Opinion
Case No. CV 94-8288-JFW (RNBx)
June 9, 2003
FINDINGS OF FACT AND CONCLUSIONS OF LAW; ORDER
This action came on for court trial on February 18, 19, 20, 21, 24, 25, 2003. Kevin H. Brogan of Hill, Farrer Burrill LLP appeared for Plaintiff and Counter-Defendant Moe Nasr ("Plaintiff"). Ralph W. Tarr, Terry L. Higham, and Pamela M. Robertson of Andrews Kurth LLP appeared for Plaintiff-In-Intervention and Counter-Claimant-In-Intervention Ben B. Floyd ("Plaintiff-In-Intervention"). Larry A. Hammond and Debra A. Hill of Osborne Maledon, PA appeared for the Carlsberg Defendants and the Carlsberg Counter-Claimants. Counter-Defendant Wayne Reeder appeared pro se.
The "Carlsberg Defendants" and the "Carlsberg Counter-Claimants" are defined below.
During the trial of this action, the Carlsberg Defendants objected to the admissibility of the deposition testimony of the following witnesses offered by Plaintiff-In-Intervention Ben B. Floyd: (1) Michele Gringas; (2) Catherine Imondi; (3) Stephen Johnson; (4) Colleen Crommett; (5) Vera Hunter; (6) Jarrell Ormand; and (7) William Geary. After considering the joint statements regarding the admissibility of the deposition testimony filed by the parties on March 14, 2003, the Court overrules the Carlsberg Defendants' objections and admits the deposition testimony into evidence.
At the conclusion of the trial of this action, Plaintiff-In-Intervention also objected to "transaction summaries" prepared by Ming-chu Chen Rouse, an attorney who represented the Carlsberg Defendants from 1994 through 1999. The Court conditionally received the "transaction summaries" into evidence subject to any post-trial written objections filed by Plaintiff-In-Intervention's. After considering Plaintiff-In-Intervention's written objections filed on March 21, 2003, the Court sustains Plaintiff-In-Intervention's objections to the "transaction summaries," and the Court's ruling admitting the transaction summaries into evidence is vacated.
Pursuant to the Court's order dated February 28, 2003, the parties were required to file proposed post trial findings of fact and conclusions of law. Plaintiff and Plaintiff-In-Intervention each filed post trial findings of fact and conclusions of law on March 10, 2003, and the Carlsberg Defendants filed their answering post trial findings of fact and conclusions of law on March 21, 2003. After considering the evidence, briefs, and parties' proposed findings of fact and conclusions of law, the Court makes the following findings of fact and conclusions of law:
Any finding of fact that constitutes a conclusion of law is also hereby adopted as a conclusion of law.
The Parties
Plaintiff and Counter-Defendant Moe Nasr is an individual residing in the State of Texas and is the trustee of the George Business Trust.
Plaintiff-In-Intervention and Counter-Claimant-In-Intervention Ben B. Floyd is an individual and resident of the State of Texas and is the Chapter 7 Trustee of RHI Holdings, Inc. ("RHI") and of Hill Top Developers, Inc. ("Hill Top"). Plaintiff-In-Intervention was appointed Chapter 7 Trustee on February 1, 1996 in proceedings in the United States Bankruptcy Court for the Southern District of Texas, Case Nos. 94-43383-H1-7 and 94-43384-H5-7.
The defendants include the following: William W. Geary, Jr.; Carlsberg Managed Properties Fund, Ltd.; Carlsberg Mobile Home Properties, Ltd.; Carlsberg Properties, Ltd.; Carlsberg Resources Corporation; CAC Realty, Inc., a/k/a CAC Realty Services, Inc., a/k/a CAC Realty; CAC Securities Corporation; D R Energy, Inc.; Del Rey Sunrise, Inc.; Five Seasons Investments, Ltd.; Geary Realty Corporation; Halls Properties, Inc.; Indrio Properties, Inc.; Kathleen Krzeminski; LJB Enterprises; Northlake Mobile Home Properties; RG Daytona, Inc.; Santa Barbara Mobile Home Properties; Silver Star Associates; Sunrise Golf Development Corp.; Sunrise Mobile Homes, Inc.; Sunset Strip Corporation; TCP, Inc.; TTP, Inc.; and Walcott Mobile Home Properties (collectively the "Carlsberg Defendants").
The Counter-Claimants are William W. Geary, Jr.; Carlsberg Management Company; Carlsberg Mobile Home Properties, Ltd.; Geary Realty Corporation; Halls Properties, Inc.; Kathleen Krzeminski; Santa Barbara Mobile Home Properties; Sunrise Golf Development Corp.; Sunrise Mobile Homes, Inc.; Sunset Strip Corporation; and TTP, Inc. (collectively the "Carlsberg Counter-Claimants").
The Counter-Defendants are Ball Park Plaza Property; Butcher Building Properties; Commerce Center Properties; Gallup Investors; Gallup Properties; George Business Trust; George Family Trust; Hickory Star Properties; Key Square Properties; Lakeside Manor East Properties; Lakeside Manor South Properties; Northlake Mobile Home Park Properties; Santa Barbara Mobile Home Properties; Sunrise Terrace Properties; Sunset Center Property; Sunset Strip Properties; The 1660 Property; The 1670 Property; The Cinema Properties; The Library Square Properties; The Virginian Property; Moe Nasr, Individually and as Trustee of the George Business Trust; and Wayne Reeder a/k/a George Wayne Reeder, individually and as Settlor of the George Business Trust and as General Partner of Key Square Properties, Commerce Center Properties, Sunset Center Property, Lakeside Manor East Property, Lakeside Manor South Properties, Sunrise Terrace Properties, Ball Park Plaza Property, The Library Square Properties, The Virginian Property, The 1670 Property, and The 1660 Property (collectively the "Reeder Counter-Defendants").
The Claims
Plaintiff Moe Nasr asserts four claims for relief against the Carlsberg Defendants: (1) Breach of fiduciary duty; (2) Fraud or use of undue influence in violation of California Civil Code §§ 1575 3412; (3) Conversion; and (4) Accounting.
Plaintiff-In-Intervention Ben Floyd asserts seven claims for relief against the Carlsberg Defendants: (1) Violation of Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962; (2) Avoidance of fraudulent transfers with actual intent to hinder, delay, or defraud creditors pursuant to 11 U.S.C. § 544 and California Civil Code § 3439.04(a); (3) Avoidance of constructively fraudulent transfers pursuant to 11 U.S.C. § 544 and California Civil Code § 3439.04 (b)(1); (4) Avoidance of constructively fraudulent transfers pursuant to 11 U.S.C. § 544 and California Civil Code § 3439.04(b)(2); (5) Avoidance of constructively fraudulent transfers pursuant to 11 U.S.C. § 544 and California Civil Code § 3439.05; (6) Recovery of transferred properties pursuant to 11 U.S.C. § 544 550 and California Civil Code §§ 3439.07 3439.08; and (7) Accounting.
Carlsberg Counter-Claimants assert claims for slander of title against the Reeder Counter-Defendants.
Facts I. The Relationship Between Wayne Reeder, William Geary, Hill Top, 113 Corporation, and RHI
Hill Top is a California corporation incorporated by Wayne Reeder in 1956. Hill Top operated as a real estate development and holding company and it owned property and transacted business throughout the United States. By the late 1980s, the book value of Hill Top's assets was in excess of $150,000,000.113 Corporation is a Florida corporation incorporated by Wayne Reeder in 1977. 113 Corporation operated as a real estate investment company. On or about December 31, 1989, 113 Corporation merged with an entity then known as Resolute Holdings, Inc. 113 Corporation, the surviving corporation, changed its name to RHI Holdings, Inc. ("RHI").
RHI and 113 Corporation are collectively referred to as "RHI/113 Corporation."
Reeder and his wife were the sole shareholders of Hill Top and RHI/113 Corporation until April 1992, at which time Reeder became the sole shareholder of Hill Top and RHI.
William W. Geary, Jr. was an officer and director of Hill Top and RHI/113 Corporation from the mid-1980s through June 3, 1993. Although Geary served as the Chief Financial Officer of Hill Top and 113 Corporation from approximately 1986 through 1988, Reeder made all of the material financial decisions on behalf of Hill Top and 113 Corporation. Reeder employed a full-time accounting staff located in Hill Top's offices in Bakersfield, California. Reeder's accounting staff was responsible for preparing financial statements and maintaining the books and records for Mr. Reeder and his companies, including Hill Top, RHI, and 113 Corporation.
From July 1973 through February 1986, Geary was employed by Carlsberg Management Company. Carlsberg Management Company was owned by the Carlsberg Corporation, which was owed by the Carlsberg family. Carlsberg Management Company provided property management, real estate leasing and development services to several clients, including Reeder and his companies. On several occasions during the mid-1980s, the Carlsberg family offered Geary and Reeder the opportunity to invest in various real estate developments, several of which are discussed below.
In 1986, 113 Corporation purchased Carlsberg Management Company, and, thereafter, Geary served as the President, Chief Executive Officer, and a member of the Board of Directors of Carlsberg Management Company. Geary became the sole shareholder of Carlsberg Management Company in 1989.
II. The Joint Investments Of Geary And Reeder A. Walcott Mobile Home Properties, Northlake Mobile Home Properties, And Santa Barbara Mobile Home PropertiesIn May 1981, Geary formed a California general partnership, LJB Enterprises, consisting of two equal partners: Geary and Michael Palmer, who was also an employee of Carlsberg Management Company.
In November 1981, Hill Top and LJB Enterprises formed a joint venture known as Walcott Mobile Home Properties in order to acquire Walcott Mobile Home Park. Hill Top and LJB Enterprises each owned a fifty percent interest in Walcott Mobile Home Properties.
In December 1982, Hill Top and LJB Enterprises formed a second joint venture known as Northlake Mobile Home Properties in order to acquire Northlake Mobile Home Park. Hill Top owned a sixty percent interest and LJB Enterprises owned a forty percent interest in Northlake Mobile Home Properties.
On May 31, 1983, Hill Top and LJB Enterprises formed a third joint venture known as Santa Barbara Mobile Home Properties in order to acquire Santa Barbara Mobile Home Park. Similar to the Northlake Mobile Home Properties joint venture, Hill Top owned a sixty percent interest and LJB Enterprises owned a forty percent interest in Santa Barbara Mobile Home Properties. On the same day the third joint venture was formed, LJB Enterprises sold twelve and one-half percent of its forty percent joint venture interest in Santa Barbara Mobile Home Properties to Kathleen Krzeminski, who was aleo an employee of Carlsberg Management Company.
On January 1, 1985, Palmer sold his 50% partnership interest in LJB Enterprises to Hill Top. On April 23, 1985, Hill Top sold its 50% partnership interest in LJB Enterprises to Geary, who became the sole remaining partner of LJB Enterprises. As a result, LJB Enterprises was dissolved, and the joint venture interests owned by LJB Enterprises were distributed to Geary.
As of April 23, 1985, the interests of Geary, Hill Top, and Krzeminski in each of the three joint ventures described above were as follows: (1) Hill Top and Geary each owned a fifty percent interest in Walcott Mobile Home Properties; (2) Hill Top owned a sixty percent interest and Geary owned a forty percent interest in Northlake Mobile Home Properties; and (3) Hill Top owned a sixty percent interest, Geary owned a thirty-five percent interest, and Krzeminski owned a five percent interest in Santa Barbara Mobile Home Properties.
B. Sunrise Golf Development Corporation
In the beginning of 1984, the Carlsberg family expressed an interest in acquiring all of the stock of Sunrise Golf Development Corporation ("Sunrise Golf"). Sunrise Golf was a Florida corporation and it was in the business of developing residential properties. Sunrise Mobile Homes, Inc. was a wholly owned subsidiary of Sunrise Golf. After Geary concluded his investigation of this potential acquisition, the Carlsberg family decided not to purchase Sunrise Golf. As a result, Geary approached Reeder and they agreed to purchase Sunrise Golf as a joint investment with the knowledge and consent of the Carlsberg family.
On May 15, 1984, Hill Top entered into a Stock Purchase Agreement with the existing shareholders of Sunrise Golf, whereby Hill Top acquired all of the issued and outstanding shares of Sunrise Golf for $3,487,500 in cash. Simultaneously, Hill Top transferred all of its shares in Sunrise Golf to 113 Corporation, which had advanced the $3.5 million purchase price required to acquire the stock from the various shareholders of Sunrise Golf.
On May 31, 1984, 113 Corporation and Geary entered into an Option Agreement, whereby 113 Corporation granted Geary an option to purchase fifty percent of the outstanding common stock of Sunrise Golf for $1,00. Pursuant to the Option Agreement, Geary was entitled to exercise his option after 113 Corporation recouped its initial $3.5 million investment with interest. Geary's option was effective for a period of one year after it vested.
At the time of the Sunrise Golf stock acquisition, Sunrise Golf owned eleven condominium developments: (1) Commerce Center; (2) Key Square Condominiums; (3) Lakeside Manor East; (4) Lakeside Manor South; (5) Sunset Center; (6) Sunrise Terrace; (7) Ball Park Plaza; (8) Library Square; (9) the Virginian; (10) the 1660 property; and (11) the 1670 property.
After the Sunrise Golf stock acquisition, Sunrise Golf and its wholly owned subsidiary, Sunrise Mobile Homes, Inc. acquired the following properties: Sunrise Golf purchased Five Seasons Davenport Mobile Home Park and Five Seasons Cedar Falls Mobile Home Park on May 16, 1984; Sunrise Mobile Homes, Inc. purchased Cedar Terrace Mobile Home Park in December 1987; and Sunrise Golf purchased Catalina Mobile Home Park in January 1988.
Although 113 Corporation had recouped its initial $3.5 million investment in Sunrise Golf with interest by October 6, 1986, Geary and 113 Corporation agreed in writing to extend Geary's option to purchase fifty percent of Sunrise Golf to May 31, 1994.
In June 1988, Hill Top purchased all of the issued and outstanding shares of Sunrise Golf from 113 Corporation and assumed 113 Corporation's obligations under the Option Agreement with Geary.
C. Sale Of Carlsberg Management Company To Geary
In 1985, the Carlsberg family sold the Carlsberg Corporation and its wholly owned subsidiary, Carlsberg Management Company, together with several other Carlsberg family owned entities to Southmark Corporation. Southmark Corporation immediately attempted to market the unwanted portions of the portfolio it acquired from the Carlsberg family, which included Carlsberg Management Company. On January 16, 1986, Geary and Southmark Corporation entered into a letter agreement which provided that Geary would purchase of all of the outstanding shares of stock of Carlsberg Management Company.
Geary assigned his rights under the January 16, 1986 letter agreement to 113 Corporation, and on February 26, 1986, 113 Corporation purchased all of the stock of Carlsberg Management Company.
On February 26, 1986, 113 Corporation entered into three separate written option agreements with Geary, Elmer Simbol, and Teresita DeLeon, which granted options to Simbol, DeLeon, and Geary to purchase twenty percent, ten percent, and thirty percent, respectively, of the stock in Carlsberg Management Company. DeLeon and Simbol were employees of Carlsberg Management Company, and they were instrumental in arranging the sale of Carlsberg Management Company to 113 Corporation. Geary, DeLeon, and Simbol were entitled to exercise their options after 113 Corporation recouped its initial investment with interest in Carlsberg Management Company.
D. Silver Star Associates
In January 1987, 113 Corporation and Geary were equal partners in Silver Star Associates, a partnership originally formed by Hill Top and Geary in March 1986 for the purpose of acquiring Silver Star Self Storage. On August 8, 1989, Silver Star Associates acquired two additional properties: U.S. Rentals-Wintergarden and U.S. Rentals-Kissimmee. Silver Star Associates was the last joint investment owned by Geary and Reeder.
III. Reader's Relationship With Various Lending Institutions
During 1987 and 1988, Hill Top had a business relationship with as many as thirty-six mortgage lenders, including Home Federal Savings Loan ("Home Federal") and Continental Bank, N.A. ("Continental"). As a result of the Savings and Loan crisis in the late 1980s, Home Federal and Continental were under significant pressure from federal regulators to clean up their balance sheets.
A. Hill Top'S Disputes With Home Federal
During 1987 and 1988, Reeder's companies had more than 100 different loans with Home Federal. In June 1987, Hill Top ceased making payments to Home Federal on certain loans that were secured by real property and other assets owned by Reeder and his companies. In May 1988, Home Federal filed notices of default on the Hill Top loans that were secured by certain time share notes and real property known as Desert Aire.
Although Hill Top could have made the delinquent loan payments, Reeder decided not to make the payments as part of his negotiating strategy to settle various disputes between Hill Top and Home Federal. On June 22, 1988, Hill Top and Home Federal settled their disputes, which included: (1) Hill Top's loan defaults, (2) the notices of default filed on the time share notes and Desert Aire, and (3) a lawsuit between Home Federal and Hill Top known as the "Wimpy Gentry" lawsuit. After these disputes were settled, Home Federal continued to be Reeder's largest and most valuable lender.
B. Hill Top's Disputes With Continental
In October 1987, Hill Top failed to make a $2.3 million installment payment to Continental Bank on a $10 million loan that was secured by liens on various properties, including Heritage Ranch. Although Hill Top could have made the installment payment, Hill Top advised Continental Bank that it did not have sufficient cash to make the payment in an effort to negotiate a reduction or discount on its loan with Continental Bank.
Continental Bank responded by filing an action to foreclose on its lien on Heritage Ranch on June 3, 1988. Ultimately, Hill Top and Continental settled the foreclosure litigation and Hill Top paid off the $10 million loan at a substantial discount.
Despite the disputes with Home Federal and Continental, Reeder and his companies, including Hill Top, continued to develop residential housing, make other investments, and borrow money from a variety of lenders on projects across the country.
IV. Readers' Acquisition Of American Universal Insurance Company and Diamond Benefits Life Insurance Company
In early February 1988, Reeder and Charles Christopher agreed that Reeder's companies would acquire a controlling interest in Resolute Holdings, Inc. Resolute Holdings, Inc. was in the process of acquiring two insurance companies: American Universal Insurance Company ("American Universal") and Diamond Benefits Life Insurance Company ("Diamond Benefits").
As part of the insurance company acquisitions, Hill Top, 113 Corporation, and Six Corporation, a wholly owned subsidiary of Hill Top, agreed to loan $50 million to American Universal, and Hill Top and 113 Corporation agreed to loan $12 million to Diamond Benefits. The loans were evidenced by a $50 million capitalization note secured by a lien on real property known as Heritage Ranch and Indian Palms and a $12 million capitalization note secured by a lien on real property known as Indian Springs.
Shortly after the insurance companies were acquired, Hill Top Ioaned Diamond Benefits an additional $18 million. Hill Top's $18 million loan was evidenced by a promissory note secured by a lien on real property known as Windbrook Country Club.
V. Transfers Made By Hill Top and 113 Corporation From 1987 To 1993
Beginning in 1986, the national real estate market began to decline and traditional sources of real estate financing became unavailable. Many of the joint investments owned by Reeder and Geary, required additional capital contributions to fund operating expenses and debt service requirements. Reeder became slow to make the Reeder-company share of these capital contributions from non-shared sources. Reeder and Geary developed differing objectives for their joint investments. Reeder's companies needed to dispose of their interests in the joint investments to obtain and preserve cash for other, larger holdings, such as Reeder's insurance company venture. Geary, on the other hand, was willing to fund the operating expenses and the debt service requirements on the joint investments despite the declining real estate market.A. Expert Testimony Regarding Retrospective Appraisals
Plaintiff-In-Intervention offered and the Court received into evidence the expert testimony of Samuel W. Hines, Ronald A. Neyhart, Gerald C. Taylor, and Callie Yeary who performed retrospective appraisals of the various properties at issue in this case. The Court has separately considered the testimony of these expert witnesses and finds that their testimony is not persuasive. The Court finds their respective opinions unreliable due to the methodology they employed in determining the value of these properties more than ten years after the fact. In many instances, the appraisers had insufficient historical data upon which to base their opinions and they made questionable assumptions regarding the physical condition of the properties on the valuation dates. In addition, the appraisers were unfamiliar with the economic conditions existing in the various areas in which the properties were located and they departed from the requirements of the Uniform Standards of Professional Appraisal Practice in performing their retrospective appraisals.
In contrast, there was more credible and reliable evidence of the fair market value of these properties on the valuation dates based on the testimony of Geary and Reeder, contemporaneously created appraisals of the properties and other market data which the Court finds persuasive and which outweigh the opinions offered by Plaintiff-In-Intervention's experts.
B. Hill Top's Sixty Percent Joint Venture Interest In Santa Barbara Mobile Home Properties
In November 1987, Joseph Pace entered into a written agreement with Santa Barbara Mobile Home Properties to purchase its sole asset, Santa Barbara Mobile Home Park, for $5,700,000. Pursuant to this agreement, Santa Barbara Mobile Home Properties would have received $1,659,000 and Pace's assumption of the existing mortgage and assessments on Santa Barbara Mobile Home Park, which totaled approximately $4,041,000. Geary and Krzeminski, who were both investors in Santa Barbara Mobile Home Properties, negotiated the sale to Pace. Because they would receive forty percent of the sale proceeds, Geary and Krzeminski were extremely motivated to negotiate the best sales price for the joint venture.
Although Mr. Pace could not complete the purchase because he was unable to obtain financing, Reeder still wanted to sell Hill Top's interest in Santa Barbara Mobile Home Properties. During the negotiations with Pace, Reeder had agreed that the sales price agreed to by Pace was fair. As a result, Geary and Krzeminski offered to purchase Hill Top's interest for $995,400, which Geary determined would have been the same amount (sixty percent of $1,659,000) that Hill Top would have received if the sale to Pace had been completed. Hill Top accepted their offer, and pursuant to an agreement dated November 6, 1987, Hill Top received $995,400 in cash for its sixty percent joint venture interest in Santa Barbara Mobile Home Properties.
Pace's agreement to purchase the property for $5,700,000 and Reeder's agreement that this was a fair price constitute a more credible and reliable indication of value than Mr. Taylor's retrospective appraisal. The Court finds that Hill Top received reasonably equivalent value for the sale of its sixty percent interest in Santa Barbara Mobile Home Properties to Geary and Krzeminski.
C. 113 Corporation's Promissory Notes From Saugus Joint Venture No. 17684
In August 1987, 113 Corporation and C C Saugus Land formed a partnership known as Saugus Joint Venture No. 17684 which owned lots in Saugus, California. Saugus Joint Venture No. 17684 employed Carlsberg Management Company to manage the property.
Saugus Joint Venture No. 17684 sold eleven parcels of land to individual buyers. As part of the sale, Saugus Joint Venture No. 17684 took back eleven promissory notes from the buyers which had a total value of $1,032,632. 113 Corporation owned a 5/11 (45.45%) interest in the promissory notes which had a value of $469,000. In July 1988, 113 Corporation and C C Saugus Land entered into an agreement which provided that four of the eleven promissory notes would be distributed to 113 Corporation. The four promissory notes received by 113 Corporation had a value of $401,000.
At the time the four promissory notes were distributed to 113 Corporation, Silver Star Associates, a partnership consisting of 113 Corporation and Geary, was delinquent in its mortgage payments to Firststate Financial. Because the delinquency was primarily the result of 113 Corporation's failure to make its share of the capital contributions, Reeder agreed to contribute the four promissory notes to Silver Star Associates so that it could attempt to negotiate an extension of credit from Firststate Financial. As a result, 113 Corporation contributed the four promissory notes to Silver Star Associates, and Silver Star Associates pledged the promissory notes to Firststate Financial. 113 Corporation received credit for the full value of the notes against its delinquent capital contribution obligations.
Thereafter, C C Saugus Land and 113 Corporation agreed to transfer a fifth note, valued at approximately $68,000, to Carlsberg Management Company as reimbursement for unpaid advances made by Carlsberg Management Company on behalf of Saugus Joint Venture No. 17684 during the time it managed the property.
The Court finds that 113 Corporation received reasonably equivalent value for the transfer of its four promissory notes to Silver Star Associates and for the transfer of the $68,000 promissory note to Carlsberg Management Company.
D. Walcott Mobile Home Park
Hill Top and Geary each owned a fifty percent interest in Walcott Mobile Home Properties. On January 1, 1988, Walcott Mobile Home Properties transferred its sole asset, Walcott Mobile Home Park, to Sunrise Mobile Homes, Inc., a wholly owned subsidiary of Sunrise Golf, for $1,029,337. At the time of the transfer, Walcott Mobile Home Park was encumbered by debt and other liabilities totaling $1,029,337.
Plaintiff-In-Intervention failed to offer any evidence regarding the value of Walcott Mobile Home Park at the time of the transfer. The Court finds that Hill Top received reasonably equivalent value for its fifty percent interest in Walcott Mobile Home Properties.
E. Five Season's Davenport Mobile Home Park
In November 1988, Sunrise Golf, a wholly owned subsidiary of Hill Top, transferred Five Seasons Davenport Mobile Home Park to Carlsberg Mobile Home Properties, Ltd. in exchange for cancellation of almost $1,700,000 in debt. At the time of the sale, there was no equity in Five Seasons Davenport Mobile Home Park. The Court finds that Sunrise Golf received reasonably equivalent value for the transfer of the property.
F. 200 Shares Of Carlsberg Management Company's Stock
By the middle of 1987, 113 Corporation had recouped its initial investment with interest in Carlsberg Management Company, and the options to purchase the stock of Carlsberg Management Company from 113 Corporation owned by Simbol, DeLeon, and Geary had vested. On March 1, 1988, Geary exercised his option and purchased 150 shares (30%) of the stock in Carlsberg Management Company from 113 Corporation. On the same day, Simbol exercised his option and purchased 100 shares (20%) of the stock in Carlsberg Management Company, and Simbol sold his shares to Geary for $500,000. On September 12, 1988, Geary purchased Teresita DeLeon's option for $250,000, and he immediately exercised the option and purchased an additional 50 shares (10%) of the stock in Carlsberg Management Company.
On January 1, 1989, Geary purchased the remaining 200 shares (40%) of the stock in Carlsberg Management Company from 113 Corporation in exchange for a $1,000,000 promissory note, payable to 113 Corporation in five years. Reeder and Geary agreed on the purchase price of $1,000,000 based on their respective opinions of the value of the assets of Carlsberg Management Company. The purchase price was also supported by the purchase price of $250,000 paid by Geary to acquire DeLeon's option and the purchase price of $500,000 paid by Geary to acquire Simbol's shares. The Court finds that 113 Corporation received reasonably equivalent value for the sale of its 200 shares of stock in Carlsberg Management Company to Geary.
G. Sixty Percent Interest In Northlake Mobile Home Properties
The deteriorating economic conditions in Colorado in 1988 and 1989 adversely affected the value of Northlake Mobile Home Properties. Northlake Mobile Home Properties had lost a great deal of money because its sole asset, Northlake Mobile Home Park, experienced high vacancies and low rents, resulting in significant negative cash flow.
Reeder was not willing to continue to support the operations and the negative cash flow, and Reeder wanted to abandon Hill Top's sixty percent interest in the joint venture. As a result, on January 2, 1989, Hill Top assigned its sixty percent interest in Northlake Mobile Home Properties to Sunrise Golf in exchange for Sunrise Golf's agreement to assume the outstanding debt of approximately $6,933,017.
The Court finds that Hill Top received reasonably equivalent value for the transfer of its sixty percent interest in Northlake Mobile Home Properties to Sunrise Golf.
H. Hickory Star Marina, Fort Wear RV Park, The Butcher Building, And TTP, Inc.
In 1989, 113 Corporation owned three properties in Tennessee known as the Union County (Butcher) Building, Fort Wear RV Park, and Hickory Star Marina. Each of the properties had a significant negative cash flow. Reeder was unwilling to continue to fund the negative cash flow and he decided to abandon the properties and allow the lenders to foreclose.
On March 7, 1989, 113 Corporation transferred the Butcher Building, Fort Wear RV Park, and Hickory Star Marina to TTP, Inc., a wholly owned subsidiary of Hill Top. On May 31, 1989, Hill Top transferred all of its stock in TTP, Inc. to its wholly owned subsidiary, Sunrise Golf.
After these transfers were completed, the Butcher Building, Fort Wear RV Park, and Hickory Star Marina continued to lose significant amounts of money. From 1989 through 1996, Hickory Star Marina, Fort Wear RV Park, and the Butcher Building experienced negative cash flows in excess of $800,000. Because the Butcher Building never generated sufficient rental revenues to cover its operating expenses or debt service, it was demolished in 2000.
The Court finds that 113 Corporation received reasonably equivalent value for the transfer of the Butcher Building, Fort Wear RV Park, and Hickory Star Marina to TTP, Inc. In addition, the Court finds that Hill Top received reasonably equivalent value for its transfer of all of the stock in TTP, Inc. to Sunrise Golf.
I. Sunrise Golf Development Corporation Stock
In 1989, many of the properties owned by Sunrise Golf were experiencing negative cash flows. Six of the properties owned by Sunrise Golf had a negative cash flow of $2.2 million from 1989 to 1996. In May 1989, Reeder decided to sell Hill Top's stock in Sunrise Golf as part of his plan to eliminate those investments with negative cash flows from Hill Top's portfolio.
At this time, Reeder was interested in purchasing the IRS Building in Houston, Texas, from D R Energy, Inc., a wholly owned subsidiary of Carlsberg Management Company. Although the IRS Building had lost its major tenant, Reeder had devised a plan to restructure the debt on the building. Reeder's plan contemplated the transfer the IRS Building to Six Corporation, a wholly owned subsidiary of Hill Top. Thereafter, Six Corporation would file a bankruptcy proceeding which would be used as a basis to renegotiate the debt on the IRS Building with the lender. Reeder and Geary believed that the equity in Sunrise Golf and the IRS Building was close to zero, and therefore, agreed to a transaction whereby Hill Top and D R Energy essentially exchanged the stock of Sunrise Golf for the IRS Building.
As a result, Hill Top and D R Energy Corporation entered into a Stock Purchase Agreement dated May 31, 1989, which provided that Hill Top would sell all of its stock in Sunrise Golf to D R Energy in exchange for a $1,660,000 promissory note due on November 1, 1989. At this time, Geary, who was the sole owner of D R Energy Corporation's parent, Carlsberg Management Company, still owned an option to purchase fifty percent of the stock of Sunrise Golf for $1.00.
Hill Top's sale of stock in Sunrise Golf was in anticipation that D R Energy would sell the IRS Building to Hill Top for $1,660,000 so that Reeder could implement his plan to renegotiate the debt on the IRS Building. In a letter dated October 25, 1989, Geary advised that if Reeder's plan to renegotiate the debt on the IRS Building failed, Geary would give Reeder a fifty percent interest in Sunrise Golf's future profits. On October 31, 1989, D R Energy, Inc. sold the IRS Building to Six Corporation for $1,660,000 and assumption of the existing loan. Reeder and Geary agreed on the price so that Hill Top would be able to establish a basis of $1,660,000 in the IRS Building.
Reader's plan to renegotiate the debt on the IRS Building failed, and the lender foreclosed on the building before Six Corporation filed bankruptcy in April 1991.
The Court finds that Hill Top received reasonably equivalent value for the sale of its stock in Sunrise Golf to D R Energy, Inc.
J. Halls Properties, Inc. Stock
In 1989, Hill Top owned 1000 shares (50%) of the common stock, and 2,500 shares (100%) of the preferred stock in Halls Properties, Inc. Southern Cinemas, Inc. owned the remaining 1,000 shares of common stock of Halls Properties, Inc. Halls Properties, Inc.'s sole assets were a theater and an adjacent parking lot.
Halls Properties, Inc. was never profitable. The theater was too small for the changing motion picture environment, and more screens were needed to offer more variety. Southern Cinemas proposed a plan to add three more screens at a cost of $500,000. Reeder, however, did not want to invest additional funds to refurbish the operations or make up the operating losses of approximately $60,000 incurred by Halls Properties, Inc. during the first six months of 1989.
On June 30, 1989, Hill Top and Sunrise Golf entered into a Stock Purchase Agreement whereby Hill Top sold its 1000 shares of common stock and its 2500 shares of preferred stock in Halls Properties, Inc. to Sunrise Golf for $250,000.
The Court finds that Hill Top received reasonably equivalent value for the sale of its stock in Halls Properties, Inc. to Sunrise Golf.
K. Sunset Strip Corporation Stock
In 1989, Sunset Strip Corporation was a wholly owned subsidiary of 113 Corporation and its sole asset was the Riverside Condominiums complex in Florida. Because the Riverside Condominiums complex was only partially completed, it was unable to generate sufficient rental revenues to cover the operating expenses and service the loan held by Firststate Financial. The complex was over encumbered with debt and there was no equity in the property,
Firststate Financial offered to significantly reduce the balance due on the mortgage in exchange for a $300,000 cash payment. Reeder, who had never seen the property, did not want to invest additional funds in the property because he wanted to pursue other investments. As a result, Reeder and Geary agreed that Geary would purchase the stock of Sunset Strip Corporation and make the $300,000 cash payment to Firststate Financial.
In July 1989, 113 Corporation sold all of its stock in Sunset Strip Corporation to Sunrise Golf. Upon completion of the sale, Carlsberg Management Company advanced funds to Sunset Strip Corporation, which it used to make the $300,000 payment to Firststate Financial, thereby reducing the balance of the loan to $1,200,000.
The Court finds that 113 Corporation received reasonably equivalent value for the sale of its stock in Sunset Strip Corporation to Sunrise Golf.
L. Fifty Percent Interest In Silver Star Associates
In August 1989, Silver Star Associates owned three storage warehouses: Silver Star Self-Storage, U.S. Rentals-Wintergarden, and U.S. Rentals-Kissimmee. The three properties were encumbered by debt in the approximate amount of $6.7 million. Silver Star Self-Storage was over encumbered and it had no equity, and the loans on the two U.S. Rentals properties far exceeded the value of the properties.
Although Reeder and Geary had each contributed $800,000 to Silver Star Associates, Reeder decided to sell 113 Corporation's interest in the partnership rather than make additional capital contributions. As a result, on August 31, 1989, 113 Corporation sold its fifty percent partnership interest in Silver Star Associates to Sunrise Golf.
The Court finds that 113 Corporation received reasonably equivalent value for the sale of its stock to Sunrise Golf.
M. Seventy-Five Shares Of Warsaw Land Company Stock And Cancellation Of One Million Dollar Promissory Note To Hill Top
In 1987, Hill Top purchased a real estate asset known as the Camarillo Property for approximately $9 million. Hill Top financed the entire $9 million purchase price with a loan from a savings and loan.On May 15, 1989, Hill Top and Geary entered into a written agreement which provided that Hill Top would employ Geary to negotiate the sale of the Camarillo Property, which was then owned by Warsaw Land Company, a wholly owned subsidiary of Hill Top. The agreement provided that if Geary sold the Camarillo Property for $40 million or more, Hill Top would cancel Geary's $1,000,000 promissory note which was used to purchase the 200 shares of stock in Carlsberg Management Company in January 1989. Pursuant to the agreement, Geary received seventy-five shares of stock in Warsaw Land Company.
As a result of Geary's efforts, the Camarillo property was sold for $40,850,000. Although Hill Top had invested only $1-2 million in the property, it received at least $25,000,000 from the sale. In accordance with its agreement with Geary, Hill Top canceled Geary's $1,000,000 promissory note shortly after the closing of the sale of the Camarillo Property, Geary never received any proceeds from the sale of the Camarillo Property, nor did he receive any distribution or dividend payment from Warsaw Land Company during his ownership of the seventy-five shares of stock in Warsaw Land Company.
The Court finds that Hill Top received reasonably equivalent value for the transfer of its seventy-five shares of stock in Warsaw Land Company to Geary and the cancellation of Geary's $1,000,000 promissory note.
N. $250,000 Loan From Warsaw Land To RG Daytona
In 1990, Geary incorporated RG Daytona, Inc. in order to purchase the Red Garter Lounge in Daytona, Florida. In a letter to Hill Top dated September 7, 1990, Geary asked Hill Top to loan RG Daytona $250,000 at ten percent interest. If Hill Top made the loan, Geary advised that he would grant Hill Top an option to purchase fifty percent of the stock in RG Daytona, Inc. for one dollar. Hill Top made the $250,000 loan to RG Daytona, and it was evidenced by RG Daytona's promissory note in the amount of $250,000 payable to Warsaw Land Company, a wholly owned subsidiary of Hill Top.
After the loan was funded, Geary decided that RG Daytona would acquire a leasehold interest, rather than a fee interest in the Red Garter lounge. Geary advised Reeder of his decision and Reeder raised no objection. RG Daytona then loaned $130,000 to Geary Realty, a related entity owned by Geary. On September 19, 1990, Geary Realty purchased the Red Garter Lounge, and RG Daytona acquired a leasehold interest in the property. In February 1993, Geary paid the $250,000 promissory note payable to Warsaw Land Company in full.
O. Old Winter Garden Warehouses
Indrio Properties, a wholly owned subsidiary of Hill Top, owned the Old Winter Garden Warehouses in Orlando, Florida. The Old Winter Garden Warehouses property was located in a bad neighborhood; the warehouses were in poor condition; and several of the tenants had stopped paying rent. In May 1991, Firststate Financial's lien of over $1,600,000 on the Old Winter Garden Warehouses property greatly exceeded the value of the property.Indrio Properties also owned another property located in Florida known as the Indian Pines condominium complex, which experienced negative cash flows in 1990. From November 1990 through May 1990, Sunrise Golf, which was then a wholly owned subsidiary of D R Energy, Inc., made various loans to Indrio Properties totaling approximately $390,000 to cover the negative cash flow at the Indian Pines condominium complex.
On May 31, 1991, Indrio Properties sold the Old Winter Garden Warehouses to Sunset Strip Corporation, a wholly owned subsidiary of Sunrise Golf, for $150,000, which was paid by canceling $150,000 of Indrio Properties' $390,000 debt to Sunrise Golf.
The Court finds that Indrio Properties received reasonably equivalent value for its sale of the Old Winter Garden Warehouses to Sunset Strip Corporation.
P. Del Rey Mobile Home Park
On May 31, 1991, Indrio Properties, a wholly owned subsidiary of Hill Top, sold the Del Rey Mobile Home Park in Albuquerque, New Mexico to Sunrise Mobile Homes, Inc. in exchange for its assumption of $5.3 million debt. At the time of the sale, there were very few sales of mobile home parks in Albuquerque, and there were a large number of repossessions in the mobile home market.
Plaintiff-In-Intervention offered no evidence regarding the value of Del Ray Mobile Home Park at the time of the transaction. The Court finds that Indrio Properties received reasonably equivalent value for its sale of the Del Rey Mobile Park to Sunrise Mobile Homes, Inc.
Q. Terrace Apartments
Hill Top owned 85% of the stock of RDI Corporation, which owned the Terrace Apartments complex in Gallup, New Mexico. The Terrace Apartments complex was a Housing and Urban Development ("HUD") project that had lost money since the early 1980s. By 1991, the debt on the Terrace Apartments was approximately $2,390,532 and there was no equity in the property.
On May 31, 1991, RDI Corporation sold the Terrace Apartments complex to Sunset Strip Corporation, a wholly owned subsidiary of Sunrise Golf, in exchange for its assumption of the $2,390,532 mortgage note.
The Terrace Apartments complex had no equity at the time of the sale. The Court finds Hill Top's subsidiary, RDI Corporation, received reasonably equivalent value for its sale of the Terrace Apartments complex to Sunset Strip Corporation.
R. TCP, Inc. Stock
Hill Top formed TCP, Inc. in 1987 for the purpose of acquiring three properties in Colorado. By 1992, the lenders had foreclosed on all three of the Colorado properties, which comprised TCP, Inc.'s only assets. Although TCP, Inc. had no assets, it had a net operating loss carry-forward of approximately $1,000,942. Because Geary wanted to use TCP, Inc. to make future real estate investments rather than form a new corporation, he offered to purchase TCP, Inc. from Hill Top. Reeder and Geary agreed that TCP, Inc.'s net operating loss carry-forward had no value to either Hill Top or Carlsberg Management Company, and on September 30, 1992, Hill Top sold all of the outstanding stock of TCP, Inc. to Carlsberg Management Company.TCP, Inc. had no assets and its net operating loss carry-forward had no value to Hill Top or Carlsberg Management Company. The Court finds that Hill Top received reasonably equivalent value for the sale of its stock in TCP, Inc. to Carlsberg Management Co.
S. Indrio Properties, Inc.'s Stock, Fifty Percent Interest In Sunrise Golf's Future Earnings, Option To Purchase Fifty Percent Interest In RG Daytona
In 1993, Indrio Properties, Inc.'s sole asset was the Indian Pines Condominiums complex, which was encumbered by a $1,600,000 loan to Firststate Financial. The loan was due and no interest payments had been made for several months, Geary was able to negotiate an extension of the Firststate Financial loan by agreeing to pay the past due interest and assuming responsibility for any additional losses experienced by Indian Pines. On March 1, 1993, Hill Top sold all of its stock in Indrio Properties, Inc. to Carlsberg Management Corporation for $1000. At the time of the sale, Indrio Properties, Inc.'s liabilities exceeded its assets by $361,734, and Indrio Properties, Inc. continued to experience negative cash flows totaling $750,000 until the sale of the final units at Indian Pines was completed in 1995.
As part of Hill Top's sale of its stock in Indrio Properties, Inc. to Carlsberg Management Company, Reeder agreed to cancel his 50% profit interest in Sunrise Golf's future earnings and Hill Top's option to acquire 50% of RG Daytona and Geary agreed to transfer his seventy-five shares of stock in Warsaw Land Company back to Hill Top. Although the assets of Sunrise Golf still had a significant negative cash flow, Reeder believed that the stock of Warsaw Land Company was valuable.
The Court finds that Hill Top received reasonably equivalent value for the sale of its stock in Indrio Properties, Inc. and the cancellation of its fifty percent interest in Sunrise Golf's future earnings and option to purchase a fifty percent interest in RG Daytona.
VI. Solvency
Plaintiff-In-Intervention and the Carlsberg Defendants offered and the Court received into evidence conflicting expert opinions of Gregg Curry and Jeffrey Compton on the issue of Hill Top's and RHI/113 Corporation's solvency. The Court has carefully considered the conflicting opinions and it accepts the opinions of Mr. Curry and rejects the opinions of Mr. Compton, For the reasons discussed in the following paragraphs, the Court finds Mr. Curry's opinions persuasive and his opinions were given substantial weight. The Court rejects Mr. Compton's opinions because he relied on questionable and unreliable financial data, including but not limited to the Turner Schedules; he failed to consider existing fair market value evidence in arriving at his opinions; and he failed to offer adequate reasons in support of his opinions.
Although the Court accepts Curry's opinions and rejects Compton's opinions on the issue of Hill Top's and RHI/113 Corporation's solvency in their entirety, the Court will only discuss the significant differences between Compton's opinions and Curry's opinions.
A. Hill Top's Solvency
The Court accepts Curry's opinions and finds that Hill Top was solvent at least up through May 1990 because the fair value of Hill Top's assets exceeded the fair value of its liabilities.
The Court has considered and rejects Compton's opinions that Hill Top was insolvent as of June 1987 and remained insolvent through May 31, 1993. In order to reach his opinions regarding Hill Top's solvency, Compton made two significant and improper adjustments to Hill Top's balance sheets. First, Compton reduced Hill Top's assets for various "write-offs, transfers, foreclosures, settlements and sales." Compton's adjustments were based on handwritten schedules titled "Sales, Foreclosure, And Worthless Assets Removed From Books" prepared by Hill Top's accountant, Richard Turner, in 1993 or 1994. Second, Compton added three promissory notes related to the investments in American Universal Insurance Company and Diamond Benefits Life Insurance Company to Hill Top's liabilities. The three promissory notes evidenced loans of $50,000,000, $12,000,000, and $18,000,000.
1. The Turner Schedules Were Unreliable
Compton should not have relied on the hand written schedules prepared by Turner to reduce Hill Top's assets. Compton admitted that he was not certain why or for what purpose Turner prepared the schedules. Moreover, Turner advised Compton that the adjustments Compton proposed based on the hand written schedules were already accounted for in Hill Top's balance sheets. Hill Top's books confirmed that several of Compton's adjustments were already accounted for, and any adjustments made to Hill Top's assets based on Turner's handwritten schedules would be duplicative.
2. Compton Improperly Applied The Full Amount Of All Three Insurance Company Notes To Hill TOP'S Liabilities
The Court also rejects Compton's adjustment which added the entire amount of the three promissory notes related to the insurance company investments to Hill Top's liabilities. First, Compton failed to deduct from Hill Top's debt the portion of the insurance company notes secured by properties not included as assets on Hill Top's balance sheets. The $50,000,000 note was made by Hill Top, Six Corporation, and 113 Corporation and was secured by Heritage Ranch and Indian Palms. Indian Palms was owned by 113 Corporation, and Heritage Ranch was owned by Six Corporation, which was a wholly owned subsidiary of Hill Top. The $12,000,000 note was made by Hill Top and 113 Corporation and secured by Indian Springs, which was owned by 113 Corporation. Compton included the entire $50,000,000 note and the entire $12,000,000 note as debt on both Hill Top's and 113 Corporation's balance sheets. Hill Top's liabilities as represented by the $62 million of the insurance company notes should be reduced by approximately $37.6 million for May 31, 1988 and May 31, 1989 and reduced by $43.3 million as of May 31, 1990 in order to account for the value of the properties used as collateral that were not included as assets of Hill Top.
The Court also rejects Compton's adjustment which added the entire amount of the $18,000,000 note to Hill Top's liabilities. Although the $18,000,000 note was secured by Windbrook Country Club, which was owned by Hill Top, only $16,500,000 of the note was used for Hill Top's or 113 Corporation's benefit. As a result, these liabilities should be adjusted from $18,000,000 to $16,500,000.
Finally, Hill Top's liabilities should be reduced by $1.7 million, which represents its portion of the principal payments made on the $50,000,000 note during 1988 and 1989.
3. Existing Fair Market Value Information Regarding Hill Top's Assets Should Be Used In Determining Hill Top's Solvency
Hill Top's assets should be increased to reflect the fair market values of various properties owned by Hill Top based on information existing during the time frame utilized to determine Hill Top's solvency. Compton failed to incorporate existing fair market value information of various assets owned by Hill Top into his analysis.For purposes of a solvency analysis, fair value and fair market value are relatively interchangeable concepts of value. Fair market value is the most probable price in a transaction between a hypothetical willing buyer and willing seller. Fair value is the value at which assets and liabilities are most properly stated for purposes of determining the market value or the realizable value of the assets and liabilities.
The appraised value of Heritage Ranch in 1988 was $21.5 million. Hill Top's balance sheets listed the value of Heritage Ranch at a cost basis of $9,600,000. Compton failed to adjust Hill Top's assets to account for the fair market value of Heritage Ranch.
The 1990 sale price of the Camarillo Property is the best evidence of fair value or market value of this property in 1990. Hill Top netted approximately $25 million from the sale of the Camarillo Property. Hill Top's balance sheets listed the value of the Camarillo Property at a cost basis of $9,200,000. Hill Top's assets should be adjusted by $24 million as of May 31, 1988 and May 31, 1989 to account for the additional value of the Camarillo Property not included on Hill Top's balance sheets. Compton failed to adjust Hill Top's balance sheets to account for the fair market value of the Camarillo Property.
When Hill Top's balance sheets are properly adjusted to account for the debt related to the insurance company notes and the fair market value of its assets, Hill Top was solvent at all relevant times.
B. RHI/113 Corporation
The Court accepts Curry's opinions and finds that 113 Corporation was solvent through at least December 31, 1989, when it merged with Resolute Holdings, Inc. and became RHI. The Court has considered and rejects Compton's opinions that 113 Corporation was insolvent as of February 28, 1988 and remained insolvent when it merged with Resolute Holdings, Inc. and became RHI. The Court also rejects Compton's opinion that RHI was insolvent from December 31, 1989 through December 31, 1993. In order to reach his conclusion regarding the solvency of 113 Corporation and RHI, Compton improperly added two of the insurance company notes to the liabilities of 113 Corporation and RHI. The notes were written for $50,000,000 and $12,000,000.
1. Compton Improperly Applied The Full Amount Of The $50,000.000 Insurance Company Note To 113 Corporation's Liabilities
The $50 million note was already included on the books of 113 Corporation because the liabilities section of its balance sheet shows an increase of $50,000,000 in 1989 and also shows a $50 million investment in 1989 related to the insurance company notes. Thus, Compton's addition of the $50 million note is duplicative.
Moreover, as with the analysis of Hill Top's solvency, there should be a deduction from 113 Corporation's liabilities of that portion of the $50,000,000 insurance company note secured by property not included as an asset on 113 Corporation's balance sheets. The $50,000,000 note was secured by Heritage Ranch and Indian Palms. Heritage Ranch was owned by Six Corporation and was appraised at $21.5 million in May 1988 and $22.9 million in December 1989. 113 Corporation's liabilities should be reduced by at least $21.5 million in order to account for the value of Heritage Ranch.
Finally, 113 Corporation's liabilities should also be reduced by $1.7 million, which represents its portion of the principal payments made on the $50,000,000 note during 1988 and 1989.
2. Existing Fair Market Value Information Regarding RHI/113 Corporation's Assets Should Be Used In Determining RHI/113 Corporation's Solvency
RHI/113 Corporation's assets should be increased to reflect the fair value of various properties owned by RHI/113 Corporation based on information existing during the time frame utilized to determine RHI/113 Corporation's solvency. Compton failed to incorporate existing fair market value information of the various assets owned by RHI/113 Corporation into his solvency analysis.
The appraised value of Indian Palms in 1988 was $31,200,000. RHI/113 Corporation's balance sheets list the value of Indian Palms at a cost basis of $11,100,000. Indian Springs was appraised at $8,000,000 in 1988. RHI/113 Corporation's balance sheets list the value of Indian Springs at a cost basis of $3,000,000. Accordingly, the assets of RHI/113 Corporation should be increased by $25.1 million to reflect the fair value of Indian Palms and Indian Springs.
When RHI/113 Corporation's balance sheets are properly adjusted to account for the debt on the $50,000,000 insurance company note and the fair market value of its assets, RHI/113 Corporation was solvent at all relevant times.
VII. Negative Pledge Agreements And The George Business Trust
From July 1993 to September 1993, Reeder through his attorney, Michael Wells, filed "negative pledge agreements" relating to the following properties: Terrace Apartments; Hickory Star Resort; Northlake Mobile Home Park; Old Winter Garden Warehouses; Butcher Building; Sherwood Forest Mobile Home Park; Walcott Mobile Home Park; Ball Park Plaza; Commerce Center; Halls Theater; Key Square; Lakeside Manor East; Lakeside Manor South; Library Square; Sunrise Terrace; Sunset Center; The 1660 Property; The 1670 Property; The Virginian Property; and Santa Barbara Mobile Home Park. The negative pledge agreements alleged that the George Business Trust, or a partnership composed of the George Business Trust and another entity, had an interest in these properties. Reeder knew and could reasonably foresee that the negative pledge agreements would discourage potential purchasers, lenders, and lessees from buying, leasing or making loans on the properties.
Prior to filing the negative pledge agreements, Reeder advised Nasr that he was angry with Geary and that he was going to file negative pledge agreements. Although Nasr knew that Reeder was filing the negative pledge agreements on behalf of the George Business Trust, Nasr undertook no investigation or inquiry to determine whether there was any basis to file the negative pledge agreements and never attempted to remove the negative pledge agreements. Nasr assumed the negative pledge agreements were in the nature of a lien and would have to be removed before Geary could sell the properties. Thus, Nasr could reasonably foresee that a third party might not purchase the properties, given the existence of the negative pledge agreements.
Prior to the time that Geary learned of the negative pledge agreements, Geary had never heard of the George Business Trust. Geary had never seen any documents relating to the George Business Trust nor had he ever had a conversation with Reeder, or anyone else, relating to the George Business Trust, or to any other trust established by Reeder. Geary never received any correspondence that referred to the George Business Trust, or to any other trust established by Reeder.
VIII. Statute Of Limitations
On May 13, 1994, Hill Top and RHI filed voluntary petitions in bankruptcy under Chapter 11 of the Bankruptcy Code. On January 31, 1996, the cases were converted to Chapter 7 bankruptcies, and Plaintiff-In-Intervention Ben Floyd was appointed as the Chapter 7 Trustee for Hill Top and RHI on February 1, 1996. After he was appointed, Plaintiff-In-Intervention reviewed the file of the U.S. Bankruptcy Trustee, which included the docket and the pleadings in the bankruptcy actions.In early February 1996, Plaintiff-In-Intervention met with the lawyers for American Universal Insurance Company and Diamond Benefits Life Insurance Company, two of the largest creditors in the bankruptcy actions, and the receiver for Diamond Benefits. During this February 1996 meeting, the lawyers for American Universal and Diamond Benefits warned Plaintiff-In-Intervention that he should file his avoidance actions by May 13, 1996 to avoid the bar of the two year statute of limitations set forth in 11 U.S.C. § 546(a).
In February 1996, Plaintiff-In-Intervention received a letter dated February 20, 1996 from Kelly Crawford, the bankruptcy lawyer for Diamond Benefits, which enclosed copies of a previous letter from Mr. Crawford and an earlier letter from Russell Nelms, the bankruptcy lawyer for American Universal Insurance Company. Mr, Nelms' letter included an attachment which listed possible fraudulent transfers known to American Universal, including: Northlake Mobile Home Park; Halls Theaters; Butcher Building; Sunrise Golf Development stock; TTP stock; Halls Properties stock; Sunset Strip stock; Silver Star Associates; Terrace Apartments; TCP stock; Fort Wear; Hickory Star; and Old Winter Garden warehouses.
In February or March 1996, Plaintiff-In-Intervention met with Susan Hardy, the bankruptcy attorney for Hill Top and RHI. By the time Plaintiff-In-Intervention met with Hardy, he had received a copy of the complaint filed in this case by Moe Nasr as trustee of the George Business Trust. Ms. Hardy told Plaintiff-In-Intervention that she thought the bankruptcy estates had an interest in the claims set forth in the complaint filed by Moe Nasr.
Plaintiff-In-Intervention's law firm, Floyd, Smith Rios, represented Plaintiff-In-Intervention as the Trustee in the RHI and Hill Top bankruptcy actions. On March 7, 1996, Randy Rios, Plaintiff-In-Intervention's law partner, reviewed an American Bankruptcy Institute Journal article entitled "The Continuing Saga of the Statute of Limitations Dilemma under the Pre-and Post-1994 Amendments to § 546," which specifically discussed the statute of limitations in the Ninth Circuit for filing avoidance actions in Chapter 11 bankruptcy cases. In addition, on March 7, 1996, Mr. Rios conducted legal research concerning the applicable statute of limitations under 11 U.S.C. § 546(a) for avoidance claims in cases converted from Chapter 11 to Chapter 7. On March 11, 1996, Mr. Rios met with Plaintiff-In-Intervention and they discussed the law concerning the applicable statute of limitations.
On April 26, 1996, Mr. Warfield, the Receiver for Diamond Benefits Insurance Company, wrote Plaintiff-In-Intervention and advised him that the U.S. Trustee in Arizona recommended that trustee's should file avoidance actions within two years from the original Chapter 11 filing date. On May 2, 1996, Mr. Rios responded to Mr. Warfield's April 26, 1996 letter and set forth his analysis of this issue.
Although the Ninth Circuit had previously held in Mosier v. Kroger Co. (In re IRFM, Inc.), 65 F.3d 778, 780-81 (9th Cir. 1995), that the two year limitations period for avoidance claims commences on the date the Chapter 11 petition was filed in a case that is converted from a Chapter 11 to Chapter 7, Mr. Rios stated in his May 2, 1996 letter that they had been unable to find case law holding that a Trustee was required to commence an avoidance action within two years of the filing of a Chapter 11 case and that they were confident that the statute of limitations in this case would not run on May 13, 1996.
Plaintiff-In-Intervention did not file his Complaint-in-Intervention until November 26, 1996, six months after the two-year statute of limitations expired and ten months after he was appointed as interim trustee in the RHI and Hill Top bankruptcies. Plaintiff-In-Intervention's original Complaint-in-Intervention merely incorporated the claims of the George Business Trust, and did not include any avoidance claims. Plaintiff-In-Intervention did not allege avoidance claims in this case under 11 U.S.C. § 544 and § 550 until he filed his Amended Complaint-in-Intervention on July 10, 1997.
On March 5, 1999, the Carlsberg Defendants filed a Motion For Partial Summary Judgment On The Second And Third Claims For Relief Of The First Amended Complaint-In-Intervention. On April 20, 1999, Judge Dickran Tevrizian granted the Carlsberg Defendants' motion for summary judgment, holding that the Plaintiff-In-Intervention's avoidance claims were barred by 11 U.S.C. § 546 (a)'s two year statute of limitations and that the doctrine of equitable tolling did not apply.
Plaintiff-In-Intervention appealed Judge Tevrizian's order dated April 20, 1999, On September 4, 2001, the Ninth Circuit reversed Judge Tevrizian's ruling. Nasr v. De Leon, 2001 WL 1024041 (9th Cir. 2001), Although the Ninth Circuit held that the two year statute of limitations for filing the avoidance actions in this case was governed by IRFM and commenced on May 13, 1994, which was the date Hill Top and RHI filed their Chapter 11 petitions in bankruptcy, the Ninth Circuit also held that the doctrine of equitable tolling applied based on the evidence in the record in the district court. The record did not include the correspondence among the Plaintiff-In-Intervention and the lawyers representing American Universal and Diamond Benefits.
Conclusions Of Law
I. Jurisdiction And Venue1. This Court has subject matter jurisdiction of this action pursuant to 28 U.S.C. § 1331 because this case arises under the laws of the United States, including 18 U.S.C. § 1964 and 11 U.S.C. § 544 550. The Court has subject matter jurisdiction of the remaining claims pursuant to 28 U.S.C. § 1367. Moreover, the Court also has subject matter jurisdiction of this action pursuant to 28 U.S.C. § 1331 because the Plaintiff and the Plaintiff-In-Intervention are citizens of different states than the Carlsberg Defendants and the amount in controversy exceeds $75,000, exclusive of interest and costs.
2. Venue in the United States District Court for the Central District of California is proper pursuant to 28 U.S.C. § 1391(b) because a substantial part of the events or omissions giving rise to the claims occurred in this district.
II. Plaintiff-In-Intervention's Fraudulent Conveyance Claims
3. Pursuant to 11 U.S.C. § 544(b), "The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title."
4. By its terms, Section 544(b) provides the Trustee the right to avoid and recover, for the benefit of the bankruptcy estate, a fraudulent transfer that would have been recoverable by a creditor under applicable state fraudulent transfer laws. In re Acequia, Inc., 34 F.3d 800, 807 (9th Cir. 1994).
5. Pursuant to the "independent judgment" test, which is used for choice of law by federal courts in non-diversity jurisdiction cases such as this one, the primary applicable law is that of the State of California because California has the" . . . most significant relationship to the transactions at issue." In re Consolidated Capital Equities Corp., 143 B.R. 80, 85 (N.D.Tex. 1992).
6. The California Uniform Fraudulent Transfer Act, California Civil Code §§ 3439 et seq., provides four separate and distinct possible theories under which a transfer can be determined to be fraudulent. For each transfer, the Chapter 7 Trustee need only demonstrate any one of the following for the court to determine the transfer to be fraudulent: (a)"Actual intent" to hinder, delay or defraud creditors, as set forth in California Civil Code § 3439.04(a); or (b) the transferor did not receive reasonably equivalent value for the transfer, and, at the time of the transfer, the transferor: (i) was engaged or was about to engage in business or a transaction for which the remaining assets of the transferor were unreasonably small in relation to the business or transaction (California Civil Code § 3439.04(b)(1)); or (ii) intended to incur or believed or reasonably should have believed that it would incur debts beyond the ability of the transferor to pay (California Civil Code § 3439.04(b)(2)); or (iii) was insolvent at the time of the transfer or became insolvent as a result of the transfer (California Civil Codes 3439.05).
7. Once the Trustee has shown that the transfer is fraudulent as to the creditors, the Trustee can assert a claim pursuant 11 U.S.C. § 544(b), and avoid and recover the transfer or the value of the property transferred, at the option of the Trustee, pursuant to California Civil Code § 3439.07 and 11 U.S.C. § 550.
A. Actual Intent To Hinder, Delay. Or Defraud Creditors
8. Transfers made with the actual intent to hinder, delay or defraud creditors are fraudulent transfers under California Civil Code § 3439.04(a), subject to avoidance under California Civil Code § 3439.07(a)(1). The burden of proving that debtors effected transfers with actual intent to hinder, delay or defraud creditors lies with the Chapter 7 Trustee.
9. The standard of proof for actual intent under California Civil Code § 3439.04(a) is by a preponderance of the evidence. In re Serrato, 214 B.R. 219, 229 (N.D.Cal.1997); Liodas v. Sahadi, 19 Cal.3d 278, 292 (1977); Annod Corporation v. Hamilton Samuels, 100 Cal.App.4th 1286, 1293 (2002).
10. "The focus in the inquiry into actual intent is on the state of mind of the debtor." In re Cohen, 199 B.R. 709,716-17 (B.A.P. 9th Cir. 1966). If the requisite intent to hinder, defraud or delay creditors is present, it is not necessary to show insolvency, malice, or that less than reasonably equivalent value was received by the debtor in exchange for the transfer. Id.; accord Fross v. Wotton, 3 Cal.2d 384, 388 (1935) (holding that it is not necessary to show that debtor retained insufficient assets to satisfy judgment after transfer); Burrows v. Jorgensen, 158 Cal.App.2d 644, 647-48 (1958) (holding that where intent is present, "the fact that transferee gave consideration is immaterial").
11. "[I]n most cases the evidence [of intent to hinder, delay or defraud creditors] must of necessity consist of inferences drawn from the circumstances surrounding the transaction and the relationship and interests of the parties." Serrato, 214 B.R. at 229 quoting Neumeyer v. Crow Funding Corp., 56 Cal.App.3d 178, 183 (1976).
12. In aid of this analysis, courts have traditionally recognized the existence of "badges of fraud" in a transaction as indicative of actual intent to hinder, delay or defraud creditors. Serrato, 214 B.R. at 229-31 (applying badges of fraud under California Civil Code § 3439.04(a)); Mussetter v. Lyke, 10 F. Supp.2d 944, 959-63 (N.D.Ill. 1998) (same; applying California law).
13. Eleven such "badges of fraud" are described in the legislative committee comment of California Civil Code § 3439.04(a):
(a) whether the transfer was to an insider of the transferor;
(b) whether the transferor retained possession or control of the transferred property;
(c) whether the transfer was disclosed or concealed;
(d) whether the transferor was sued or threatened with suit before the transfer was made;
(e) whether the transfer was of substantially all of the transferor's assets;
(f) whether the transferor removed or concealed assets;
(g) whether the debtor has absconded or disappeared;
(h) whether the value received by the transferor was reasonably equivalent to the asset transferred;
(i) whether the transferor was insolvent or became insolvent shortly after the transfer;
(j) whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(k) whether the transferor had transferred the essential assets of the business to a lienor who had transferred the assets to an insider of the transferor.
This list is not intended to be exhaustive.
14. "The presence of one or more badges of fraud does not create a presumption of fraud. Rather, it is merely evidence from which an inference of fraudulent intent may be drawn." California Civil Code § 3439.04 legislative committee comment, "The fact that a transfer has been made to a relative or to an affiliated corporation has not been regarded as a badge of fraud sufficient to warrant avoidance when unaccompanied by any other evidence of fraud." Id.
15. Hill Top did not transfer property to the Carlsberg Defendants with the actual intent to hinder, delay, or defraud creditors of Hill Top.
16. RHI/113 Corporation did not transfer property to the Carlsberg Defendants with the actual intent to hinder, delay, or defraud creditors of RHI/113 Corporation.
B. Reasonably Equivalent Value
17. In determining whether debtors received reasonably equivalent value for a transfer, the Court must compare the value of the property transferred with the value of what a debtor received in exchange for the transfer. In re Pajaro Dunes Rental Agency, Inc., 174 B.R. 557, 578 (N.D.Cal. 1994)("The analysis is directed at comparing what the debtor surrendered and what the debtor received"); In re Dayton Title Agency, Inc., 262 B.R. 719, 731 (S.D. Ohio 2001); (under the Uniform Fraudulent Transfer Act, "courts generally compare the value of the property transferred with the value of that received in exchange for the transfer"); In re WCC Holding Corp., 171 B.R. 972, 984 (N.D.Tex. 1994) (under the Uniform Fraudulent Transfer Act, courts must weigh the value of property received against the value of property transferred).
18. Reasonably equivalent value "is to be judged from the standpoint of the creditors of the debtor." California Civil Code § 3439.03 legislative committee comment; Pajaro Dunes, 174 B.R. at 578 (whether debtor received reasonably equivalent consideration "is determined from the perspective of creditors of the estate"); Consolidated Capital Equities Corp., 143 B.R. at 87-88; Patterson v. Missler, 238 Cal.App.2d 759, 766 (1965).
19. Hill Top received reasonably equivalent value for all transfers made to the Carlsberg Defendants.
20. RHI/113 Corporation received reasonably equivalent value for all transfers made to the Carlsberg Defendants.
C. Unreasonably Small Assets
21. California Civil Code § 3439.04(b)(1) applies when the Debtor is left with unreasonably small assets, compared to his historical level of assets or cash flow and current needs* "The subparagraph focuses attention on whether the amount of all the assets retained by a debtor was inadequate, i.e., unreasonably small in light of the needs of the business or transaction in which the debtor was engaged or about to engage." California Civil Code § 3439,04 legislative committee comment.
22. Unreasonably small assets signify an inability to generate enough cash flow from operations and the sale of assets to remain financially stable. WCC Holding Corp., 171 B.R. at 985. Evaluation of cash flow projections must focus on information available at the time of the transaction, not on hindsight. Id. The court should principally focus not on whether the projections were correct but on whether they were reasonable and prudent at the time they were made. Id. Relevant data to consider includes historical cash flow, gross profit margins, net profits, and working capital. Id. Historical performance is an important, but not the only, indicator of a debtor's future ability to generate cash and pay its debts. Id. To a degree, the parties should account for difficulties that are likely to occur and for reasonably potential general economic downturns. Id. The Court must take into account that businesses fail for all sorts of reasons, and that fraudulent conveyance laws are not a panacea for all such failures. Id. at 985-86.
23. Hill Top was not engaged or about to engage in business or a transaction for which its remaining assets were unreasonably small in relation to the business or transaction at the time of the transfers to the Carlsberg defendants.
24. RHI/113 Corporation was not engaged or about to engage in business or a transaction for which its remaining assets were unreasonably small in relation to the business or transaction at the time of the transfers to the Carlsberg defendants.
D. Insolvency And Ability To Pay Debts
25. "A debtor is insolvent if at fair valuations, the sum of the debtor's debts is greater than all of the debtor's assets." California Civil Code § 3439.02(a); see also In re Bay Plastics, Inc., 187 B.R. 315, 330 (C.D.Cal. 1995).
26. California Civil Code § 3439.01(d) defines "debt" as a "liability on a claim." The definition of "debt" is derived directly from the Bankruptcy Code. California Civil Code § 3439.01 legislative committee comment; see also 11 U.S.C. § 101(12). A "claim," also derived from the Bankruptcy Code, is defined as "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." California Civil Code § 3439.01(b); 11 U.S.C. § 101 (5)(A). The term "claim" encompasses "all legal obligations of the debtor, no matter how remote or contingent." In re Energy Co-op, Inc., 832 F.2d 997, 1001 (7th Cir. 1987).
27. The terms "debt" and "claim" are coextensive. In re Quintana, 915 F.2d 513, 517 (9th Cir. 1990) citing Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 557-58 (1990); In re Jordan, 166 B.R. 201, 202 (D.Me. 1994) ("The terms `debt' and `claim' are synonymous and refer to a single obligation as seen from the point of view of the debtor and creditor; a debtor has `debts' and a creditor has `claims.'")
28. "In determining whether a debtor is paying its debts generally as they become due, the court should look at more than the amount and due dates of the indebtedness. The court should also take into account such factors as the number of the debtor's debts, the proportion of those debts not being paid, the duration of the nonpayment, and the existence of bona fide disputes or other special circumstances alleged to constitute an explanation for the stoppage of payments." California Civil Code § 3439.02 legislative committee comment. "A presumption of insolvency does not arise from nonpayment of a debt as to which there is a genuine bona fide dispute, even though the debt is a substantial part of the debtor's indebtness." Id.
29. Hill Top and RHI/113 Corporation were generall paying their debts as they became due at the time of the transfers to the Carlsberg Defendants.
30. Hill Top and RHI/113 Corporation were solvent at the time of the transfers to the Carlsberg Defendants.
E. Alternative Conclusions Of Law Regarding Plaintiff-In-Intervention's Fraudulent Conveyance Claims
31. Certain properties were not "interests of the debtors" as required by 11 U.S.C. § 544. These properties are: Red Garter Lounge; Ball Park Plaza; Commerce Center Condos; Five Seasons Davenport Mobile Home Park; Key Square Condos; Lakeside Manor East; Lakeside Manor South; Library Square; Sunrise Terrace; Sunset Center Condos; The Virginian; 1670 Properties; 1660 Properties; $60,000 note (originally-owned by Walcott Mobile Home Properties); Catalina Mobile Home Park; Cedar Terrace Mobile Home Park; Del Rey Mobile Home Park; Indian Pines; Old Wintergarden Warehouses; Riverside Condominiums; Hall's Theater; Terrace Apartments; Camarillo land; Loan of $250,000 to RG Daytona; Option to Purchase 50% of RG Daytona; Transfer of $60,000 note; Walcott Mobile Home Park; Northlake Mobile Home Park; Santa Barbara Mobile Home Park; Assignment of $98,000 note to Geary; Assignment of notes to 113 Corp.; Sale of Saugus land; Silver Star Warehouse; U.S. Rentals Kissimmee; and U.S. Rentals Winter Gardens. Union Bank v. Anderson, 232 Cal.App.3d 941, 949 (1991); In re Mercantile Guar. Co., 263 Cal.App.2d 346, 352 (1968); Comstock v. Fiorella, 260 Cal.App.2d 262, 266 (1968).
32. Certain properties were not "transferred" as required by 11 U.S.C. § 544. These properties are: Catalina Mobile Home Park; Cedar Terrace Mobile Park; Key Square Condominiums; Northlake Mobile Home Park; Red Garter Lounge; Riverside Condominiums; Santa Barbara Mobile Home Park; Silver Star Self Storage; Sunset Center; U.S. Rentals Kissimmee; U.S. Rentals Winter Garden; 1660 Properties; 1670 Properties; and Sunrise Mobile Homes stock. In re Pajaro Dunes Rental Agency, Inc., 174 B.R. 557 (N.D. Cal. 1994).
33. Other transfers were made from one debtor to the other or their subsidiaries. Consequently, neither Hill Topnor RHI have been damaged by such transfers. These transfers are: 113 Corporation transferred $1,000,000 note to Hill Top; Hill Top assigned its interest in Northlake Mobile Home Properties to Sunrise Golf Development Corporation; 113 Corporation transferred Fort Wear RV Park, Hickory Star, and Union County Building to TTP; Hill Top transferred its stock in TTP to Sunrise Golf Development Corporation; and Hill Top transferred Del Rey Mobile Home Park to Indrio Properties, Inc.
F. Statute of Limitations Defense
34. Despite the Ninth Circuit's ruling that the statute of limitations was tolled by the doctrine of equitable tolling, the Carlsberg Defendants have raised an affirmative defense that Plaintiff-In-Intervention's avoidance claims are barred by the two year statute of limitations set forth in 11 U.S.C. § 546(a)35. "The `law of the case' rule ordinarily precludes a court from re-examining an issue previously decided by the same court, or a higher appellate court, in the same case. "Moore v. Jas H. Matthews Co., 682 F.2d 839, 833 (9th Cir.1981). However, a court has discretion to depart from the law of the case where "the evidence on a subsequent trial was substantially different, controlling authority has since made a contrary decision of the law applicable to such issue, or the decision was clearly erroneous and would work a manifestin justice." Id. at 834.
36. The Court carefully reviewed the Ninth Circuit's September 4, 2001 opinion and acknowledges that its holding applying the doctrine of equitable tolling would normally foreclose any further review of the issue by this Court.However, based on additional evidence presented at trial that was not before the Ninth Circuit or Judge Tevrizian, which included the letters from Russell Nelms, Kelly Crawford, and Lawrence Warfield, and the fully developed testimony of Ben Floyd, the Court believes that it is appropriate to make findings and rule on the statute of limitations defense. The Court concludes that the doctrine of equitable tolling does not apply to the facts of this case now before the Court. See Tahoe-Seirra Preservation Council, Inc., 216 F.3d 764, 787 (9th Cir. 2000) (noting that "we have suggested in dicta on several occasions that district courts may, in certain circumstances, decline to follow law of the case set forth by this court"); see also United States v. Cuddy, 147 F.3d 1111, 1114-15 (9th Cir. 1998) (holding that "the district court was justified in departing from the law of the case because our previous conclusion in Sherwood I was clearly erroneous"). Accordingly, Plaintiff-In-Intervention's fraudulent conveyance claims are barred by 11 U.S.C. § 546(a)'s statute of limitations. See IRFM, 65 F.3d at 780-81; In re Hosseinpour-Esfahani, 198 B.R. 574 (B.A.P. 9th Cir. 1996) (noting that "the principles of equitable tolling [ ] do not extend to what is at best a garden variety claim of excusable neglect").
Ill. Plaintiff-In-Intervention's RICO Claims
37. To establish a RICO violation, the Plaintiff-In-Intervention must prove the following:
(1) The Carlsberg Defendants were participants in an enterprise and agreed to have some part in directing the affairs of the enterprise. United States v. Benny, 786 F.2d 1410, 1416 (9th Cir. 1986), cert. den., 479 U.S. 1017(1986);
(2) The enterprise gained property, securities and/or income through a series and pattern of racketeering activities. HJ, Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 109 S.Ct. 2893, 106 L. Ed 2d 195 (1989); United Energy Owners Comm., Inc. v. U.S. Energy Mgmt. Sys., Inc., 837 F.2d 356 (9th Cir. 1988);
(3) The Carlsberg Defendants committed the necessary predicate acts. The following constitute predicate acts under RICO: 18 U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), §§ 1956 and 1957 (money laundering), § 2314 (interstate transportation of stolen or forged property); 15 U.S.C. § 77b 78j and 17 C.F.R. § 240.10b-5 (securities fraud);
(4) Such racketeering activities were a substantial factor in bringing about the Debtor corporations' damages. E.g., S.P.R.L. v. Imrex Co., 473 U.S. 479, (1985).
38. The Carlsberg Defendants did not engage in two or more acts that constitute a pattern of racketeering activity.
39. The alleged RICO predicate acts were not related and continuous.
40. The alleged RICO predicate acts were not related because the acts did not have the same or similar purposes, results, participants, victims, or methods of commission and were isolated events.
41. The Carlsberg Defendants did not commit mail fraud, wire fraud, money laundering, interstate transportation of stolen or forged property, or securities fraud.
42. The Carlsberg Defendants did not directly or indirectly invest in, or participate in, an enterprise, the activities of which affected interstate commerce.
43. Under the in pari delicto doctrine, a bankruptcy trustee cannot sue third parties for injuries that a corporation suffered in connection with a fraudulent scheme in which the corporation was involved. In re Granite Partners, 194 B.R. 318, 328 (S.D.N.Y. 1996).
44. Hill Top, RHI/113 Corporation, and their sole shareholder, Reeder, were actively involved and participated in all of the allegedly fraudulent transfers and predicate acts that serve as the basis of Plaintiff-In-Intervention's RICO claims. Accordingly, Plaintiff-In-Intervention's claims are barred by the in pari delicto doctrine. In re Granite Partners, 194 B.R. at 330 (holding that "[i]t suffices that the law imputes to the corporation the knowledge and conduct of the guilty insider; a corporation only acts through its agents, and the imputation of the agent's wrongful conduct lies at the heart of in pari delicto"); Pate v. Hunt, 149 B.R. 96, 101 (N.D.Tex. 1992) (holding that "[a] co-conspirator in a fraudulent act, such as the RICO bankruptcy fraud alleged here, cannot also be a victim entitled to recover damages, for he cannot have relied on the truth of the fraudulent representations, and such reliance is an essential element in a case of fraud").
IV. Plaintiff's Breach Of Fiduciary Duty Claims
45. The elements of a cause of action for breach of fiduciary duty are: (1) existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by the breach. Stanley v. Richmond, 35 Cal.App.4th 1070, 1086 (1995).
46. The Carlsberg Defendants did not breach or owe any fiduciary duty to the George Business Trust.
V. Plaintiff's Claim For Undue Influence In Violation Of California Civil Code § 1575
47. Pursuant to California Civil Code § 1575, undue influence is defined as using confidence or authority for the purpose of taking an unfair advantage. See California Civil Code § 1575.
48. The Carlsberg Defendants never used confidence or authority to obtain an unfair advantage and did not take advantage of Reeder or the George Business Trust.
VI. Plaintiff's Claim For Conversion
49. The elements of conversion are: (1) the plaintiff's ownership or right to possession of the property at the time of the conversion; (2) the defendant's conversion by a wrongful act or disposition of property rights; and (3) damages. Oakdale Village Group v. Fong, 43 Cal.App.4th 539,543-44 (1996); see also Lin v. Ehrle, 189 B.R. 771, 776 (9th Cir. B.A.P. 1995).
50. The Carlsberg Defendants did not convert any property owned by the George Business Trust.
VII. Accounting
51. In light of the Court's findings in favor of the Carlsberg Defendants, Plaintiff and Plaintiff-In-Intervention are not entitled to an accounting.
VIII. Counter-Claimant's Slander Of Title Claims
52. The elements of a claim for slander of title under California law are: "(1) publication, (2) absence of justification, (3) falsity and (4) direct pecuniary loss." Seeley v. Seymore, 190 Cal.App.3d 844, 858 (1987).53. "The cause of action for slander of title requires that the owner prove that the disparaging statement was made maliciously." Harry D. Miller Marvin B. Starr, California Real Estate § 11:46 (citing cases).
54. Moe Nasr did not maliciously file any negative pledge agreements on behalf of the George Business Trust and did not authorize Reeder to file any negative pledge agreements on behalf of the George Business Trust.
55. Pursuant to California Civil Code § 47(b)(2), "[a] privileged publication is one made . . . [i]n any . . . judicial proceeding."
56. Section 47(b)'s litigation privilege is an absolute privilege. Aronson v. Kinsella, 58 Cal.App.4th 254, 267(1997). "The distinction between absolute and qualified privileges is essentially that an absolute privilege confers immunity regardless of motive while a qualified privilege can be lost if the defendant acted out of malice." Id. at 263.
57. The litigation privilege "applies to any publication, such as the recordation of a notice of lis pendens, that is required . . . or permitted . . . by law in he course of a judicial proceeding to achieve the objects of the litigation, even though the publication is made outside the courtroom and no function of the court or its officers is invoked." Albertson v. Raboff, 46 Cal.2d 375, 380-81 (1956) (emphasis added).
58. "The privilege also extends to communications which have some relation to an anticipated lawsuit." Kinsella, 58 Cal.App.4th at 262 (emphasis added). Thus, "a prelitigation statement is protected by the litigation privilege of[Section 47(b)] when the statement is made in connection with a proposed litigation that is contemplated in good faith and under serious consideration." Id. Moreover, "it is immaterial whether the party whose communications are at issue is a potential plaintiff intent on filing suit, or a potential defendant contemplating imminent litigation." Edwards v. Centex Real Estate Corp., 53 Cal.App.4th 15, 36(1997).
59. Reeder, through his attorney, Michael Wells, filed the negative pledge agreements in favor of the George Business Trust in connection with litigation that was contemplated in good faith and under serious consideration at the time. Accordingly, the filing of the negative pledge agreements were absolutely privileged pursuant to California Civil Code § 47(b)(2).
The Carlsberg Defendants shall submit a proposed judgment consistent with the Court's Findings Of Fact And Conclusions Of Law within fifteen days of the date of this Order.