Opinion ID: 744192
Heading Depth: 2
Heading Rank: 2

Heading: Whether Power Depot's purchase of approximately

Text: 43 $1,185,000 in inventory and fixed assets from GTI 44 constituted a fraudulent transfer. 45 In conducting discovery in aid of execution of the judgment against GTI and Baeza, Sr., Yale uncovered a number of fraudulent transfers made by GTI and Baeza, Sr., between September 30, 1992, the date of the magistrate judge's opinion and order, and May 7, 1993, the day the amended final judgment against GTI and Baeza, Sr. was entered. After holding evidentiary hearings, the magistrate judge issued an order on February 24, 1994, which set aside or invalidated the following transfers: 24 (1) Baeza, Sr.'s transfer of six lots in Miami, Florida to his daughter Michele approximately ten weeks after the adverse September 1992 ruling; (2) Baeza, Sr.'s transfer in January 1993 of a 43' Bertram yacht to his son, Manny; (3) Baeza, Sr.'s January 1993 transfer of lots in West Palm Beach, Florida to his son Javier; (4) GTI's transfer between November 1992 and April 1993 of $550,000 to the GT corporation, 25 a family owned business of which Baeza, Sr. was an insider; 26 (5) GTI's payment of a bonus on December 17, 1992, to Javier Baeza of $250,000; and, (6) GTI's payment of a bonus of $26,789 to Manny Baeza on January 12, 1993. While the magistrate judge found that the aforementioned transfers constituted fraudulent conveyances, it did not find GTI's transfer of $1,185,000 in inventory and fixed assets to Power Depot to be a fraudulent transfer. 46 Power Depot was started on October 27, 1992, 27 by Javier Baeza, who had previously worked at GTI and was a director of GTI. Javier Baeza was Power Depot's only officer and its sole shareholder. Power Depot hired GTI employees, remained at GTI's old location, used many of GTI's suppliers, and maintained many of GTI's former customers. On appeal, Yale raises the following arguments: the assets and inventory which Power Depot bought from GTI were fraudulently transferred; Power Depot is the alter ego of GTI, and therefore liable for GTI's debts; and, the transfer at issue is void because it violated Florida's bulk sales laws. 28 47 In deciding whether Power Depot was the recipient of fraudulent transfers, the magistrate judge applied Fla. Stat. § 56.29(6)(a), which governs supplementary proceedings. Section 56.29(6)(a) provides that a judgment creditor, in this case Yale, may reach any property to which the judgment debtor, GTI, transferred title within one year of service of process on him if the transferee is a relative, or is a person on confidential terms with the defendant. 29 See Allied Industries International, Inc. v. AGFA-GEVAERT, Inc., 688 F.Supp. 1516, 1520 (S.D.Fla.1988). Under § 56.29, GTI had the burden of proving that the transfer at issue was not made to delay, hinder or defraud Yale. In addition, to prove fraud only a preponderance or greater weight of the evidence is required. Wieczoreck v. H & H Builders, Inc., 475 So.2d 227, 228 (Fla.1985) (quoting Rigot v. Bucci, 245 So.2d 51, 53 (Fla.1971)). 48 Also applicable to GTI's transfer to Power Depot is Florida's Uniform Fraudulent Transfer Act (UFTA), which provides in relevant part: 49 (1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: 50 (a) With actual intent to hinder, delay, or defraud any creditor of the debtor; or 51 (b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: 52 1. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or 53 2. Intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due. 54 Fla. Stat. § 726.105(1). In determining actual intent under § 726.105(1)(a), the UFTA directs courts to consider whether any of the following badges of fraud are applicable to the transfer at issue: 55 (a) The transfer or obligation was to an insider. 56 (b) The debtor retained possession or control of the property transferred after the transfer. 57 (c) The transfer or obligation was disclosed or concealed. 58 (d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. 59 (e) The transfer was of substantially all the debtor's assets. 60 (f) The debtor absconded. 61 (g) The debtor removed or concealed assets. 62 (h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred. 63 (i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred. 64 (j) The transfer occurred shortly before or shortly after a substantial debt was incurred. 65 (k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. 66 While [a] single badge of fraud may only create a suspicious circumstance and may not constitute the requisite fraud to set aside a conveyance, ... several of them when considered together may afford a basis to infer fraud. Johnson v. Dowell, 592 So.2d 1194, 1197 (Fla.Dist.Ct.App.1992) (citing Banner Constr. Corp. v. Arnold, 128 So.2d 893, 896 (Fla.Dist.Ct.App.1961)). Moreover, while the UFTA lists a number of badges of fraud, [i]t is clear from the language of the Statute that in determining intent, consideration may be given to factors other than those listed. In re Miller, 188 B.R. 302, 306 (Bankr.M.D.Fla.1995) (citing Harper v. United States, 769 F.Supp. 362 (M.D.Fla.1991)). In addition, courts take into account the particular facts surrounding the conveyance, and avoid determining in a vacuum the presence or absence of a debtor's actual intent to hinder or delay a creditor. Kirk v. Edinger, 380 So.2d 1336, 1337 (Fla.Dist.Ct.App.1980). 67 Finally, Fla. Stat. § 726.106 is potentially applicable to this case. That statute applies to transfers affecting present creditors, such as Yale, and does not require proof of fraudulent intent if: (1) the debtor was insolvent or became insolvent as a result of the transfer, and did not receive a reasonably equivalent value for the transfers; or, (2) the debtor made the transfer to an insider, and the insider had reasonable cause to believe that the debtor was insolvent. Id. 68 Applying Fla. Stats. § 56.29(6)(a), § 726.105 and § 726.106, the magistrate judge concluded that Power Depot had not been the recipient of a fraudulent transfer. We have serious doubts as to whether this finding by the magistrate judge was correct, and therefore vacate his finding on this issue. 69 The magistrate judge found the following factors to constitute badges of fraud:  GTI had been sued at the time of the transfer; the transfer was for value reasonably equivalent to the value of the assets; and GTI became insolvent shortly after these transfers. In addressing the badges of fraud which were not present, the magistrate judge, stated, inter alia, that Power Depot was not an 'insider' to the transaction merely because Javier Baeza was its sole owner[,] and that the transfer did not represent all of the debtor's assets. 70 We are concerned with the magistrate judge's conclusion that the purchases by Power Depot of approximately $1,185,000 in inventory and fixed assets from GTI in conjunction with GTI's termination of business activities was for fair value. In addressing whether fair consideration was given, no mention was made of the good will which obviously was transferred. Also confusing was the fact that, while the court made the statement that GTI's property was sold for equivalent value and at a profit, it nevertheless listed this factor as a badge of fraud. 71 We also question the magistrate judge's general conclusion that Power Depot was not an insider. While we recognize that technically under the Florida law Power Depot cannot be classified as an insider, 30 it is clear that in substance it was: Javier Baeza, who controlled Power Depot, was an insider to GTI (he was a director), and was the son of the person in control of GTI. A close relationship between a transferor debtor and a transferee is a factor equivalent to a badge of fraud which should be considered in determining fraudulent intent. Banner Constr. Corp., 128 So.2d. at 897; The Florida Bar v. Rood, 620 So.2d 1252, 1254 (Fla.1993); Harper, 769 F.Supp. at 367 (where the court held that [l]ack of consideration for the transfer, a close family relationship between transferor and transferee, pending or threatened litigation, and insolvency or substantial indebtedness can indicate fraudulent intent); Orlando Light Bulb v. Laser Lighting and Elec. Supply, Inc., 523 So.2d 740, 744 (Fla.Dist.Ct.App.1988) (close business relationship is a badge of fraud). The magistrate judge's opinion lacks language to indicate that he considered the fact that there was a close relationship between GTI and Power Depot. 72 In Banner Constr. Corp., the court concluded that [t]he recognized indicia or badges of fraud include the fact that the parties to the disputed transfer are related, one to the other, by blood or marriage, or are associated in business. 128 So.2d. at 896. In that case, a third party claimant in a garnishment proceeding, Banner Construction Corporation (Banner), appealed a jury verdict in favor of the plaintiff-creditor A.F. Arnold (Arnold). Banner had received an assignment from Bruce Bowen, Inc., of sums due from a court judgment in Bruce Bowen Inc.'s favor. At trial, Arnold, the garnishing creditor, alleged that Banner's claim was made in order to divert funds from Arnold and to avoid payment. The reviewing court looked at what badges of fraud were sufficient to uphold the jury verdict. Id. at 895. 73 On appeal, the court considered the close relationship of the parties to the disputed transfer, Bruce Bowen, Inc. and Banner. Bruce Bowen, Inc., had been incorporated in 1953 and was made up of officers related by blood or marriage, and was owned by its president, Bruce Bowen. In the fall of 1954, the company suffered from financial difficulties. Id. In the summer of 1955, Banner was formed. Banner was capitalized by Bruce Bowen and his relatives, and Banner's original officers and stockholders were all related by blood or marriage. In upholding the jury's verdict, the court considered the following factors to be badges of fraud: 31 74 The relationship of the interlocking directors and stockholders of Bruce Bowen, Inc., and Banner Construction Corporation, the precarious financial condition of the assignor, Bruce Bowen, Inc., and the capacity of Bruce Bowen as general manager and vice president of Banner and as president and sole owner of the stock of Bruce Bowen, Inc., ... constitute sufficient evidence to sustain the verdict of the jury. 75 Id. at 896. We think the facts of the present case closely resemble those in Banner Construction. Like that case, GTI's officers and directors are related, and Power Depot's president and sole shareholder, Javier Baeza, is an insider to GTI. In addition, like Banner, Power Depot was formed only a short time after GTI was suffering from financial difficulties; in this case GTI's financial problems stemmed from the multiple judgments entered against it in the district court. 76 In addition to the magistrate judge's failure to consider the close relationship badge of fraud, we find error with the court's application of Fla. Stat. § 726.105(2)(e), which directs a court to consider whether a transfer was of substantially all of the debtor's assets. Here, the transfer of GTI's assets and inventory was in conjunction with GTI's termination of business activities. Based on the record before us, there is a strong probability that substantially all of GTI's assets and inventory were transferred: GTI was selling its assets and inventory at the time it was closing its doors for business, and Power Depot took over other significant parts of GTI's business, as Power Depot hired GTI employees, remained at GTI's old location, used many of GTI's suppliers, and maintained many of GTI's former customers. In his order, the magistrate judge concluded that the transfer did not represent all of the debtor's assets. The conclusory language used by the magistrate judge, without further explanation, makes us question whether the magistrate judge raised the standard for finding a badge of fraud under Fla. Stat. § 726.105(2)(e), i.e., did he inquire into whether substantially all, rather than all of GTI's assets had been transferred. 77 Finally, the particular circumstances surrounding this case give us cause for concern. Around the time that GTI was selling its assets and inventory to Power Depot, GTI and/or Baeza, Sr. made a total of six fraudulent transfers. Moreover, the magistrate judge found that subsequent to the September 1992 opinion against Baeza, Sr. and GTI, Baeza, [Sr.] has gone to extreme lengths to exhaust his own personal wealth through acquisitions of expensive art work, multiple ocean cruises, sizeable entertainment expenses, gambling at high stakes, large charitable deductions and other spending activities allegedly resulting ... in his inability to satisfy Yale's judgments against him. The actions taken by GTI and Baeza, Sr. shortly after the adverse district court judgment indicate a clear pattern of fraud, and raise a substantial inference of an intent to hinder, delay, and defraud Yale. While we recognize that the magistrate judge was aware of the circumstances surrounding this conveyance, the magistrate judge's opinion leaves us with the impression that GTI's and Baeza, Sr.'s other actions were not taken into account in assessing whether GTI had fraudulently transferred its assets and inventory to Power Depot. 78 While we have serious concerns over whether the record supports the district court's conclusion that Power Depot's purchase of GTI's assets and inventory was not a fraudulent transfer, we decline at this point to reverse and render a decision for two reasons. First, this issue might be moot. Yale's judgment may have already been satisfied by the assets which the magistrate judge set aside in the transfers which he found to be fraudulent. Furthermore, if the transfer to Power Depot really was for fair value, that value would be in GTI, where Yale could reach it; there would be no need for a finding of fraudulent transfer. We have serious doubt, however, as to whether Power Depot paid the full value to GTI. 32 79 In addition, before deciding this issue definitively ourselves, we would want more specific findings with respect to whether Power Depot really paid full value for the inventory and assets, as well as the good will. Furthermore, we would need the district court to reconsider whether substantially all of GTI's assets were sold to Power Depot. For the above reasons, we vacate the district court's decision, and remand for further proceedings not inconsistent with this opinion. 80 C. Whether the magistrate judge erred in finding that Yale 81 had filed the involuntary bankruptcy petition in bad faith. 82 Approximately three months after GTI filed suit against Yale, on April 8, 1988, Yale filed a Chapter 7 involuntary bankruptcy petition against GTI, pursuant to 11 U.S.C. § 303(a). On appeal, Yale challenges the magistrate judge's finding that it filed the involuntary petition in bad faith, and therefore was liable to GTI for $500,000 in punitive damages under 11 U.S.C. § 303(i)(2). 33 On appeal, Yale argues that the magistrate judge used the wrong standard in determining whether it acted in bad faith. 83 Because bad faith is not defined in the bankruptcy code, and because there is no legislative history addressing the intended meaning of this language, courts have used different approaches to determine whether a petition was filed in bad faith. Some courts have established an improper purpose test, under which bad faith exists where the filing of the petition was motivated by ill will, malice or the purpose of embarrassing or harassing the debtor. In re Camelot, 25 B.R. 861, 864 (Bankr.E.D.Tenn.1982) (bad faith where motivation for filing involuntary petition was to spitefully forestall the dissolution of the debtor corporation and to frustrate the results of a state court proceeding); see In re Better Care, Ltd., 97 B.R. 405, 410 (Bankr.N.D.Ill.1989). 84 A second line of authority applies what is known as an improper use test, where bad faith exists when a creditor's actions amount to an improper use of the Bankruptcy Code as a substitute for customary collection procedures. In re Better Care, Ltd., 97 B.R. at 410. An improper use includes instances where a creditor uses an involuntary bankruptcy to obtain a disproportionate advantage to that particular creditor's position, rather than to protect against other creditors obtaining such a disproportionate advantage. Id. at 411. 85 The third line of authority analyzes the bad faith issue by reference to Bankruptcy Rule 9011, which is patterned after Fed.R.Civ.P. 11. 34 An analysis under Rule 9011 inquires into a significant objective requirement bearing on the legal justification of a claim or defense: a reasonable inquiry into the facts and the law. In re Turner, 80 B.R. 618, 623 (Bankr.D.Mass.1987). In addition to requiring an objective inquiry, Rule 9011 requires a subjective inquiry as well: the bankruptcy proceeding cannot have been interposed for an improper purpose, such as to harass, to cause delay, or to increase the cost of litigation. Rule 9011. 86 In finding that Yale had wrongfully filed the involuntary petition, the magistrate judge applied the subjective improper purpose test, and found that Yale filed the petition in bad faith. In concluding that Yale acted with ill will, spite or malice, the magistrate judge noted, inter alia, that it had found GTI to be solvent, that Yale had received a personal guaranty from Baeza, Sr., and that Yale had the ability to recover damages in the district court case. On appeal, Yale argues that instead of using a subjective standard to determine bad faith, the magistrate judge should have made both an objective and subjective inquiry according to the standards set forth in Bankruptcy Rule 9011. 87 We need not decide what is the correct approach to determine bad faith, however, because we find that under any of the three enunciated tests, the magistrate judge's finding was clearly erroneous. While some of the facts point in the other direction, a careful review of the record leaves us firm in our conviction that Yale was primarily motivated, both objectively and subjectively, by proper purposes in bringing the involuntary petition. 35 88 After carefully reviewing the record, we find that Yale's primary concern in filing the petition was to protect itself against other creditors' obtaining a disproportionate share of GTI's assets. This is a proper purpose for filing an involuntary petition. See In re Better Care, 97 B.R. at 411. There is ample evidence that GTI was preferring other creditors at Yale's expense. The evidence clearly shows that Yale had reason to believe that both GTI and its principal shareholder, Baeza, Sr., were liquidating all of Yale's secured collateral, and possibly liquidating GTI's other assets as well. In January 1988, an inspection of GTI's collateral revealed that GTI had sold at least 55 Yale forklifts since an October 1987 collateral audit of GTI. Most of the forklifts were sold to Gonzalez Trading, a Puerto Rican corporation owned by Baeza, Sr. GTI had not made remittance to Yale for any of these sales as required by the Financing and Security Agreement. In addition, at that inspection Baeza, Sr. informed Yale's credit manager, Leonard G. Thornborough, that GTI had deposited the proceeds from these sales into its own operating account at Ocean Bank of Miami, and used the sale proceeds to pay other creditors. In addition, Baeza, Sr. told Thornborough that he intended to continue selling Yale forklifts without remitting the proceeds to Yale, and, if necessary, he would take GTI into voluntary bankruptcy, retire from the business, and pursue GTI's lawsuit against Yale. 36 We think the above statements by Baeza, Sr. gave Yale reason to believe that their debts would not have been protected by the outcome of the lawsuit in the district court; had Baeza, Sr. carried out his threat to liquidate GTI entirely to deprive Yale of its money, Yale may not have been protected even if it prevailed in the district court. 89 Moreover, Yale had documentary evidence which gave it reason to believe that Baeza, Sr. intended to carry out his threat to deplete GTI of its assets, and give a disproportionate share of those assets to creditors other than Yale. 37 A schedule of GTI's secured and unsecured transactions between the end of 1987 and February 29, 1988, gave Yale reason to believe that GTI was wrongly liquidating secured assets, as well as dismantling GTI through corporate transfers. 38 That schedule revealed numerous transfers of large amounts of money, in multiples of at least $10,000, to GTI insiders and to non-insider, unsecured trade creditors. Of particular concern to Yale was the transfer of approximately $280,000 to Ocean Bank between January 5, 1988, and January 28, 1988. 90 Yale's counsel, Harold Moorefield, Jr,. testified that, based on his experience and research, many of the payments reflected in GTI's books constituted preference payments to non-insider creditors which could only be recovered by a bankruptcy proceeding. 39 Under the Bankruptcy Code, a trustee may avoid any non-insider preference payment made by a debtor only if the transfer of interest was made on or within 90 days before the date of filing of the petition. 11 U.S.C. § 547(b)(4)(A). Thus, Yale's decision to file the petition was partly motivated by a well-founded belief that it needed to fall within the 90 day preference period to enable it to reach back and recover money transferred by GTI to non-insiders. 40 91 Finally, we think Yale was legally justified in filing the involuntary petition, as Yale had a reasonable basis in the law to think its petition would not be dismissed. The bankruptcy court's opinion indicates that Yale's petition was dismissed because it found that GTI was solvent; as a solvent debtor, GTI did not fall within the intendment of 11 U.S.C. § 303(h)(1), which allows courts to order relief in an involuntary proceeding only if the debtor is generally not paying its debts as they become due. 41 In determining GTI's solvency, the bankruptcy court excluded Yale's claims against GTI because it found those claims to be subject to a bona fide dispute. 42 It is clear from the face of the bankruptcy court's opinion that, if Yale's claims had not been excluded as subject to a bona fide dispute, Yale would not have lost on the issue of whether GTI was generally not paying its debts; 43 as such, § 303(h)(1) would have been inapplicable and the bankruptcy court would not have been required to dismiss the petition. 44 92 We want to underscore that Yale had a good faith basis in law and fact in believing that its petition would not be dismissed as a result of the existence of a bona fide dispute. Upon reviewing the bankruptcy court's order of dismissal, the district court recognized that bona fide dispute is not defined in the Bankruptcy Code, that no binding decision on this question exists, and that courts have used divergent tests to define this term. At issue was whether Yale's claims in the involuntary petition as well as the counterclaims it asserted in the district court, were separate from the claims asserted by GTI in its lawsuit in the district court. The district court affirmed the bankruptcy court's finding of a bona fide dispute. 45 93 While we need not decide whether the district court's finding of a bona fide dispute was error, 46 we recognize that, in making its finding, the bankruptcy court, as well as the district court on review, chose not to follow a line of authority which holds that counterclaims only serve to diminish or set off the amounts owing on a claim, and do not render a petitioner's claim subject to a bona fide dispute. See In re Atwood, 124 B.R. 402, 409 (S.D.Ga.1991) (quoting In re Drexler, 56 B.R. 960, 969 (Bankr.S.D.N.Y.1986)) (Generally, 'the debtor's assertion of a counterclaim, even if of substance, does not render the petitioner's claim the subject of a bona fide dispute.' ); In re Onyx Telecommunications, Ltd., 60 B.R. 492, 495 (Bankr.S.D.N.Y.1985); Harris v. Capehart-Farnsworth Corp., 225 F.2d 268, 270 (8th Cir.1955). If the courts below had followed this line of cases, the counterclaims asserted by Yale in GTI's lawsuit very likely would not have rendered Yale's claims in bankruptcy subject to a bona fide dispute. Assuming arguendo that those courts were correct in not following the above cases, the fact remains that Yale had a good faith and reasonable basis under the law to believe that its claims were not subject to a bona fide dispute. If either the bankruptcy court or the district court had been persuaded by the authority cited by Yale, it is probable that Yale's involuntary petition would not have been dismissed. Of course, if the petition was not dismissed, Yale could not under the Bankruptcy Code have been subject to the bad faith inquiry. See 11 U.S.C. § 303(i)(2). To hold Yale liable because it lost the bona fide dispute argument would be inappropriate. 94 Because the evidence overwhelmingly indicates that Yale had more than sufficient reasons to file the involuntary petition, and because Yale had a good faith basis in believing its petition would not be dismissed as a result of its claims being subject to a bona fide dispute, we reverse the magistrate judge's bad faith finding. 95 D. Whether it was error for the district court to affirm the 96 bankruptcy court's dismissal of the involuntary 97 bankruptcy petition. 98 From the representations made at oral argument, it appears likely that the issue of the bankruptcy court's dismissal of Yale's involuntary bankruptcy petition is moot. We therefore decline to resolve the issue. Should any party desire, the issue may be pursued by first seeking a resolution of the mootness issue in the district court. Then a new appeal to this court may be taken.