Opinion
Case No. 98-13045-AJM-11, Case No. 98-13044-AJM-11, (Jointly Administered Under Case No. 98-13045-AJM-11), Adversary Proceeding No. 98-535
October 9, 1998
FINDINGS OF FACT AND CONCLUSIONS OF LAW AND FINAL JUDGMENT
This cause of action came before the Court, beginning on May 3, 2000, and concluding on May 12, 2000, for trial on the Complaint filed by Plaintiffs, Baker O'Neal Holdings, Inc. and American Public Automotive Group, Inc., against Defendants, Sally O'Neal, James T. O'Neal, III, Kelly O'Neal, Kathleen O'Neal, and Patrick O'Neal (the "O'Neal Transferees"), and the Court having considered the testimony, the demeanor of the O'Neal Transferees and the other witnesses, the exhibits admitted into evidence, and other matters of record in this cause, together with briefs and arguments of counsel, and being otherwise duly advised, now makes the following findings of facts and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure:
On or about January 21, 2000, the Court granted a Joint Stipulation of Dismissal, without prejudice, of the Plaintiffs' Complaint against John and Marlene Pavia. On or about May 3, 2000, the Court entered a Final Judgment against Defendant, James T. O'Neal, Jr.
FINDINGS OF FACT The Debtors
1. Baker O'Neal Holdings, Inc. ("Baker O'Neal Holdings") is a Delaware corporation with its principal place of business in Indianapolis, Indiana.
2. American Public Automotive Group, Inc. ("APAG") is a Delaware corporation with its principal place of business in Indianapolis, Indiana.
3. On October 9, 1998 (the "Petition Date"), Baker O'Neal Holdings and APAG (sometimes collectively referred to herein as the "Debtors") filed voluntary petitions for relief pursuant to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
4. Pursuant to sections 1107 and 1108 of the Bankruptcy Code, Baker O'Neal Holdings and APAG, as debtors in possession, are continuing in possession of their properties and operating and managing their respective businesses.
The Defendants
5. Sally O'Neal is the wife of James T. O'Neal, Jr. ("O'Neal").
6. James T. O'Neal, III is the thirty (30) year old son of O'Neal and Sally O'Neal.
7. Kelly O'Neal is the twenty-eight (28) year old daughter of O'Neal and Sally O'Neal.
8. Kathleen O'Neal is the twenty-two (22) year old daughter of O'Neal and Sally O'Neal.
9. Patrick O'Neal is the nineteen (19) year old son of O'Neal and Sally O'Neal.
Officers and Directors of Baker O'Neal Holdings and APAG
10. Patrick J. Baker ("Baker") is the sole shareholder of Baker O'Neal Holdings and has been the Chairman of the Board of Baker O'Neal Holdings since its incorporation.
11. Mr. Baker has also been the Chairman of the Board of APAG since its incorporation.
12. All shares of APAG have been wholly owned by Baker O'Neal Holdings since the date of APAG's incorporation.
13. O'Neal was the President and Chief Executive Officer of Baker O'Neal Holdings from the date of Baker O'Neal Holdings' incorporation on December 6, 1993, until his removal on September 2, 1998.
14. O'Neal was also the President and Chief Executive Officer of APAG until his removal on September 2, 1998. O'Neal's Fallout with Arnold Palmer
15. Prior to his involvement with the Debtors, O'Neal was an officer and part-owner of Arnold Palmer Automotive Group, Inc. ("APAG I").
16. APAG I was a closely-held corporation owned by O'Neal, professional golfer, Arnold Palmer, and International Management Group ("IMG") founder, Mark McCormack.
17. O'Neal was also an officer and part-owner of a number of other businesses with Messrs. Palmer and McCormack.
18. Before becoming business partners, O'Neal and Palmer were best friends.
19. Moreover, Mr. Palmer is the godfather to O'Neal's youngest child, Patrick O'Neal.
20. In 1989 and 1990, O'Neal attempted to acquire APAG I and other automobile dealerships around the country in an attempt to create a public megadealership.
21. In December 1990, O'Neal and Palmer had a falling out and their business and personal relationship ended.
22. APAG I incurred over Ten Million Dollars ($10,000,000.00) in losses.
23. Allegations surfaced that O'Neal misappropriated assets from APAG I and the other businesses owned with Messrs. Palmer and McCormack for his own personal use, including building a show-stopping, multi-million dollar home in the Isleworth residential community (the "Isleworth Home").
The Isleworth Home was constructed to resemble, in part, the clubhouse at Augusta National Golf Course.
24. O'Neal was removed as an officer of APAG I.
O'Neal's Financial Collapse
25. As a result of O'Neal's mismanagement of APAG I and his related malfeasance, O'Neal was forced to surrender all of his business interests to Messrs. Palmer and McCormack, including, but not limited to, (a) the Isleworth Home, (b) his nearby farm, (c) his one-third share of APAG I and (d) his Fourteen percent (14%) stake in Bay Hill Club.
26. In late 1990 or early 1991, O'Neal and the O'Neal Transferees moved from the Isleworth Home to the one story ranch at 6100 Tarawood in Bay Hill, Orlando, Florida (the "Bay Hill Home") which O'Neal purchased in 1972 when he moved from Indiana to Florida.
27. The following judgments were entered against O'Neal, individually, or against O'Neal and his wife, Sally O'Neal, jointly and severally (the "Judgments"):
a. Default Judgment in the amount of $478,224.41 against James T. O'Neal, Jr. dated December 2, 1991, in the action entitled Bank One, Indianapolis, N.A. v. James T. O'Neal, Jr., et al., Hamilton County Superior Court, Indiana, Cause No,. 29D03-9107-CP-318;
b. Default Judgment in the amount of $11,313,377.25 against James T. O'Neal, Jr. and Sally L. O'Neal dated February 27, 1992, in the action entitled Bank One, Indianapolis, N.A. v. James T. O'Neal, Jr., et al., Hamilton County Superior Court, Indiana, Cause No. 29D03-9107-CP-318;
c. Order for Restitution and Investigative Costs against James T. O'Neal, Jr. dated May 17, 1994, in the action entitled State of Florida v. James O'Neal, Orange County Circuit Court, Florida, Cause No. CR92-4879, ordering Mr. O'Neal to pay (i) the sum of $347,987.28 in restitution; and (ii) the sum of $41,539.26 for investigative costs;
d. Final Judgment in the amount of $300,731.00 against James T. O'Neal, Jr. dated April 25, 1991, in the action entitled Delvin Miller v. James O'Neal, Jr., Orange County Circuit Court, Florida, Case No. CI-1228; and
e. Final Summary Judgment in the amount of $5,550,336.00 against James T. O'Neal, Jr., Sally O'Neal, et al. as to First and Fourth Causes of Action dated April 9, 1991, in the action entitled Sun Bank, National Assoc. v. APAG Holdings, Inc., et al., Orange County Circuit Court, Florida, Case No. CI-90-9676.
28. Some, if not all, of the O'Neal Transferees attended the trial on the State of Florida's indictment of O'Neal on ten felony counts of theft of State funds and eight misdemeanor counts of sales tax evasion.
29. O'Neal was unemployed and financially destitute following his removal from APAG I and the other businesses owned with Messrs. Palmer and McCormack.
30. In 1992, O'Neal earned a total of Twelve Thousand Dollars ($12,000) as a consultant.
31. Sally O'Neal, who had been a homemaker, returned to work in 1992, as a registered nurse, to help support their family.
32. Larry Guest authored a biography of Mr. Palmer, ARNIE INSIDE THE LEGEND, which includes a chapter titled, "The Ultimate Fender-Bender" which describes O'Neal's fallout with Mr. Palmer and O'Neal's ensuing financial collapse in pertinent part as follows:
But all that chumminess came to a sudden and stormy end in December 1990, when O'Neal was banished from Arnie's inner circle, cloaked in innuendo that he had not only plunged the auto partnership into suffocating debt, but — at the very least — used Arnie's friendship and name and — at the very worst — perhaps diverted hundreds of thousands of dollars from the company to his personal use.
* * *
Was O'Neal a spurious opportunist guilty of massive skimming? Or was he merely the latest and most calamitous in the procession of friends/business associates who became too close to Arnie for IMG's comfort? Was O'Neal a rat? Or did McCormack and IMG seize on an opportunity to poison Arnie's mind on O'Neal and sweep him aside? That is the lingering debate in those among Arnie's inner circle. Even his family is divided on the issue.
* * *
One faction, including most of those who worked alongside O'Neal in the auto business, remain convinced that O'Neal is an honorable, if incurably fast-lane Arniephile guilty of nothing more than a megadealership dream and a disastrous 1989 buy back arrangement with Hertz that cost the three-way auto partnership (O'Neal, Palmer, McCormack) $13 million. The opposite faction accepts the McCormack/IMG portrait that paints O'Neal as a calculating scalawag who avoided criminal prosecution only by signing over to Arnie and McCormack his show-stopping, $4.5 million Isleworth home, his nearby farm, his third of the auto partnership and his 14% stake in Bay Hill Club.
* * *
According to Dadey, O'Neal and Palmer group Chief Financial Officer, C.J. Roach, the dark discovery IMG made was that O'Neal had made hundreds of charges on the company American Express Card for clothes, shoes, airline tickets for his family, toys for his children and other personal items, passing them off as "public relations" expenses. Beside each charge, O'Neal had jotted "P/R" in the margin of the monthly American Express statements. Over a 10-year period, these charges had climbed well into six figures. IMG's conclusion: Mark and Arnie were footing the bill for O'Neal's Gucci life style.
* * *
`I feel sorry for Arnold about O'Neal. O'Neal was a crook. O'Neal stole money,' said McCormack. `O'Neal brought his Isleworth house with money from Arnold's and my car dealerships without telling us he was doing it.'
* * *
O'Neal said he earned a total of $12,000 in 1992, a `gift' consulting fee from a mutual friend of Arnie's who has stood behind O'Neal. Sally O'Neal, a registered nurse by training, went back to work in 1992 to help support the family.
* * *
33. Sally O'Neal and James T. O'Neal, III each read Chapter 7, "The Ultimate Fender-Bender," of Mr. Guest's biography, ARNIE INSIDE THE LEGEND.
34. However, Sally O'Neal and James T. O'Neal, III's testimony that they did not recall the above-referenced allegations concerning O'Neal's malfeasance, misconduct, and financial collapse is not credible. This conclusion is bolstered by Sally O'Neal and James T. O'Neal, III's vivid recollection of other passages from the book.
The Transfers to the O'Neal Transferees
35. As President and CEO of Baker O'Neal Holdings and APAG, O'Neal was responsible for the day-to-day operations of the corporations, including controlling the books and records of the Debtors, and the disposition of their assets.
36. During his tenure as President and CEO of Baker O'Neal Holdings and APAG, O'Neal caused the Debtors to transfer their interests in property directly to and/or for the benefit of the O'Neal Transferees.
37. More specifically, O'Neal caused the Debtors to make the following transfers to and/or for the benefit of the O'Neal Transferees (the "Transfers") as follows:
a. Baker O'Neal Holdings' Payment of Defendants' Purchase of Personal Items through the Baker O'Neal Holdings' American Express Corporate Credit Card:
i Sally O'Neal $84,553.87
ii James T. O'Neal, III $34,471.46
iii Kelly O'Neal $151.89
iv Kathleen O'Neal $1,129.72
b. Baker O'Neal Holdings' Payment of the Defendants' Personal Credit Cards:
i Sally O'Neal $156,447.08
ii James T. O'Neal, III $30,053.22
iii Kelly O'Neal $33,913.63
iv Kathleen O'Neal $27,210.14
c. Baker O'Neal Holdings' and APAG's Payment of Defendants' Personal Expenses by Company Check or Disbursement:
i Sally O'Neal $103,909.30
ii James T. O'Neal, III $329,338.45
iii Kelly O'Neal $183,360.50
iv Kathleen O'Neal $60,707.01
v Patrick O'Neal $82,406.96
d. Transfers of Plaintiffs' Assets for Property and/or Improvements
i. Sally O'Neal —
(1) Satisfaction of Mortgage/Atlantic Mortgage/6100 Tarawood — $82,563.88
(2) Improvements to 6100 Tarawood — $176,068.90
ii. James T. O'Neal, III
(1) Pavia Farm Purchase and related expenses — $98,223.01
(2) Pavia Farm Improvements — $235,228.70
(3) Other Transfers — $3,800.29
iii. Kelly O'Neal —
(1) Pavia Farm Purchase and related expenses — $98,223.01
(2) Pavia Farm Improvements — $235,228.70
(3) Other Transfers — $2,775.41
Baker O'Neal Holdings' Corporate American Express Cards/ Personal Credit Cards
38. Although they were not officers, directors, or employees of Baker O'Neal Holdings, Sally O'Neal, James T. O'Neal, III, Kelly O'Neal and Kathleen O'Neal each received a Baker O'Neal Holdings' Corporate American Express Card from O'Neal (the "BOH AMEX Corporate Cards").
39. Sally O'Neal, James T. O'Neal, III, Kelly O'Neal and Kathleen O'Neal also had personal credit cards (the "Personal Credit Cards").
40. Each of them used the BOH AMEX Corporate Cards and their Personal Credit Cards for personal expenses; however none of them paid any of the invoices for those personal expenses.
41. Rather, they simply mailed or provided all of their receipts to O'Neal or Paul Mohabir, Baker O'Neal Holdings' bookkeeper, for payment by the Debtors.
Purchase of Automobiles
42. As part of Baker O'Neal Holdings and APAG's payment of Defendants' personal expenses by company check or disbursement, O'Neal, among other things, caused the Debtors to transfer its property to purchase the following automobiles (the "Automobiles") to and/or for the benefit of the following O'Neal Transferees:
a. James T. O'Neal, III — 1997 Jeep Cherokee, VIN No. 1J4FT27S6VL563073;
b. Kelly O'Neal — 1997 Jeep Grand Cherokee, VIN No. 1J4GX78YXVC656459;
c. Kelly O'Neal — 1997 Jeep Grand Cherokee, VIN No. 1J4G278Y9VC634804;
d. Kathleen O'Neal — 1997 Ford Explorer, VIN No. 1FMDU32P7VZC05718; and
e. Patrick O'Neal — 1997 Chevrolet Tahoe, VIN No. 3GNEK18R8VG107980.
43. Although the 1997 Jeep Grand Cherokee, VIN No. 1J4GX78YXVC656459, is titled to Kelly O'Neal (the "Black Jeep"), Sally O'Neal has always been the primary driver of the Black Jeep and continues to maintain possession of it at the Bay Hill Home.
44. Kelly O'Neal's testimony that O'Neal purchased the Black Jeep as a Christmas gift for Sally O'Neal and titled the Black Jeep in Kelly's name because O'Neal wanted to surprise Sally is not credible. Although O'Neal may have desired to surprise Sally with the Black Jeep, no reason existed to title the Black Jeep in Kelly's name other than to shield the Black Jeep from their creditors. Moreover, this conclusion is bolstered by the fact that Sally's pervious car, a 1994 White Jeep, was also titled in Kelly's name.
45. As a signatory on the Baker O'Neal Holdings' checking account, Sally O'Neal signed the Baker O'Neal Holdings' check in excess of $35,000 to purchase the 1997 Chevrolet Tahoe for Patrick O'Neal.
Purchase of Real Property and Improvements
46. As part of the Transfers of Plaintiffs' assets for property and/or improvements, O'Neal, among other things, caused the Debtors to transfer their interest in property as follows:
a. to pay off the mortgage on the Bay Hill Home held by Atlantic Mortgage in the amount of $82,563.88;
b. to pay for improvements to the Bay Hill Home in the amount of $176,068.90;
c. to satisfy a mortgage on a farm in the name of James T. O'Neal, III and Kelly K. O'Neal in the amount of $196,446.02; and
d. to make improvements to the farm in the amount of $470,457.40.
The Bay Hill Home
47. Mr. O'Neal and Sally O'Neal own the Bay Hill Home which is more particularly described as follows:
Lot 282, BAY HILL, SECTION 8, according to the plat thereof as recorded in Plat Book 4, page 144, Public Records of Orange County, Florida.
48. Most, if not all of the O'Neal Transferees, lived in the Bay Hill Home while the improvements were made to it.
49. Sally O'Neal, in particular, lived in the Bay Hill Home during the entire period the improvements were made to it.
50. During the period of time O'Neal caused the Debtors to pay off the mortgage and to pay for the improvements to the Bay Hill Home, Sally O'Neal had knowledge of the Judgments, her and her husband's insolvency, and that O'Neal was using the Debtors' assets to pay off the mortgage and to pay for extensive improvements to the Bay Hill Home.
51. Without a budget to restrict her, Sally O'Neal participated in and directed the improvements to the Bay Hill Home including but not limited to, a completely remodeled kitchen and bathroom.
The Pavia Farm
52. On January 31, 1994, James T. O'Neal, III ("O'Neal, III") and Kelly O'Neal purchased property in Ocala, Florida, identified as Parcel Number 37294-000-00 (the "Pavia Farm") from John and Marlene Pavia for a purchase price of $172,000.
53. On January 31, 1994, O'Neal, III and Kelly O'Neal executed a purchase money mortgage (the "Pavia Mortgage") in favor of the Pavias.
54. The Pavia Mortgage was granted to secure the Mortgage Note executed on January 31, 1994, by O'Neal, III and Kelly O'Neal in favor of the Pavias in the amount of $145,000.
55. O'Neal caused Baker O'Neal Holdings to issue checks payable to the Pavias to satisfy the interest due from O'Neal, III and Kelly on the Mortgage Note (the "Interest Payments").
56. On December 22, 1997, O'Neal, as President of Baker O'Neal Holdings, caused the corporation to issue a check in the amount of $146,446.02 ($145,000.00 in principal plus $1,446.02 in interest) payable to the Pavias to satisfy the obligations of O'Neal, III and Kelly under the Mortgage Note (the "Mortgage Payment").
57. No value was given to Baker O'Neal Holdings by O'Neal, O'Neal, III or Kelly O'Neal for the Interest Payments or the Mortgage Payment.
58. The O'Neal Transferees' explanation that O'Neal gave the Pavia Farm to O'Neal, III and Kelly O'Neal as a gift is not credible and contradicted by their testimony. Sally O'Neal testified O'Neal and she looked for farm property but that O'Neal decided to give the Pavia Farm to O'Neal, III and Kelly O'Neal. O'Neal, III and Kelly, who were twenty-four and twenty-two years old at the time of the purchase of the Pavia Farm, claim there were told, without explanation, to sign the documents to transfer title to them, including, but not limited to, the Mortgage Note and Mortgage. Moreover, neither of them claims to have read either of the documents despite their education — O'Neal, III had completed his undergraduate degree and Kelly was in college. Although they owned the property, neither O'Neal, III nor Kelly directed any of the improvements, to the Pavia Farm nor did they question who was paying for the improvements, even though the improvements exceeded $470,000.00.
Christmas 1997
59. On December 25, 1997, O'Neal presented each of the O'Neal Transferees with checks in the following amounts as Christmas gifts (the "Christmas Checks"):
O'Neal caused the Debtors to issue other checks to the O'Neal Transferees at that same time which were deposited to accounts held in the names of the O'Neal Transferees.
a. Sally O'Neal $50,000
b. James T. O'Neal, III $10,000
c. Kelly K. O'Neal $10,000
d. Kathleen O'Neal $10,000
e. Patrick O'Neal $10,000
60. The O'Neal Transferees' explanation of what transpired next is not credible.
61. Although each of the O'Neal Transferees testified that they had never received gifts similar to the Christmas Checks, none of the O'Neal Transferees could recall any discussion among them about the generous Christmas Checks, absent thanking O'Neal. Moreover, Sally O'Neal would have the Court believe that she immediately left the room upon receiving a check in the amount of $50,000 to tend to the turkey she was preparing for Christmas dinner, rather than discuss the Christmas Checks. Sally O'Neal further claims that she returned her check and all of the children's checks, except O'Neal, III's check, because she thought they were "excessive."
The Accounts
62. As part of his scheme to defraud the Debtors and shield assets from creditors, O'Neal created bank accounts in the names of James T. O'Neal, III, Kelly and Kathleen O'Neal (the "Accounts"). O'Neal deposited the Debtors' funds to those Accounts for the benefit of the O'Neal Transferees.
63. The O'Neal Transferees affirmatively assisted O'Neal in his scheme to deplete the Debtors' assets and conceal those assets from creditors.
64. For example, Sally O'Neal took Kathleen O'Neal to National City Bank in the summer of 1997 and deposited approximately $30,000.00 in an account created in Kathleen O'Neal's name. Sally O'Neal and Kathleen O'Neal returned to National City Bank in May 1998 and withdrew the $30,000.00.
65. On two other occasions, O'Neal took Kathleen O'Neal to two different banks to deposit sums in excess of $30,000.00 to accounts created in Kathleen O'Neal's name.
66. Following the filing of the Complaint, O'Neal and Kathleen O'Neal returned to those banks in November 1998 to withdraw those deposits.
No Business Purpose or Justification Existed for the Transfers
67. O'Neal did not disclose the Transfers to other representatives of the Debtors, including Patrick Baker.
68. O'Neal did not have the authority of the Debtors to make the Transfers to and/or for the benefit of the O'Neal Transferees.
69. Patrick Baker did not authorize nor did he ratify the Transfers. Mr. Baker's personal guaranty to repay promissory notes to APAG "Accredited Investors" supports this conclusion because Mr. Baker would not have consented to the personal guaranty if he had known O'Neal was going to make the Transfers.
70. When questioned about the Transfers by Sally O'Neal, O'Neal, who has refused to answer questions from counsel for the Debtors relating to the Transfer based on the privilege against self-incrimination, told Sally "C.J. said it was legal." O'Neal did not say Mr. Baker had knowledge of the Transfers or that the Transfers were authorized.
O'Neal's assertion of his privilege against self-incrimination gives rise to an adverse inference that the Transfers were not authorized. See In re Maurice, 73 F.3d 124, 126 (7th Cir. 1995) (Court recognized that a claim of the privilege against self-incrimination may give rise to an adverse inference against the party invoking the privilege); Kontos v. Kontos, 968 F. Supp. 400, 408-09 (S.D.Ind. 1997) (An adverse inference may be drawn from a party's refusal to testify in a civil case).
71. Nevertheless, it is irrelevant whether the Transfers are authorized because under the Bankruptcy Code and the Indiana Uniform Fraudulent Transfer Act, transfers may be voluntary or involuntary. See, e.g., 11 U.S.C. § 548. ("The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily . . . .") (Emphasis added); Indiana Code § 32-2-7-10 ("[T]ransfer means any mode of disposing of or parting with an asset or an interest in an asset whether direct or indirect, absolute or conditional, or voluntary or involuntary.") (emphases added).
72. Throughout his tenure, O'Neal maintained and controlled the Debtors' books and records at the Debtors' Florida offices.
73. No business purpose or justification existed for O'Neal to make the Transfers to and/or for the benefit of the O'Neal Transferees.
74. The Transfers to and/or for the benefit of the O'Neal Transferees greatly reduced the size of the Debtors' estates.
75. The Transfers were to and/or for the benefit of O'Neal's wife, Sally O'Neal, and his four (4) children, James T. O'Neal, III, Kelly O'Neal, Kathleen O'Neal, and Patrick O'Neal.
76. O'Neal caused the Debtors to make the Transfers to and/or for the benefit of the O'Neal Transferees with the actual intent to hinder, delay, and defraud the Debtors' creditors.
77. The Debtors made the Transfers to and/or for the benefit of the O'Neal Transferees with the actual intent to hinder, delay, and defraud the Debtors' creditors.
78. O'Neal caused the Debtors to make the Transfers to third parties to pay the debts owed to those parties by the O'Neal Transferees.
79. The Debtors have been damaged by having made payments to third parties for the benefit of the O'Neal Transferees.
The O'Neal Transferees Gave No Value
80. The Debtors did not receive anything of value in exchange for the Transfers.
81. More specifically, none of the O'Neal Transferees was an employee of Baker O'Neal Holdings or APAG nor did they provide services to Baker O'Neal Holdings and APAG in exchange for the Transfers to and/or for their benefit.
The Debtors' Financial Condition
82. At the time of the Transfers, Baker O'Neal Holdings and APAG were insolvent.
83. At the time of the Transfers, the financial condition of APAG was such that the sum of APAG's debts was greater than all of APAG's property, at a fair valuation.
84. At the time of the Transfers, the financial condition of Baker O'Neal Holdings was such that the sum of Baker O'Neal Holdings' debts was greater than all of Baker O'Neal Holdings' property, at a fair valuation.
85. At the time of the Transfers, Baker O'Neal Holdings and APAG had unsecured creditors.
86. Between 1994 and 1997, APAG and numerous "Accredited Investors" (the "Note Holders") executed promissory notes, letter agreements, and subscription agreements where upon the Note Holders would receive convertible promissory notes (the "Notes") in the principal amount of his or her respective loan to APAG.
87. Under the subscription agreements, the Note Holders had the right to convert their Notes into shares of APAG common stock.
88. None of the Note Holders ever converted their Notes into shares of APAG common stock.
89. The Notes are debts of APAG.
The Discovery of the Transfers
90. Baker O'Neal Holdings and APAG did not discover the Transfers to and/or for the benefit of the O'Neal Transferees until August 1998.
91. In that regard, Kevin Rankel, then an employee of 21st Century Automotive Group, Inc., provided Michael Quinn, an employee of Baker O'Neal Holdings, with a partial page of Baker O'Neal Holdings' general ledger which listed unknown and unauthorized expenses related to farms in Ocala, Florida.
The Debtors formed 21st Century Automotive Group, Inc. to acquire the Massey Group and complete the initial public offering.
92. Mr. Quinn informed Mr. Baker of the discovery and Mr. Baker removed O'Neal as President and CEO of Baker O'Neal Holdings and APAG on September 3, 1998.
93. The contemporaneous handwritten notes of C.J. Roach of a telephone conversation on September 3, 1998, between Mr. Baker and Mr. Roach, an accountant with Ernst Young LLP who was to provide professional services for Baker O'Neal Holdings and APAG, corroborate the discovery of the Transfers and provide in relevant part:
• Pat is taking over as CEO
• Jim [O'Neal] has been relieved of authority
* * *
• Pat Baker was not aware of the extent of the dollars being spent other than on Massey deal. . . .
• Jim has spent more than Pat has in net worth
* * *
• I was under the impression that Pat approved all budgeted expenditures — that has not happened. . . .
(emphasis in original).
94. Mr. Roach's own handwritten note reflects that Mr. Roach had no knowledge that Mr. Baker had knowledge of or had approved the Transfers.
The O'Neal Transferees
95. Based upon the overall facts and circumstances, and in view of the many contradictions and gaps in the O'Neal Transferees' explanation for what transpired, and also in consideration of the O'Neal Transferees' demeanor on the witness stand, the Court is of the belief that at least some of the O'Neal Transferees had or should have had knowledge of the fraudulent diversion of the Debtors' assets to them and/or for their benefit.
96. In particular, some of the O'Neal Transferees' explanation for certain events is not credible. For example,
a. James T. O'Neal, III testified as follows:
i. His parents gave the Isleworth Home to Arnold Palmer as a gift;
ii. His parents gave the Pavia Farm to his sister, Kelly, and him, as a gift or an "estate planning tool" despite the fact that O'Neal, III was aware that his parents had unsatisfied judgments against them and his parents' only assets were the Bay Hill Home and a life insurance trust; and
iii. He could not recall the allegations regarding O'Neal's malfeasance, misconduct and financial collapse contained in Chapter Seven, "The Ultimate Fender-Bender" from Larry Guest's biography on Mr. Palmer, ARNIE INSIDE THE LEGEND, yet he could vividly remember other passages from the book.
b. Sally O'Neal testified as follows:
i. She required her children, except O'Neal, III, to return the Christmas Checks because the amount of the checks was excessive for children of that age, yet she signed, as a signatory on the account, a Baker O'Neal Holdings' check in excess of $35,000 to purchase a 1997 Chevrolet Tahoe for Patrick O'Neal who was sixteen (16) years old at the time.
ii. She has no idea why the Black Jeep or the 1994 White Jeep which she drove were titled in Kelly O'Neal's name; and
iii. Despite her and her husband's insolvency, she had no budget to operate within when she remodeled the kitchen in the Bay Hill Home.
c. Kelly O'Neal testified as follows:
i. The Pavia Farm was a gift to her brother, O'Neal, III, and her from their parents;
ii. O'Neal purchased the Black Jeep titled in her name as a Christmas gift for her mother and titled it in Kelly's name because O'Neal wanted to surprise Sally O'Neal; and
iii. O'Neal deposited large sums of money to bank accounts created in her name as a gift for the future but then removed some of those funds from her without any discussion or explanation.
d. Kathleen O'Neal testified as follows:
i. The accounts created in her name on trips to the banks with her mother and father were gifts and no restrictions were placed on her use of those accounts but the removal of those funds by O'Neal occurred without discussion or explanation; and
ii. She had no budget for her wedding at the Grand Cypress Resort in Orlando, Florida, for 130 of her "closest family and friends" despite the fact that she had been sued by the Debtors to recover the Transfers complained of herein.
97. At the very least, Sally O'Neal and O'Neal III knew that some, if not all, of the Transfers were fraudulently obtained by O'Neal.
98. Moreover, Sally O'Neal and O'Neal III knowingly and actively participated in the fraud with O'Neal to deplete the Debtors' assets for the O'Neal Transferees' benefit.
99. In that regard, Sally O'Neal and O'Neal III had knowledge of the following:
a. O'Neal was financially ruined as a result of his fallout with Arnold Palmer;
b. O'Nel was unemployed following his removal from APAG I and the other busiesses which O'Neal owned with Messrs. Palmer and McCormack;
c. Sally O'Neal, a homemaker, had to return to work in 1992, to support the family;
d. some, if not all, of the Judgments against O'Neal and Sally O'Neal remained unsatisfied;
e. as a result of the Judgments, O'Neal and Sally O'Neal could not hold assets in their names because judgment creditors could take those assets;
f. the O'Neal family was forced to move from the show-stopping, multi-million dollar Isleworth Home to the modest, one story Bay Hill Home because O'Neal could no longer afford the Isleworth Home;
g. the allegations regarding O'Neal's malfeasance, misconduct and financial collapse contained in Chapter Seven, "The Ultimate Fender-Bender" from Larry Guest's biography on Mr. Palmer, ARNIE INSIDE THE LEGEND; and
h. the lien on the Isleworth Home as a result of the Palmer/McCormack judgment.
100. The O'Neal Transferees participated in defrauding the Debtors, their creditors, the and the holders of the Judgments as follows:
a. The O'Neal Transferees enjoyed a lavish lifestyle funded by the Transfers from the Debtors including, but not limited to:
i. cruises;
ii. country club memberships and use charges;
iii. automobile lease and purchase costs; and
iv. Labor Day weekends at Long Boat Key, Florida.
b. Use of Baker O'Neal Holdings' Corporate American Express cards for personal expenses;
c. Sending receipts for personal expenses charged to their Personal Credit Cards to Paul Mohabir, Baker O'Neal Holdings' bookkeeper, for payment by the Debtors;
d. O'Neal, III and Kelly O'Neal purchased the Pavia Farm in their names for their parents;
e. O'Neal, III and Kelly O'Neal did not object to the improvements to the Pavia Farm in excess of $470,000;
f. Kelly O'Neal allowed two of Sally O'Neal's cars to be titled in her name, including (1) a 1994 White Jeep; and (2) the Black Jeep;
g. Shielding assets from creditors by allowing and assisting O'Neal to deposit large sums of money to the Accounts; and
h. Use of the sums deposited to the Accounts.
101. Sally O'Neal and O'Neal, III's conduct is particularly egregious.
102. With respect to Sally O'Neal, at all relevant times, she was aware she was legally responsible for the judgments in favor of Palmer and McCormack and Sun Bank which totaled in excess of $16,000,000.00.
103. Nonetheless, Sally O'Neal never made any effort to pay $1.00 to her creditors.
104. Sally O'Neal signed, as a signatory on the account, Baker O'Neal Holdings' checks to and/or for the benefit of the O'Neal Transferees.
105. At all relevant times, Sally O'Neal signed joint income tax returns for O'Neal and herself which revealed the following:
a. O'Neal and she had a negative net income in excess of $6 million; and
b. O'Neal had no taxable wages to pay for the luxurious lifestyle that the O'Neal Transferees enjoyed from 1994 through 1998 as a result of the Transfers.
106. With respect to O'Neal, III, he received a Doctorate of Jurisprudence from the University of Florida in 1997 and a L.L.M. in taxation from New York University ("NYU") in May 1999.
107. In law school, O'Neal, III took a course on bankruptcy which required O'Neal, III to study and be tested on fraudulent transfers.
108. O'Neal, III had knowledge of and understood the concept that a corporation is a separate legal entity which can own and transfer property.
109. O'Neal, III also has knowledge that officers and directors owe fiduciary duties to corporations, including to act in the corporations' best interests.
110. O'Neal, III understood that his parents could not hold assets in their names as a result of the Judgments against them.
111. O'Neal, III knew that his father, O'Neal, held assets jointly with his children.
112. O'Neal, III knew that his father, O'Neal, was transferring the Debtors' assets to and/or for the benefit of the O'Neal Transferees.
113. Despite the above-referenced knowledge and education, O'Neal, III never questioned whether he should accept the Transfers or whether the Transfers were proper. Rather, O'Neal, III chose to remain silent and accept the "fruits of ill-gotten gains."
114. For example, when O'Neal, III was accepted to NYU, O'Neal, III told his father, O'Neal, that he needed $100,000 to attend NYU.
115. O'Neal caused the Plaintiffs to issue a check in the amount of $100,000 to O'Neal, III to enable him to attend NYU.
116. O'Neal further caused the Plaintiffs to transfer $42,000 for O'Neal, III's housing at NYU.
117. O'Neal, III had student loans from his undergraduate degree and law school in excess of $50,000.
118. O'Neal, III gave the account numbers for the student loans to O'Neal.
119. O'Neal, III states that the student loans were subsequently satisfied in full.
120. O'Neal, III was aware that a Baker O'Neal Holdings' check was issued to pay for his bar review.
CONCLUSIONS OF LAW
Based on the foregoing facts, the Court makes the following conclusions of law:
1. This Court has jurisdiction of this action pursuant to 28 U.S.C. § 157 and § 1334.
2. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H).
3. Venue of this matter is proper in this Court pursuant to 28 U.S.C. § 1409.
4. Baker O'Neal Holdings and APAG, as debtors in possession, have the power to avoid fraudulent transfers under federal and state law. See, § 544(b) and 548; see also, National Peregrine, Inc. v. Capitol Fed. Savs. And Loan Ass'n of Denver, 116 B.R. 194, 204 (C.D.Cal. 1990) ("As a debtor in possession, NPI has nearly all of the powers of a bankruptcy trustee, see 11 U.S.C.A. § 1107(a), including the authority to set aside preferential or fraudulent transfers, as well as transfers otherwise voidable under applicable state or federal law."); see also 11 U.S.C.A. § 1107(a)("[A] debtor in possession shall have all the rights . . . and powers, and shall perform all the functions and duties . . . of a trustee serving in a case under this chapter.").
5. The Debtors did not discover the Transfers until August 1998.
6. All of the Transfers occurred within four (4) years of the Petition Date.
7. The Debtors commenced this cause of action within one (1) year after the Transfers were or could reasonably have been discovered by the Debtors.
8. At the time of the Transfers, Baker O'Neal Holdings and APAG had unsecured creditors.
Avoidance of Fraudulent Transfers Pursuant to 11 U.S.C. § 548(a)(1)(B) and Section 14(2) and 15 of the Indiana Uniform Fraudulent Transfer Act
9. To avoid a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B) (a)(2) and Section 14(2) and 15 of the Indiana Uniform Fraudulent Transfer Act, the Debtors in Possession must prove the following:
Section 544(b) authorizes a debtor in possession to avoid "any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title . . . ." 11 U.S.C.A. § 544. See also, In re: American Way Serv. Corp., 229 B.R. 496, 592-30 (Bankr.S.D.Fla. 1999) (Section 544 permits debtor in possession to avoid certain transfers under applicable state law).
Although Florida law may arguably apply to the Plaintiffs' claims under the Uniform Fraudulent Transfer Act, Indiana and Florida have both adopted the Uniform Fraudulent Transfer Act. Thus, Indiana and Florida law would produce the same decision in the lawsuit.
a. Transfer made or obligation incurred by the Debtor involved property of the Debtors;
b. The Debtors did not receive reasonably equivalent value for the property transferred or obligation incurred, and
c. That the Debtors were insolvent, made insolvent by the transaction, operating or about to operate without sufficient capital, or unable to pay debts as they became due.
Mellon Bank, N.A. v. Official Comm. Of Unsecured Creditors of R.M.L., Inc., 92 F.3d 139, 144 (3rd Cir. 1996); In re Heddings Lumber Bldg. Supply, Inc., 228 B.R. 727, 729 (Bankr 9th Cir. 1988) 11 U.S.C.A. § 548; Ind. Code. Ann. § 32-2-7-14(2) and 15.
10. A transfer, as defined under Section 101(54) of the Bankruptcy Code and Section 10 of the Indiana Uniform Fraudulent Transfer Act, encompasses every mode of parting with property or an interest in property. Thompson v. Jonovich, 168 B.R. 408, 416 (Bankr.D.Ariz. 1994); see also 11 U.S.C.A. § 101(54); Ind. Code Ann. § 32-2-7-10. Furthermore, as stated in ¶ 71 of these Findings, a transfer means any mode of disposing of or parting with an asset or an interest in an asset, whether direct or indirect, absolute or conditional, or voluntary or involuntary.
11. The test used to determine reasonably equivalent value in the context of a fraudulent conveyance requires the court to determine the value of what was transferred and compare it to what was received." Barber v. Golden Seed Co., Inc. 129 F.3d 382, 387 (7th Cir. 1997).
12. "[B]efore determining whether the value was `reasonably equivalent' to what the debtor gave up, the court must make an express factual determination as to whether the debtor received any value at all." Mellon Bank, 92 F.3d at 149.
13. "A payment made solely for the benefit of a third party, such as a payment to satisfy a third party's debt, does not furnish reasonably equivalent value to the debtor." In re Whaley, 229 B.R. 767, 775 (Bankr.D.Minn. 1999); Leibowitz v. Parkway Bank Trust Co., 210 B.R. 298, 302 (N.D.Ill. 1997), aff'd by, 139 F.3d 574 (1998) ("[T]ransfers made exclusively for the benefit of third parties do not furnish reasonably equivalent value."); Coan v. Fleet Credit Card Servs., Inc. 225 B.R. 32, 36 (Bankr. D. Conn. 1998) ("Transfers made or obligations incurred solely for the benefit of third parties do not furnish reasonably equivalent value."); McGraw v. Allen, 64 B.R. 620, 628 (Bankr.N.D.Ohio 1986) ("If a transfer solely benefits a third party, such that the property is used to satisfy a debt owed by one other than the debtor, there can be no reasonably equivalent exchange received by the debtor in exchange for the transfer.").
14. "In cases where the immediate benefit from a transfer is identifiable to a non-debtor third party, the burden shifts to the transferee to show that the debtor received a cognizable indirect benefit." Whaley, 229 B.R. at 775. "The indirect benefit must have been tangible and of concrete economic value." ("This is not an easy thing to prove, in the context of a personal relationship between a debtor and beneficiary third party."); In re Pilavis, 233 B.R. 1, 11(Bankr.D.Mass. 1999) ("In an intra-family transaction, the court places a heavier burden on the transferee to establish fair consideration for the transfer").
15. The undisputed evidence reveals that the Debtors did not receive reasonably equivalent value for the Transfers to and/or for the benefit of the O'Neal Transferees. Indeed, the O'Neal Transferees were not employees of Baker O'Neal Holdings or APAG nor did they provide services to Baker O'Neal Holdings or APAG. Moreover, the Transfers were made exclusively to and/or for the benefit of the O'Neal Transferees, who are all members of O'Neal's family. Thus, the burden shifts to the O'Neal Transferees to demonstrate that the Debtors received a benefit from the Transferees. The O'Neal Transferees have failed to offer any evidence which reveals a benefit, even indirect, to the Debtors from the Transfers. Accordingly, the Debtors did not receive reasonably equivalent value for the Transfers.
William J. Wilhelm's Expert Qualifications
16. Technical, specialized knowledge regarding financial accounting will assist the Court to understand the evidence regarding Baker O'Neal Holdings and APAG's financial condition and to determine facts related to Baker O'Neal Holdings' and APAG's insolvency.
17. William J. Wilhelm, CPA, ABV, CVA, is qualified as an expert pursuant to Rule 702 of the Federal Rules of Evidence to provide opinion testimony regarding issues of financial accounting, including opinions regarding Baker O'Neal Holdings' and APAG's financial condition.
APAG's Insolvency
18. Each item identified as a "liability" on the APAG balance sheets prepared by Mr. Wilhelm for December 31, 1995, December 31, 1996, December 31, 1997, and October 9, 1998, constitutes a "debt" of APAG pursuant to 11 U.S.C. § 101(12).
19. Each APAG convertible promissory note, the aggregate outstanding value of which is identified as "Notes Payable — Investors" on the APAG balance sheets prepared by the Mr. Wilhelm, represents a "debt" of APAG pursuant to 11 U.S.C. § 101(12).
20. Section 101(32)(A) of the Bankruptcy Code defines insolvency as a:
financial condition such that the sum of the entity's debts is greater than all of such entity's property, at a fair valuation . . . 11 U.S.C. § 101(32)(A). For purposes of Section 548, solvency is measured at the time the debtor transferred value, not at some later or earlier time. This is known as the "balance sheet" test: assets and liabilities are tallied at fair valuation to determine whether the corporation's debts exceeds its assets.
Mellon Bank, 92 F.3d at 154; see also, Ind. Code Ann. § 32-2-7-12 ("A debtor is insolvent if the sum of the debtor's debts is greater than all the debtor's assets at a fair valuation.")
21. The undisputed evidence reveals that APAG was "insolvent" pursuant to 11 U.S.C. § 101(32) at the time of the Transfers and continued to be "insolvent" through the petition date, October 9, 1998.
Baker O'Neal Holdings's Insolvency
22. Each item identified as a "liability" on the Baker O'Neal Holdings balance sheets prepared by Mr. Wilhelm for December 31, 1995, December 31, 1996, December 31, 1997, and October 9, 1998, represents a "debt" of Baker O'Neal Holdings pursuant to 11 U.S.C. § 101(12).
23. The undisputed evidence reveals that Baker O'Neal Holdings was "insolvent" pursuant to 11 U.S.C. § 101(32) at the time of the Transfers and continued to be "insolvent" through the petition date, October 9, 1998.
24. Pursuant to 11 U.S.C. § 548(a)(1)(B) and Section 14(2) and 15 of the Indiana Uniform Fraudulent Transfer Act, the Transfers are fraudulent transfers and are subject to avoidance.
Avoidance of Fraudulent Transfers Pursuant to 11 U.S.C. § 548(a)(1)(A) and Section 14(1) of the Indiana Uniform Fraudulent Transfer Act
25. To make a case under section 548(a)(1)(A) of the Bankruptcy Code or section 14(1) of the Indiana Uniform Fraudulent Transfer Act (i.e., actual fraud), the Debtor in Possession must show that the transfers or obligations incurred by the Debtors actually took place and that the Debtors had actual intent to hinder, delay or defraud their creditors. Krudy v. Scott, 227 B.R. 834 (Bankr.S.D.Ind. 1998).
Actual intent may be proven by the debtor in possession by a preponderance of the evidence. Thompson v. Jonovich, 168 B.R. 408, 418 (Bankr.D.Ariz. 1994); see also, Grogan v. Garner, 111 S.Ct. 654 (1991); Western Wire Works, Inc. v. Lawler, 141 B.R. 425, 428 (Bankr. 9th Cir. 1992) ("A fair reading of the Supreme Court's opinion leads to the inference that the preponderance standard applies in all bankruptcy proceedings grounded in allegations of fraud.") Cf. Hirsh, 226 B.R. at 522 (Courts disagree whether actual fraud under § 548(a)(1) must be proven by clear and convincing evidence or a preponderance of the evidence.) Under either standard, the Debtors made the Transfers with the actual intent to hinder, delay, or defraud their creditors.
26. "Because actual fraud is rarely proven by direct evidence, courts infer fraudulent intent by examining the circumstances surrounding the transfer to determine whether any `badges of fraud' are present." Hirsch v. Steinberg, 226 B.R. 513, 523 (Bankr.D.Conn. 1998).
27. These badges of fraud include the following:
the transfer of property by the debtor during the pendency of a suit; a transfer of property that renders the debtor insolvent or greatly reduces his estate; a series of contemporaneous transactions which strip the debtor of all property available for execution; secret or hurried transactions not in the usual mode of doing business; any transaction conducted in a manner differing from customary methods; a transaction whereby the debtor retains benefits over the transferred property; little or no consideration in return for the transfer; a transfer of property between family members.
Diss v. Agri Business Int'l, Inc., 670 N.E.2d 97, 100 (Ind.Ct.App. 1996); United States v. Smith, 950 F. Supp. 1394, 1404 (N.D.Ind. 1996).
28. "No single factor constitutes a showing of fraudulent intent per se; the facts must be taken together to determine how many badges of fraud exist and if together they amount to a pattern of fraudulent intent." INDIANAPOLIS DIVISION; Hirsch, 226 B.R. at 522 ("The presence of a single badge of fraud may spur suspicion; the confluence of several can constitute conclusive evidence of actual intent to defraud.").
29. Since O'Neal was the President and Chief Executive Officer of each of the Debtors, O'Neal was in a position to and did, in fact, control the disposition of the Debtors' property.
30. Thus, O'Neal's fraudulent intent may be imputed to the Debtors. Consove v. Cohen, 701 F.2d 978, 984 (1st Cir. 1983) ("We may impute any fraudulent intent of Consove to the transferor Roco, because, as the company's president, director, and sole shareholder, he was in a position to control the disposition of its property."); McGraw v. Allen, 64 B.R. 620, 629-30 (Bankr.N.D.Ohio 1986) (Managing partner's fraudulent intent may be equitably imputed to the Debtor).
31. In this case, numerous badges of fraud are present:
a. At the time of the Transfers, O'Neal was insolvent;
b. At the time of the Transfers, the Judgments had been entered against O'Neal, individually, and against O'Neal and his wife, Sally, jointly and severally;
c. O'Neal did not have the knowledge, consent or authority of the Debtors to make the Transfers to and/or for the benefit of the O'Neal Transferees;
d. O'Neal controlled the Debtors' books and records at the Debtors' Florida office;
e. No business purpose or justification existed for O'Neal to make the Transfers to and/or for the benefit of the O'Neal Transferees;
f. The Debtors did not receive anything of value in exchange for the Transfers;
g. The Transfers to the O'Neal Transferees greatly reduced the size of the Debtors' estates; and
h. The Transfers were to and/or for the benefit of O'Neal's wife, Sally O'Neal, and his four (4) children, James T. O'Neal, III, Kelly O'Neal, Kathleen O'Neal, and Patrick O'Neal.
32. In light of the foregoing, O'Neal caused the Debtors to make the Transfers to and/or for the benefit of the O'Neal Transferees with the actual intent to hinder, delay, and defraud the Debtors' creditors.
33. As the President and Chief Executive Officer of the Debtor, O'Neal's fraudulent intent may be imputed to the Debtors. Therefore, the Debtors made the Transfers to and/or for the benefit of the O'Neal Transferees with the actual intent to hinder, delay, and defraud the Debtors' creditors.
34. Pursuant to 11 U.S.C.A. § 548(a)(1)(A) of the Bankruptcy Code and section 14(1) of the Indiana Uniform Fraudulent Transfer Act, the Transfers are fraudulent transfers and are subject to avoidance.
Liability of O'Neal Transferees
35. Once it is determined that the elements of Section 548 are met, Section 550 then dictates from whom a trustee (and in this case, the debtor-in-possession) may recover. Under Section 550(a), certain types of transferees are strictly liable, with no affirmative defenses available to them:
When a transfer is avoidable: Section 550(a) provides that the trustee [or in this case, the debtor in possession] may recover the avoided property — or its value — for the benefit of the estate from the initial transferee and the entity for whose benefit the transfer was made, and from any subsequent transferees, both immediate and mediate. This chain of potentially liable parties is cut off by subsequent transferees who take for value and in good faith. The initial transferee and the entity for whose benefit the transfer was made, however, are held strictly liable to the trustee.
Poonja v. Charles Schwab Co., Inc., 199 B.R. 410, 412-13 (Bankr. 9th Cir. 1996) (emphasis added); General Electric Capital Auto Lease, Inc. v. Broach, 185 B.R. 801, 809 (Bankr. 9th Cir. 1995) ("Section 550(a)(1) subjects to strict liability not only the initial transferee, but also `the entity for whose benefit such transfer was made.'")
36. The "good faith for value with no knowledge of voidability" affirmative defense under Section 550(b) raised by the O'Neal Transferees does not apply if the O'Neal Transferees otherwise fall under the strict liability provisions of Section 550(a) in that they were either (a) initial transferees or (b) entities for whose benefit such transfer was made.
37. All of the O'Neal Transferees, except Patrick, had personal credit cards, of which the charges were paid for from Baker O'Neal Holdings funds (see, Findings of Fact, ¶ 37(b)) or used the Baker O'Neal Holdings' American Express Corporate Credit Card to pay their personal expenses (see, Findings of Fact, ¶ 37(a)). There can be no doubt that, when Baker O'Neal funds were used to pay either personal credit cards or for the company credit card for personal charges, these O'Neal Transferees were the entities for whose benefit the transfers were made, thus bringing them squarely into the strict liability provisions of Section 550(a)(1).
Who or what entity is the "initial transferee" under the other prong of the Section 550(a) strict liability provision is another matter. According to the testimony at trial, all BOHI checks, whether to pay the charges incurred on personal credit cards, or whether to pay the personal charges of Sally O'Neal and O'Neal III, Kelly and Kathleen incurred on the BOHI card, were made out directly to the credit card company, and not to the defendants. There was no evidence at trial to suggest that, at least with respect to the payments made on the personal charge cards, BOHI cut the defendants a check, who, in turn deposited the check into their respective personal accounts, thereafter writing a check to the credit card companies to pay off the credit card charges. According to this Court's reading of Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890 (7th Cir. 1988), BOHI's writing a check directly payable to the credit card company was a "one step" transaction, instead of the "two step" transaction which occurred in that case. The Bonded court surmised that, had a "one step" transaction occurred there, the bank to whom the check was made payable would be the "initial transferee". Because the Court has already found under the alternative prong of strict liability that the O'Neal Transferees (except Patrick) were the entities for whose benefit the transfers were made, there is no need to determine who comes under the scope of "initial transferee".
38. The same analysis is true with respect to the transfers of BOHI assets which were used to purchase or improve property, or used for related expenses. (See Findings of Fact, ¶ 37(d)). Sally O'Neal, O'Neal III and Kelly O'Neal all were either the initial transferees or the entities for whose benefit the transfers were made, and therefore, these defendants are strictly liable for value of any such transfers.
39. The BOHI funds used to pay the personal expenses of the O'Neal Transferees (see Findings of Fact, ¶ 37(c)), present a different analysis, at least with respect to Patrick O'Neal. Patrick testified that, as of the date of his testimony, he was 19 years old. The BOHI transfers that were allegedly made for his benefit occurred between December 12, 1994 and August 13, 1998. There was no evidence presented to suggest that Patrick was already 18 years of age during this time period and therefore, the only conclusion the Court can draw is that Patrick was a minor when these transfers occurred. Several of the checks paid from BOHI funds were for medical expenses or tuition at Culver Military Academy, medical and educational needs of which the parents of a minor are primarily responsible. Although Patrick certainly received an incidental benefit of medical treatment and an excellent education, the primary beneficiaries of these transfers were O'Neal and Sally O'Neal, as the payment of these costs relieved them of their obligation to provide for the medical and educational needs of their minor son. With respect to the bulk of the remaining disbursements that paid golf club memberships and travel expenses, the Court fails to see how Patrick would be otherwise liable for these charges if he was a minor, with no capacity to enter into a contract. Regardless, the Court feels that imposing a money judgment on an individual for debts incurred before he was of a legal age to contract would be inequitable under the circumstances here, and therefore, under its Section 105 equitable powers, the Court will enter no such money judgment against Patrick. However, under § 550, the Debtors are entitled to recover, for the benefit of the estate, the property transferred, to the extent available, or in the alternative, the value of the Transfers from the O'Neal Transferees.; therefore, to the extent Patrick holds assets that were purchased with BOHI funds, he must turn them over.
40. By reason of the Debtors having been caused to pay the debts of the O'Neal Transferees, the Debtors are now equitably subrogated to the rights of the former creditors of the O'Neal Transferees. Equitable Lien
41. The Debtors are entitled to equitable liens on the following properties:
a. the Bay Hill Home for the Transfers to satisfy the mortgage on the Bay Hill Home and to pay for improvements to the Bay Hill Home;
b. the Pavia Farm for the Transfers to satisfy the Pavia Mortgage and for improvements to the Pavia Farm.
O'Neal, III and Kelly O'Neal are not occupying the Pavia Farm as a homestead. Thus, the homestead exemption is not applicable. To the extent they claim otherwise, the Debtors are still entitled to an equitable lien.
42. In the seminal case of Jones v. Carpenter, 106 So. 127 (Fla. 1925), the president of a bread company embezzled funds from the company which he used to make substantial improvements to his house. Less than two months later, an involuntary bankruptcy was commenced against the bread company. Since the former president of the bread company was insolvent, the trustee sought to impose an equitable lien on the former president's house to recover the embezzled funds. The former president asserted the defense of the homestead exemption.
43. The Florida Supreme Court recognized that there are three exceptions where a homestead may be subject to forced sale:
(1) the payment of taxes and assessments thereon;
(2) obligations contracted for the purchase, improvement, or repair thereof; or
(3) obligations contracted for the house, field or other labor performed on the realty.
Id. at 130.
44. Finding that the funds sought to be recovered had been used for labor and materials to improve the home, the Florida Supreme Court stated that the homestead exemption should not be applied so as to make it an instrument of fraud or an imposition upon creditors. Id. Accordingly, the court granted the trustee an equitable lien on the former president's home in the amount of the embezzled funds. Id.
45. The Debtors are likewise entitled to an equitable lien for the Transfers to make improvements to the Bay Hill Home and the Pavia Farm because O'Neal fraudulently caused the Debtors to make the Transfers which lead to improvements to the Bay Hill Home and the Pavia Farm.
46. Similarly, the Debtors are entitled to an equitable lien for the Transfers to satisfy the mortgages on the Bay Hill Home and the Pavia Farm because the Debtors' assets were used to satisfy the mortgages. Moreover, the Debtors are entitled to "stand in the shoes" of the prior lienors.
47. In Palm Beach Savings Loan Ass'n. F.S.A. v. Fishbein, 619 So.2d 267, 271 (Fla. 1993), a husband borrowed $1.2 million from the bank and secured the loan with a mortgage on his home. The husband then used $930,000 of the proceeds of the loan to satisfy the existing mortgages on his homestead. The bank subsequently discovered that the husband had forged his wife's signature on the loan documents. The bank contended that because the loan proceeds were used to satisfy prior liens on the homestead, it stood in the shoes of the prior lienors on the homestead under the doctrine of equitable subrogation. Thus, the bank claimed that it had the same rights to enforce a lien against the homestead property as the prior lienholders. The wife, who now has possession of the house following their divorce, claimed that the bank's equitable position could not be sustained because its claim did not fall with the exceptions to the homestead exemption.
48. The Florida Supreme Court, however, recognized that where equity demands it, this Court has not hesitated to permit equitable liens to be imposed on homesteads beyond the literal language of the homestead exemption. Id. at 270. Thus, in order to prevent a windfall to the wife, the court granted the bank an equitable lien to the extent that the bank's funds were used to satisfy pre-existing mortgages and taxes on the property, even though the wife had not been a party to the fraud, because the wife was in no worse position than she stood before the execution of the mortgage in favor of the bank. Id. at 270-71.
49. The Debtors are likewise entitled to an equitable lien on the Bay Hill Home and the Pavia Farm in the amounts used to pay off the mortgages on the Bay Hill Home and the Pavia Farm. Moreover, the Debtors are entitled to enforce the liens as the prior lienholders — Atlantic Mortgage and the Pavias — because Sally O'Neal, James T. O'Neal, III and Kelly O'Neal are in no worse position than they stood prior to the Transfers.
50. If the Court does not grant the equitable liens, Sally O'Neal, O'Neal, III and Kelly O'Neal would be unjustly enriched at the expense of the Debtors.
51. An award of an equitable lien under the circumstances is warranted because of the following:
a. Sally O'Neal, O'Neal, III and Kelly O'Neal had knowledge of the diversion of the Debtors' assets to satisfy the mortgages on the Bay Hill Home and the Pavia Farm and the improvements to each property; and
b. Sally O'Neal, O'Neal, III and Kelly O'Neal knowingly and actively participated in the use of the Debtors' assets to satisfy the mortgages and make improvements to the Bay Hill Home and the Pavia Farm.
In re Mesa, 232 B.R. 508, 514 (Bankr.S.D.Fla 1999) (Court held that equitable lien could be imposed in insurance company's favor on debtor's one-half interest in property, for funds which employee converted from insurer and used, with debtor's knowledge and active participation, to remodel homestead).
52. An equitable lien may provide a means for the Debtors to recover at least a portion of the funds which were misappropriated to and/or for the benefit of O'Neal, Sally O'Neal, O'Neal, III and Kelly O'Neal. Id.
53. Accordingly, the Debtors are granted an equitable lien on the Bay Hill Home in the amount of $258,632.78, which consists of the following:
a. $82,563.88 to pay off the mortgage to Atlantic Mortgage on the Home; and
b. $176,068.90 to pay for the improvements to the Home.
54. Having paid off the mortgage on the Bay Hill Home held by Atlantic Mortgage, the Debtors are entitled to succeed to all right, title and interest previously held in the Bay Hill Home by Atlantic Mortgage. Palm Beach Savings Loan Ass'n, F.S.A., v. Fishbein, 619 So.2d 267, 269 (Fla. 1993) (bank granted equitable lien on the homestead in the amount of the bank's funds which were used to pay off the existing mortgage and taxes).
55. The Debtors are further granted an equitable lien on the Pavia Farm in the amount of $666,903.42, which consists of the following:
a. $196,446.02 to satisfy the mortgage on the Pavia farm; and
b. $470,457.40 to pay for improvements to the Pavia farm.
56. Having paid off the mortgage on the Pavia farm held by the Pavias, the Debtors are entitled to succeed to all right, title and interest previously held in the Pavia farm by the Pavias. Palm Beach Savings Loan Ass'n, F.S.A., v. Fishbein, 619 So.2d 267, 269 (Fla. 1993) (bank granted equitable lien on the homestead in the amount of the bank's funds which were used to pay off the existing mortgage and taxes).
FINAL JUDGMENT
57. Final Judgment is hereby entered in favor of Plaintiffs, Baker O'Neal Holdings and APAG, and against Defendants, Sally O'Neal, James T. O'Neal, III, Kelly O'Neal, and Kathleen O'Neal, in the following amounts:
Sally O'Neal $603,543.03
James T. O'Neal, III $731,115.13
Kelly O'Neal $553,653.14
Kathleen O'Neal $89,046.87
with interest accruing thereon at the statutory rate until paid in full.
58. As a portion of the Final Judgment in the amount of $603,543.03, against Sally O'Neal and not in addition to that Final Judgment, the Plaintiffs are GRANTED an equitable lien on Sally O'Neal's residence at 6100 Tarawood, Orlando, Florida, which is more particularly described as follows:
Lot 282, BAY HILL, SECTION 8, according to the plat thereof as recorded in Plat Book 4, page 144, Public Records of Orange County, Florida.
59. The equitable lien is to be imposed as follows:
a. With respect to $82,563.88 paid to satisfy the mortgage on 6100 Tarawood held by Atlantic Mortgage, the Plaintiffs are entitled to succeed to all right, title and interest to that mortgage previously held by Atlantic Mortgage. Moreover, the O'Neals' homestead exemption shall not act as a defense to an action to enforce or foreclose on the equitable lien.
b. With respect to the $176,068.90 paid for improvements to 6100 Tarawood, the Plaintiffs are granted an equitable lien on 6100 Tarawood in that amount.
60. The Final Judgment against Sally O'Neal shall be reduced by the amount of recovery to the Plaintiffs from enforcement of the equitable lien.
61. As a portion of the Final Judgment in the amount of $731,115.13 against James T. O'Neal, III, and in the amount of $553,653.14 against Kelly K. O'Neal and not in addition to that Final Judgment, the Plaintiffs are GRANTED an equitable lien on the Pavia Farm which is more particularly described as follows:
The East 1/2 of the West 1/2 of the S.E. 1/4 of the N.W. 1/4 of Section 27, Township 16 South, Range 22 East, Marion County, Florida
62. The equitable lien is to be imposed as follows:
a. With respect to $196,446.02 paid to satisfy the Pavia Mortgage on the Pavia Farm held by John and Marlene Pavia, the Plaintiffs are entitled to succeed to all right, title and interest to that mortgage previously held by the Pavias. Moreover, the O'Neals' homestead exemption, if any, shall not act as a defense to an action to enforce or foreclose on the equitable lien.
b. With respect to the $470,457.40 paid for improvements to the Pavia Farm, the Plaintiffs are granted an equitable lien on the Pavia Farm in that amount.
63. The Final Judgments against O'Neal, III and Kelly O'Neal shall be reduced by one-half of the amount of recovery to Plaintiffs from enforcement of the equitable lien. 64. On February 22, 1999, the Court issued a Stipulation and Temporary
Restraining Order and Order Scheduling Hearing on Plaintiffs' Emergency Motion (A) to Modify the Court's Orders Dated December 9 and 10, 1998 respecting injunctive relief and (B) to show cause as to why Defendants, O'Neal, Sally O'Neal, James T. O'Neal, III, Kelly O'Neal, Kathleen O'Neal, and Patrick O'Neal Should Not be Held in Civil Contempt of Court (the "February 22 Order").
65. The February 22 Order, as amended, froze those certain accounts and other assets including life insurance identified on Exhibit A attached hereto (hereinafter the "Accounts"). This Court hereby orders that all assets held in the Accounts be transferred to Baker O'Neal Holdings and that the bank or other custodian or trustee of such account is hereby ordered to transfer the full value and amount of each such account to Baker O'Neal Holdings.
66. The Debtors are further entitled to the immediate return of the following automobiles (the "Automobiles") which were purchased by means of the Transfers for the benefit of the O'Neal Transferees:
a. James T. O'Neal, III — 1997 Jeep Cherokee, VIN No. 1J4FT2756VL563073
b. Kelly O'Neal — 1997 Jeep Grand Cherokee, VIN No. 1J4GX78YXVC656459
c. Kelly O'Neal — 1997 Jeep Grand Cherokee, VIN No. 1J4G278Y9VC634804
d. Katie O'Neal — 1997 Ford Explorer, VIN No. 1FMDU32P7VZC05718
e. Patrick O'Neal — 1997 Chevrolet Tahoe, VIN No. 3GNEK18R8VG107980.
67. The amount of the Final Judgment will be reduced accordingly upon receipt and application of the Accounts frozen by this Court's February 22 Order, as amended, and the proceeds from the sale of the Automobiles purchased by means of the Transfers.