Opinion
Case No. 02-45451-JBR, Adversary Proceeding No. 02-4591-JBR
April 7, 2004
Vladimir von Timroth, Esq., Aframe, Bamhill and von Timroth, Worcester, MA, for Debtors, Plaintiff
Michael J. Fencer, Esq., Jager Smith, PC, Boston, MA, for Official Committee Of Unsecured Creditors, Plaintiff-Intervenor
Michael J. Michaels, Esq., Wolfson Keenan Cotton Meagher, Worcester, MA, for Kenneth J. Babineau, New Horizon Tech., Inc., Defendants
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This above-captioned adversary proceeding (the "Adversary Proceeding") is before the Court on the complaint (the "Complaint") of Industrial Commercial Electrical, Inc. (the "Debtors") against Kenneth Babineau (the "Defendant" or "Babineau") and New Horizons Technologies ("New Horizons"). The Official Committee of Unsecured Creditors (the "Committee") of Industrial Commercial Electrical, Inc. ("ICE"), I.C.E. Management Corp. ("Management"), and I.C.E.-Conn, Inc. ("CONN") (collectively, the "Debtors") is pursuing the Complaint as an intervening plaintiff in the Adversary Proceeding. The Committee subsequently filed an amended complaint (the "Amended Complaint"), as a matter of course, entitled Joinder of Intervening Plaintiff in Complaint of Debtors, adding Count IX for recovery of unlawful distributions pursuant to Mass. Gen. Laws ch. 156B, § 45. Although the Complaint lists eight counts against Defendant and New Horizons, counsel to the Committee stated at trial that the Committee would not present evidence on seven of the eight counts in the Complaint and thus waived those counts. No counts were pursued against New Horizons. Therefore, the only two counts before the Court are Count I as set forth in the Complaint for avoidance of a fraudulent transfer pursuant to Bankruptcy Code section 544(b) and Massachusetts General Laws chapter 109A and Count IX as set forth in the Amended Complaint. After a two-day trial, the Court took the matter under advisement and now makes the following findings of fact and rulings of law pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding by F.R.Bankr.P. 7052.
"According to Fed.R.Civ.P. 15(a), '[a] party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served.' The term "responsive pleading" is defined by reference to Fed.R.Civ.P. 7(a), which distinguishes between pleadings and motions, and provides an exclusive list of pleadings: a complaint (including a third party complaint), an answer to a complaint or a cross-claim, and a reply to a counterclaim." Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 569 (6th Cir. 2003). The Committee filed the Amended Complaint before any of these responsive pleadings were filed.
The following contains mixed findings of fact and conclusions of law.
I. Findings of Fact
1. On and prior to January 10, 2001, Defendant, David P. LeBlanc ("LeBlanc"), and Daniel J. Kennedy ("Kennedy") each held one third (1/3) of the outstanding common stock of ICE, Management, and CONN. ( Joint Pretrial Memorandum ("J.P. Mem.") at pg. 6-7).
2. On and prior to January 10, 2001, LeBlanc was the president of ICE, Management, and CONN; Defendant was the vice-president of ICE, Management, and CONN; and Kennedy was the treasurer and chief financial officer of ICE, Management, and CONN.
3. On and prior to January 10, 2001, ICE, Management, and CONN were separate legal entities that each maintained one or more deposit accounts at Flagship Bank Trust Company ("Flagship") in their respective names. (J.P. Mem. at pg. 12).
4. On and prior to January 10, 2001, Defendant, LeBlanc, and Kennedy were each a trustee of the CLM Realty Trust ("CLM"), a Massachusetts real estate trust that owned real property situated at 9 Short Street, Worcester, Massachusetts ("9 Short Street").
5. On and prior to January 10, 2001, Kennedy was the trustee of, and Defendant, LeBlanc, and Kennedy were each the holders of one third (1/3) of the beneficial interest of the T A Realty Trust ("T A"), a Massachusetts real estate trust that owned real property situated at 3 Bethany Street, Worcester, Massachusetts ("3 Bethany Street") (together with 9 Short Street, the "Realty Trust Properties") (J.P. Mem. at pg. 7-8).
6. On and prior to January 10, 2001, ICE leased from CLM and T A the Realty Trust Properties, and all buildings and structures situated thereon, pursuant to written lease agreements that provided for ICE to pay to CLM and T A fair market rent for the use of the Realty Trust Properties (J.P. Mem. at pg. 7-8; Jan. 13, 2004 Tr. at pg. 31-32).
7. On December 21, 2000, Flagship and ICE, Management, and CONN executed a certain Loan Agreement (the "Loan Agreement") and a Demand Note pursuant to which Flagship provided to ICE, Management, and CONN a revolving line of credit with a usage not to exceed $1,500,000. Also on December 21, 2000, CLM and T A each executed and delivered to Flagship real estate mortgages on the Realty Trust Properties to secure the obligations of ICE, Management, and CONN under the revolving line of credit (J.P. Mem. at pg. 9).
8. On or before January 31, 2001, Kennedy generated individual balance sheets dated as of December 31, 2000 for each of ICE (the "ICE December 31, 2000 Balance Sheet), Management, and CONN (collectively, the "December 31, 2000 Balance Sheets"), which, as required under the terms of the Loan Agreement, were published to Flagship on or about January 31, 2001 (J.P. Mem. at pg. 11). A review of the December 31, 2000 Balance Sheets, coupled with the testimony of the Plaintiff's expert witness, established that the December 31, 2000 Balance Sheets are not only internally consistent and substantively consistent with the stipulated facts and documents in evidence (Pl.'s Exs. 4 and 6; J.P. Mem. at pg. 11), but also that they are temporally consistent with the transactions that are the subject matter of this Adversary Proceeding (Pl.'s Exs. 1, 2, 3, 4, 6, and 8). Therefore, the information contained in the December 31, 2000 Balance Sheets is a substantially accurate accounting portrayal of the assets and liabilities of those entities on December 31, 2000.
9. According to the ICE Balance Sheet, the reported historical value of the assets of ICE on December 31, 2000 was, rounded to the nearest dollar, $2,509,761 (Pl.'s Ex. 4 at pg. 6). On that same date, the total reported liabilities of ICE was, rounded to the nearest dollar, $2,262,000, (Pl.'s Ex. 4 at pg. 7). ICE was solvent on an accounting basis on December 31, 2000 by the amount of $247,761.
10. On January 10, 2001, Babineau and ICE executed the Stock Redemption Agreement and Employment Termination and Equities Transfer Agreement (the "Agreement"). Sections I, II and III are relevant to the issues before the Court.
11. Pursuant to Section I of the Agreement, entitled Stock Redemption, on January 10, 2001 ICE transferred to Babineau the amount of $200,000 (Pl.'s Ex. 3; J.P. Mem. at pg. 11) (the "Initial ICE Stock Redemption Transfer"), and executed and delivered to Babineau a Promissory Note in the principal amount of $800,000 (the "Note") (Pl.'s Ex. 2; J.P. Mem. at pg. 11). In exchange, Defendant tendered his ICE stock back to ICE (Pl.'s Ex. 1 at pg. 2-3). The Agreement stated "The Total Redemption value of KJB's [Babineau's] entire interest in the Corporation shall be the agreed upon value of One Million ($1,000,000.00) Dollars." Between February 2001 and May 2002, ICE transferred to Defendant in partial payment of the Note, sixteen separate ICE checks, totaling $288,549.96 (J.P. Mem. at pg. 12-14). The total amount transferred by ICE to Defendant pursuant to Section I of the Agreement was $488,549.96 (the "Total ICE Stock Redemption Transfers").
12. Pursuant to Section II of the Agreement, entitled Termination of Employment Relationship, on January 10, 2001 Defendant covenanted: (i) that he would not disclose to any entity or person the proprietary business information and/or trade secrets of ICE; and (ii) that he would not solicit, nor cause to be solicited, for a period of one (1) year either any customer or client or account of ICE existing on January 10, 2001 or any ICE employees then so employed on January 10, 2001 (Pl.'s Ex. 1 at pg. 4-5; Jan. 13, 2004 Tr. at pg. 47). Also pursuant to Section II of the Agreement, ICE: (i) transferred to Defendant (a) a life insurance policy purchased by ICE insuring the life of Defendant; (b) a trade tool set and related equipment designated by Defendant for electrical contracting work; (c) office furniture and equipment (Pl.'s Ex. 1 at pg. 5-6; Jan. 13, 2004 Tr. at pg. 47-48); and (ii) agreed to release and indemnify Defendant with regard to any claims of trade vendors concerning the liabilities of ICE, Management, and/or CONN (Pl.'s Ex. 1 at pg. 5-7; Pl.'s Ex. 3; Jan. 13, 2004 Tr. at pg. 52). Neither party offered any evidence of the value of these covenants and the life insurance policy, trade tool set, or office furniture and equipment.
13. On January 10, 2001, pursuant to Section III of the Agreement, Defendant transferred to LeBlanc and Kennedy any and all beneficial interest he held in the fully encumbered Realty Trust Properties (Pl.'s Ex. 1 at pg. 8; Jan. 13, 2004 Tr. at pg. 75, 106). On that same date, and also pursuant to Section III of the Agreement, Defendant transferred to ICE his shares of common stock held in various related corporations, including: Industrial Commercial Electrical Data, Inc.; I.C.E.D. Commercial Systems, Inc.; Industrial Commercial Energy Management, Inc.; Industrial Commercial Design, Inc.; Commercial Lens Management, Inc.; ICE Management Corporation; and CONN. No evidence of the value of the shares of stock was put into evidence.
14. On January 10, 2001, ICE transferred to Babineau the amount of $142,983.24 as a capital distribution, in an amount purportedly equal to those amounts of corporate capital previously distributed to LeBlanc and/or Kennedy (the "Make-up Transfer") (Jan. 12, 2004 Tr. at pg. 33, 91-93; Jan. 13, 2004 Tr. at pg. 44).
15. On January 10, 2001 ICE transferred to Defendant $38,306 in repayment of undocumented loans by Babineau to ICE (the "Insider Loan Transfer") (Pl.'s Ex. 1 at pg. 1, 3; Jan. 13, 2004 Tr. at pg. 44) (together with the Initial ICE Stock Redemption Transfer and the Make-up Transfer, the "Transfers").
16. The total distribution of cash made by ICE to Defendant is $669,839.20 — composed of the Total ICE Stock Redemption Transfers of $488,549.96, the Make-up Transfer of $142,983.24, and the Insider Loan Transfer of $38,306.
II. Conclusions of Law
COUNT I
Count I of the Complaint is for avoidance of fraudulent transfers pursuant to 11 U.S.C. § 544(b) and Mass. Gen. Law ch. 109A, § 8. Pursuant to § 544(b), ". . . the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e)." (italics added). The Committee asserts that chapter 109 A, § 6 of the Massachusetts General Laws ("UFTA") is the applicable law under § 544(b). Section 6(a) of the UFTA provides "[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation." (italics added).
Count I of the Complaint is for avoidance of a fraudulent transfer pursuant to 11 U.S.C. § 544(b) and Mass. Gen. Laws ch. 109A, § 8. Section 8 simply lists the types of relief available in an action under chapter 109A, and does not provide a cause of action. At trial, as well as in the Proposed Findings of Fact and Conclusions of Law of Intervening Plaintiff Official Committee of Unsecured Creditors, it became clear that the Committee was pursuing Count I under chapter 109A, § 6.
Neither the Committee, whose standing is based upon that of ICE, nor ICE itself, have standing to pursue a claim under 11 U.S.C. § 544(b). The Committee, as intervening plaintiff, relies exclusively on the UFTA made applicable by § 544(b). "[U]nder 544(b), the Trustee [here, the debtor-in-possession] succeeds to the rights of an actual unsecured creditor who could have avoided under UFTA the payments made to or on behalf of [a creditor]. The burden is on the Trustee to demonstrate the existence of such a qualified unsecured creditor." Tomsic v. Pitocchelli (In re Tri-Star Technologies Co., Inc.), 260 B.R. 319, 328 (Bankr. D. Mass. 2001). In a footnote in Pitocchelli, Judge Boroff recognized that courts disagree as to whether a trustee is required to establish the existence of a specific creditor in order to have standing under § 544(b), id. at 329 (citing, inter alia, Lassman v. Goldstein (In re Goldstein), 194 B.R. 1, 2-3 (Bankr. D. Mass. 1996); Ferrari v. Barclays Business Credit, Inc. (In re Morse Tool, Inc.), 148 B.R. 97, 131 (Bankr. D. Mass. 1992)), and further stated "This Court agrees with those cases which hold that the estate representative must identify the existence of a relevant creditor and respectfully disagrees that this necessary predicate can be established by the Court's inferences with respect to the state of the case file. Standing is an essential element of a § 544(b) action and this Court ought not take judicial notice of a missing element of a party's proof by 'poking around' in the case files after the close of evidence and without affording prior notice to and an opportunity to be heard by the party prejudiced thereby." Pitocchelli, 260 B.R. at 329, n. 10. This Court agrees with Judge Boroff. It is incumbent upon a plaintiff to demonstrate his standing in a section 544(b) action.
It is well settled that a creditor must be unsecured to pursue a claim pursuant to 11 U.S.C. § 544. See House and Senate Reports (Reform Act of 1978) ("Subsection (b) is derived from current section 7Oe. It gives the trustee the rights of actual unsecured creditors under applicable law to void transfers. It follows Moore v. Bay, 284 U.S. 4 (1931), and overrules those cases that hold section 70e gives the trustee the rights of secured creditors."); see also Colliers, ¶ 544.09[1] ("The drafters of section 544(b) made it clear that this section overrules those cases that hold [former] Section 70e gives the trustee the rights of secured creditors.")
"Section 544(b) . . . borrows applicable nonbankruptcy law which would be available to an unsecured creditor of the debtor. . . ." Le Cafe Creme, Ltd. v. Le Roux (In re Le Cafe Creme, Ltd.), 244 B.R. 221, 238 (Bankr. S.D.N.Y. 2000) (italics added); see Goldstein, 194 B.R. at 3 ("Under § 544(b), the Trustee bears the burden of proving the existence of a qualified unsecured creditor . . .") (citing Morse Tool, 148 B.R. at 130 (". . . the Trustee must prove that there exists at least one qualified unsecured creditor: a creditor holding an allowable unsecured claim who could bring the same avoidance action the Trustee seeks to bring.")). Thus, pursuant to § 544(b) and M.G.L. 109(a) respectively, the Court's analysis of standing in this case must focus on two main inquiries about such a creditor: (1) whether there is an unsecured creditor of the debtor; and if so (2) whether the creditor's claim arose before the transfer was made or the obligation was incurred. Young v. Paramount Communications, Inc. (In re Wingspread Corp.), 178 B.R. 938, 945-46 (Bankr. S.D.N.Y. 1995) ("[B]efore a trustee is able to utilize applicable state or federal law referred to in Section 544(b), there must be an allegation and ultimately a proof of the existence of at least one unsecured creditor of the Debtor who at the time the transfer occurred could have, under applicable law, attacked and set aside the transfer under consideration." (citation omitted)).
Here, the Committee offered no evidence to prove the existence of a creditor that meets both requirements. In fact, the Committee addressed the issue of standing for the first time in its Proposed Findings of Fact and Conclusions of Law submitted after the close of evidence. The Committee simply makes the bald assertion that "[s]ince Flagship currently holds a claim against ICE that arose before ICE made the Transfers, and before ICE made the Note, both the Bankruptcy Code and applicable state law confer standing upon the Debtors, and the Committee as an intervening plaintiff, to bring this action. . . ." That Flagship's claim arose before the Transfers is undisputed, but merely satisfies the second of the two inquiries required. Pursuant to § 544(b), Flagship must also hold an unsecured claim in order to have standing. The Committee has not addressed this issue, and therefore failed to meet its burden of proof in identifying the existence of a relevant creditor.
Even if the Court were to exceed the scope of its inquiry and engage in the type of "poking around" proscribed by Pitocchelli, Debtors' schedules offer no support for the assertion that Flagship has standing under § 544(b). Flagship appears as a secured creditor on Debtors' Schedule D Creditors Holding Secured Claims, with a further notation that there is no unsecured portion of its claim. Further, in its Emergency Motion For Interim and Final Orders (I) Authorizing Use of Cash Collateral Pursuant to Section 363 of the Bankruptcy Code; (ii) Granting Adequate Protection Pursuant to Sections 361 and 363 of the Bankruptcy Code; and (III) Scheduling A Final Hearing Pursuant to Bankruptcy Rule 4001(c), ¶ 48, Debtors assert that Flagship has an equity cushion of $600,000.
In addition, of the 155 creditors listed on Debtors' Schedule F Unsecured Nonpriority Claims, all except Defendant were listed as having incurred a claim in 2002, while the Transfer occurred in 2001. UFTA § 6(a) bars these claimants from pursuing a claim under that section because it states "[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred . . ." Similarly, all eleven creditors listed on Debtors' Schedule E Unsecured Priority Claims are listed as having incurred a claim in 2002, and are also barred from pursuing a claim under UFTA § 6(a).
Debtors' Schedule D lists another secured creditor, Ford Motor Credit Company. According to a motion for relief, all retail sales contracts were entered into between February and October of 2001, revealing that UFTA § 6(a) would also bar this claimant from pursuing a claim.
No amendments to these schedules have been filed. Therefore, not only has the Plaintiff failed to assert the existence of a creditor with standing, a review of the record reveals that such a creditor probably does not exist.
Unfortunately, the issue of standing was not raised by either party throughout the course of the Adversary Proceeding. The issue of standing must be addressed by the Court, however, and cannot be waived by the parties. See Van Leeuwen v. United States, 868 F.2d 300, 301 (8th Cir. 1989) (affirming district court's sua sponte dismissal of plaintiffs' complaint on grounds that, among other things, they lacked standing); In re Unger Associates, Inc., 292 B.R. 545 (Bankr. E.D. Tex. 2003) ("Parties cannot waive an objection to standing which even the appellate Courts may raise sua sponte." (citation omitted)); In re Euell, 271 B.R. 388, 390 (Bankr. D. Co. 2002) (finding sua sponte examination of party's standing to pursue an exception to discharge proper because "[s]tanding to sue is an essential element to a justiciable cause. It is a jurisdictional prerequisite that is not subject to waiver. Federal courts have an independant obligation to examine their own jurisdiction, and standing "is perhaps the most important of [the jurisdictional] doctrines." (citations omitted)).
Plaintiffs have not met their burden in proving the existence of a creditor who would have standing pursuant to § 544(b). "If there are no creditors against whom the transfer is voidable under the applicable law, the trustee is powerless to act under section 544(b)." Le Cafe Creme, Ltd., 244 B.R. at 238 (citing 5 L. King, COLLIER ON BANKRUPTCY, ¶ 544.09, at 544-17 (15th ed. rev.1999)). Debtors did not have standing to pursue an action under § 544(b), and therefore neither does the Creditors' Committee as intervening plaintiff.
COUNT IX
The Committee requests this Court subordinate the obligation incurred by ICE in connection with the Note to those of the Debtors' unsecured creditors, and award ICE damages for distributions made by ICE that exceed those amounts which could have been made without rendering ICE insolvent, together with pre-judgment interest, post-judgment interest, attorneys' fees, and costs pursuant to Mass. Gen. Laws ch. 156B, § 45. This section states, in relevant part:
Stockholders to whom a corporation makes any distribution, whether by way of dividend, repurchase or redemption of stock, or otherwise, except a distribution of stock of the corporation, if the corporation is, or is thereby rendered, insolvent shall be liable to the corporation for the amount of such distribution made, or for the amount of such distribution which exceeds that which could have been made without rendering the corporation insolvent, but in either event, only to the extent of the amount paid or distributed to them respectively.
Section 45 does not dictate how "insolvency" is to be determined and the parties have not cited, nor can the Court find, any cases addressing this issue. Cases addressing M.G.L. ch. 156B, § 61, which deals with distributions made by a corporation which is "insolvent or is rendered insolvent," are instructive, however. In Murphy v. Robinson (In re Ipswich Bituminous Concrete Products, Inc.), 79 B.R. 511, 518 (Bankr. D. Mass. 1987), the Chapter 7 trustee brought an adversary complaint pursuant to, among others, Bankruptcy Code section 548(a)(2), Mass. Gen. Laws ch. 109A, and 156B, § 61. There, the court first examined the section 548(a)(2) claim, and noted that the Bankruptcy Code prescribes a standard balance sheet test for determining solvency, which "focuses on the fair market value of the debtor's assets and liabilities within a reasonable time of the transfers. Asset valuation need not be exact. Assets should be reduced by the value of the assets not readily susceptible to liquidation and the payment of debts." Id. at 517 (citations and internal quotation marks omitted). Further, the court noted that the "First Circuit has held that 'unaudited financial statements may be admissible as the best available evidence and that it is for the trier of fact to assess the accuracy of such statements.'" Id. (citations omitted). After applying this test and finding the defendant insolvent for purposes of the section 548 claim, the court turned its attention to the claims brought pursuant to M.G.L. ch. 156B, § 61. The court found liability under this provision, stating "[s]ince the Court has found that the Debtor was insolvent (or at least rendered insolvent by the distribution), the Court has no difficulty finding that [the directors] are jointly and severally liable for the $100,000 pursuant to section 61 of the MBCL [ch. 156B] as well as section 548 of the Bankruptcy Code." Id. at 518; see also First Fed. Sav. Loan Assoc. of Galion, Ohio v. Napoleon, 701 N.E.2d 350, 354 n. 4 (Mass. 1998) (Courts making a determination of solvency under the Massachusetts UFTA employ a balance sheet test to measure the fair value of the debtors' assets against the value of the debtor's liabilities.) Therefore, the Court concludes that the proper test of insolvency to be applied is the standard balance sheet test for determining insolvency prescribed by the Bankruptcy Code.
Section 61 provides, in relevant part:
Directors of a corporation who vote to authorize any distribution by the corporation to one or more of its stockholders, whether by way of a dividend, repurchase of redemption of stock, or otherwise, except a distribution of stock of the corporation, which is in violation of the corporation's articles of organization shall be jointly and severally liable to the corporation for the amount by which such distributions exceeds that which could have been made without violation of the corporation's articles of organization, but only to the extent such excess distribution is not repaid to the corporation. If the corporation is insolvent or is rendered insolvent by the making of any such distribution, whether or not in violation of the articles of organization, the directors who voted to authorize such distribution shall be jointly and severally liable to the corporation for the amount of such distribution made when the corporation is insolvent, or for the amount of such distribution which exceeds that which could have been made without rendering the corporation insolvent, but in either event only to the extent such distribution, or such excess, is not repaid to the corporation.
In making factual determinations of solvency, it is appropriate to adjust the asset values shown on the most contemporaneous balance sheet available to reflect "the fair market price of the debtor's assets that could be obtained if sold in a prudent manner within a reasonable period of time to pay the debtor's debts." Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 35 (2d Cir. 1996) (emphasis added); see also Travellers Int'l AG v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 134 F.3d 188, 193-94 (3d Cir. 1998). The total value of the assets, as adjusted to fair value, is then compared to the recorded liabilities to determine whether a condition of solvency or insolvency exists. First Fed. Sav., 701 N.E.2d at 354 n. 4.
The December 31, 2000 Balance Sheet for ICE created by Kennedy and published to Flagship constitutes the most contemporaneous and consistent financial information available, see Viscount Air, 232 B.R. at 437-38; Ipswich Bituminous, 79 B.R. 511, 518; Foley v. Briden (In re Arrowhead Gardens, Inc.), 32 B.R. 296, 298-99 (Bankr. D. Mass. 1983), and is, therefore the appropriate starting point to determine the issue of the solvency of ICE on January 10, 2001. In addition, the December 31, 2000 Balance Sheet for ICE is a substantially accurate accounting portrayal of ICE's assets and liabilities on December 31, 2000. See Arrowhead Gardens, 32 B.R. at 299. The parties did not raise the issue of whether the values listed on the Balance Sheet reflect the fair market value of such items and therefore the Court finds they are, with the exception of the vehicles addressed later in this decision. Rather, the parties disagree as to what additional items should be added to or subtracted from the Balance Sheet. Therefore with the December 31, 2000 Balance Sheet as its staring point, the Court must determine what adjustments, if any, must be made in order to determine ICE's financial condition on January 10, 2001, the date of the Agreement.
The Committee presented the expert testimony of Craig R. Jalbert of Verdolino Lowey, P.C., a Certified Insolvency and Restructuring Advisor (Jan. 12, 2004 Tr. at pg. 17-21). In the course of his professional practice, Mr. Jalbert has performed an estimated 1,000 prior insolvency analyses, as well as preferences and fraudulent conveyance analyses, and other types of forensic accounting investigations (Jan. 12, 2004 Tr. at pg. 20-21) for trustees, debtors-in-possession, and official committees (Jan. 12, 2004 Tr. at pg. 19). Moreover, Mr. Jalbert has previously qualified as an expert to opine on the issue of insolvency in other Bankruptcy Courts in the First Circuit (Jan. 12, 2004 Tr. at pg. 20-21).
Mr. Jalbert employed a balance sheet test to determine the solvency of ICE as of the relevant date. To do this, he started with the December 31, 2000 Balance Sheet, and then reviewed it to determine what additional information would be required to determine the value of assets and the extent of liabilities. Mr. Jalbert's testimony revealed that, in this particular engagement: (i) the facts and data upon which his opinion of insolvency was based were sufficient (Jan. 12, 2004 Tr. at 25-28); (ii) that the methodologies he employed are generally recognized in bankruptcy as reliable means for conducting an insolvency analysis (Jan. 12, 2004 Tr. at pg. 22-24); (iii) that he employed those methodologies in the proper manner after having made certain reasonable assumptions (Jan. 12, 2004 Tr. at pg. 29-38, 77-80, 81-84); and (iv) that he focused his analysis on January 10, 2001, the only date relevant in this adversary proceeding (Jan. 12, 2004 Tr. at pg. 24).
Mr. Jalbert provided credible testimony that the fair value of the assets of ICE as of January 10, 2001 was $2,765,553. Mr. Jalbert began his calculation with the total current assets of $2,509,760.98 listed on the December 31, 2000 ICE Balance Sheet. Mr. Jalbert then made the reasonable and undisputed assumption that no material transactions took place between December 31, 2000, the date of the most contemporaneous financial statements, and January 10, 2001 (Jan. 12, 2004 Tr. at pg. 32). See Ipswich Bituminous, 79 B.R. at 517 (". . . the United States Court of Appeals for the First Circuit has expressly approved" the technique of retrojection, whereby a trustee may meet his burden of proof on the issue of insolvency by showing that the debtor was insolvent at a reasonable time subsequent to the alleged transfer, accompanied by proof that the debtor's financial situation did not change materially during the intervening period." (citations omitted)).
Mr. Jalbert reduced the cash listed as an asset by $342,983, the total amount of the $200,000 Initial ICE Stock Redemption Transfer made on the Note plus the $142,983.24 Make-up Transfer. Mr. Jalbert also testified that he increased the value of ICE's assets to reflect the fair value of motor vehicles owned and potentially owned by ICE in the amount of $598,775; he apparently took this approach because although the vehicles were fully depreciated on the Balance Sheet they were still operational and had value. Mr. Jalbert calculated this adjustment by compiling a list of every vehicle owned by any of ICE and its affiliates, and determining the fair value of the vehicles by referring to the January 2001 periodical edition of the Official Used Car Guide published by the National Automobile Dealer's Association. Mr. Jalbert also testified that he gave full value to the accounts receivable portion of the assets listed on ICE's Balance Sheet, without a reserve for bad debts, despite his experience that receivables are not one hundred percent collectable, even in an ongoing business.
Mr. Jalbert testified that he took the most the most conservative approach he could to his analysis in order to give Defendant every "benefit of the doubt." (Jan. 12. Tr. at 31). While the Court notes that the value ascribed to both the vehicles and the accounts receivables are higher than their probable actual value, the Court credits these values as no contrary evidence was proffered.
Mr. Jalbert provided credible testimony that on January 10, 2001 the total liabilities of ICE was $3,062,000. Mr. Jalbert began his calculation with total liabilities of $2,261,999.83 listed on the December 31, 2000 ICE Balance Sheet. Mr. Jalbert then increased this figure by the $800,000 amount due on the Note, calculating the total liabilities of ICE as of January 10, 2001 at $3,062,000.
Mr. Jalbert's calculation of assets of $2,765,553 and liabilities of $3,062,000 reflects that ICE was insolvent on January 10, 2001 by the amount of $296,447 (Jan. 12, 2004 Tr. at pg. 36). The Court credits Mr. Jalbert's testimony on the issue of the solvency of ICE on January 10, 2001 and adopts his conclusions as its finding that ICE was in fact rendered insolvent by the Transfers and obligations incurred under the Agreement on January 10, 2001.
Defendant offered the expert testimony of Jon H. Fudeman, C.P.A., who had never, prior to the trial in this adversary proceeding, rendered any opinion of insolvency with respect to any business or entity (Jan. 13, 2004 Tr. at pg. 95-96), and furthermore admitted that he did not, prior to trial, conduct an insolvency analysis of either ICE alone or the combined Debtors using generally accepted methods, (Jan. 13, 2004 Tr. at pg. 101-102). Without impugning either Mr. Fudeman's personal or professional credibility, and with all due respect to his expertise in business valuations, Mr. Fudeman's testimony is given little weight due to the methodologies he employed.
Fudeman testified that the net worth of ICE, standing alone, on January 10, 2001 was approximately $622,409 excluding goodwill, and approximately 2.5 million inclusive of goodwill. Mr. Fudeman began this analysis with Mr. Jalbert's testimony that ICE was insolvent as of January 10, 2001 by about $295,000. (Jan. 13 Tr. at 85). To this figure, Fudeman added a $100,000 receivable from Kennedy and LeBlanc for the purchase of Defendant's interests in the CLM and T A realty trusts, $324,000 that ICE owed to ICE Management, the $142,183 Make-up Payment (even though there was a check for this amount on January 10, 2001, Fudeman stated that he felt it was simply an "evening up of stuff that LeBlanc had taken out previously" and should not be counted), and $350,000 of inventory and equipment that Defendant testified had existed at the time of the Agreement. Fudeman also testified that the companies should be considered as one entity because of common control and a "confused intermingling."
The Court declines to credit Mr. Fudeman's testimony because this approach does not comport with the correct balance sheet approach to be applied in an insolvency analysis nor with the evidence presented. Mr. Fudeman included a number of inappropriate factors in his calculation, including the following:
A. Goodwill
Contrary to Defendant's assertions, goodwill is not a factor in determining insolvency, at least in liquidation cases, because goodwill cannot be separately sold to satisfy the claims of creditors. GATX Financial Copr. v. National Fairways Partners I, Ltd. P'ship, 2003 WL 231673, *2 (Conn.Super. 2003) ("It seems unlikely that goodwill would be considered an asset in judging solvency pursuant to General Statutes § 52-552c(a), providing that '[a] debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation.'"); see also United States v. Paradise, 127 F. Supp.2d 951, 956 (N.D. Ill. 2000) ("'The law looks to the attainment of practical results, and a solvency which it cannot employ in the payment of the debts of an unwilling debtor is certainly not distinguishable by an valuable difference from an insolvency.'" (citation omitted)).
B. Value of the Real Estate Trusts
Defendant asserts that the value of the CLM and T A realty trusts should be included in the value of ICE. The Court finds no merit in this argument. T A and CLM were never under the ownership of ICE, but rather were transferred to third party insiders. These trusts engaged in arms-length dealings at fair market value for the rental of the Realty Trust Properties. (J.P. Mem. At pg. 7-8).
Mr. Fudeman further testified that under the Agreement, ICE actually paid $900,000 for the ICE Stock Redemption Transfer and gave $100,000 to Kennedy and LeBlanc to purchase Defendant's interest in the trusts, and ICE should therefore have a $100,000 receivable on its Balance Sheet reflecting this $100,000 "loan." Mr. Fudeman assumed this receivable existed because Kennedy and LeBlanc received Defendant's interest in the CLM and T A trusts. Looking to the plain language of the Agreement, the Court finds no support for this argument, and declines to credit Mr. Fudeman's testimony on this point.
C. Inventory not Reflected on the Balance Sheet
Defendant testified that there was approximately $250,000 of inventory stored at the ICE warehouse, which was not reflected on the Balance Sheets of December 31, 2000. Inventory was not included on any of the ICE balance sheets in evidence preceding December 31, 2000 or subsequent thereto. No explanation was offered for the absence of inventory on the balance sheets. It is unclear from Defendant's testimony which portion of this $250,000 in inventory belonged to ICE and which portion may have belonged to its affiliates. Further, Defendant did not produce any corroborating testimony from anyone that would have been aware of such inventory. The only other evidence of the amount of inventory was Stephen Wentzell's report that there was between $35-70,000 in inventory when he was appointed as examiner almost two years after the Agreement. While the Court recognizes that there was likely some inventory not reflected on the Balance Sheet, it also notes that Defendant's testimony is this regard is wholly unsubstantiated, vague and clearly self-serving. Therefore, the Court gives little weight to this testimony. See Leisy v. U.S., 102 F. Supp. 789, 791-92 (Minn. 1952) ("Whether or not a party is interested goes to the weight of their testimony.")
D. Equipment
Similarly, Defendant testified that there was approximately $100,000 of equipment stored in the vehicles owned by ICE and its affiliates that was not included on the Balance Sheet. Again, this testimony is wholly uncorroborated and self serving, and the Court gives it little weight. See Leisy, 102 F. Supp. at 791-92. In addition, the December Balance Sheets of some of the affiliates and the Debtor do list equipment as an asset. No testimony in the record addresses whether the equipment on the various balance sheets includes the equipment Defendant testifies was stored in the trucks, and the Court declines to speculate.
E. Make-up Payment
Mr. Fudeman testified that he would add the value of the Make-up Payment back into the value of ICE for determining insolvency. Mr. Fudeman testified that this amount was not part of the redemption amount, and thus it was "different." (Jan. 13 Tr. at 110). As Plaintiff points out, however, this is a distribution that reduces the capital of ICE. The Court thus declines to credit Mr. Fudeman testimony on this point.
F. Debt Owed to ICE Management
Mr. Fudeman testified that he added $324,000 back into the value of ICE on account of a debt owed by ICE to ICE Management. Mr. Fudeman stated that he believed this liability was in question because there was no consideration given for it. No other evidence was presented to support this assertion, although Mr. Fudeman stated that he based his testimony in this regard on opinions of various bank personnel. (Jan. 13 Tr. at 123). In the absence of any evidence supporting this conclusion, the Court declines to credit Mr. Fudeman's testimony on this point.
G. Consolidation
Finally, Defendant argues that both the Debtors and the non-debtor affiliates should be consolidated for purposes of determining solvency. The assets and liabilities of ICE, Management, CONN, CLM, and T A will not be consolidated for the purposes of determining solvency because Defendant, as the proponent of consolidation, failed to satisfy his burden of proof that the separate identity of those entities should be disregarded. See Nat'l Med. Care, Inc. v. Home Med. of America, Inc., 2002 WL 31187683, *4 (Mass.Super.Ct., August 9, 2002) ("There is a presumption of corporate separateness that must be overcome by clear evidence that the parent in fact controls the activities of the subsidiary."(citations omitted)).
Defendant's expert stated that he believed that the ICE; Management, CONN, CLM, and T A should be consolidated on an accounting basis because of common control (Jan. 14, 2004 Tr. at 88-89). Whether separate legal entities should be consolidated on accounting basis, though, is not determinative of whether a creditor of one legal entity has the legal or equitable right to reach the assets of another separate but related entity to satisfy that creditor's claim, which in this instance is the appropriate test. Established Massachusetts law controls. In determining whether separate corporate identities should be disregarded, Massachusetts courts examine, among other factors, whether there exists: (i) a pervasive control of the corporations by the dominant shareholders; (ii) a confused intermingling of the corporations' business assets; (iii) thin capitalization; (iv) non-observance of corporate formalities; (v) the absence of corporate records; (vi) a siphoning away of corporate assets by affiliates; (vii) the use of one corporation for another's transactions; and (viii) the use of the various corporations in promoting a fraud. See My Bread Baking Co. v. Cumberland Farms, Inc., 233 N.E.2d 748, 751-52 (Mass. 1968); Pepsi Cola Metropolitan Bottling Co. v. Checkers, Inc., 754 F.2d 10, 14-16 (1st Cir. 1985). "[C]ommon ownership of the stock of two or more corporations with common management, standing alone, will not give rise to the liability on the part of one corporation for the acts of another." My Bread Baking, 233 N.E.2d at 752.
In this case, the stipulated facts and other evidence establish that each of the subject entities were legally existing entities that maintained separate books and records, filed separate tax returns (Jan. 13, 2004 Tr. at pg. 82, 115-116), and maintained separate banking accounts (J.P. Mem. at pg. 11-12). In addition, ICE entered into arm length lease agreements with CLM and T A, (J. P. Mem. at pg. 7-8), both of which paid their own mortgages on the Realty Trust Properties (Jan. 13, 2004 Tr. at pg. 55). Defendant offered no evidence, by way of testimony or documentation, that any of the assets or liabilities of the various related entities were in any way intermingled, much less confusingly intermingled. Nor did Defendant offer evidence that any of the corporations or real estate trusts ever failed to observe the necessary formalities. On the contrary, Defendant testified that the real estate trusts each collected rent from ICE and paid their own mortgages (Jan. 13, 2004 Tr. at pg. 31-32, 55). Additionally, Defendant's expert testified to having reviewed separate tax returns for each of the above referenced entities, (Jan. 13, 2004 Tr. at pg. 82), as well as separate financial statements, (Jan. 13, 2004 Tr. at pg. 115-116). Therefore, since the only evidence adduced by Defendant in support of consolidation is common ownership and common management, that evidence, standing alone, is insufficient to warrant the consolidation of those entities' individual assets and liabilities in this proceeding. My Bread Baking, 233 N.E.2d at 752. Therefore, the appropriate inquiry of insolvency on January 10, 2001 is one involving only ICE as the party to the Agreement, and as the sole maker of the Note and the Total ICE Stock Redemption Transfers.
The Court also declines to add the value of the affiliate stock that ICE received pursuant to Section III of the Agreement. Defendant could have but did not raise this issue prior to or at trial. Moreover, there is no meaningful analysis in evidence of the value of the stock of any of these affiliates. According to the December 31, 2000 Balance Sheet, the only significant equity is in ICE Management. This equity is composed largely of the $324,000 debt owed to Management by ICE, and is also composed of equipment and inventory. From the record, there is no way for the Court to determine which assets are attributable to which affiliate, and the risk of double counting assets is virtually certain.
Industrial Commercial Electrical Inc. and Affiliates Combined Financial Statements, June 30, 2001 and 2000 further reveals that the affiliate stock was not brought onto the books by ICE's accountant after the Agreement.
Based upon the stipulated facts in evidence, and the exhibits and all the testimony, the Court finds that ICE was rendered insolvent on January 10, 2001 by the amount of $296,447 as a result of having made the Transfers and the Note. Defendant is liable to the ICE estate pursuant to Mass. Gen. Laws ch. 156, § 45 in the amount of $373,392.20, the portion of the total distribution of $669,839.20 made to Defendant in excess of the $296,447 that could have been made without rendering ICE insolvent. The Court awards post-judgment interest pursuant to 28 U.S.C. § 1961. The Court does not award attorneys' fees and costs as requested by the Plaintiff as there is no basis for this request. Finally, the Court finds the amount due Defendant under the remainder of the Note should be equitably subordinated pursuant to 11 U.S.C. § 510(c). In re SPM Manufacturing Corp., 163 B.R. 411, 416-22 (Bankr. D. Mass. 1994) (holding that while Mass. Gen. Laws. ch. 156B, section 45 would give parity with all other unsecured claims to a claim for the balance due under a note delivered by a corporation in connection with redemption of its stock, Bankruptcy Code section 510(c) requires subordination of such a claim to all unsecured claims.)
In fact, Defendant's counsel conceded in opening arguments that without the addition of certain assets advocated by Defendant's expert ICE, standing alone, was insolvent on the relevant date. (Jan. 12, 2004 Tr. at pg. 10).
Section 510(c) provides, in relevant part:
". . . after notice and a hearing, the court may —
(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest;"
III. CONCLUSION
For the reasons set forth herein, Count I of the Complaint is dismissed, and Judgment shall enter for Plaintiff on Count IX.
A separate order shall enter.