory after the transfer. Id. at 764-65. It was for this reason that the court found the recovery was not for the benefit of the estate. Id.; see Mellon Bank, N.A. v. Dick Corp., 351 F.3d 290, 293 (7th Cir. 2003) (clarifying that § 550's “benefit to the estate” denotes the set of all potential interested parties rather than any particular class of creditors). Defendants have not demonstrated either that National City maintained a security interest in the inventory itself after it approved the sale to Brennan. The unsold inventory and the proceeds of Brennan’s sales to Globe are part of the bankruptcy estate, which includes not only any interest in property that the trustee recovers under § 550 and, in turn, § 548, but also the proceeds or profits of or from property of the estate. 11 U.S.C. § 541(a)(3) and (6). Finally, defendants argue in their third brief in this court that the trustee lacked standing to bring an alter ego claim even on behalf of general unsecured creditors. In No. 07-3319 18 support of this proposition, defendants rely on Mixon v. Anderson (In re Ozark Restaurant Equipment Co.), 816 F.2d 1222 (8th Cir. 1987), and DSQ Property Co. v. DeLorean, 891 F.2d 128 (6th Cir. 1989). Both cases involved application of the holding in Caplin that the trustee does not have standing to assert claims on behalf of specific creditors. The court in Mixon held that, under Arkansas law, an alter ego claim brought against the principals of the debtor corporation is not a claim belonging to the corporation or its shareholders, but one that runs to the corporate creditors personally. 816 F.2d at 1225. The trustee is not asserting such a claim here, and other courts have recognized that a bankruptcy trustee has standing to raise an alter ego theory in a trustee’s action to collect the assets of the estate. Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1349-50 (7th Cir. 1987); see also Kalb, Voorhis & Co. v. Am. Fin. Corp., 8 F.3d 130, 132-34 (2d Cir. 1993); Towe v. Martinson, 195 B.R. 137, 140 (D. Mont. 1996). Concluding that the trustee had standing to pursue the fraudulent transfer claim with respect to the inventory, we turn to the defendants’ arguments with respect to the merits.
The bankruptcy court recognized that FDP was a separate legal entity from its sole shareholder, James Fisher. Zimmerman v. Eagle Mortgage Corp., 675 N.E.2d 480, 485 (Ohio Ct. App. 1996). Under Ohio’s alter ego doctrine, “where the stock of a corporation is owned entirely by one party, and the party in interest is the stockholder, the fiction of the separate entity of the corporation may be disregarded where the ends of justice require it.” Knight v. Burns, 154 N.E. 345, 346 (Ohio Ct. App. 1926). No. 07-3319 19 Defendants argue that the bankruptcy court improperly applied reverse-piercing of the corporate veil, which has not been recognized in Ohio. To be sure, the Ohio courts have not adopted reverse-piercing, despite acknowledging that it has been permitted by other courts in limited cases where the corporation was found to be the alter ego of its controlling shareholders and a creditor was seeking assets of the corporation to satisfy the debts of the controlling alter ego. Geiger v. King, 815 N.E.2d 683, 685 (Ohio Ct. App. 2004). This court has explained, however, that veil piercing and alter ego concepts are distinct. The former asks a court to hold A vicariously liable for B’s debts, while the latter asserts that A and B are the same entity and therefore liability is direct. IUAU Local 600 v. Aguirre, 410 F.3d 297, 302 (6th Cir. 2005). Here, the bankruptcy court found that because Fisher and FDP were the same entity, FDP’s inventory belonged to Fisher such that the transfer to Brennan was a transfer of an interest in property of the debtor. In Ohio, the courts may consider a number of nonexclusive factors in deciding whether to disregard the corporate fiction under the alter ego theory. Those factors include: “(1) grossly inadequate capitalization, (2) failure to observe corporate formalities, (3) insolvency of the debtor corporation at the time the debt is incurred, (4) shareholders holding themselves out as personally liable for certain corporate obligations, (5) diversion of funds or other property of the company property for personal use, (6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the dominant shareholder(s).” Taylor Steel, Inc. v. Keeton, 417 F.3d 598, 605 (6th Cir. 2005); see also Carter-Jones Lumber Co. v. LTV Steel Co., 237 F.3d 745, 749 (6th Cir. 2001). The No. 07-3319 20 bankruptcy court made the following findings: The parties did not specifically argue these points at trial and the Trustee inexplicably presented no evidence regarding Fisher’s actions with regard to the corporate formalities required for the separateness of FDP. FDP is an Ohio “S” corporation meaning that the tax liabilities of the corporation flow directly through to Fisher. Fisher was always the sole shareholder of FDP. The Trustee presented evidence regarding Fisher’s mismanagement of FDP. Fisher frequently commingled his funds with FDP’s and treated FDP’s debts as his own. He put FDP cash into his accounts and paid FDP expenses. He paid his own expenses from the commingled funds. One of the Trustee’s experts, Robert Bowman, a former vice president of NCIC [an FDP lender], testified that Fisher literally bled the corporation of capital prior to its demise. Even Fisher had a difficult time remembering to distinguish between himself and his corporation during testimony. The documentary evidence regarding the potential sale and inventory transfer to Globe also supports the conclusion that Fisher and FDP were one and the same. Although the memoranda from Globe mention that FDP is a corporation, it is apparent that Fisher treated FDP as an alter ego when discussing [] Fisher’s financial problems. The memorandum dated December 14, 2002 states that Fisher “is now prepared to go into bankruptcy as he feels he is doomed.” Notably, the memorandum does not state that Fisher felt that FDP was doomed or that Fisher was contemplating bankruptcy for FDP, but only for himself. Based on that evidence and the total lack of evidence regarding Fisher’s treatment of FDP as a separate entity, the court finds that FDP was Fisher’s alter ego. The transfer of FDP’s inventory in January 2003 to Brennan was a transfer from Fisher to Brennan. Defendants do not contend that these findings were clearly erroneous, but argue that they suggest an improper shifting of the burden of proof to the defendants. We cannot agree that the bankruptcy court’s statement that the trustee presented no evidence regarding the corporate formalities was anything more than a comment on the evidence. Nor are we persuaded that the bankruptcy court erred in finding that FDP was Fisher’s alter ego. No. 07-3319 21
Finally, defendants appeal from the finding that inventory was transferred to Brennan with “actual intent to hinder, delay, or defraud” any of Fisher’s creditors. 11 U.S.C. § 548(a)(1)(A). Despite evidence regarding Brennan’s business expertise and financial resources, the bankruptcy court rejected the defendants’ contention that Brennan purchased the inventory on her own, and concluded that: This transfer reeks of actual fraud. There is abundant evidence that Fisher undertook careful pre-bankruptcy planning. Part of that planning was clearly the removal of the inventory out of FDP and into Brennan’s hands. At deposition, Fisher testified to that simple fact[,] stating that he did not purchase the inventory himself because he knew that a future bankruptcy trustee would take the inventory. Although Fisher directly refuted that testimony at trial, the court is sufficiently convinced that Fisher’s deposition testimony was true. The court’s impression of Fisher is that he is an adept business person who was both capable of and willing to reap every possible benefit from FDP prior to its demise—even if that required him to hatch a potentially fraudulent scheme to move the inventory to the person he was living with prior to filing bankruptcy. The Globe memoranda detailing Fisher’s employment negotiations support this conclusion. The memorandum dated December 24 and updated on December 26, 2002 states that Fisher “is arranging to take the raw stock” and that he “will get this deal done” without requiring Globe to purchase the inventory. It is clear from the memoranda that Fisher is working on a deal to get the inventory to Globe at a reduced price and without requiring Globe to purchase the inventory directly. In addition to the above, it is also compelling that Fisher knew the inventory had a much greater value than National City Bank placed on it. In his deposition, he testified that the value of the inventory was between $200,000 and $300,000, yet National City valued the inventory at just $3,000. Fisher clearly indicated in his deposition and his trial testimony that the inventory was a money-making opportunity. Finally, it is simply too convenient that the person Fisher was living with eventually purchased the inventory. Fisher actually testified in court that No. 07-3319 22 he was against Brennan’s purchase, but given the deposition testimony and the remaining evidence before the court, this seems improbable. Given all the circumstances involved, the court finds that Fisher intentionally created a plan to keep the value of the inventory for himself by having Brennan purchase it. For her part, Brennan was clearly a knowledgeable accomplice in Fisher’s plan. Once again, the court does not question Brennan’s business acumen and was impressed with both the testimony regarding her professionalism and her knowledge of the inventory. But, both Brennan and Fisher’s testimony regarding the transfer was unbelievable. Not only did Brennan indicate that she was not aware of Fisher’s financial status, but she also steadfastly claimed that it was her idea to purchase the inventory. Brennan’s testimony in this regard directly contradicts the Globe memoranda which indicate Fisher was planning on getting the inventory in some manner or another well before Brennan showed any interest. In addition, the Trustee produced evidence and Brennan verified that although she purchase the inventory [and shelving] for only $3,850, she immediately sold a portion of it for $10,326.11. Although Brennan went so far at trial as to testify that she was concerned over whether she would be able to get rid of the inventory, this testimony is also directly contra[di]cted by the Globe memoranda as well as common sense. As of October 28, 2004, Brennan had sold inventory to Globe for the total amount of $99,128.65. There was no testimony on the exact portion of the inventory now on hand, but it is clear that some portion remains for Brennan to sell in the future. Brennan has not sold the inventory to any other purchaser and there is no indication that she will need to because Globe’s needs are not abating. All of these facts indicate to the court that Fisher and Brennan not only devised, but executed, a[n] effective plan to move the inventory from FDP for their benefit without having to sacrifice any of the inventory’s value in Fisher’s bankruptcy. The final piece of evidence regarding the inventory transfer that the court finds relevant is the information regarding Brennan’s use of the proceeds from the sale of the inventory. Although a good portion of the proceeds were used for typical expenses, Brennan also used some of the money to pay former employees of FDP. Brennan insisted at trial that the payments were gifts and the court acknowledged that fact. But the amounts of the payments look very similar to payroll expenses. Although that was not proven at trial, there is enough evidence that supports the conclusion that Fisher and Brennan had empathy with the former employees who went unpaid No. 07-3319 23 when FDP closed. Based on the evidence, the bankruptcy court found that the sale of inventory to Brennan was fraudulent under § 548. Defendants argue that this finding was based upon speculation and surmise, and defied the evidence presented at trial. Specifically, defendants insist that the Globe memoranda actually showed that Globe did not want to buy the inventory directly and that Fisher was simply attempting to negotiate a deal between National City and Globe. That is only part of what was shown, however. After Globe decided it did not want to buy it and National City did not want to take it, Globe understood that Fisher would arrange to secure the inventory so that it would be available for Globe to purchase “as needed.” Yet, despite being the sole shareholder of FDP, Fisher did not take the inventory because he knew it would become part of the bankruptcy estate and the revenue expected from this moneymaking opportunity would be lost to his creditors. This is indeed indicative of actual fraud under § 548(a)(1)(A). Next, defendants take issue with the bankruptcy court’s statement that Fisher valued the inventory at $200,000 to $300,000, emphasizing that he actually testified the acquisition cost of the inventory was a “couple hundred thousand dollars.” In that exchange, however, Fisher also acknowledged that Globe was given a balance sheet that showed raw materials valued at $230,000. Defendants claim that the appraisal was the only evidence as to the value of the inventory at the time of the transfer. On the contrary, the bankruptcy court could infer the value from the circumstances, including that Globe purchased more than $10,000 No. 07-3319 24 worth of inventory within two weeks of the sale to Brennan. The fact that the first sale of a portion of the inventory was for more than three times what Brennan paid for all of the inventory is evidence that the transfer was for less than reasonably equivalent value.9 Finally, defendants suggest that there could be no fraud because, as National City’s representative testified, Fisher revealed that the inventory would be worth more than the liquidation appraisal value. Also, National City confirmed that it was willing to approve the sale of the inventory to any buyer for the appraised value. This, defendants argue, shows that Fisher did not make a misrepresentation or omission of material fact to National City. No misrepresentation is required for the trustee to avoid the transfer. The bankruptcy court did not clearly err in finding that Fisher and Brennan acted in concert to take advantage of the difference between the appraised value and the unique value to Globe—a patent holder—and that, in doing so, the inventory was transferred away from Fisher/FDP with actual intent to hinder, delay, or defraud Fisher’s creditors. Accordingly, the judgment of the bankruptcy court is AFFIRMED. 9 This supports a finding of constructive fraud under § 548(a)(1)(B).