Opinion
Case No. 06-30086 Adv. No. 08-3010
04-19-2017
In re: ORLANDO Y. CARTER, Debtor JOHN PAUL RIESER, CHAPTER 7 TRUSTEE, Plaintiff v. MICHELLE CASTELLANOS ET AL., Defendants
Copies to: Served electronically Dianne F. Marx John Paul Rieser Served by U.S. Mail Michelle Castellanos, 5631 Dockside Drive, Mason, Ohio 45040 ExecSolutions, LLC dba Exec Building Solutions c/o Orlando Carter, Statutory Agent, 11497 Enyart Rd., Loveland, OH 45140 ExecSolutions, LLC dba Exec Building Solutions c/o Orlando Carter, Statutory Agent, 8355 Oakdale Court, Mason, Ohio 45040
Chapter 7
Decision Following Trial on Trustee's Complaint
I. Introduction
This adversary proceeding is before the court following the trial of the Chapter 7 trustee's amended complaint to avoid and recover seven conveyances as being fraudulent under the Bankruptcy Code (11 U.S.C. § 548), the Ohio Uniform Fraudulent Conveyances Act (Ohio Rev. Code § 1336.01 et seq.), and the Ohio Avoidance Statute (Ohio Rev. Code §§ 1313.56-1313.58). The trustee alleges that the transfers of the debtor's interests in the property to the defendant were made with the actual intent to hinder, delay, or defraud the debtor's creditors and, in addition, were not made in exchange for reasonably equivalent value. The matter was tried before the court on January 12, 2017.
The court has carefully considered and weighed the testimony of the witnesses and the exhibits admitted into evidence, giving due consideration to the credibility and weight of each of those items. For the reasons set forth below, the court determines that four of the seven transfers totaling $9,610.65 were fraudulent transfers of the debtor's interest in property.
The following decision constitutes the court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
II. Findings of Facts
The defendant, Michelle Castellanos ("Castellanos"), is the one-time fiancé of the debtor, Orlando Y. Carter ("Carter"). Castellanos and Carter lived with each other since 2002, maintaining separate residences and splitting time between each other's homes. The couple purchased a home together in April of 2005, and both moved in shortly later.
At the time, Carter was the owner of Dynus and Cincinnati Capital Partners XVIII ("Cincinnati Capital"), and Castellanos was a recruiter, working as an independent contractor for Dynus over the previous year. Beginning September of 2005 Castellanos began to notice "instability" in Carter's businesses. At that time she created and issued an invoice for her recruiting work which had been performed over the previous year. This was the first invoice created for Castellanos' work for Carter's businesses.
On October 18, 2005 Fifth Third Bank ("Fifth Third") took a cognovit judgment (the "Cognovit Judgment") against Carter and Dynus in the amount of $5,891,751.70 and filed a certificate of judgment which served as a lien against the home Carter shared with Castellanos. The entering of the Cognovit Judgment began a chain of events resulting in Carter's bankruptcy. About the same time, Fifth Third froze Carter's bank account. Though Carter and Castellanos had maintained separate finances, when Fifth Third froze his account, Carter began using a bank account belonging to Castellanos at National City Bank (the "National City Account"). Carter was made a signatory on that account on January 19, 2006, the day after he filed bankruptcy.
At the time of his bankruptcy petition in January of 2006, Carter listed the value of his ownership interest in Dynus as being $0 on Schedule B of his bankruptcy schedules. (est. doc. 22 at 5). Castellanos testified that Dynus closed its doors around the time of the entering of the Cognovit Judgment. Accordingly, the court finds that Carter's interest in Dynus was either worthless or negligible at the time of entry of the Cognovit Judgment as well.
Documents filed in the estate case will be referred to as "est. doc. ___"; documents filed in this adversary proceeding will be referred to as "doc. ___"; and documents filed in Carter's criminal case in the District Court will be referred to as "crim. doc. ___".
At the time of the entry of the Cognovit Judgment, Carter owned the following assets:
| Asset | Value |
| 973 Sanctuary Lane | $1,300,000.00 |
| 422 Oak Run Drive (rental property) | $75,000.00 |
| 6214 Murphey Road (co-owned with ex-wife) | $150,000.00 |
| Household goods | $4,000.00 |
| USB investment account | $1,876.53 |
| Total | $1,530,876.53 |
|---|
Carter scheduled the following undisputed, non-contingent claims that were incurred before the Cognovit Judgment was entered:
| Liability | Amount |
| Mortgage on Sanctuary Lane | $850,000.00 |
| Mortgage on 6214 Murphey Road (co-owned withex-wife) | $140,000.00 |
| Construction Lien on 973 Sanctuary Lane | $24,000.00 |
| Medical Bill | $612.00 |
| water service | $2,099.54 |
| Installment loan | $15,000.00 |
| Legal Services | $2,200.00 |
| Legal Services | $6,872.50 |
| Medical Bill | $56.00 |
| Legal Services | $25,000.00 |
| Blinds for Sanctuary Lane property | $5,000.00 |
| Total | $1,070,840.04 |
|---|
In 2008 a federal grand jury indicted Carter on 11 counts, including mail fraud, bank fraud, and bankruptcy fraud. Carter was tried ("Carter's Criminal Trial") and found guilty of 11 felony charges. The conviction was affirmed on appeal. United States v. Carter, 483 F. App'x 70 (6th Cir. 2012), cert. denied, 133 S. Ct. 677 (2012).
At the trial of this adversary proceeding and during Carter's Criminal Trial, Castellanos provided testimony on a series of transfers from Carter to herself. For the sake of simplicity, a chart of the transfers follows:
Individually, the transfers will be referred to as "Transfer [#]" (e.g. Transfer 2C, Transfer 2D, etc.) and collectively as the "Transfers". The Transfers will be referred to by the exhibit number contained in the chart.
| Exhibit | Underlying Document Description | Amount |
| 2C | 8/20/2005 check from Carter to Castellanos | $1,000.00 |
| 2D | 8/25/2005 check from Carter to Castellanos | $500.00 |
| 3 | Excerpt of Transcript of Castellanos's testimony in Carter'sCriminal Trial Discussing the Transaction | $43,924.00 |
| 4A | 10/11/2005 check from Rhyne Assoc., Inc. to Carter in theamount of $372.65. Endorsed to Castellanos, deposited on11/21/2005 | $372.65 |
| 4B | 10/20/2005 check from Rhyne Assoc., Inc. to Carter in theamount of $1,000.00. Endorsed to Castellanos, depositedon 11/21/2005 | $1,000.00 |
| 4C | 11/3/2005 check from the State of Ohio to Carter in theamount of $1,674.00 for 2004 Ohio Income tax refund.Endorsed to Castellanos, deposited on 11/21/2005 | $1,674.00 |
| 4D | 11/18/2005 check from United States Treasury to Carter inthe amount of $6,564.00 for tax refund. Endorsed toCastellanos, deposited on 11/21/2005 | $6,564.00 |
Transfers 4A-D were all checks that were made payable to Carter, but were endorsed by Carter to Castellanos. Images of the checks were contained on a deposit slip from a November 21, 2005 deposit into the National City Account. Transfers 4A and 4B were from Rhyne Associates for rental proceeds from Carter's property in North Carolina. Transfer 4A was for 372.65 and dated October 11, 2005. Transfer 4B was for $1,000 and dated October 20, 2005. Transfer 4C was a tax refund check from the state of Ohio for $1,674 and dated November 8, 2005. Transfer 4D is an IRS tax refund check for $6,564 dated November 18, 2005.
The Trustee provided evidence of Transfer 3 in the form of a transcript excerpt from Castellanos' testimony at Carter's Criminal Trial:
Q. What is that check?(Exhibit 3, at 32-34). To summarize Castellanos' testimony, on October 4, 2005 Castellanos invoiced Cincinnati Capital, a company owned and controlled by Carter, for recruiting services which Castellanos provided to Carter's businesses over the previous year. On that same date, Cincinnati Capital wrote a check for $43,924 to ExecuSolutions, Castellanos' unincorporated business. Though ExecuSolutions LLC is also a party in this adversary proceeding, the limited liability company was not formed until January 2007, over two years after Transfer 3. (Exhibit 6A). Castellanos testified that she created a new bank account for ExecuSolutions in order to deposit that check and that Carter and Castellanos made withdrawals from that account to pay for household expenses.
A. That check is a fee paid to ExecuSolutions.
Q. And who's it being paid by?
A. By Cincinnati Capital Partners.
Q. XVIII?
A. XVIII.
Q. Do you know what Cincinnati Capital Partners XVIII was?
A. I only know it was a division of Dynus.
Q. And who controlled Cincinnati Capital Partners XVIII?
A. I don't know who controlled.
Q. Well, who controlled Dynus?
A. Orlando Carter.
* * *
Q. And is there a date on that check?
A. October 4th, 2005.
* * *
Q. And how much is that check for?
A. 43,924
Q. And who's the payee?
A. ExecuSolutions.
* * *
Q. Well, who owned Executive Solutions?
A. I do. Uh-huh. I'm in staffing and recruiting.
III. Procedural Background
On January 18, 2006 Carter filed a petition for relief under Chapter 7 of the Code. (est. doc. 1) (the "Petition"). On January 17, 2008 the Trustee initiated several adversary proceedings to avoid and recover various pre-petition and post-petition transfers, including this one against Castellanos, ExecuSolutions, and John Does No. 1-10. (The "Adversary Proceeding").
Meanwhile, 0n April 7, 2009 the court entered a pre-trial scheduling order setting various discovery deadlines and setting trial for January 11, 2010. (doc. 21). After an initial extension, at the request of the Trustee, the court suspended the discovery dates and trial until sentencing was complete in Carter's Criminal Trial and required the filing of a status report by January 15, 2010. (doc. 31). On January 15, 2010 the Trustee filed a status report advising that Carter had not been sentenced yet and requested that the stay of the Adversary Proceeding be continued until Carter was sentenced and the "appeal deadline has run." (doc. 32). Carter was sentenced on June 9, 2010 (crim. doc. 103), and exhausted his appeals on November 26, 2012. Carter v. United States, 133 S. Ct. 677. On February 15, 2013 the Trustee filed a status report in the estate case advising the court that the suit was ready to proceed. (est. doc. 236). Accordingly, on February 26, 2013 the court entered an order reactivating this Adversary Proceeding. (doc. 34).
After several extensions and the filing of various status reports by the Trustee, the cut-off date for discovery passed on September 20, 2015 and the court set January 29, 2016 as the due date for dispositive motions. Before the deadline, both parties filed motions for summary judgment. The Trustee's motion also requested that his requests for admissions should be deemed admitted because Castellanos did not answer those requests within the 30-day deadline. Both motions were denied and the trial was set for January 12, 2017.
On December 22, 2016 over a month after the deadline to submit witness lists, and only a few weeks before trial, Castellanos moved the court to contact the federal prison housing Carter and request an accommodation for Carter to testify at trial. The court denied this request after holding a telephonic hearing with the parties. The trial took place on January 12, 2017.
The Amended Complaint sought relief under nine theories. (doc. 100, at 9-18). However, at trial, the Trustee stated that he was only seeking relief under 11 U.S.C. § 548 and state law fraudulent transfer claims under Ohio Revised Code §§ 1336 and 1313.56-58 as made applicable to this proceeding through 11 U.S.C. § 544. (Transcript, at 128-129, doc. 125).
The Trustee also suggested that he was unsure if 11 U.S.C. § 542 applied based on the evidence presented. Because the Trustee did not present any evidence that the funds in question remained property of Carter's bankruptcy estate after their transfer to Castellanos, the Court will limit its consideration to the fraudulent transfer theories.
The Amended Complaint alleges a total of $92,834.65 in transfers from Carter to Castellanos. (doc. 100 at 6). However, in his closing statement at trial, the Trustee stated:
[W]e are seeking recovery for $55,034.65. And that consists of the amounts that we specified earlier, which consists of the two tax refund checks, the two Ryan Associate rental check refunds and the $43,394 -- if I've got that right -- along with the two checks identified in the Amended Complaint.(Transcript, at 122). The Trustee questioned Castellanos on the Transfers represented by exhibits 2C, 2D, 3, and 4A-D—which total $55,034.65—so those are the Transfers that the court will consider.
IV. Analysis
A. Jurisdiction
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This is a core proceeding by virtue of 28 U.S.C. § 157(b)(2)(H).
B. Castellanos' Assertion of Her Fifth Amendment Privilege
Upon being called to the witness stand by counsel for the Trustee, Castellanos invoked the Fifth Amendment privilege against self-incrimination. The Trustee argued that Castellanos testified on the subject matter without invoking her right not to testify during Carter's Criminal Trial, thus waiving her right. Castellanos replied that the prosecutors had given her immunity at that trial; though she was unsure of the exact terms, and whether that immunity still existed. Castellanos stated that she had no concern of being charged with a crime, but felt that she had already been deposed three times on this matter and so she thought it was her right not to testify.
The Fifth Amendment privilege against self-incrimination prevents a person from being compelled to give testimony tending to show that she has committed a crime. Brown v. United States, 234 F.2d 140, 143 (6th Cir. 1956), aff'd, 356 U.S. 148 (1958). The privilege applies alike to civil and criminal proceedings and includes proceedings within a bankruptcy case. Id.; Bertelt v. United States (In re Bertelt), 213 B.R. 173, 177 (Bankr. M.D. Fla. 1997).
Although the Fifth Amendment applies in bankruptcy proceedings, it cannot be used in a blanket fashion in answer to all questions asked. Bertelt, 213 B.R. at 179. See also O'Halloran v. Williams (In re Keller Fin. Servs. of Fla., Inc.), 259 B.R. 391, 400 (Bankr. M.D. Fla. 2000). Instead, "'to properly invoke the privilege . . . a debtor must produce, for the court, credible reasons why his answers would incriminate him'" but, "[t]he debtor is not required to establish the threat of incrimination in detail . . . since such detailed disclosure may negate the very privilege he seeks to assert." Bertelt, 213 B.R. at 179 (citation omitted). A witness' burden to justify invocation of the privilege is minimal and the witness need only explain how his answer is incriminatory in a "limited fashion." Keller Fin., 259 B.R. at 400.
Based on the parties' arguments, the court informed Castellanos that she had waived her right not to testify on the subjects covered by the depositions in this proceeding since she had not asserted the privilege at the time of those depositions. Moreover, she could not make a blanket assertion of her privilege. Finally, the court found that Castellanos had not provided a basis for how her testimony could subject her to criminal liability. This finding was based on her stated lack of concern with possible criminal liability, and the fact that the events she was to testify about had occurred over ten years before this trial, and thus new charges would likely be precluded by statutes of limitation.
C. Standards and Burdens Under Fraudulent Conveyance Claims
The Trustee asserts that the Transfers from Carter to Castellanos are subject to avoidance as both actual fraudulent transfers made with the actual intent to hinder, delay, or defraud creditors and constructively fraudulent transfers made for less than reasonably equivalent value. He brings those claims under Bankruptcy Code § 544(a)(3) permitting a bankruptcy trustee to seek avoidance of fraudulent transfers under applicable state laws, including the Ohio Uniform Fraudulent Transfer Act, Ohio Revised Code §§ 1336.01 et seq. (the "Ohio UFTA") and 1313.56-58 (the "Ohio Avoidance Statute"), and § 548(a)(1). The Trustee has the burden of proof as to all the required elements of these claims. Baumgart v. Bedlyn, Inc. (In re Empire Interiors, Inc.), 248 B.R. 305, 307 (Bankr. N.D. Ohio 2000); Hunter v. KeyBank Nat'l Ass'n (In re Fox), 265 B.R. 739, 744 (Bankr. N.D. Ohio 2001) (citing Crews v. Shopping Ctr. Equities, Inc. (In re Sneakers Sports Grill, Inc.), 228 B.R. 795, 800 (Bankr. M.D. Fla. 1999)).
Unless otherwise noted, all statutory references are to the Bankruptcy Code of 1978, as amended, 11 U.S.C. §§ 101-1532 (the "Code"), cited hereinafter in this decision as "§ ___".
The Ohio Revised Code will hereinafter be cited as "ORC § ___".
The fraudulent transfer provisions of the Code and the Ohio UFTA are substantially similar both in terms of rights, remedies, and defenses. See Daly v. Deptula (In re Carrozzella & Richardson), 286 B.R. 480, 483 n. 3 (D. Conn. 2002); Bash v. Cunningham (In re Cunningham), No. 07-01146, 2008 WL 2746023 (Bankr. N.D. Ohio July 11, 2008). Therefore, findings made under the Code are applicable to actions under the Ohio UFTA. Levit v. Spatz (In re Spatz), 222 B.R. 157, 164 (N.D. Ill 1998). The main distinction between those two statutes is the reach-back period. The Code permits the avoidance of fraudulent transfers made within two years of the petition date whereas the Ohio UFTA permits avoidance of those transfers for up to four years after the date such transfers occurred. § 548(a)(1) and ORC § 1336.09 (A) and (B).
Similarly, the Ohio Avoidance Statute mirrors the actual intent cause of action provided under § 548(a)(1)(A), but has been held to have an eight-year statute of limitation. Digiammarino, 559 B.R. at 499-500. All the transfers in question fall well within the two-year reach back period of § 548.
The Ohio Avoidance Statute provides a cause of action under both preference and fraudulent transfer theories. Corzin v. Digiammarino (In re Maglione), 559 B.R. 489, 499-500 (Bankr. N.D. Ohio 2016). However, as discussed, the Trustee is only pursuing a claim under that statute under the fraudulent conveyance theory. In pertinent part, the statute provides that "[a] sale, conveyance, transfer, mortgage, or assignment made . . . or judgment procured by him to be rendered, in any manner, with intent to hinder, delay, or defraud creditors, is void as to creditors of such debtor at the suit of any creditor." ORC § 1313.56. However, a critical difference between the UFTA actual fraudulent intent provision and ORC § 1313.56-58 is that § 1313.56 does not apply "unless the person to whom such . . . transfer . . . is made, knew of such fraudulent intent on the part of such debtor." See ORC § 1313.57; Sease v. John Smith Grain Co., Inc., 479 N.E.2d 284 (Ohio Ct. App. 1984); and Parker v. Clary, 154 N.E.2d 641 (Ohio Ct. App. 1958).
D. Transfer 3 Is Not a Transfer of Carter's Interest in Property
A trustee may avoid a fraudulent transfer under either § 548 or § 544 of the Code, but "[u]nder both provisions, the trustee's power is limited to 'any transfer of an interest of the debtor in property.'" Spradlin v. Beads & Steeds Inns, LLC, (In re Howland), No. 16-5499, 2017 WL 24750, at *2 (6th Cir. Jan. 3, 2017)(citation omitted). Since the Trustee's state law claims are brought through § 544, the Trustee may only avoid the Transfers that meet this requirement. Transfers 2C and 2D were both checks drawn from an account owned by Carter. Transfers 4A, 4B, 4C, and 4D are checks made payable to Carter and subsequently endorsed by Carter to Castellanos. Thus, at the time those checks were written or endorsed by Carter, he had a legal interest in them.
However, the Trustee did not prove that Carter had a legal interest in the funds which were the subject of Transfer 3. First, the only evidence presented regarding the existence of Transfer 3 is the transcript of Castellanos' testimony from Carter's Criminal Trial. No documents evidencing that transfer were admitted into evidence. However, more significantly, assuming that the Trustee introduced sufficient evidence to prove that this transfer existed, he did not meet his burden to show that the funds transferred to Castellanos from Cincinnati Capital was a transfer of an "interest of the debtor in property." 11 U.S.C. §§ 548 and 544.
Ohio law provides that while "[a] membership interest in a limited liability company is personal property[,]" ORC § 1705.17, "property owned or purchased by a limited liability company shall be held and owned in the name of the company[,]" and "[c]onveyance of that property shall be made in the name of the company." ORC § 1705.34. Ohio state courts, as well as the Sixth Circuit Bankruptcy Appellate Panel, and other Ohio bankruptcy courts have interpreted these statutes as meaning that property owned by a Limited Liability Company is property of the LLC, not the property of its members. See Whittaker v. Groves Venture, LLC (In re Bolon), 538 B.R. 391, 398-39 (Bankr. S.D. Ohio 2015) (citing Ogle v. Hocking Cty., No. 14CA3, 2014 WL 6977628, at *6 (Ohio Ct.App. Dec. 8, 2014); In re Breece, No. 12-8018, 2013 WL 197399, at *3 (6th Cir. BAP Jan. 18, 2013)).
Beads & Steeds Inns illustrates how the theories of substantive consolidation and reverse veil piercing may be used to pursue the property of a debtor's corporation. 2017 WL 24750 at *2. The Trustee neither pursued nor offered sufficient evidence for the court to apply either theory.
Transfer 3, as testified to at Carter's Criminal Trial, was made through a check written on the account of Cincinnati Capital. A membership or other ownership interest in Cincinnati Capital is not listed on Carter's schedule of assets; however, Castellanos testified that she believed it to be owned by Carter. Yet, even if Castellanos' belief is taken as true, this still does not establish that Transfer 3 was a transfer of Carter's interest in property since even if he was the sole member of Cincinnati Capital, he did not own its corporate property.
E. Transfers Made with Actual Intent to Defraud Creditors
The Trustee asserts that the Transfers constitute fraudulent transfers pursuant to § 548(a)(1)(A) and ORC §§ 1336.04(A)(1) and 1313.56—the actual, as opposed to constructive, fraudulent transfer provisions of the Code, Ohio UFTA, and the Ohio Avoidance Statute.
Code § 548(a)(1) in pertinent part provides:
The Trustee may avoid any transfer . . . of an interest of the debtor in property, or any obligation . . . incurred by the debtor, that was made or incurred on or within 2 years before the date of filing of the petition, if the debtor voluntarily or involuntarily -ORC § 1336.04 in pertinent part provides:
(A) made such transfer or incurred such obligation with actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was uncured, indebted[.]
(A) A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the claim of the creditor arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation in either of the following ways:ORC § 1313.56 in pertinent part provides:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor[.]
[A] sale, conveyance, transfer, mortgage, or assignment made . . . or judgment procured by [a debtor] to be rendered, in any manner, with intent to hinder, delay, or defraud creditors, is void as to creditors of such debtor at the suit of any creditor.
To set aside the transfer of Carter's interests in the property as actual fraudulent transfers, the Trustee needed to show that the Transfers were made with the "actual intent to hinder, delay or defraud" Carter's creditors. § 548(a)(1)(A); ORC § 1336.04(A)(1); ORC § 1313.56. Under the UFTA, intent must be established by clear and convincing evidence. Slone v. Lassiter (In re Grove-Merritt), 406 B.R. 778, 793 (Bankr. S.D. Ohio 2009); Daneman v. Stanley (In re Stanley), 384 B.R. 788, 799 (Bankr. S.D. Ohio 2008). Under the Code, however, the standard of proof a trustee must meet to avoid a fraudulent transfer based on § 548(a)(1)(A) is the lower preponderance of the evidence standard. Likewise, a fraudulent transfer claim under the Ohio Avoidance Statute need only be established by a preponderance of the evidence, Parker v. Clary, 154 N.E.2d 641, 644-45 (Ohio Ct. App. 1958), but requires an additional finding of the transferee's knowledge of the fraudulent intent. (See supra note 6). Accordingly, since there is no limitations issue which would make a difference as to whether the Code, UFTA, or the Ohio Avoidance Statute is applied, the court will limit its analysis of the Transfers to § 548(a)(1).
While courts are split as to the quantum of proof a trustee must meet in pursuing a claim under § 548(a)(1)(A), a majority follow the preponderance of the evidence standard, relying on Grogan v. Garner, 498 U.S. 279 (1991) which held that a party must establish the nondischargeability of a debt under § 523 by a preponderance of the evidence, including those based on fraud. Id. at 288-89.
"Because proof of actual intent to hinder, delay or defraud creditors may rarely be established by direct evidence, courts infer fraudulent intent from the circumstances surrounding the transfer." Schilling v. Heavrin (In re Triple S. Rests., Inc.), 422 F.3d 405, 416 (6th Cir. 2005) (quoting Brown v. Third Nat'l Bank (In re Sherman), 67 F.3d 1348, 1353 (8th Cir. 1995)). Such circumstances are reflected in the factors that are often referred to as the "badges of fraud," which under Ohio law include:
(1) Whether the transfer or obligation was to an insider;ORC § 1336.04(B); Grove-Merritt, 406 B.R. at 793-94 (Bankr. S.D. Ohio 2009). Once a plaintiff establishes a sufficient number of badges of fraud, the burden shifts to the defendant to demonstrate that the debtor received a benefit or that there was some legitimate purpose for the transfer. Silagy v. Gagnon (In re Gabor), 280 B.R. 149, 157 (Bankr. N.D. Ohio 2002). "Although the presence of a single badge [of fraud] may only raise the suspicion of a debtor's fraudulent intent, the confluence of several badges can be conclusive evidence of fraudulent intent, absent significantly clear evidence of debtor's legitimate supervening purpose." Id.
(2) Whether the debtor retained possession or control of the property transferred after the transfer;
(3) Whether the transfer or obligation was disclosed or concealed;
(4) Whether before the transfer was made or the obligation incurred, the debtor had been sued or threatened with suit;
(5) Whether the transfer was of substantially all of the assets of the debtor;
(6) Whether the debtor absconded;
(7) Whether the debtor removed or concealed assets;
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the obligation incurred;
(9) Whether the debtor was solvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
At trial, the Trustee argued the existence of the following badges of fraud at the time of the Transfers: 1) the transferee, Castellanos, was an insider; 2) the Transfers were made without consideration; 3) Carter retained control of the property transferred; 4) the Transfers were concealed; 5) the Transfers were made when Carter had been threatened with suit; and 6) Carter was insolvent at the time the Transfers were made. The court will review these badges in turn.
1. Castellanos Was an Insider at All Relevant Times
The Code provides a list of categories that are defined as insiders of an individual debtor, one of which is relatives of the debtor. § 101(30)(A); Thrush v. Marvin (In re Hollar), 100 B.R. 892, 893 (Bankr. N.D. Ohio 1989) (holding that due to the "including" qualifier before the list, the examples are non-exhaustive). Additionally, § 101(45) defines a relative to be an "individual related by affinity or consanguinity within the third degree as determined by the common law . . . ." Under Ohio law, "[a]ffinity has been defined as the 'connection existing, in consequence of marriage, between each of the married persons and the kindred of the other.'" Kest v. Lewis, 159 N.E.2d 449, 450 (Ohio 1959) (citation omitted); Affinity, Black ' s Law Dictionary, (10th ed. 2014) ("The relation that one spouse has to the blood relatives of the other spouse; relationship by marriage."). Thus, it appears that as fiancé and co-habitant of Carter, Castellanos was not a relative of Carter.
However, under the Bankruptcy Code, "[t]he true test of an 'insider' is one who has such a relationship with the debtor that their dealing with one another cannot be characterized as an arms-length transaction." Hollar, 100 B.R. at 893 (quoting Montanino v. Minar (In re Montanino), 15 B.R. 307 (Bankr. D.N.J. 1981)). While the Montanino court found that the parents of the debtor's girlfriend were insiders of the debtors, the Hollar court found that the mere fact that the defendant was the debtor's girlfriend and future fiancé at the time of the transfer was insufficient to make the defendant an insider. Id. The Hollar court emphasized that there was no evidence before the court other than the girlfriend and future fiancé relationship, such as other facts which would indicate control or influence over the debtor's transactions. See Grove-Merritt, 406 B.R. at 800 ("[T]he crux of determining whether a person is an insider under the Code is ferreting out whether that person has 'a sufficiently close relationship with the Debtor that his conduct is made subject to closer scrutiny than those dealing at arm's length with the debtor,' including determining the extent to which the defendant was in a position to control or influence the debtor.").
Here, Castellanos was living with Carter for over three years at the time of the Transfers and shared expenses with him. These facts establish a sufficiently close relationship to conclude that Castellanos was an insider at the time of all of the Transfers.
2. Castellanos Received No Consideration for Transfers 2C, 2D, and 4A-D
Castellanos testified that Transfer 3 was made in exchange for her previous year of work as a recruiter for Carter's businesses, the check was made payable to her business, and it was deposited into a new account she established for her business. On the other hand, according to Castellanos' testimony, Transfers 2C, 2D, and 4A-D were deposited directly into her National City Account which she and Carter used to pay their joint household expenses. However, there was no evidence that Castellanos or Carter used these funds to specifically pay Carter's bills or expenses or that Castellanos was legally obligated to pay any of Carter's expenses. Accordingly, based upon the evidence submitted, the court finds that Transfers 2C, 2D, and 4A-D were made without consideration.
Because Transfer 3 was not a transfer of Carter's interest in property, the court makes no finding as to whether it was made for equivalent value.
3. Carter Was Sued or Threatened With Suit Prior to Transfers 4A-D
The Cognovit Judgment was entered on October 18, 2005. No evidence was presented that Fifth Third threatened suit before the Cognovit Judgment was taken. One month later, Transfers 4A-D were deposited into Castellanos' account.
At this point, the exact date of the Transfers becomes important. Transfer 4A was a check dated October 11, 2005, one week before entry of the Cognovit Judgment. (Exhibit 4A). The check was deposited into the National City Account on November 21, 2005, over a month after entry of the Cognovit Judgment. Id. At some point between those dates, Carter endorsed the checks to Castellanos.
In the context of deciding whether a check fell within § 547(b)'s 90-day preference window, the Supreme Court held that "[f]or the purposes of payment by ordinary check . . . a 'transfer' as defined by § 101(54) occurs on the date of honor, and not before." Barnhill v. Johnson, 503 U.S. 393, 400 (1992). The Court noted that many circuits previously held that the date a check was received should determine the date of transfer in the context of § 547(c). Id. at 406 n.9. The Court declined to rule on those cases, but noted that their reasoning did not apply beyond § 547(c). Id. The Sixth Circuit cited that language when it also adopted the receipt rule for § 547(c). Brown v. Shell Can. Ltd., (In re Tenn. Chem. Co.), 112 F.3d 234, 238 (6th Cir. 1997).
The Court cited the following for that proposition: Braniff Airways, Inc. v. Midwest Corp., 873 F.2d 805 (5th Cir. 1989); Durham v. Smith Metal & Iron Co. (In re Continental Commodities, Inc.), 841 F.2d 527 (4th Cir. 1988); Kupetz v. Elaine Monroe Assocs. (In re Wolf & Vine), 825 F.2d 197 (9th Cir. 1987); Morrow v. Agri-Beef Co. (In re Kenitra, Inc.), 797 F.2d 790 (9th Cir. 1986); Bernstein v. RJL Leasing (In re White River Corp.), 799 F.2d 631 (10th Cir. 1986); and O'Neill v. Nestle Libbys P.R., Inc., 729 F.2d 35 (1st Cir. 1984)). See also Brown v. Shell Can. Ltd., (In re Tenn. Chem. Co.), 112 F.3d 234, 238 (6th Cir. 1997) (later adopting the receipt rule in the limited context of § 547(c)(4)).
Code § 547(c) provides defenses or exceptions to preference liability, including the ordinary course of business and contemporary exchange of value defenses.
The Sixth Circuit later applied Johnson ' s honor rule to a post-petition unauthorized transfer proceeding under § 549(a), holding that it was appropriate because it "provides a date certain upon which parties to the transfer can rely and upon which courts can base a ruling in the event of litigation. In contrast, the date of receipt rule leaves too much room for manipulation by the parties to the transaction." Guinn v. Oakwood Props., Inc., (In re Oakwood Mkts., Inc.), 203 F.3d 406, 409 (6th Cir. 2000). The Sixth Circuit Bankruptcy Appellate Panel applied Johnson and Oakwood's reasoning in the context of an automatic stay violation. Buckeye Check Cashing, Inc. v. Meadows (In re Meadows), 396 B.R. 485, 492 (B.A.P. 6th Cir. 2008) ("[W]e conclude that the Debtor's property interest in her bank funds was disposed of, or parted with, when her bank honored her check . . . .").
Applying the Johnson date of honor general rule, and finding no exception to it here, under §§ 548 and 544 an ordinary check will be considered a transfer on the date it is honored by the bank. This accords with the Sixth Circuit's reasoning since fraudulent transfers also provide a scenario under which the court would wish to limit the "room for manipulation." Accordingly, the court finds that only Transfers 4A-D occurred after suit was filed and, therefore, that this badge of fraud only applies to those Transfers.
4. Carter Retained Control of the Property Transferred by Transfers 4A-D
Castellanos testified at trial that in October 2005, before Transfers 4A-D, Carter started to use the National City Account into which she deposited his checks. Transcript, 33:9-13. Castellanos further testified that Carter was added to the account the day after filing for bankruptcy. Id. at 33:21-24. However, there is no evidence that Carter retained control over funds transferred to the National City Account before October of 2005. Given Castellanos's testimony, the court finds this badge present for Transfers 4A-D, but not for Transfers 2C and 2D.
5. Transfers 4A-D Were Concealed
While Transfers 2C and 2D were made by check from Carter's account directly to Castellanos, Transfers 4A-D were checks from third parties payable to Carter which Carter endorsed to Castellanos. By being endorsed directly to Castellanos and bypassing Carter's bank account, these transfers were hidden from potential creditors. As indicated above, however, transfers 2C and 2D were made with checks from Carter's checking account, and thus were not hidden from creditors. Therefore, the Trustee has established the existence of this badge of fraud with respect to Transfers 4A-D, but not to 2C and 2D.
6. Carter Was Insolvent at the Time Transfers 4A-D Were Made
Carter's Summary of Schedules listed a total of $1,530,876.53 in assets and $14,082,602.44 in total liabilities as of the Petition date. The Trustee testified that his investigation of Carter's schedules indicated that Carter was certainly insolvent by the time of the entry of the Cognovit Judgment, and was likely insolvent before this time as well. The results of this investigation are supported by Carter's Petition and schedules, as well as by Castellanos' testimony at Carter's Criminal Trial. When asked why she had chosen to invoice Carter on October 4th for an entire year's worth of work, she responded that there was some "instability" in the business. While there is ample evidence that Carter was insolvent by October of 2005, there is insufficient evidence to show that the insolvency existed as far back as the August transfers. Therefore, the Trustee has met his burden to prove that Carter was insolvent at the time Transfers 4A-D were made, but not Transfers 2C and 2D.
In summary, the court finds that Castellanos was an insider at the time of each Transfer and that there was no equivalent value given for any of the Transfers. However, the other four badges of fraud—retained control by debtor, debtor sued before transfer, concealed nature of transfer, and insolvency of debtor—were only present in Transfers 4A-D. Therefore, the court finds that Transfers 4A-D were made with the actual intent to defraud creditors and may be recovered under § 548(a)(1). Castellanos' insider status and the lack of value given for Transfers 2C and 2D are insufficient to establish an actual intent to defraud with respect to those Transfers. For the same reasons, the court finds that Transfers 2C and 2D may not be recovered under the Ohio Avoidance Statute and Ohio UFTA.
F. Transfers Made with Constructive Intent to Defraud Creditors
The Trustee has also pursued fraudulent conveyance claims under the constructive fraudulent transfer provisions of § 548(a)(1)(B) and ORC § 1336.04(A)(2). As noted, the relevant provisions of the Ohio UFTA are nearly identical to the Code provision except that the Ohio UFTA extends the reach-back period to four years. All Transfers fall well within the two year look back period of § 548.
Code § 548(a)(1)(B) provides in relevant part:
The trustee may avoid any transfer . . . of an interest of the debtor in property, or any obligation . . . incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
ORC § 1336.04(A)(2) provides in relevant part:(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believe that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured[.]
(A) A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the claim of the creditor arose before, or . . . after, the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation in either of the following ways:
* * * *
(2) Without receiving a reasonable equivalent value in exchange for the transfer or obligation, and if either of the following applies:
(a) The debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction;
(b) The debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they become due.
To prevail on a constructive fraudulent transfer claim, the Trustee must establish by a preponderance of the evidence that that Carter received less than reasonably equivalent value in exchange for the challenged Transfers and at least one of the following: a) Carter was insolvent at the time of the relevant transfer or became insolvent as result of the transfer; b) Carter was engaged in a business or a transaction for which his property remained unreasonably small in relation to the business or transaction; or c) Carter intended to incur, or believed or reasonably should have believed that he would incur debts beyond his ability to pay. 11 U.S.C. 548(a)(1)(B); ORC § 1336.04(A)(2); Corzin v. Fordu (In re Fordu), 201 F.3d 693, 707 (6th Cir. 1999); and Rieser v. Hayslip (In re Canyon Sys. Corp.), 343 B.R. 615, 639 (Bankr. S.D. Ohio 2006).
Code § 548 also provides a cause of action for transfers made "for the benefit of an insider . . . under an employment contract and not in the ordinary course of business." § 548(a)(1)(B)(ii)(IV). However, there is no indication that any Transfer was made under an employment contract. --------
As discussed, Carter did not receive value for any of the Transfers. Castellanos provided testimony that she did a significant amount of work as a freelance recruiter for Carter's businesses in exchange for Transfer 3. Moreover, Transfer 3 was deposited into a separate account created by Castellanos for use by her business, while the other Transfers were deposited into her personal account. However, there is no indication that any of the other Transfers were made for any purpose other than to provide a place for Carter to deposit his money after his bank accounts had been frozen. Having already found that the Transfers were not for equivalent value, the court now turns to the other elements of this claim.
The earliest date at which there is evidence regarding Carter's financial state is Castellanos' testimony in Carter's Criminal Trial. After having worked as a free-lance recruiter for Carter for over a year, she issued her first invoice on October 4, 2005. When asked why she had chosen to invoice Carter on October 4, her reply was "I felt there was some instability. I felt it was due." (Transcript at 51, Exhibit 3 at 37). When asked if she knew the company was going under at this point she answered, "I didn't know it was going under. I knew there was instability issues." Id. Two weeks after the invoice and check were issued, the Cognovit Judgment effectively shut down Carter's businesses. The rush to invoice for a year's worth of work combined with the knowledge of the "instability" of Carter's business just two weeks before entry of the Cognovit Judgment provide a clear picture of Carter's financial condition at that point. The preponderance of evidence shows that by October 4, Carter knew, or reasonably should have known, that his businesses were left with unreasonably small capital and that he would soon be unable to pay his debts. Since Carter personally guaranteed his business loans, his personal financial situation was in the same condition as his business.
As discussed earlier, the court has already found that the preponderance of evidence has shown that Carter was insolvent by September, 2005. Therefore, the court finds that the Transfers made after September, 2005, Transfers 4A-D, are constructively fraudulent, while the Transfers made before that date, Transfers 2C and 2D, are not.
V. Conclusion
For the foregoing reasons, the court FINDS that the Trustee is not entitled to avoid Transfers 2C, 2D, and 3, but is entitled to avoid Transfers 4A-D and to recover $9,610.65.
The court will issue an order concurrently with this decision.
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/ _________
Guy R. Humphrey
United States Bankruptcy Judge Dated: April 19, 2017 Copies to:
Served electronically
Dianne F. Marx John Paul Rieser
Served by U.S. Mail
Michelle Castellanos, 5631 Dockside Drive, Mason, Ohio 45040 ExecSolutions, LLC dba Exec Building Solutions c/o Orlando Carter, Statutory Agent, 11497 Enyart Rd., Loveland, OH 45140 ExecSolutions, LLC dba Exec Building Solutions c/o Orlando Carter, Statutory Agent, 8355 Oakdale Court, Mason, Ohio 45040