Opinion
Case No. 02-34260, Adv. No. 04-3148.
June 24, 2005
John Paul Rieser, Esq., Dayton, Ohio (Plaintiff).
Steven L. Clayton, Hilliard, Ohio (Defendant).
Joanne Clayton, Hilliard, Ohio (Defendant).
J. Michael Debbeler, Esq., Graydon Head and Ritchey, Cincinnati, Ohio (Atty. for the Defendants, Union Savings Bank The Cincinnati Insurance Company).
Arthur R. Hollencamp, Esq., Dayton, OH (Atty. for National City Bank).
Bryan K. Stewart, Esq., Tipp City, Ohio (Atty. for Monroe Federal Savings Loan Association).
Robert G. Sanker, Esq.,/Brian P. Muething, Esq., Cincinnati, Ohio (Atty. for the Defendant, Fifth Third Bank).
Joel E. Sechler, Esq.,/Timothy R. Bricker, Esq., Columbus, Ohio (Atty. for Olympic Title Insurance Company).
Timothy J. Robinson, Esq.,/P. Brian See, Esq., Columbus, Ohio (Attys. for First American Title Insurance Company).
Dennis A. Lieberman, Esq., Dayton, Ohio (Atty. for Defendants).
Montgomery County Prosecutor's Office, George B. Patricoff, Dayton, Ohio.
Background
On June 4, 2004, John Paul Rieser, the chapter 7 Trustee (the "Trustee") of the Debtor, Equity Land Title Agency, Inc. ("ELT"), filed a Complaint Of Trustee For Breach Of Fiduciary Duties; For Theft And Conversion; To Avoid And Recover Pre-Petition Transfers Received By Defendants Pursuant To 11 U.S.C. Sections 547, 548, And 550 And Pendent Or Incorporated By 11 U.S.C. § 544 And State Statutory And Common Law Causes Of Action, Specifically The Ohio Uniform Fraudulent Transfer Act O.R.C. Chapter 1336; To Declare And Impose A Constructive Trust; To Order The Return Of Money Had Or Retained By Defendants, For Accounting, And Disgorgement And Return Of All Monies Received By Defendants; To Disallow Any And All Proofs Of Claim Filed Or To Be Filed By Defendants; For Prejudgment Interest And Punitive Damages; And For An Accounting For Costs, Reasonable Attorney Fees And Other Relief against Steven L. Clayton and Joanne Clayton (the "Defendants"). (Doc. 1) The extensive Complaint and its multiple attachments sets forth a series of transfers, which are categorized by specifically defined terms, asserts nine separate claims for relief and seeks multi-million dollar judgments and other relief against both Defendants. Steven Clayton was, at all relevant times, the former president, director and sole stockowner of ELT. (See Doc. 1 and Paragraph 4 of the Amended Answers — Docs. 20 and 21) Joanne Clayton was, at all relevant times, his wife and an employee of ELT (See Doc. 1 and Paragraph 6 of Docs. 20 and 21).
On July 7, 2004, Steven Clayton, appearing pro se, filed an unnumbered answer, which contained a blanket assertion of the Fifth Amendment protection and, to the extent the complaint asserted allegations not subject to Fifth Amendment protection, a total denial of all the claims asserted by the Trustee. (Doc. 10) On October 12, 2004, Joanne Clayton, also appearing pro se, filed a similar answer which contained a blanket assertion of the spousal privilege or, to the extent the privilege did not apply, a total denial. (Doc. 11) Following various Trustee motions and court orders, the Debtors filed amended answers (Docs. 20 and 21); however, these amended answers, while containing paragraph by paragraph responses to the complaint, continued to assert spousal privilege and, for the first time, Joanne Clayton's amended answer asserted her Fifth Amendment protection.
The Trustee filed a Motion of Trustee For Partial Summary Judgment Against Defendants Steven L. Clayton and Joanne Clayton on February 28, 2005. (Doc. 32) Also, on February 28, 2005, the Trustee filed a Certification of No Response By the Defendants of Requests for Admission by the Trustee. (Doc. 30)
Although the Defendants did not respond to any of the Trustee's specific discovery requests, and did not participate, in any manner, in discovery in this adversary, the Defendants filed responses (Docs. 39 and 40) to the motion for summary judgment, including an affidavit. The Trustee filed a reply and a Motion of Trustee to Strike Defendant's Affidavit (Doc. 42) on March 29, 2005. The Court has separately entered an Order Granting Motion of Trustee to Strike Defendant's Affidavit. Accordingly, the affidavit of Joanne Clayton in Document 39, which was also referenced in the response of Steven Clayton in Doc. 40, was not considered in this decision.
For clarity of the record, the court notes the response of Steven L. Clayton (Doc. 40) is incorrectly captioned as a response of Joanne Clayton.
Additionally, based on the Trustee's requests for admissions, which the Defendants failed to respond to, together with the uncontradicted affidavits and other evidence presented by the Trustee, although the determinations in this decision are binding upon the Defendants Steven Clayton and Joanne Clayton, the Court does not intend to give preclusive effect, including law of the case, to the determinations in this adversary in connection with other pending adversaries in which other defendants are actively participating in pending pretrial discovery proceedings.
Jurisdiction
This proceeding arises in a case referred to this court by the Standing Order Of Reference entered in this district. It is also determined to be a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (F) and (H).
Summary Judgment Standard
The summary judgment standard is contained in Federal Rule of Civil Procedure 56(c) and is applicable to bankruptcy adversary proceedings by incorporation in Bankruptcy Rule 7056. Federal Rule of Civil Procedure 56(c) states, in part, that a court must grant summary judgment to the moving party if:
the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331, 106 S.Ct. 2548, 2556 (1986). If the burden is on the non-moving party at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmoving party's claim; or 2) demonstrate to the court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim. Id. at 331-332, 106 S.Ct. at 2557. Thereafter, the opposing party "must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587, 106 S.Ct. 1348, 1356 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-251, 106 S.Ct. 2505, 2510-12 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-588, 106 S.Ct. at 1356-57. "The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its complaint. `The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party].'" Gibson v. Gibson (In re Gibson), 219 B.R. 195, 198 (B.A.P. 6th Cir. 1998), citing Hall v. Tollett, 128 F.3d 418, 421-22 (6th Cir. 1997) (internal citations omitted). Parties who ignore a properly filed motion for summary judgment, do so at their own peril.
Analysis Introduction
The Trustee seeks partial summary judgment on five legal theories: (1) fraudulent conveyance — 11 U.S.C. § 548; (2) preference recovery — 11 U.S.C. § 547; (3) Ohio Uniform Fraudulent Transfer Act ("UFTA") — Chapter 1336, et seq. of the Ohio Revised Code; (4) breach of fiduciary duty under Ohio law and (5) the Ohio tort of civil conversion. In addition, pursuant to 11 U.S.C. § 502(d), the Trustee requests that any proof of claim of the Defendants be disallowed until any judgment against the Defendants is paid in full.
The Trustee has defined three categories of transfers which appear in his initial complaint and its attachments, his subsequent discovery requests and in his motion for partial summary judgment: (1) "Direct Transfers"; (2) "Indirect Transfers" and (3) "Waste Transfers." Direct transfers are transfers of ELT assets directly to the Defendants. As will be detailed, the uncontradicted evidence establishes ELT assets in the form of checks payable to Steven Clayton went to the Defendants for their own personal use with no benefit to ELT. See Exhibit K (copies of the Direct Transfer checks) and Exhibit L (summary of the Direct Transfer checks). Indirect transfers are transfers which provided economic benefits to the Defendants, although the transfers were not made directly to the Defendants. The Trustee does list a final amount for the indirect transfers, and those transfers were not detailed in the motion. Finally, the Trustee refers to Waste Transfers as use of ELT funds for various perks for realtors, employees and senior management including, but not limited to, gambling junkets, tickets to sporting events and raffles for ELT employees. See Exhibit M (copies of Waste Transfer checks) and Exhibit L (summary of Waste Transfer checks). The evidence establishes that the Defendants "wasted" assets of ELT by using funds with no significant benefit to ELT.
Any reference to an exhibit is part of Doc. 32.
ADMISSIONS
As the Court previously noted, and as further detailed in the simultaneously entered Decision On Order Striking Defendant's Affidavit, the Defendants failed to answer or respond to the Trustee's discovery request, including the requests for admissions. (See Doc. 30 — Certification Of No Response By the Defendants Of Requests For Admission By The Trustee.) Due to the failure of the Defendants to answer these admissions, the admissions are "conclusively established" and are part of the evidentiary presentation in connection with the Trustee's Motion.
Federal Rule of Civil Procedure 36, applicable in adversary proceedings by Bankruptcy Rule 7036, states in pertinent part:
(a) Request for Admission. A party may serve upon any other party a written request for the admission, for purposes of the pending action only, of the truth of any matters within the scope of Rule 26(b)(1) set forth in the request that relate to statements or opinions of fact or of the application of law to fact, including the genuineness of any documents described in the request. . . .
Each matter of which an admission is requested shall be separately set forth. The matter is admitted unless, within 30 days after service of the request, or within such shorter or longer time as the court may allow or as the parties may agree in writing, subject to Rule 29, the party to whom the request is directed serves upon the party requesting the admission a written answer or objection addressed to the matter. . . . .
* * * * *
(b) Effect of Admission. Any matter admitted under this rule is conclusively established unless the court on motion permits withdrawal or amendment of the admission.
As this court has explained:
Federal Rule of Civil Procedure 56(c) specifies that "admissions on file" can be an appropriate basis for the entry of summary judgment. It is also settled that "[a]dmissions made under Rule 36, even default admissions can serve as the factual predicate for summary judgment. Rule 36(b) provides that a matter admitted is conclusively established." U.S. v. Kasuboski, 834 F.2d 1345, 1350 (7th Cir. 1987); Rainbolt v. Johnson, 669 F.2d 767, 768 (D.C. Cir. 1981); National Advertising Co., Inc. v. Dick, 640 F.Supp. 1474, 1475 (S.D.Ind. 1986); Goodnow v. Adelman (In re Adelman), 90 B.R. 1012, 1015 (Bankr.D.S.D. 1988). "The rule is designed to expedite litigation, and it permits the party securing admissions to rely on their binding effect." Rainbolt, 669 F.2d at 768.
The scope of Rule 36(a) is quite broad and permissible requests include even "ultimate facts" or facts dispositive of a case, Campbell v. Spectrum Automation Co., 601 F.2d 246, 253 (6th Cir. 1979).
See Friedly v. Niswonger (In re Niswonger), 116 B.R. 562, 565-66 (Bankr. S.D. Ohio 1990). See also McKinnie v. Roadway Express, Inc., 341 F.3d 554 (6th Cir. 2003) (Court not required to inform pro se defendants of the consequences of failing to respond to a summary judgment motion); Lovejoy v. Owens, 86 F.3d 1156, 1996 WL 287261 (6th Cir. May 28, 1996) (table decision) (unresponded to admissions may be used against a pro se defendant); Buckaloo v. Pressley, 889 F.2d 1086, 1989 WL 140176 (6th Cir. Nov. 21, 1989) (Court entered partial summary judgment against a pro se defendant where the defendant failed to respond to admissions or a motion for partial summary judgment.)
The following admissions as to each Defendant are established for purposes of the Trustee's Motion for partial summary judgment:
JOANNE CLAYTON
RA1. Admit that Defendant was an insider of the Debtor as defined in 11 U.S.C. § 101(31).
RA2. Admit that Defendant personally benefitted [sic] from Steven L. Clayton's looting of the Debtor.
RA3. Admit the Defendant received Direct Transfers, Indirect Transfers, and Waste Transfers of property in which the Debtor had an interest in the amount of Five Million Nine Hundred Forty-Four Thousand Dollars ($5,944,000.00).
RA4. Admit the Defendant received Unknown Transfers of property in which the Debtor had an interest within one year before the Petition Date.
RA5. Admit that the Transfers of property in which the Debtor had an interest to the Defendant, were made for less than reasonably equivalent value.
RA6. Admit that the Transfers to the Defendant of property in which the Debtor had an interest were made to or for the benefit of the Defendant.
RA7. Admit that the Transfers of property in which the Debtor had an interest to the Defendant in the one year prior to the Petition Date enabled the Defendant to receive more than Defendant would have if the case were a case under Chapter 7 of the Bankruptcy Code, the transfer had not been made and Defendant received payment of the debt to the extent provided by the provisions of the Bankruptcy Code.
RA8. Admit that all documents attached as (1) exhibits to the Complaint, (2) attached to the Plaintiff's initial disclosures and (3) documents produced by the Defendant in response to the Requests for Production are true and accurate copies of the originals, and may be introduced at trial or into evidence, and/or used in connection with any motion for summary judgment in whole or in part, the same as the originals.STEVEN L. CLAYTON
RA1. Admit that Defendant at all times relevant hereto was an officer (president), director, and sole stock owner of the Debtor.
RA2. Admit that Defendant was the sole person in control of the Debtor from March 28, 1986 to March 29, 2002.
RA3. Admit that the Defendant owed a fiduciary duty to the Debtor and breached that fiduciary duty by failing to exercised [sic] that degree of skill, diligence, and due care that a reasonably prudent person would as an officer, director, and/or controlling shareholder.
RA4. Admit that the Defendant knew or should have known the Debtor was insolvent from at least 1995-2002.
RA5. Admit Defendant was an "insider" of the Debtor as that term is defined in 11 U.S.C. § 101(31).
RA6. Admit that Defendant engaged in a pattern of fraudulent activities undertaken both personally and through his agents, of fraudulently converting, withdrawing, diverting, and/or transferring from the Debtor monies and assets and/or the proceeds thereof belonging to the Debtor or in which the Debtor had an interest, to himself, his family, his employees, and/or to his own personal benefit.
RA7. Admit the Defendant moved money between the Debtor's escrow and operating accounts.
RA8. Admit the Defendant converted, embezzled, misappropriated, or otherwise defrauded the Debtor by transferring funds to or for his benefit of at least Three Million Three Hundred Thousand Seventy-Nine Thousand Four Hundred Forty-Four Dollars and Seventy-Seven Cents (3,379,444.77).
RA9. Admit that Defendant is liable to the Trustee for theft and conversion of the Direct Transfers as plead in Paragraph 13 of the Complaint and including, but not limited to those transfers listed in Exhibit A of the Complaint.
RA10. Admit Defendant and/or the Defendant directed others to make Indirect Transfers of the Debtor's fund to or for the Defendant's personal and/or the Defendant's family's benefit.
RA11. Admit the Defendant made Waste Transfers, including but not limited to those transfers listed on Exhibit B of the Complaint.
RA12. Admit the Defendant received Direct Transfers, Indirect Transfers, and Waste Transfers of property in which the Debtor had an interest in the amount of Five Million Nine Hundred Forty-Four Thousand Dollars ($5,944,000.00).
RA13. Admit the Defendant received Unknown Transfers of property in which the Debtor had an interest within one year before the Petition Date.
RA14. Admit that the Transfers from the Debtor to the Defendant were made for less than reasonably equivalent value.
RA15. Admit that the Transfers of property were made to or for the benefit of the Defendant.
RA16. Admit that the Transfers of the Debtor's property enabled the Defendant to receive more than Defendant would have received if the case were a case under Chapter 7 of the Bankruptcy Code, had the Transfers not been made and had the Defendant received payment of the debt to the extent provided by the provisions of the Bankruptcy Code.
RA17. Admit that all documents attached as exhibits to the Complaint and the exhibits attached to Initial Disclosures provided by the Plaintiff and produced by the Defendant in response to the Requests for Production are true and accurate copies of the originals, and may be introduced at trial or into evidence, and/or used in connection with any motion for summary judgment in whole or in part, the same as the originals.
The remainder of the Defendants' responses to the Motion for Partial Summary Judgment do not demonstrate "specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co, 475 U.S. at 586-587, 106 S.Ct. at 1356.
Parties who ignore the discovery process, particularly properly filed requests for admission, do so at their own peril.
Fraudulent Conveyance — 11 U.S.C. § 548
11 U.S.C. § 548 states, in relevant part:
The various recent changes to 11 U.S.C. § 548 (and § 547, which is also addressed in a separate section of this opinion) in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 do not apply to this adversary proceeding.
(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor has or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.11 U.S.C. § 548(a)(1)(A)
In order to establish a fraudulent conveyance under 11 U.S.C. § 548(a)(1)(A), the Trustee must show the Defendants transferred an interest of ELT's property (within a year before the petition date) with an actual intent to hinder, delay or defraud other creditors of the estate. Between June 7, 2001 and the petition date, June 7, 2002, checks written to Steven Clayton total $652,000. See Exhibit J. These were Direct transfers as defined in the Trustee's various filings. The admissions of the Defendants, and the otherwise uncontradicted evidence of the Trustee, establishes, for purposes of this decision, that these funds were from the Operating Account and are property of the estate. See generally Begier v. I.R.S., 496 U.S. 53, 59, 110 S.Ct. 2258, 2263 (1990) (discussing the definition of "property of the estate" under 11 U.S.C. § 541(a)(1)); Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 443 (6th Cir. 2003) (similar). As noted, all the transfers sought to be avoided under § 548 were within one year of the bankruptcy.
The evidence establishes the transfers were made with intent to hinder, delay or defraud other creditors of the estate. The uncontradicted evidence establishes that Steven Clayton was engaged in a check kiting scheme for the Defendants' benefit. The evidence shows (See page 4-6 of the Trustee's Motion — Doc. 32 and referencing exhibits) that Steven Clayton instructed ELT employees to draw checks on an account that did not have sufficient funds to cover the checks. These checks were deposited in a second account. Just before a check was returned for payment to the first account, ELT employees (on Steven Clayton's instructions) would deposit checks drawn on the second account into the first account. Thus, although there were no, or insufficient, actual funds to cover checks from either account, the time delay in the processing of the checks created an intentional false balance. See United States v. Stone, 954 F.2d 1187, 1188, fn. 1 (6th Cir. 1992) (brief explanation of check kiting).
It is also undisputed in this record that ELT was operated after February 20, 1999 without authority in the State of Ohio, since the Articles of Incorporation were cancelled by the Ohio Secretary of State. (See Exhibit F — Doc. 32).
The Trustee has proven the claim under 11 U.S.C. § 548(a)(1)(A).
11 U.S.C. § 548(a)(1)(B)Under 11 U.S.C. § 548(a)(1)(B), the Trustee can avoid transfers made within one year of an interest in the debtor's property for less than reasonably equivalent value and while the debtor was insolvent. The Trustee seeks a finding that the $652,000 (previously referenced in the section addressing § 548(a)(1)(A)) is also a fraudulent conveyance pursuant to § 548(a)(1)(B). The evidence presented by the Trustee, for purposes of this decision, demonstrates the Debtor was insolvent while the transfers were occurring. See 11 U.S.C. § 101(32). As this court has noted, "[i]nsolvency is essentially a balance sheet test — that is, a debtor is insolvent when the debtor's liabilities exceed the debtor's assets, excluding the value of preferences, fraudulent conveyances and exemptions." Whittaker v. CITRA Trading Corp. (In re Int'l Diamond Exchange Jewelers, Inc.), 177 B.R. 265, 269 (Bankr. S.D. Ohio 1995), quoting In re Taubman, 160 B.R. 964, 979 (Bankr. S.D. Ohio 1993) ( citing Foreman Indus., Inc. v. Broadway Sand Gravel (In re Foreman Indus., Inc.), 59 B.R. 145, 149 (Bankr. S.D. Ohio 1986)).
The check kiting scheme demonstrates insufficient funds were in the accounts of ELT to pay checks drawn on ELT's Operating Account. The report of the state court receiver, which preceded this involuntary bankruptcy (See Doc. 32 — Exhibit O), lists $162,650.56 as the assets of ELT. The summary of non-contingent, non-duplicative and not amended proof of claims prior to June 7, 2001 (one year from the filing date), as compiled by the Trustee, list $6,325,525.46 as the debts of ELT. (See Doc. 32 — Exhibit N.) Based on a balance sheet method of insolvency this court has previously used, the court finds that ELT was insolvent during the time of all these transfers.
The uncontradicted evidence shows the Defendants received $652,000 and provided no reasonable equivalent value to ELT. Accordingly, pursuant to 11 U.S.C. § 548(a)(1)(A) and § 548(a)(1)(B), the Trustee is entitled to avoid all the § 548 fraudulent transfers between June 7, 2001 and June 7, 2002 for a total of $652,000.
Preference Recovery — 11 U.S.C. § 547
The Trustee seeks summary judgment on transfers totaling $652,000 as preferences. These are the exact same transfers detailed in the prior section concerning 11 U.S.C. § 548. The motion of the Trustee concedes the preference recovery is dependent on the court finding that the Defendants were creditors of ELT. See page 27-28 of Doc. 32. The court does not sufficient evidence in the Trustee's Motion to conclude that these transfers were to a "creditor." See 11 U.S.C. § 101(10) and § 547(b)(1). As a corollary and additional necessary element, there is nothing in the record to conclude that the Defendants were owed funds from ELT at the time of the transfers that would constitute an antecedent debt. See 11 U.S.C. § 547(b)(2); Roberds, Inc. v. Broyhill Furniture (In re Roberds, Inc.), 315 B.R. 443, 451-53 (Bankr. S.D. Ohio 2004). Instead, the evidence shows, the Defendants simply, in the language of the Trustee's motion, "looted" ELT of Operating Accounts funds for their personal use. Accordingly, as to the preference count, the motion for partial summary judgment is DENIED.
Ohio Uniform Fraudulent Transfer Act — Chapter 1336 of the Ohio Revised Code
The elements of a cause of action under the Ohio Uniform Fraudulent Transfer Act are in Ohio Revised Code § 1336.04:
(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 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 he would incur, debts beyond his ability to pay as they became due.
(B) In determining actual intent under division (A)(1) of this section, consideration may be given to all relevant factors, including, but not limited to, the following:
(1) Whether the transfer or obligation was to an insider;
(2) Whether the debtor retained possession or control of the property transferred after the transfer;
(3) Whether the transfer or obligation was disclosed or concealed;
(4) Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
(5) Whether the transfer was of substantially all of the assets of the debtor;
(6) Whether the debtor absconded;
(7) Whether the debtor removed or concealed assets;
(8) Whether 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;
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred;
(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
The Ohio Uniform Fraudulent Transfer Act ("UFTA") has a four year reachback period and, therefore, can apply to transfers beyond those of 11 U.S.C. § 548 — which has a one year reachback period. Ohio Revised Code § 1336.09(A). Under the strong arm clause of 11 U.S.C. § 544(b), the Trustee steps into the shoes of an unsecured creditor and can assert claims under applicable state law. Corzin v. Fordu (In re Fordu), 201 F.3d 693, 678-98 (6th Cir. 1999). The Trustee seeks recovery of $2,261,755.40 of Direct Transfers to the Defendants in the four years prior to filing (June 7, 1998 — June 7, 2002). See Exhibits C (Affidavit of Courtney Snyder [former ELT employee] concerning the transfers), K (checks paid directly to Steven Clayton) and J (summary of the checks in Exhibit K).
In order to avoid a transfer under UFTA, the Trustee must show either (1) the transfers were made to or for the benefit of the Defendants and the transfers were done with an actual intent to hinder, delay or defraud or (2) the transfers were made without the Debtor receiving reasonably equivalent value when (a) the Debtor was engaged in a business or transaction in which the remaining assets were unreasonably small in relation to the business or transaction or (b) the debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
The Trustee has shown, by the evidence presented, that all the transfers were solely for the Defendants' personal benefit and were simply an attempt to defraud ELT. (The key language of "actual intent to hinder, delay, or defraud" is identical in § 548(a)(1)(A) and UFTA.) Concerning the factors of intent, the Defendants were insiders [See 11 U.S.C. § 101(31) and (45)], transferred assets, concealed assets through check kiting and failed to return assets of a reasonably equivalent value to ELT. See Ohio Revised Code § 1336.04(B); See also Noland v. Morefield (In re Nat'l Liquidators, Inc.), 232 B.R. 915, 918-19 (Bankr. S.D. Ohio 1998).
Concerning the alternative elements for a claim under UFTA, the Trustee has proven that all the transfers in question under the UFTA claim were made without any reasonably equivalent value being received by ELT and, as the final report of the state court receiver demonstrates [See Exhibit O], left ELT with unreasonably small assets to continue in business. In fact, there is no evidence any of the transfers were anything but transfers for the personal benefit of the Defendants. See generally Dayton Title Agency, Inc. v. The White Family Cos., Inc. (In re Dayton Title Agency, Inc.), 292 B.R. 857, 874 (Bankr. S.D. Ohio 2003) ("[C]ourts should keep the equitable purposes behind fraudulent transfer law in mind, recognizing that any significant disparity between the value received and the value surrendered will significantly harm innocent creditors.").
Accordingly, the transfers to the Defendants in the total amount of $2,261,755.40 are avoided pursuant to the Ohio Uniform Fraudulent Transfer Act.
Ohio law of civil conversion
Under Ohio law, the tort of conversion "is the wrongful exercise of dominion over property to the exclusion of the rights of the owner, or withholding it from his possession under a claim inconsistent with his rights." Joyce v. General Motors Corp., 49 Ohio St.3d 93, 96, 553 N.E.2d 172, 175 (Ohio 1990), citing Zacchini v. Scripps-Howard Broadcasting Co., 47 Ohio St.2d 224, 226, 351 N.E.2d 454, 456 (Ohio 1976); Schafer v. RMS Realty, 138 Ohio App.3d 244, 282, 741 N.E.2d 155, 182 (Ohio Ct.App. 2000). Exhibit K lists checks written for the benefit of Steven Clayton and not ELT. Exhibit J is a summary of those checks. The total value of the checks constituting Direct Transfers from January 27, 2005 until June 7, 2002 is $3,379,444.77. There is undisputed evidence that these checks were nothing more than the conversion of the property of ELT for the Defendants' benefit.
Zacchini was reversed on other grounds by the U.S. Supreme Court. See Zacchini v. Scripps-Howard Broadcasting Co., 433 U.S. 562, 97 S.Ct. 2849 (1977).
Admission 8 propounded to Steven L. Clayton stated "Admit the Defendant [Steven L Clayton] converted, embezzled, misappropriated, or otherwise defrauded the Debtor by transferring funds to or for his benefit of at least Three Million Three Hundred Thousand [sic] Seventy-Nine Thousand Four Hundred Forty-Four Dollars and Seventy-Seven cents (3,379,444.77)." (Doc. 30) Joanne Clayton admitted she benefited from these transfers by her failure to respond to the admissions. Specifically, she was asked in Admission 2 propounded to her whether she "personally benefitted [sic] from Steven L. Clayton's looting of the Debtor." (Doc. 30) See also Admission 3 propounded to Joanne Clayton. Joanne Clayton exercised dominion over these funds. See Niswonger, 116 B.R. at 556. Accordingly, the court grants summary judgment against the Defendants for the claim of civil conversion in the amount of $3,379,444.77.
Breach of Fiduciary Duty
The Trustee seeks summary judgment on transfers totaling $4,157,856.35 for transfers from January 27, 2005 until the filing date, June 7, 2002 for breach of fiduciary duty. These Transfers, which have been reduced to a sum certain, constitute Direct Transfers ($3,379,444.77) and Waste Transfers ($778, 411.58).
"A person who occupies a fiduciary relationship to another acts as an agent to that person and owes the utmost loyalty and honesty to the principal." Thompson v. Central Ohio Cellular, Inc., 93 Ohio App.3d 530, 540, 639 N.E.2d 462, 468 (Ohio Ct.App. 1994), citing Testa v. Roberts, 44 Ohio App.3d 161, 165, 542 N.E.2d 654, 659 (Ohio Ct.App. 1988). In order to succeed on a claim of breach of fiduciary duty, the Trustee must show a duty, a breach of that duty and damages proximately resulting from the breach. The elements are the same as negligence, but a fiduciary carries a higher standard of care. Strock v. Pressnell, 38 Ohio St.3d 207, 215, 527 N.E.2d 1235, 1242 (Ohio 1988) In admission 3 propounded to him (Doc. 30), Steven Clayton was asked to "[a]dmit that the Defendant owed a fiduciary duty to the Debtor and breached that fiduciary duty by failing to exercised [sic] that degree of skill, diligence, and due care that a reasonably prudent person would as an officer, director, and/or controlling shareholder." These admission requests were not responded to by Steven Clayton and, therefore, are deemed admitted. Niswonger, 116 B.R. at 556. The court GRANTS summary judgment as to Steven L. Clayton for the breach of fiduciary duty for $4,157,856.35.
The court does not find sufficient evidence to grant summary judgment against Joanne Clayton for breach of fiduciary duty. Joanne Clayton was not an officer, director or shareholder of ELT, nor is there sufficient evidence, including the admissions, to conclude Joanne Clayton breached a fiduciary duty to ELT as an employee. Even assuming arguendo such a tort is cognizable under Ohio law against a mere employee (as opposed to an officer, director or shareholder) — an argument not briefed in the Trustee's motion — there is nothing in the record demonstrating what actions were taken by Joanne Clayton specifically in regard to this claim. In regard to the fiduciary duty claim against Joanne Clayton, summary judgment is DENIED.
11 U.S.C. § 502(d)11 U.S.C. § 502(d) states that:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
Under 502(d), any proof of claim of the Defendants is disallowed until the entire judgment (including interest), representing the transfers of the Defendants of assets of ELT, is paid by the Defendants. See Roberds, 315 B.R. at 476. Accordingly, the Trustee's claim under § 502(d) is GRANTED.
Conclusion
Therefore, the court GRANTS IN PART AND DENIES IN PART the Motion of Trustee For Partial Summary Judgment Against Defendants Steven L. Clayton and Joanne Clayton (Doc. 32) consistent with this decision, plus interest from the date of judgment pursuant to 28 U.SC. § 1961 until paid in full. Additionally, any proof of claim filed by either Defendant is DISALLOWED pursuant to 11 U.S.C. § 502(d) until the total amount of the judgment is paid in full against that Defendant. The request of the Trustee for an accounting, for costs and attorney fees and other relief not specifically granted is, at this time denied, without prejudice to being presented in a future proceeding. An order in accordance with this decision will be simultaneously entered.
The Trustee shall separately submit an order containing the total dollar amounts and other relief awarded against each Defendant.
SO ORDERED.