Opinion
Case No. 13-11552
03-25-2016
In Re INNER CITY PROPERTIES, LLC Debtor
Chapter 11
MEMORANDUM OF DECISION ON ORDER PARTIALLY SUSTAINING OBJECTION TO CLAIM
Before the Court is a claim objection ("Objection")(Doc. 260) filed by Bryan Perkins, Administrator of the Estate of Troy S. Clements ("Perkins"). The Objection seeks the disallowance of a $1,228,488.62 claim ("Claim")(Claim No. 11-3) filed by Linda Hines. Linda Hines opposes the Objection. See Doc. 272. Subsequent to an evidentiary hearing, the parties filed post-hearing briefs. See Docs. 305, 306, and 307.
JURISDICTION
The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1334(b) and the Standing Order of Reference entered in this District. Pursuant to 28 U.S.C. § 157(b)(2)(B), this is a core proceeding in which the Court possesses the authority to enter final judgment. This memorandum constitutes the Court's findings of fact and conclusions of law under Fed. R. Bankr. P. 7052.
Stern v. Marshall, 131 S. Ct. 2594 (2011) and its progeny are not implicated because this action does not involve a "Stern claim." See Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2170 (2014)("Stern claim" is a core proceeding that could have been brought as a suit at common law).
THE PARTIES
Linda Hines ("Linda") is the mother of the Debtor's sole owner, James Hines ("James"). The Debtor, Inner City Properties, LLC ("ICP"), is a limited liability company incorporated by James on March 5, 2010. ICP's articles of organization identify the purpose of the company as "property management."
THE CLAIM
The basis for the Claim is "money loaned for purchase of rental properties & expenses." See Claim No. 11-3. Attached to the Claim are copies of fifteen checks totaling $1,331,244.80. According to Linda, the checks evidence loans she extended to ICP.
PRESUMPTION OF VALIDITY AND BURDEN OF PROOF
"A proof of claim executed and filed in accordance with [the Federal Rules of Bankruptcy Procedure] shall constitute prima facie evidence of the validity and amount of the claim." Fed. R. Bankr. P. 3001(f). To rebut this presumption, a party objecting to the claim must establish a "colorable challenge" to the claim. In re Morton, 298 B.R. 301, 307 (B.A.P. 6th Cir. 2003). This must be done by means of "some legal reason or some factual evidence." In re McLaughlin, 320 B.R. 661, 665 (Bankr. N.D. Ohio 2005). If the presumption is rebutted, the burden shifts to the claimant to substantiate the claim by a preponderance of the evidence. Morton, 298 B.R. at 307; In re Hollars, 198 B.R. 270, 271 (Bankr. S.D. Ohio 1996); see also Bloomberg Law: Bankruptcy Treatise, pt. X, ch. 357, at II, (D. Michael Lynn et al. eds., 2016).
The Objection seeks the disallowance of the entire claim because: (1) nine of the checks pre-date the formation of ICP; (2) fourteen of the checks are cashier's checks that evidence no apparent relationship to Linda as the source of funds; (3) eleven of the cashier's checks expressly provide that they were "purchased by" James or his ex-wife Tracy Hines ("Tracy"); (4) only one of the checks is payable to ICP - a cashier's check which states it was purchased by James; (5) seven of the checks are payable to James; (6) several of the checks reference real property owned by James, not ICP; (7) the amount of the claim is inconsistent with ICP's books and records, which reflect a $340,000.00 debt to Linda according to Schedule F; and (8) the Claim does not include any loan documentation. These arguments raise significant questions whether Linda possesses a right to payment from ICP, see 11 U.S.C. § 101(5)(defining a "claim" as a "right to payment"), at least with respect to the amount claimed. Consequently, Perkins has established a colorable challenge to the Claim and the burden shifts to Linda to substantiate her Claim by a preponderance of the evidence.
The chapter 11 trustee also shares these concerns, filing his own objection to the Claim that raised many of the same arguments. See Doc. 246. The trustee reached a settlement with Linda and filed a Fed. R. Bankr. P. 9019 motion for approval of the settlement. See Doc. 283. Perkins opposes the proposed settlement. See Doc. 296. The Court will address the Rule 9019 motion by separate order.
Perkins did not introduce any of his own witnesses, and only a few of his own exhibits, at the evidentiary hearing. Linda therefore does not believe Perkins has introduced the evidence necessary to rebut the presumption of a prima facie claim. Even if Perkins' evidence does not establish a colorable challenge to the Claim, the Court does not agree with Linda that the presentation of evidence is the only way to rebut the presumption. It can also be rebutted by a "legal reason." McLaughlin, 320 B.R. at 665.
ELEVATED BURDEN OF PROOF WHEN CLAIMANT IS AN INSIDER
Linda is an insider of ICP. When the debtor is a corporation, the Bankruptcy Code defines an "insider" as a "relative of a general partner, director, officer, or person in control of the debtor." See 11 U.S.C. § 101(31)(B)(vi); see also 11 U.S.C. § 101(45)(defining relative as an "individual related by affinity or consanguinity within the third degree as determined by the common law").
When an insider files a claim against the bankruptcy estate, the insider bears a "heavy" burden of proof and the claim must be "carefully scrutinized." In re Scheidmantel Olds-Cadillac, Inc., Case No. 92-21270, 1994 WL 386855 at *2 (Bankr. W.D. Pa. Jul. 12, 1994); In re Candy Braz, Inc., 98 B.R. 370, 373 (Bankr. N.D. Ill. 1988). Otherwise it would be too easy for the sole owner of a debtor corporation, who has no personal stake in the claims resolution process, to act in a manner that prejudices the debtor's non-insider creditors in favor of the insider.
THREE LENDING AGREEMENTS
To substantiate her claim at the evidentiary hearing, Linda introduced three lending agreements in the aggregate, principal amount of $1,028,488.62. See Claimant's Exs. 5, 20, and 22. The agreements, however, raise some of the same questions raised by the checks appended to the Claim. Linda is the lender under each agreement. However, the borrower under each agreement is James, not ICP. One of the agreements is dated prior to ICP's formation. None of the agreements reference ICP.
ANOTHER CASHIER'S CHECK
Linda also introduced an additional cashier's check that was not appended to her Claim. It is a $40,000.00 cashier's check made payable to ICP. See Claimant's Ex. 23. The check identifies Linda as the remitter.
LINDA'S DIVORCE
Linda and Carlos Hines ("Carlos") were divorced in 2005. Prior to the divorce, they jointly owned a business known as A. Hines Racing Engines. A separation agreement, incorporated into the divorce decree, provided that "[the] business will be turned over to [Linda] for the purposes of allowing their son, [James], to . . . have ownership of said business with [Linda]." See Claimant's Ex. 1. Carlos quitclaimed the business real estate to Linda. See Claimant's Ex. 2. Shortly thereafter, Linda quitclaimed the same to James and herself. See Claimant's Ex. 3.
FIRE AND THE INSURANCE PROCEEDS
In 2008, the business was destroyed by a fire. As compensation for a total loss, Erie Insurance Exchange issued nine checks totaling $788,488.62. See Claimant's Ex. 4. Six of the checks are jointly payable to James and Linda. Two of the checks are payable to A. Hines Racing Engines. One check is payable to James alone.
JAMES' BUSINESS ACTIVITY BEFORE AND AFTER THE FIRE
Prior to the fire, James engaged in at least two different business activities: (1) A. Hines Racing Engines; and (2) real estate rentals of single-family and multi-family homes and apartments. Long before the fire, James individually acquired approximately twenty-four rental properties. The fire put an end to James' business activity related to A. Hines Racing Engines. James' real estate activity has continued to the present.
FIFTH THIRD "LINE OF CREDIT"
Linda opened a joint account at Fifth Third Bank ("Fifth Third Joint Account") and deposited the insurance proceeds. The account owners were Linda, James, and Tracy.
James' testimony gave the impression that Linda, alone, opened the Fifth Third Joint Account and deposited the checks. This seems as though it may conflict with a bank's obligation to verify the identity of all account owners. See 31 U.S.C. § 5318(l)(2)(A)(establishing regulations for the verification of "the identity of any person seeking to open an account" at a financial institution)(emphasis added).
Linda and James testified that they viewed Linda as the owner of the insurance proceeds. James testified that he approached Linda in 2009 and suggested that he borrow the funds to invest in real estate. According to Linda and James, they agreed that: (1) James could borrow the funds for the sole purpose of building a real estate rental business; and (2) the Fifth Third Joint Account would serve as a "line of credit" for this purpose; and (3) James was authorized to withdraw funds from the Fifth Third Joint Account, as a joint owner of the account, without prior approval of Linda.
Linda believed that James was good at buying and selling property because James had done so with apparent success for several years. She wanted to provide a way for James to generate income after the fire.
FIRST LENDING AGREEMENT
Linda testified that the first of the three lending agreements ("Agreement I"), dated March 1, 2009, memorialized the "line of credit" agreement. In that agreement, Linda is identified as the lender and James is identified as the borrower. Agreement I further states that $788,488.62 is loaned to James "for the sole purpose of operating expense." ICP is not mentioned anywhere in Agreement I.
FIFTH THIRD BANK CHECKS
Eleven of the checks attached to the Claim are drawn on Fifth Third Bank. See Claimant's Exs. 6-14, and 16. All of these checks are cashier's checks. Each check identifies the purchaser. None were purchased by Linda. Nine were purchased by James. Two were purchased by Tracy. To prove that the funds were drawn from the Fifth Third Joint Account, Linda introduced bank statements that allegedly evidence corresponding debits from the Fifth Third Joint Account. See Claimant's Exs. 6-14, and 16.
Only one of the checks identifies ICP as payee. Nine of the checks were issued prior to ICP's March 5, 2010 incorporation.
The following table identifies the checks by date, purchaser, payee, and amount.
| Date | Purchaser | Payee | Amount |
|---|---|---|---|
| May 4, 2009 | James | James | $54,481.29 |
| May 29, 2009 | Tracy | RTC Tile | $4,275.65 |
| July 10, 2009 | James | James | $7,046.66 |
| August 14, 2009 | James | James | $92,622.02 |
| August 19, 2009 | James | James | $49,791.72 |
| October 16, 2009 | James | James | $200,000.00 |
| November 12, 2009 | Tracy | Central Land Title | $6,188.19 |
| January 8, 2010 | James | James | $91,339.27 |
| February 4, 2010 | James | First Sealord Surety | $1,500.00 |
| April 14, 2010 | James | Inner City Properties | $174,000.00 |
| April 30, 2010 | James | Spring Valley Bank | $250,000.00 |
Linda did not offer any explanation for the difference between the funds allegedly drawn from the Fifth Third Joint Account ($931,244.80) and the principal amount of Agreement I ($788,488.62).
FIFTH THIRD JOINT ACCOUNT RECORDS
As mentioned previously, Linda introduced account statements to establish that the Fifth Third Bank checks were drawn on the Fifth Third Joint Account. The statements, however, reveal that at least two of the checks appear to have been drawn on a different account that was also jointly owned by Linda, James, and Tracy.
Unfortunately, or perhaps intentionally, Linda failed to introduce the first page of any of the account statements from the Fifth Third Joint Account during her testimony. Thus, none of the statements contain the related account number. Notwithstanding, a careful examination of the statements reveals that they are not all related to the same account. Two of the account statements are published bi-monthly. See Claimant's Exs. 7 and 14. The remaining nine are published monthly. One of the bi-monthly statements covers the period from June 27, 2009, to August 27, 2009. See Claimant's Ex. 7. This statement stands in contrast to a monthly statement covering the period from July 30, 2009, to August 27, 2009. See Claimant's Ex. 8. Although both statements cover the latter period, the August 19, 2009 check listed on Exhibit 7's statement is not listed on Exhibit 8's statement. Likewise, the August 14, 2009 check listed on Exhibit 8's statement is not listed on Exhibit 7's statement. Moreover, the two statements list different annual percentage yields for the same period.
James unequivocally identified Claimant's Ex. 6 as the Fifth Third Joint Account into which the insurance proceeds were deposited. The account statement contained in Claimant's Exhibit 6 is one of the nine monthly statements. Therefore, it appears that the following checks, recorded on the two bi-monthly statements, were not drawn on the Fifth Third Joint Account. See Claimant's Exs. 7 and 14.
| Date | Purchaser | Payee | Amount |
|---|---|---|---|
| August 19, 2009 | James | James | $49,791.72 |
| April 30, 2010 | James | Spring Valley Bank | $250,000.00 |
James and Linda suggested in their testimony that all of the checks were drawn on a single account into which the insurance proceeds were deposited. Not only is it troubling that the actual bank statements suggest otherwise, these statements appear also to belie James and Linda's sworn testimony.
James and Linda also gave the impression that the only withdrawals of insurance proceeds from the Fifth Third Joint Account were the Fifth Third Bank checks attached to the Claim. But that is not the case. Of the monthly statements, Claimant's Exhibits 6, 9, and 13 reveal withdrawals from the Fifth Third Joint Account, which were unaccounted for, in the amounts of $33,762.07, $69,997.45, and $64,147.56, respectively.
Similarly, James and Linda gave the impression that the only deposits into the Fifth Third Joint Account were the nine checks from Erie Insurance Exchange - resulting from the fire at A. Hines Racing Engines. However, the monthly statements suggest otherwise. Claimant's Exhibits 6 and 16 reveal deposits into the Fifth Third Joint Account in the amounts of $75,457.37 and $186,182.76, respectively. These amounts do not match any of the nine insurance checks or any combination thereof. Moreover, Claimant's Exhibit 12 includes two illegible deposit amounts that are legibly described as "Funds Transfer From SV."
JAMES PURCHASES PROPERTIES
Several of the Fifth Third Bank checks reference individual properties on the "memo" line. James testified that he used the Fifth Third Bank checks to acquire these properties. He did not purchase the properties in the name of ICP. ICP did not yet exist.
According to James, he flipped the referenced properties and others, eventually using the proceeds to acquire property for ICP. There is one exception where he did not flip a referenced property. One of the cashier's checks, dated January 8, 2010, references a property known as Kings Court. James purchased Kings Court prior to the formation of ICP. Subsequent to ICP's formation, James transferred Kings Court to ICP.
JAMES FORMS ICP
James formed ICP on March 5, 2010. He testified that he "was just creating it for liability coverage." Neither James nor Linda viewed ICP as an entity separate from James. To them, James was ICP and ICP was James.
Based on all the evidence adduced at trial, Linda had no knowledge of ICP or James' intent to form ICP until shortly before ICP's formation. Even James did not have much forethought of ICP. He said incorporation only crossed his mind because his property flipping "snowballed."
SPRING VALLEY BANK ACCOUNT
In March of 2010, James opened a bank account for ICP at Spring Valley Bank. James testified that the April 30, 2010 cashier's check from Fifth Third Bank, payable to Spring Valley Bank in the amount of $250,000.00, was deposited into ICP's account at Spring Valley Bank on April 30, 2010.
FUNDING AFTER DEPLETION OF THE FIFTH THIRD JOINT ACCOUNT
By the end of April of 2010, the Fifth Third Joint Account had been depleted. According to Linda, she continued to lend money through accounts she owned at U.S. Bank and PNC Bank. Attached to her Claim are the following cashier's checks. See Claimant's Exs. 17-18.
| Date | Bank | Payee | Amount |
|---|---|---|---|
| April 30, 2010 | U.S. Bank | Spring Valley Bank | $15,000.00 |
| April 30, 2010 | PNC Bank | Spring Valley Bank | $85,000.00 |
| October 20, 2010 | PNC Bank | Spring Valley Bank | $100,000.00 |
Linda introduced ICP account statements which, according to Linda, reveal corresponding deposits into ICP's account at Spring Valley Bank. See Claimant's Exs. 15 and 19.
COUNTRY CLUB APARTMENTS
In December of 2011, ICP was trying to acquire the Country Club Apartments in Indianapolis, Indiana. James believed ICP needed an additional $200,000.00 to repair the apartments, if purchased, based upon information received from a contractor named Dan Woeste. James asked Troy Clements ("Clements") to verify the repair estimates.
In the meantime, James arranged a meeting with Linda and her financial advisor about obtaining the repair funds from Linda. Clements joined James for the meeting. At that time, Clements advised that ICP needed $1,000,000.00 for the repairs. James and Linda were surprised by Clements' comments. Linda's advisor did not trust Clements and told Linda to watch Clements. Based upon the advice of her advisor, Linda decided that she would lend $200,000.00; but only to James, not ICP. She did not trust Clements and believed the funds might be at risk if deposited into ICP's operating account where they may be accessed by Clements. Linda refused to advance funds unless they were under the exclusive control of James. Thereafter, Linda issued the following personal check to James. See Claimant's Ex. 21.
| Date | Bank | Payee | Amount |
|---|---|---|---|
| December 8, 2011 | Wells Fargo Bank | James | $200,000.00 |
SECOND LENDING AGREEMENT
Linda memorialized the Wells Fargo Bank loan to James in a second lending agreement, dated December 8, 2011 ("Agreement II"). In Agreement II, Linda is identified as the lender and James is identified as the borrower. That agreement states that $200,000.00 is loaned to James "for the sole purpose of business operation expense." Agreement II never mentions ICP.
THE FINAL CHECK
The final check that Linda relies upon is an April 2, 2013 cashier's check in the amount of $40,000.00, payable to ICP. See Claimant's Ex. 23. The check is issued by PNC Bank.
| Date | Bank | Payee | Amount |
|---|---|---|---|
| April 2, 2013 | PNC Bank | ICP | $40,000.00 |
According to James, he used the $40,000.00 to pay the legal fees for ICP's bankruptcy filing. James testified that the funds were deposited into ICP's account at Spring Valley Bank or else the check was made payable to ICP's bankruptcy attorneys. The statement of financial affairs filed with the bankruptcy petition discloses a $40,000.00 payment by ICP to its bankruptcy counsel on April 2, 2013.
THIRD LENDING AGREEMENT
According to Linda, a third lending agreement ("Agreement III"), dated March 31, 2013, memorializes the PNC Bank loan to ICP. Like the first two agreements, Agreement III identifies Linda as the lender and James as the borrower. It states that $40,000.00 is loaned to James "for the sole purpose of business operation expense." Agreement III also fails to make any mention of ICP.
ICP CHECKS TO LINDA
Linda introduced proof of four checks made payable to her that were drawn on the ICP account at Spring Valley Bank. See Claimant's Exs. 25-28. James and Linda testified that these were interest payments on funds that Linda loaned to ICP. The memo line on each check includes a reference to interest.
| Date | Amount | Memo |
|---|---|---|
| June 1, 2010 | 2,000.00 | "Int on Loan" |
| June 30, 2010 | 2,000.00 | "Int on Loan" |
| December 15, 2010 | 2,000.00 | "Int Paid" |
| January 7, 2011 | 2,000.00 | "Int Paid on Loan" |
Q: Which loan was . . . the interest for?These interest payments all occurred subsequent to Linda's transfer of funds to Spring Valley Bank and prior to James and Linda's signing Agreement II and Agreement III.
A: It would have been whatever date was close to that loan. I'm not sure exactly right off hand.
Q: Okay.
A: It was just a good faith when she needed money.
Q: So basically you just were going to make the payment to her when she needed money and call that interest and go back and allocate the deduction to the loans later?
A: Exactly, yes.
Q: How did you come up with the $2,000 figure?
A: Just something that was simple and was able to pay to help her out.
LINDA'S THEORY OF THE CASE
Linda predicates her Claim upon four theories: (1) breach of contract; (2) unjust enrichment; (3) corporate liability for promoter's contracts; and (4) equity.
SUMMARY OF HOLDING
For the following reasons, the record warrants an allowed claim for unjust enrichment in the amount of $240,000.00. However, Linda failed to sustain her elevated burden of proof with respect to the balance of her Claim in the amount of $1,088,488.62.
LINDA'S APPEAL TO EQUITY
Linda concedes that a lawyer would have documented loans to ICP differently - perhaps with greater precision. However, citing 11 U.S.C. § 105(a), she believes that equity mandates the allowance of her Claim because, according to her: (1) ICP ended up with her funds; and (2) ICP would not exist without her advances.
CORPORATE DISTINCTIONS CANNOT BE IGNORED
Linda's appeal to equity ignores the importance of the legal distinction between a corporate entity and an individual. "Where money is loaned to a corporate officer in his individual capacity, the fact that he later invested it in or loaned it to the corporation does not suffice to make it a loan of the original lender to the corporation." In re J.M. Check Cashing Corp., 49 B.R. 273, 277 (Bankr. E.D.N.Y. 1985); see also Scheidmantel, 1994 WL 386855 at *3 ("[Corporate] [d]ebtor's use of the funds obtained from its principal officer does not establish that it has an obligation to [officer's parents who loaned funds to officer] personally.").
Under Ohio law, a limited liability company is separate and distinct from its individual members. In general, the members are not liable for the debts of the company. Ohio Rev. Code § 1705.48(B). Similarly, the members of the company do not possess any interest in the assets of the company. See Ohio Rev. Code § 1705.17.
Did funds travel directly from Linda to ICP? Or did they travel from Linda to James, who then transferred the funds, or proceeds thereof, to ICP? If James, acting in his individual capacity, controlled the funds before they reached ICP, then Linda's claim for those funds lies against James and not ICP. See J.M. Check Cashing Corp., 49 B.R. at 277 (a loan to a corporate officer, individually, is a personal transaction between the lender and the individual and the lender's claim is against the individual and not the bankruptcy estate of the corporation); see also Scheidmantel, 1994 WL 386855 at *2.
FOR EACH SET OF TRANSACTIONS: WHO FIRST CONTROLLED THE FUNDS AFTER LINDA?
To answer these questions, each set of lending transactions must be analyzed separately. See Scheidmantel, 1994 WL 386855 at *2-3. Specifically, the Court must examine four sets of transactions: (1) the transfer of funds from the Fifth Third Joint Account, memorialized by Agreement I; (2) the transfer of funds to Spring Valley Bank from Linda's personal accounts at PNC Bank and U.S. Bank, which transfers are not documented by any lending agreement; (3) the transfer of funds to James from Linda's personal account at Wells Fargo Bank, memorialized by Agreement II; and (4) the transfer of funds to ICP from Linda's personal account at PNC Bank, memorialized by Agreement III.
When viewing these transactions, the pivotal question is: who first controlled the funds after Linda? See J.M. Check Cashing Corp., 49 B.R. at 276-77 (checks payable to individuals who then indorsed those checks to corporation and deposited checks into corporate account constituted loans to the individuals, not the corporation).
Among other legal theories, Linda argues that she possesses a right to payment against ICP for breach of contract. The three lending agreements identify James, not ICP, as the borrower. None of the three lending agreements reference ICP. However, if ICP first controlled any funds transferred pursuant to an agreement, then case law suggests that Linda may possess a contractual claim against ICP for such funds. See Scheidmantel, 1994 WL 386855 at *2-3; Candy Braz, Inc., 98 B.R. at 372-73; J.M. Check Cashing Corp., 49 B.R. at 276-77.
JAMES AND TRACY FIRST CONTROLLED THE FIFTH THIRD JOINT ACCOUNT FUNDS
The following cashier's checks were allegedly purchased with funds from the Fifth Third Joint Account.
As previously mentioned, it appears as though the checks dated August 19, 2009, and April 30, 2010, were not drawn on the Fifth Third Joint Account.
| Date | Purchaser | Payee | Amount |
|---|---|---|---|
| May 4, 2009 | James | James | $54,481.29 |
| May 29, 2009 | Tracy | RTC Tile | $4,275.65 |
| July 10, 2009 | James | James | $7,046.66 |
| August 14, 2009 | James | James | $92,622.02 |
| August 19, 2009 | James | James | $49,791.72 |
| October 16, 2009 | James | James | $200,000.00 |
| November 12, 2009 | Tracy | Central Land Title | $6,188.19 |
| January 8, 2010 | James | James | $91,339.27 |
| February 4, 2010 | James | First Sealord Surety | $1,500.00 |
| April 14, 2010 | James | Inner City Properties | $174,000.00 |
| April 30, 2010 | James | Spring Valley Bank | $250,000.00 |
From the evidence, the Court concludes that Linda did not move any of the funds from the Fifth Third Joint Account. Rather, James and Tracy purchased all of the cashier's checks. Nor is there any evidence that they were authorized to act as Linda's agent pursuant to a valid power of attorney. Consequently, the only way for James and Tracy to move the funds was through their individual capacity as joint owners of the account. Therefore, the chain of title to the funds traveled from Linda to James or Tracy. This evidences a loan to James or Tracy, who then transferred the funds to the payees of the cashier's checks.
This assumes that Linda owned all of the funds in the Fifth Third Joint Account, which is questionable. Linda's separation agreement suggests that James owned a one-half interest in A. Hines Racing Engines at the time of the fire. Consistent therewith, Linda transferred to James a one-half interest in the business real estate and six of the nine insurance checks were jointly payable to Linda and James. None of the other three checks were paid to Linda. One was paid to James alone. Therefore, it is quite possible that James, when he withdrew funds from the Fifth Third Joint Account, was merely withdrawing his own money.
With the exception of the two checks purchased by Tracy, for relatively de minimus amounts, the chain of title to the Fifth Third Joint Account funds is wholly consistent with Agreement I, which identifies James as the borrower and makes no reference to ICP. It is further consistent with the fact that ICP did not even exist at the time that most of these checks were purchased.
Noting that all of the lending agreements limited the use of funds to business expenses, Linda argues that this language obligates ICP under the lending agreements. The Court disagrees. Linda would like the Court to believe that she and James clearly intended to limit the use of funds to ICP. But that is not the case. At the time of Agreement I, James and Linda had no idea that James would eventually form ICP. What they clearly knew, however, was that James had a history of buying and selling rental property in his individual capacity.
Even if Linda and James intended to limit the use of funds to ICP, such intent, by itself, does not give Linda a claim against ICP. See Scheidmantel, 1994 WL 386855 at *2-3. Instead, where the contractual claim is asserted by an insider, the outcome is controlled by the documentation surrounding the transaction. Id. Otherwise, it is too easy for the insider claimant and the debtor's principal to revise their characterization of the transaction to the prejudice of non-insiders.
Similar to this case, Scheidmantel involved an objection to claims filed by the parents of a corporate debtor's president. The father filed a claim supported by checks payable to his son, individually, and promissory notes signed by his son in his individual capacity. The mother also filed a claim, supported by a check payable to her son, individually. The son transferred all of the funds into the debtor's account. Although the son testified that he borrowed the funds on behalf of the debtor and also testified that he and his parents intended the funds to be used for the business, the court disallowed the claims because no document connected the debtor to the primary transactions between the parents and their son.
ICP FIRST CONTROLLED THE FUNDS TRANSFERRED FROM LINDA'S
PERSONAL ACCOUNTS TO SPRING VALLEY BANK
The following cashier's checks to Spring Valley Bank were funded by Linda's personal accounts at PNC Bank and U.S. Bank.
| Date | Bank | Payee | Amount |
|---|---|---|---|
| April 30, 2010 | U.S. Bank | Spring Valley Bank | $15,000.00 |
| April 30, 2010 | PNC Bank | Spring Valley Bank | $85,000.00 |
| PNC Bank | Spring Valley Bank | $100,000.00 |
See infra note 13.
Unlike the Fifth Third Joint Account, Linda is the sole owner of the PNC Bank account. Additionally, the PNC Bank checks identify Linda as the purchaser. Therefore, the chain of title to these funds flows directly from Linda to Spring Valley Bank. The same appears to be true for the U.S. Bank funds.
The record does not contain any statements from U.S. Bank. However, James testified that the $15,000.00 U.S. Bank check was a loan from Linda.
The Spring Valley Bank statement for ICP includes an April 30, 2010 deposit in the amount of $350,000.00. James testified that this deposit included the $85,000.00 check and the $15,000.00 check. The Spring Valley Bank statement for ICP also includes an October 20, 2010 deposit in the amount of $100,090.00. James testified that this deposit included the $100,000.00 cashier's check and some miscellaneous rent in the amount of $90.00.
The copy of the canceled check introduced by Linda is difficult to read. See Claimant's Ex. 18. It appears that it might bear a date of October 27, 2010, which is inconsistent with James' testimony that it was deposited into ICP's account on October 20, 2010. The canceled check clearly bears a "Posting Date" of October 28, 2010, which is more consistent with a cashier's check dated October 27, 2010 (Claimant's Exhibits 14 and 16 are canceled checks that each posted one business day after the date the check was issued). If the check was purchased subsequent to October 20, 2010, then there is no proof that it was deposited into ICP's account at Spring Valley Bank. ICP's October 2010 bank statement does not show any deposits subsequent to the October 20 deposit. On the other hand, the canceled check could bear a date of October 20, 2010, which is entirely consistent with the October 20, 2010 deposit into ICP's account. But if the check is dated October 20, 2010, then why did it take eight days to post? Because Perkins did not raise this issue and James testified that the check was deposited into ICP's account, the Court will assume that the check is dated October 20, 2010.
Consequently, the record reveals that ICP was the first to control the $200,000.00 transferred from Linda to Spring Valley Bank.
Perkins argues that Linda does not possess a breach of contract claim for funds she transferred without a lending agreement. Linda contends that she transferred the funds from her personal account to Spring Valley Bank pursuant to an oral agreement. James did testify that the funds were borrowed from Linda, suggesting that there was an oral agreement. However, there is no evidence of the terms of the oral agreement. If the oral agreement requires installment payments for more than one year, with no option for early payoff, then the oral agreement violates the Ohio statute of frauds. Sherman v. Hines, 652 N.E.2d 698, 701 (Ohio 1995). Even if the oral agreement is unenforceable under the statute of frauds, however, ICP is liable to Linda for unjust enrichment. See Hummel v. Hummel, 14 N.E.2d 923, 927 (Ohio 1938)("Even though a contract is unenforceable under the statute of frauds because it is not in writing, a plaintiff who has fully performed his part of the contract may maintain an action for money had and received against the other contracting party who is the recipient of a benefit to his unjust enrichment[.]"). A claim for unjust enrichment requires proof of: (1) a benefit conferred by the plaintiff upon the defendant; (2) the defendant's knowledge of the benefit; and (3) defendant's retention of the benefit under circumstances where it would be unjust to do so without payment. Hambleton v. R.G. Barry Corp., 465 N.E.2d 1298, 1302 (Ohio 1984). Linda has sustained her burden of proving these elements with respect to the funds she transferred to Spring Valley Bank from her personal accounts.
JAMES FIRST CONTROLLED THE FUNDS TRANSFERRED FROM LINDA'S
PERSONAL ACCOUNT TO JAMES
Linda issued the following personal check to James.
| Date | Bank | Payee | Amount |
|---|---|---|---|
| December 8, 2011 | Wells Fargo Bank | James | $200,000.00 |
This is consistent with Agreement II, which identifies James as the borrower and makes no mention of ICP.
ICP FIRST CONTROLLED THE FUNDS TRANSFERRED FROM LINDA'S
PERSONAL ACCOUNT TO ICP
Linda issued the following cashier's check to ICP, using funds from her PNC Bank account.
| Date | Bank | Payee | Amount |
|---|---|---|---|
| April 2, 2013 | PNC Bank | ICP | $40,000.00 |
Therefore, ICP first controlled these funds, either depositing them into its bank account or transferring them to its bankruptcy attorneys by special indorsement.
Similar to the funds transferred from Linda's personal accounts to Spring Valley Bank, this transfer from Linda's personal account to ICP also satisfies the elements of her claim for unjust enrichment. See supra note 14. The transfers from the Fifth Third Joint Account and the $200,000 transfer from Linda's personal account to James do not because they did not confer a benefit upon ICP. Rather, they conferred a benefit upon James.
CORPORATE LIABILITY FOR PROMOTER'S CONTRACTS
Linda argues that ICP is liable for its promoter's contracts pursuant to Illinois Controls, Inc. v. Langham, 639 N.E.2d 771 (Ohio 1994). In Langham, the Supreme Court of Ohio concluded that "[a] corporation is liable for the breach of a pre-incorporation agreement executed on its behalf by its promoters where the corporation expressly adopts the agreement or benefits from it with knowledge of its terms." Id. at paragraph three of the syllabus. A careful parsing of this language reveals that ICP is not liable to Linda pursuant to Langham.
1. Pre-Incorporation Agreements
Langham is limited to pre-incorporation agreements. James incorporated ICP on March 5, 2010. Agreement II and Agreement III, dated December 8, 2011, and March 31, 2013, are not pre-incorporation agreements. The only pre-incorporation agreement in the record is Agreement I, dated March 9, 2009.
2. Executed on Behalf of the Corporation
However, Agreement I does not reference ICP. The agreement in Langham is distinguishable. It expressly referenced the "[f]ormation of . . . a new company . . . referred to as 'Newco.'" Langham, 639 N.E.2d at 775. The Langham agreement had an entire section entitled "Newco Objectives." Id.
If James did not represent that he was acting on behalf of ICP, and Linda did not understand that he was acting on behalf of ICP, then Langham is inapplicable. See Nilavar v. Osborn, 711 N.E.2d 726, 740 (Ohio Ct. App. 1998)(corporation not liable under Langham where alleged promoter "did not represent, nor could plaintiff have understood, that [alleged promoter] was acting on behalf of [corporation]."). According to James, he did not think about forming ICP until the rental properties he purchased with the insurance proceeds "snowballed." At the time that Agreement I was executed, on March 9, 2009, James had not drawn any of the insurance funds from the Fifth Third Joint Account or purchased any rental property with the insurance funds. If James had no thought of forming ICP at the time that he signed Agreement I, then he did not, nor could he, sign Agreement I on behalf of ICP.
Similarly, a promoter is one "who participate[s] in bringing about the organization of an incorporated company, and in getting it in condition for transacting the business for which it is organized." Moneywatch Companies v. Wilbers, 665 N.E.2d 689, 692 (Ohio Ct. App. 1995). Was James a promoter of ICP at the time he signed Agreement I? Certainly the answer is no, given that the thought of forming ICP had not yet crossed his mind.
3. Express Adoption of Agreement or Receipt of Benefits
There is no proof in the record that ICP formally adopted Agreement I.
Linda would like the Court to believe that ICP received all of the benefits under Agreement I. The Court disagrees. The sole benefits of Agreement I were the funds from the Fifth Third Joint Account. The Court has already determined that James, not ICP, was the recipient of these funds. Thereafter, James used the majority of the funds to purchase property in his own name. If ICP received any of the funds that James withdrew from the Fifth Third Joint Account, it was because James chose to advance those funds, or the proceeds thereof, to ICP. The Court might view this issue differently if: (1) Agreement I referenced ICP; and (2) Linda, not James, transferred the funds from the Fifth Third Joint Account directly to ICP. But that is not what happened.
4. What Funds Were Transferred Prior to ICP Incorporation?
Apart from the Langham factors, there is a fundamental problem with Linda's attempt to hold ICP liable for a pre-incorporation loan. It is far from clear that Linda funded the alleged loan to ICP. In fact, two of the checks purportedly drawn on the Fifth Third Joint Account, totaling $299,791.72, were drawn on another account jointly owned by Linda, James, and Tracy. There is no evidence that these funds were owned exclusively by Linda. See Estate of Cowling, 847 N.E.2d 405, 409-10 (Ohio 2006)(joint account is owned by parties in proportion to their net contributions and presumption of equal ownership applies if no proof of net contributions). Moreover, there are at least two deposits to the Fifth Third Joint Account from unidentified sources other than the insurance proceeds. There is no proof that Linda owned the funds used to make these deposits. Most importantly, however, is the fact that James appears to have been the owner of one-half of all the insurance proceeds, as the one-half owner of A. Hines Racing Engines. Given the significant commingling of funds, it is unclear what funds, if any, represented by the pre-incorporation checks were owned by Linda.
See supra note 9.
CONCLUSION
The record created by Linda is not impressive. Originally, she filed a claim for $340,000.00, supported by checks totaling $385,000.00. Linda provided no explanation for the difference. Then Linda filed an amended claim for $1,228,488.62, supported by checks totaling $1,331,244.80. Again, Linda provided no explanation for the difference. At the evidentiary hearing, Linda introduced an additional check in the amount of $40,000.00 (increasing the disparity between the amended claim and the supporting checks) and three lending agreements in the aggregate amount of $1,028,488.62. She never explained why she did not produce the lending agreements earlier. Linda never explained why she allegedly issued checks totaling $1,371,244.80 when the lending agreements only called for the advance of $1,028,488.62. Further compounding the problem, Linda also never explained exactly how she calculates her amended claim. Is it based upon checks alone? If yes, which ones? Is accrued interest included? If yes, how is the interest calculated? Given all these discrepancies, and with the heightened burden of proof resting squarely on the shoulders of an insider, one would think that greater care would have been taken in preparation of the claims, especially one this significant.
Nor is the Court impressed with James' characterization of some of the transactions. James testified that he and Linda intended all of the transfers to constitute loans from Linda to ICP. Yet, when asked to detail the personal funds he invested in ICP, James referenced "the money I made" from the sale of the properties purchased with funds from the Fifth Third Joint Account. Tr. at 101:17 (emphasis added). James was not referencing the rentals he owned prior to the fire because he cited those as a separate asset he tapped for additional investment in ICP. In an awkward attempt to distinguish his post-fire properties from his pre-fire properties, James referred to the former as his "personal" properties and the latter as his "personal personal" properties.
James testified as follows:
Q: [D]o you recall what this check was for?
. . .
Q: Could it have been a closing for one of the properties you owned individually?
A: No.
Q: How do you know that?
A: Because I owned my individual properties prior. Are you talking about my personal property?
. . .
A: Before Inner City was created or are you talking about my personal personal stuff?
As mentioned previously, there is a reason that an insider bears an elevated burden of proof. Otherwise non-insider creditors might be prejudiced. Unfortunately, after considering the totality of circumstances, the Court is left with the definite impression that Linda and James have characterized some of the transactions, particularly those related to the Fifth Third Joint Account, in a way that prejudices ICP's non-insider creditors and unfairly benefits Linda, and possibly James.
For the reasons stated herein, the Objection will be SUSTAINED in part. Linda possesses a right to payment from ICP in the amount of $240,000.00. This represents the $200,000.00 that Linda transferred from her personal accounts to Spring Valley Bank and the $40,000.00 that Linda transferred from her personal account to ICP. ICP was the first, after Linda, to control these funds. At the very least, Linda established that ICP was unjustly enriched by these transfers.
The balance of her proof of claim, in the amount of $1,088,488.62, will be disallowed because Linda did not sustain her elevated burden of proof as an insider of ICP. Her claim for relief to recover these funds, if any, lies against James under state law, not ICP.
The Court will enter an order to this effect.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Jeffery P. Hopkins
United States Bankruptcy Judge Dated: March 25, 2016 Copies to: Default List
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Tr. at 83:11-25 (emphasis added).