Opinion
23-10337
05-05-2023
In Re RAYMOND JOSEPH SCHNEIDER Debtor and Debtor-In-Possession
Opinion is not intended for publication
Chapter 11
ORDER DENYING EMERGENCY MOTION OF THE HUNTINGTON NATIONAL BANK FOR THE APPOINTMENT OF A CHAPTER 11 TRUSTEE PURSUANT TO 11 U.S.C. § 1104(A) [DOCKET NUMBER 13]
BETH A. BUCHANAN UNITED STATE BANKRUPTCY JUDGE
This matter is before this Court on the Emergency Motion of The Huntington National Bank for the Appointment of a Chapter 11 Trustee Pursuant to 11 U.S.C. § 1104(a ) [Docket Number 13 and 15] (the "Motion to Appoint a Trustee"), Creditor General Electric Credit Union's Objection [Docket Number 31], and Debtor Raymond Schneider's Response [Docket Number 34].
This proceeding arises in a case referred to this Court by the Standing Order of Reference entered in this District and is determined to be a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).
An expedited evidentiary hearing was held on March 15, 2023 and March 17, 2023. The parties stipulated to the admission of the exhibits filed with the Court [Docket Numbers 35, 36, 37, 38, and 50]. The following are this Court's findings of fact and conclusions of law.
I. Background Facts
Raymond Joseph Schneider, the debtor in this case, is a 72-year old entrepreneur. His current ventures include roughly 70 business enterprises or projects in an array of areas, including nursing homes, pet boarding and animal hospitals, storage facilities, apartment complexes, and other real estate ventures.
Mr. Schneider started out in the nursing home business. It was in 1999, while in the process of acquiring a nursing home in Columbus, Ohio, that Mr. Schneider first met Harold Sosna. The two developed a partnership and from there developed five nursing home facilities over the next 18 years. The facilities were managed by Mr. Sosna's company, Premier Health Care Management, Inc. ("Premier"). Mr. Sosna also owned other nursing home facilities managed by Premier in which Mr. Schneider had no interest (the "JBZ Group") [Huntington Ex. B, pp. 3-4]. Mr. Sosna was primarily responsible for arranging the financing for the Premier managed nursing home entities, including the entities in which Mr. Schneider and Mr. Sosna each held a 50% interest (the "Keller Group" and together with the JBZ Group, the "Premier Managed Entities") [Id.].
On November 30, 2018, Mr. Sosna moved the Premier Managed Entities' lending relationship to The Huntington National Bank ("Huntington"). Huntington, and other lenders, provided a $71,191,999.90 term loan and a $5,000,000 line of credit (collectively, the "Loans") to the Premier Managed Entities [Huntington Ex. A, p.2]. While not entirely clear from the record, it appears that Mr. Schneider originally guaranteed only the portion of the Loans relating to the Keller Group (in which he held a 50% interest)-which amounted to approximately 46% of the total obligation [Huntington Ex. B, pp. 3-5]. This was similar to the loan structure that the parties had with their previous lender, Fifth Third Bank. [Id., p. 4]. At some later point, however, Huntington revised the loan documents and Mr. Schneider signed a guaranty for 100% of the Loans [Id., p. 5].
According to an affidavit from Mr. Sosna, Huntington developed cash flow concerns regarding the Premier Managed Entities in October 2019, ultimately declaring the Loans in default and moving the lending relationship to the bank's workout department [Debtor Ex. 1, p. 4]. It was at this point in time that Mr. Sosna began a check kiting scheme, [Id.], which eventually resulted in losses of approximately $59 million [Huntington Ex. B., p. 3]. Mr. Sosna was indicted, convicted, and sentenced to prison for his crimes.
Mr. Schneider, who describes himself as a silent partner in the Keller Group who was not involved in the day-to-day operations [Huntington Ex. B, p. 5], testified that he was not aware of the loan defaults with Huntington or the check kiting scheme until May 26, 2020, when he received a notice from Mr. Sosna's attorney that Mr. Sosna had been arrested for kiting. Thereafter, on June 5, 2020, Huntington filed a complaint against Mr. Sosna and his wife, and Mr. Schneider seeking to enforce the guarantees [Huntington Ex. A]. The state court entered a judgment in the amount of $75,599,410 plus accruing interest from July 28, 2020 against Mr. Schneider on December 13, 2022 [Huntington Ex. C] and Huntington sought the appointment of a receiver over Mr. Schneider's assets on December 19, 2022 [Huntington Ex. G].
The balance currently owed on the judgment is approximately $27 million. Motion to Appoint a Trustee, ¶ 1.
An Amended Judgment Entry was entered on February 15, 2023, which provided that the judgment was a final appealable order [Huntington Ex. D].
Mr. Schneider is appealing the judgment [Debtor Ex. 77] and has also filed a complaint against Huntington and certain of its officers and employees for their alleged negligence in fostering and enabling Mr. Sosna's manipulation of funds [Debtor Ex. 78].
Following failed settlement negotiations with Huntington, Mr. Schneider filed a chapter 11 bankruptcy petition on March 2, 2023. The petition was a "bare bones petition" filed to halt the garnishment of Mr. Schneider's investment accounts, which he testified would have resulted in $3.5 to $4.5 million in tax liability if Huntington had been successful in liquidating the accounts. Six days later, Huntington filed its emergency Motion to Appoint a Trustee. As it asserted in the state court motion to appoint a receiver, Huntington alleges that Mr. Schneider has engaged in fraudulent transfers and other tactics to remove his assets from the reach of Huntington. Huntington maintains that a chapter 11 trustee is essential to ensure the thorough, independent investigation and prosecution of the alleged fraudulent conveyances and to preserve the integrity of the bankruptcy process.
Mr. Schneider disputes any allegations of fraud or other wrongdoing. He asserts that Huntington's Motion to Appoint a Trustee is an effort to pressure him against pursuing his state court complaint against Huntington. Mr. Schneider notes that-with the exception of Huntington-the numerous other loans that he guarantees are current and the underlying projects are performing well. He further maintains that any asset transfers were in connection with legitimate estate planning, which he began in April 2018 well before the issues with Huntington arose. Regardless, he intends to propose a 100% plan to repay his creditors so there would be no need to pursue or recover any alleged fraudulent transfers.
II. Legal Analysis
Huntington seeks the appointment of a chapter 11 trustee pursuant to 11 U.S.C. § 1104(a), which provides that on request of a party in interest or the United States trustee, a chapter 11 trustee shall be appointed:
(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or
(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor. 11 U.S.C. § 1104(a). The question of whether a trustee should be appointed in a chapter11 case must be considered by the court on a case-by-case basis considering a totality of the particular facts and circumstances. In re Thomas, 596 B.R. 350, 359-60 (Bankr. W.D. Tenn. 2019) (citing In re Sharon Steel Corp., 871 F.2d 1217, 1226 (3d Cir. 1989)). "The decision of whether to appoint a trustee is vested in the discretion of the bankruptcy court." In re Natron Corp., 330 B.R. 573, 592 (Bankr. W.D. Mich. 2005).
While Section 1104(a) gives bankruptcy courts the power to appoint a chapter 11 trustee, "'it is settled that appointment of a trustee should be the exception, rather than the rule.'" Thomas, 596 B.R. at 359. "There is a strong presumption in Chapter 11 cases that the debtor-in-possession should be permitted to remain in control . . . absent a showing of need for the appointment of a trustee." Id. at 359-60 (quoting Natron Corp., 330 B.R. at 591). This presumption is based on the facts that the debtor-in-possession has a strong sense of familiarity with the business and no trustee expense will be required, both of which will likely benefit the creditors as well as the estate. Id. (citing In re Marvel Entertainment Group, 140 F.3d 463, 470 (3rd Cir. 1998)). Furthermore, as the fiduciary of creditors, the debtor-in-possession already has an obligation to refrain from acting in a manner that could damage the estate or hinder a successful reorganization. Id.
For these reasons, appointing a trustee in a chapter 11 case is considered an extraordinary remedy. Thomas, 596 B.R. at 359-60. The parties agree that Huntington, as the movant, has the burden of showing by clear and convincing evidence that the appointment of a trustee is warranted. "For evidence to be 'clear and convincing' it must 'produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established, evidence so clear, direct and weighty and convincing as to enable [the factfinder] to come to a clear conviction, without hesitancy, of the truth of the precise facts in issue.'" In re Nat'l Staffing Servs., LLC, 338 B.R. 31, 33 (Bankr.N.D.Ohio 2005) (quoting Cruzan by Cruzan v. Director, Missouri Dept. of Health, 497 U.S. 261, 285 n.11 (1990)).
A. Section 1104(a)(1)-Appointing a Trustee for "Cause"
Huntington maintains that "cause" exists for appointment of a chapter 11 trustee pursuant to § 1104(a)(1) of the Bankruptcy Code. Specifically, Huntington asserts that prior to filing his bankruptcy petition, Mr. Schneider fraudulently conveyed and manipulated his assets to avoid the payment of the $27 million judgment owed to Huntington, that this fraudulent conduct demonstrates incompetence and gross mismanagement within the meaning of § 1104(a)(1), and that Mr. Schneider's conflict of interest in unwinding his fraudulent conduct will put him at cross-purposes with the interest of his creditors. Huntington acknowledges that it does not have all of the details of the fraud, but Huntington identifies three "smoking guns" that it contends demonstrate fraud: first, a roughly $60 million drop in net worth from June 1, 2019 to September 1, 2021; second, a significant increase in secured debt without a corresponding increase in assets; and third, a transfer of assets during this same time period for which he did not receive fair consideration.
1. Reduction in Personal Net Worth
As its first "smoking gun" of Mr. Schneider's fraudulent activity, Huntington notes that Mr. Schneider's net worth dropped dramatically in the time period following Huntington's efforts to collect on Mr. Schneider's guaranty. Specifically, there was a $60,229,300 drop in his net worth from June 1, 2019 to September 1, 2021.
Much of the evidence at the hearing regarding the changes in Mr. Schneider's net worth pertained to three personal financial statements ("PFSs"): (1) a January 25, 2018 PFS addressed to Capital Point [Huntington Ex. L] (the "2018 PFS"); (2) a June 1, 2019 PFS addressed to Huntington [Huntington Ex. E] (the "2019 PFS"); and, (3) a September 1, 2021 PFS addressed to Capital Partners [Huntington Ex. F] (the "2021 PFS"). Mr. Schneider testified that he personally prepared the PFSs without assistance from a financial professional, as he has been doing for approximately 30 years using the same or similar computer program. The 2018 PFS was prepared for a broker and was not related to any transactions with Huntington. The 2019 PFS was provided to Huntington at Huntington's request. The 2021 PFS was provided to Huntington's counsel by Mr. Schneider's non-bankruptcy counsel as part of on-going negotiations between Huntington and Mr. Schneider regarding the debt owed to Huntington.
On their face, the PFSs reflect the following:
| 2018 PFS | 2019 PFS | 2021 PFS | |
| Total Assets | $121,886,800 | $151,959,300 | $148,213,000 |
| Total Liabilities | $65,319,000 | $74,005,000 | $130,488,000 |
| Net Worth | $56,567,800 | $77,954,300 | $17,725,000 |
Indeed, the PFSs do appear to show a precipitous drop in Mr. Schneider's net worth of roughly $60 million from 2019 to 2021. However, Mr. Schneider testified that in his preparation for the hearing, he noticed a "math error" with respect to the 2019 PFS. Specifically, the schedules to the 2019 PFS reflect bank debt of $34,965,000 but the numbers listed on that schedule actually totals $77,061,000. Making this adjustment, Mr. Schneider's June 1, 2019 net worth drops to $35,858,300 decreasing the change in his net worth from 2019 to 2021 to roughly $18 million.
The bank debt reference is from the schedule on the third page of the PFSs captioned "Banks Where Credit Has Been Obtained."
| 2018 PFS | 2019 PFS | 2021 PFS | |
| Total Assets | $121,886,800 | $151,959,300 | $148,213,000 |
| Total Liabilities $ | 65,319,000 | $116,101,000 | $130,488,000 |
| Net Worth | $56,567,800 | $35,858,300 | $17,725,000 |
A change in net worth, however, is merely a reflection of increases or decreases in assets and/or liabilities on the balance sheet. As such, to understand whether the decline in Mr. Schneider's net worth is a result of fraud, we need to examine the changes in the assets and liabilities. Huntington identifies two such changes which it believes demonstrate fraud: an extraordinary increase in secured debt and the transfer of significant assets.
2. Leveraging of Assets
As its second "smoking gun" of Mr. Schneider's fraudulent activity, Huntington asserts that that there was a substantial increase in secured debt between 2019 and 2021 without any corresponding increase in other assets-leaving one to question what happened to these new loan proceeds. Huntington points to two categories of increased secured debts on Mr. Schneider's PFSs: (1) a $9,101,000 increase in secured loans against Mr. Schneider's Merrill Lynch account, and (2) a $66,340,000 increase in secured bank debt.
a. Increased Merrill Lynch Loans
In his 2021 PFS, Mr. Schneider values his Merrill Lynch account at $18,200,000 with loans against the account of $14,950,000-compared to a value of $19,454,400 and loans of $5,849,000 in his 2019 PFS. Mr. Schneider testified regarding the volatility and general decline in the stock market between 2019 and 2021. He further testified that the increased borrowing against his Merrill Lynch account during this period were used for the most part to fund business shortfalls due to COVID and to a lesser extent to fund growth and development of new projects, including the RED. While he received some PPP money, Mr. Schneider needed to borrow more to keep his businesses afloat. Mr. Schneider also testified that the businesses he owned jointly with Mr. Sosna were sold by the state court receiver following the default on the Huntington Loans. As such, he had no further income from those businesses, which also impacted his cash flow. Mr. Schneider acknowledged on cross examination though that he did not have any documentation with him to substantiate his testimony.
The RED is discussed in more detail below.
Mr. Schneider's explanation regarding use of the Merrill Lynch loans for business operations during COVID and for development, while not accounted for dollar for dollar, is not out of line with his historic borrowings. Mr. Schneider's 2018 PFS reflects that his Merrill Lynch account was worth $16,800,400 with loans against it of $10,455,00 for a loan-to-value of 62% versus a 2021 PFS Merrill Lynch balance of $18,200,000 with loans of $14,950,000 for an 82% loan-to-value. Given the number and size of Mr. Schneider's business holdings, the volatility of the market, and the impact of COVID, Mr. Schneider's testimony regarding the increase in debt and its corresponding uses is plausible. Additionally, one would not necessarily expect to see an increase in assets directly tied to these borrowings if, as Mr. Schneider testified, he was funding shortfalls over the short-term with the hopes of keeping his companies in business.
b. Increased Secured Bank Debt
The change in secured bank debt is a bit more complicated to analyze. Huntington argues that there was a $66,340,000 increase in secured bank debt between the 2019 PFS and the 2021 PFS with no corresponding increase in assets. Huntington bases the increase in secured debt on the schedules to the PFS entitled "Banks Where Credit Has Been Obtained," which show as follows:
| 2019 PFS | 2021 PFS |
| $34,965,000 | $101,305,000 |
Huntington argues that Mr. Schneider has little to no explanation for how these loan proceeds were used. During closing argument, Huntington presented its attempt to explain where the financing went based on its analysis of Mr. Schneider's exhibits relating to his 70 business entities. Based on its analysis, Huntington identified eleven entities that obtained financing after 2019. The loans to these eleven entities totaled $33,313,035-far short of the $66,340,000 of increased secured bank debt from 2019 to 2021. Huntington argues that this is not sufficient to get to the bottom of where the money went.
The eleven entities are: 9617 Kenwood Road Development LLC, Red Corner LLC, 5027 and 5055 Madison Road LLC, Gatherings of Blue Ash LLC, 5150 East Galbraith Road LLC, Techwoods Circle Road LLC, Circle Development of Cincinnati LLC, Boston Road LLC (MA), Montclair Investors LTD, Northern Kentucky Assisted Living, and North Shore Road LLC.
For his part, on direct examination Mr. Schneider testified specifically about two projects that were in a development, construction and/or renovation phase: the RED-a three building apartment complex with a parking structure, and West Chester-part of his storage facility business. The testimony was a bit confusing as the examination switched between the 2019 PFS and 2021 PFS but the gist of the testimony was that the secured debt on the RED increased from $24,996,000 on the 2019 PFS to $44,700,000 on the 2021 PFS. Similarly, the secured debt for West Chester increased from $560,000 on the 2019 PFS to $31,700,000 on the 2021 PFS.
See 2019 PFS Schedule "Banks Where Credit Has Been Obtained."
See 2021 PFS Schedule B.
See 2019 PFS Schedule C.
See 2021 PFS Schedule B.
On cross examination, Mr. Schneider affirmed that the increased borrowings were put back into his businesses. Specifically, Mr. Schneider mentioned the RED, the Red Corner, and an animal hospital in Boston. He also mentioned the Gatherings of Blue Ash, LLC, which was a property he remodeled into a banquet hall. Again, Mr. Schneider acknowledged that he did not have any documentation with him to substantiate these investments.
From Mr. Schneider's testimony, it would appear that at least three projects that were under development during this time period-the RED, West Chester, and the Red Corner-alone would account for $60,544,000 of the increased secured bank debt as reflected below.
Based on the testimony and the PFSs, it appears that Red Corner was a project that came under development after the 2019 PFS. On his 2021 PFS, Mr. Schneider reflects a $10,500,000 value for the property with a mortgage balance of $9,700,000. See 2021 PFS Schedule B.
| 2019 PFS Debt | 2021 PFS Debt | Increase in Debt | |
| the RED | $24,996,000 | $44,700,000 | $19,704,000 |
| West Chester | $560,000 | $31,700,000 | $31,140,000 |
| Red Corner | $0 | $9,700,000 | $9,700,000 |
| Total | $25,556,000 | $86,100,000 | $60,544,000 |
While the value of these projects did not increase dollar for dollar with the loan amounts, Mr. Schneider testified that the full step up in value is not recognized until the project is complete.
| 2019 PFS Value | 2021 PFS Value | Increase in Value | |
| the RED | $31,500,000 | $47,000,000 | $15,500,000 |
| West Chester | $3,500,000 | $35,000,000 | $31,500,000 |
| Red Corner | $0 | $10,500,000 | $10,500,000 |
| Total | $35,000,000 | $92,500,000 | $57,500,000 |
The problem is the parties' arguments and presentation of evidence do not lend themselves to an "apples to apples" comparison. Huntington bases the increase in secured debt on the schedules to the PFSs entitled "Banks Where Credit Has Been Obtained." As previously noted, the 2019 schedule for "Banks Where Credit Has Been Obtained" shows total debt of $34,965,000 but the numbers listed on that schedule actually total $77,061,000. Huntington appears to disregard the $42,096,000 math error in its analysis of the change in secured bank debt.
Moreover, the $101,305,000 total "Banks Where Credit Has Been Obtained" figure on the 2021 PFS, while added correctly, is not the debt figure carried forward on the liability side of the balance sheet. The figure used on the 2021 PFS is the $113,736,000 figure reflected on Schedule B. This issue was not raised by the parties at the hearing making it difficult for this Court to fully reconcile the issue.
Regardless, the increase in secured bank debt based on the parties' arguments ranges from $24,244,000 to $66,340,000. As discussed above, Mr. Schneider has accounted for all or virtually all of the increase in secured bank debt. As such, Huntington has failed to establish, by clear and convincing evidence, that Mr. Schneider fraudulently secreted away the proceeds from millions of dollars in secured bank debt.
3. Transfer of Assets
That leaves Huntington's third "smoking gun"-transfer of assets. Huntington contends that it has presented clear and convincing evidence of prepetition fraudulent transfers, which, it maintains, requires appointment of a chapter 11 trustee.
Huntington first argues that Mr. Schneider acted with actual intent to defraud Huntington by transferring millions of dollars in business holdings into family gift trusts. By definition, there was no consideration for these transfers. Huntington maintains that these transfers took place after Mr. Schneider knew about Mr. Sosna's check kiting scheme and after Huntington commenced its collection action on June 5, 2020. As such, Huntington states that any transfers that took place after June 2020 must have been made with actual intent to hinder or delay Huntington's collection efforts.
Huntington also asserted that Mr. Schneider transferred a piece of real estate identified as "Eastgate." Huntington notes that the Eastgate property was valued at $1,400,000 on Schedule D of Mr. Schneider's 2019 PFS with no mortgage against it but the property no longer appears on Schedule D of Mr. Schneider's 2021 PFS. Mr. Schneider testified that the majority of the Eastgate property was taken by eminent domain. He received some proceeds for the property, which he reinvested in other businesses. What was left of the property, is reflected on his 2021 PFS under Schedule B "Office-EG." Huntington appears to have accepted this explanation as it did not reference this "transfer" as part of its closing argument. Regardless, Huntington did not present any evidence to refute Mr. Schneider's explanation for the reduction in value of this asset on his 2021 PFS or to otherwise establish any fraud with respect to the Eastgate property.
Additionally, Huntington contends that the size of the gifts is further evidence of actual intent. By Huntington's calculations, Mr. Schneider transferred business interests worth between $16 million and $85 million to the family gift trusts. Huntington argues that Mr. Schneider is no "country bumpkin." He is a shrewd and successful businessman who knew what he was doing when he intentionally transferred those assets out of Huntington's reach.
If not actual fraud, Huntington next claims that the gifts to the family trusts where constructively fraudulent transfers. Again, Huntington notes that Mr. Schneider did not receive any value in exchange for the transfer of his business interests to the gift trusts. Additionally, Huntington maintains that it has established each of the three fragile financial condition tests necessary to prove constructive fraud: insolvency, possessing unreasonably small capital, or the debtor's belief that he would incur debts beyond his ability to repay following the transfer.
Mr. Schneider denies that the transfers to the gift trusts are evidence of fraud. He testified that the transfers were part of a legitimate estate plan that began in April 2018-well before he became aware of Sosna's check kiting scheme or the June 5, 2020 lawsuit that was filed against him by Huntington. As a person approaching his 70's and nearing retirement, he felt it was prudent to prepare an estate plan and he hired the Vorys law firm to assist him with the plan. Because of his numerous business and real estate holdings, the estate plan was complex and took time to complete. Mr. Schneider denied that the estate plan was intended to thwart Huntington's collection efforts. He stated that he believed the Huntington Loans were fully secured based on appraisals obtained at the time the Huntington Loans were taken out. In his opinion, it was Huntington's imprudent rush to liquidate the collateral and the extraordinary expenses related to the sale process that resulted in his liability for the shortfall following the sale of the collateral.
Mr. Schneider also noted that he has substantial holdings in marketable securities and personal real estate that were not transferred to any trusts-further evidence that he was not attempting to secret his assets away from the claims of his creditors.
Regardless, Mr. Schneider stated that it is his intention to propose a 100% plan to pay creditors and that he believed that he can, with time, pay his obligations to Huntington.
While Huntington raises very legitimate concerns regarding Mr. Schneider's transfers to the family gift trusts, Huntington's proof falls short of establishing fraud by clear and convincing evidence. Specifically, Huntington failed to prove a critical element of its fraudulent transfer claim-the date of the allegedly fraudulent transfer.
Huntington's sole proof of the date of the allegedly fraudulent transfers is a document entitled "Ray Schneider Estate Planning Analysis" [Huntington Ex. J.] (the "Analysis"). The Analysis, which is a one and a half page document prepared by Mr. Schneider's bankruptcy counsel, summarizes Mr. Schneider's original ownership interests in three business entities and his ownership interests in these same entities on December 31, 2020. The Analysis also reflects a "value" for each of the three business entities as of December 19, 2020.
Huntington argues that the Analysis is definitive proof that Mr. Schneider transferred his ownership interests in these three entities on December 19, 2020. Huntington references the December 19, 2020 value date in the Analysis and surmises that the entities were appraised for tax purposes as of that date. Huntington concludes that it would make no sense to show a value for these entities on December 19, 2020 unless that was the date of the transfer of those interests to the gift trusts.
Mr. Schneider's testimony did nothing to support Huntington's hypothesis. To be fair, Mr. Schneider's testimony regarding the dates of the transfers was less than helpful. Mr. Schneider testified that the estate plan was pretty complicated, and it took some time to complete. He worked with his attorneys, accountants, and the IRS throughout the process. Mr. Schneider explained that his trust documents were roughly 250 pages long and he did not bring the documents with him to the hearing because he was not asked to do so.
With respect to the dates of the transfers, Mr. Schneider's repeated testimony was that the transfers occurred sometime between April 2018 when he began his estate planning process and December 2020 when the estate plan was complete. He testified that there were transfers made all along the way. On redirect, when prompted by his counsel, Mr. Schneider affirmed that the assets were transferred over a period of time in order to satisfy certain IRS regulations.
Similarly, Mr. Schneider would not concede that the December 19, 2020 date was the appraisal date for the three entities. As with the transfer dates, he testified that the appraisals were prepared sometime between April 2018 when he began his estate planning process and December 2020 when the estate plan was complete. He reiterated that December 2020 was when the entire process was complete, and he received his final trust documents.
Huntington chastises Mr. Schneider for not providing information on the precise dates of the transfers at the hearing. Huntington argues that Mr. Schneider knew this was most important issue before the court yet failed to provide any evidence at the hearing to refute Huntington's supposition that the transfers took place on December 19, 2020. Huntington contends that this is a long standing issue and that it has been seeking information regarding the transfers in state court for months.
While this Court appreciates the exigencies of the circumstances leading up to the filing of the petition and the Motion to Appoint a Trustee, it would appear that the motion was brought prior to any material discovery or investigation of the transactions at issue. In mid-January of 2023, Huntington propounded extensive interrogatories and requests for production of documents in the state court action [Huntington Ex. I]. It is this Court's understanding that Huntington did not receive much in the way of a response to its discovery requests prior to the filing of the petition- whether that was by agreement or otherwise. Regardless, Huntington chose to file the Motion to Appoint a Trustee and seek expedited consideration of the relief requested based on the information that it had.
It is Huntington's burden to establish fraud by clear and convincing evidence. "This burden does not shrink or shift." Official Comm. Of Asbestos Claimants v. G-I Holdings, Inc. (In re G-I Holdings, Inc.), 385 F.3d 313, 320 (3rd Cir. 2004). Huntington's position regarding the date of the transfer is based on unsubstantiated assumptions about the meaning of the December 19, 2020 "value" date in the Analysis. Conjecture is not clear and convincing evidence. As such, Huntington has failed to meet its burden on this critical issue.
This Court recognizes that its conclusion may seem harsh. However, the date of the transfer is a pivotal moment in a fraudulent transfer analysis. The date of the transfer is a benchmark for determining what Mr. Schneider knew or did not know at the time the transfers were made. This Court cannot judge Mr. Schneider's credibility or determine his intent, including his assertion that the transfers were legitimate estate planning transactions, without some context for the circumstances at or near the time of the transfers.
Additionally, this Court is required to evaluate Mr. Schneider's financial condition at or near the time of the transfers to determine whether he was insolvent, possessed unreasonably small capital, or believed he would incur debts beyond his ability to repay. See e.g., Limor v. Anderson (In re Scarbrough), 2019 Bankr. LEXIS 933, at *17, 2019 WL 1418698, at *7 (6th Cir. B.A.P. Mar. 28, 2019). This Court cannot simply assume that Mr. Schneider was insolvent, possessed unreasonably small capital, or believed he would incur debts beyond his ability to repay based on the three snapshots in time reflected by Mr. Schneider's 2018, 2019, and 2021 PFSs, his current asset analyses [Huntington Ex. K, Debtor Ex. 4 and 90], or even the fact that he has filed bankruptcy and is presently unable to repay Huntington without knowing when the transfers occurred. Id. ("The Trustee cannot rely on evidence too far in the past or future, because such evidence does not paint a clear picture regarding the Debtor at the time of the transfer itself.").
Other matters regarding Mr. Schneider's financial condition at or near the time of the transfers may also impact this Court analysis of Huntington's fraudulent transfer claim. For example, Mr. Schneider's unrefuted testimony was that the Premier Managed Entities had an appraised value well in excess of the Huntington Loans. Up until the time the Premier Managed Entities were sold at a forced sale, Mr. Schneider very well may have had a reasonable expectation that there would be no shortfall that he would be required to cover-or at least that it may have been a lesser shortfall that was within his means to repay.
Along a similar line, it would appear that a significant amount of Mr. Schneider's debts are contingent liabilities based on his guaranty of his companies' obligations. "Contingent liabilities are uncertain and frequently never become actual liabilities." In re Oakes, 1993 U.S. App. LEXIS 23078, at *10, 1993 WL 339725, at *3 (6th Cir. Sept. 3, 1993) (citing Matter of Xonics Photochemical, Inc., 841 F.2d 198, 200 (7th Cir. 1988). As such, contingent liabilities are not included at face value for determining insolvency. Oakes, 1993 U.S. App. LEXIS 23078, at *9, 1993 WL 339725, at *3. Rather, contingent liabilities must be discounted "'by the probability that the contingency will occur and the liability will become real.'" Oakes, 1993 U.S. App. LEXIS 23078, at *10, 1993 WL 339725, at *3 (quoting In re Sierra Steel, Inc., 96 B.R. 275, 279 (9th Cir. B.A.P. 1989). Again, such probabilities relating to Mr. Schneider's contingent liabilities would need to be evaluated based on relevant conditions at or near the time of the transfers.
But perhaps most significantly, Huntington is seeking an extraordinary remedy-a remedy that will have significant impact on multiple creditors and other constituents in this case. While this Court has "discretionary authority to determine whether conduct rises to the level of 'cause' [sufficient to warrant the appointment of a trustee,]" Dalkon Shield Claimants v. A.H. Robins Co., Inc., 828 F.2d 239, 242 (4th Cir. 1987), once "cause" is found, this Court has no choice but to appoint a trustee. As such, this Court is holding Huntington to its burden to present "evidence so clear, direct and weighty and convincing as to enable [this Court] to come to a clear conviction, without hesitancy" that Mr. Schneider has committed fraud. Nat'l Staffing Servs., LLC, 338 B.R. at 33. On the record before this Court, Huntington has failed to do so.
B. Section 1104(a)(2)-Appointing a Trustee in the Interests of Creditors
Next, Huntington raises 11 U.S.C. § 1104(a)(2) as a basis for appointing a chapter 11 trustee. Section 1104(a)(2) provides that the court shall appoint a trustee in a chapter 11 case if it is in the interests of creditors and the estate.
Unlike § 1104(a)(1), § 1104(a)(2) does not require a finding of fault and, accordingly, a court may appoint a trustee even if no "cause" exists. Natron Corp., 330 B.R. 573, 592 (Bankr. W.D. Mich. 2005). This provision contemplates a flexible approach providing the court with the discretion to appoint a trustee when to do so would serve the parties' and the estates' interests. Thomas, 596 B.R. at 362; Nat'l Staffing Servs., 338 B.R. at 33. It is necessarily an equitable consideration where "courts eschew rigid absolutes and look to the practical realities and necessities inescapably involved in reconciling competing interests. Moreover, equitable remedies are a special blend of what is necessary, what is fair and what is workable." Nat'l Staffing Servs., 338 B.R. at 34 (internal quotation marks and citations omitted).
In balancing the equities, courts consider various factors including:
(1) the trustworthiness of the debtor; (2) the debtor's past and present performance and prospect for rehabilitation; (3) whether the business community and creditors of the estate have confidence in the debtor; and (4) whether the benefits outweigh the costs.Thomas, 596 B.R. at 363 (internal quotation marks and citations omitted). As with § 1104(a)(1), the "[a]ppointment of a trustee under § 1104(a)(2) is within the sound discretion of the bankruptcy judge." Id.
The grounds Huntington raises under § 1104(a)(2) are very similar to the grounds Huntington asserted under § 1104(a)(1). Huntington reiterates its concern about the lack of independent investigation of the potential fraudulent transfer claims regarding the gifts to the family trusts. Huntington acknowledges that an examiner would be a less intrusive means to investigate these claims but indicates that there are other risks to Huntington if a chapter 11 trustee is not appointed.
First, Huntington fears that Mr. Schneider will file a plan providing for minimal payments for four to five years with a balloon at the end and, if the plan fails, it will be too late to pursue the fraudulent transfer claims. If a chapter 11 trustee is appointed, the trustee-unlike an examiner- would have the authority to pursue the fraudulent conveyance if the trustee determines that would be appropriate and in the best interest of the estate.
Second, a trustee would provide much needed oversight and control over Mr. Schneider's business holdings. Huntington argues that if Mr. Schneider is manipulating his assets to avoid collection efforts, as Huntington believes, an examiner would have no authority to step in and control and vote Mr. Schneider's equity interests in his business entities as a chapter 11 trustee would.
Huntington further argues that Mr. Schneider's promise of a 100% plan negating the need to investigate and pursue any fraudulent transfer claims is not credible because Mr. Schneider was unable to provide any details regarding the plan at the hearing. As to other creditors, Huntington argues those creditors' loans are not in default and they are getting paid, so it is not surprising that they do not support the appointment of a chapter 11 trustee. Regardless, any detrimental effect to the value of Mr. Schneider's holdings and consequential impact on other creditors' claims is dwarfed by the millions of dollars in assets that were removed by the transfers to the gift trusts.
On balance, this Court finds that the equities do not favor the appointment of a chapter 11 trustee-particularly at this very early stage of this bankruptcy proceeding. First, there is no evidence that Mr. Schneider is an untrustworthy individual. But for the actions of Mr. Sosna, it is highly unlikely that Mr. Schneider would be before this Court. While the allegations regarding the transfers to the family gift trusts warrant further inquiry, this Court found Mr. Schneider's testimony regarding his estate planning to be credible. Whether any of the transfers to the gift trusts are ultimately determined to be fraudulent transfers based on intervening events remains to be seen.
Second, Mr. Schneider has been a successful entrepreneur and member of this community for more than 40 years. The representations to this Court by attorneys for creditors General Electric Credit Union, Civista Bank, and Heritage Bank-who spoke formally or informally against the appointment of a chapter 11 trustee-confirm that the loans Mr. Schneider guarantees at their respective financial institutions are current and in good standing.
Third, while this Court agrees with Huntington that Mr. Schneider provided scant details regarding his proposed plan of reorganization at the hearing, the Motion to Appoint a Trustee was filed six days after the petition date and the hearing was held a week later. It would behoove all interested parties to give Mr. Schneider a fair opportunity to put forth a well-reasoned and comprehensive plan to provide for payments to creditors. See 11 U.S.C. § 1121(b) (giving the debtor the exclusive right to file a plan within 120 days of the petition date).
Which brings us to the final consideration-whether the benefits of appointing a chapter 11 trustee outweigh the costs. Other than to investigate and pursue potential fraudulent transfer claims, Huntington's primary objective in appointing a chapter 11 trustee is to obtain voting control over Mr. Schneider's equity interests in his multiple business holdings. Doing so would create uncertainties with customers, vendors, other lenders, and the 300 employees who work for Mr. Schneider's various enterprises. This could have a ripple effect on Mr. Schneider's cash flow with an unintended consequence of detrimentally impacting Mr. Schneider's ability to fund a plan. It is unlikely, as Huntington asserts, that the administrative costs would be minimal. Mr. Schneider has approximately 70 business ventures in a variety of industries. It would take a chapter 11 trustee significant time and expense to come up to speed on the operations of these businesses and to perform the oversight that Huntington is seeking. Finally, the possibility exists that a chapter 11 trustee, if appointed, may ultimately determine that there were no fraudulent transfers. However, once the court crosses the Rubicon of appointing a chapter 11 trustee, there is no ability to reverse that trajectory and return control of the bankruptcy estate back to Mr. Schneider.
Huntington's risks are more manageable. There is nothing that prevents Huntington from continuing to investigate the transfers to the gift trusts. Huntington can file a motion for a Rule 2004 examination of Mr. Schneider or other relevant entities and request appropriate documents in connection therewith. Fed R. Bankr. P. 2004. Other than the concerns raised by Huntington regarding the transfers to the gift trusts, there is no evidence that Mr. Schneider has or will attempt to remove assets from the reach of creditors.
Regardless, the United States Trustee's Office is aware of the concerns expressed by Huntington and continues to monitor this case through monthly reporting requirements. This Court is confident that the United States Trustee will not hesitate to intervene if it is discovered that Mr. Schneider is dissipating assets or is otherwise not fully complying with his obligations as a debtor-in-possession. Moreover, if Huntington uncovers new evidence of wrongdoing, it also has avenues to bring such matters to the attention of this Court.
Again, the appointment of a chapter 11 trustee is an extraordinary remedy. At this stage in the proceedings and on the record currently before this Court, this Court cannot find that the appointment of a chapter 11 trustee is in the interest of creditors or the estate.
III. Conclusion
For the foregoing reason, the Emergency Motion of The Huntington National Bank for Appointment of a Chapter 11 Trustee Pursuant to 11 U.S.C. § 1104(a ) [Docket Number 13] is DENIED.
SO ORDERED.