Opinion
No. CV03-0181042S
October 5, 2004
MEMORANDUM OF DECISION
In the underlying action, the plaintiff Sarco Diamond Corp. sued Sullivan's Jewelers, Inc. and John Sullivan individually for $14,270.50 it claims it was owed for merchandise it had consigned to Sullivan's. A default judgment plus costs was entered in the amount of $14,510.50 on November 24, 2003. On January 30, 2004, an execution was made on funds of the defendant at the Thomaston Savings Bank in account number 522004199 in the full amount of the judgment and a Satisfaction of Judgment was filed on behalf of Sarco Diamond Corp. on February 2, 2004.
Thereafter on February 9, 2004, the petitioner, Commercial Credit Counseling Service, Inc. hereinafter referred to as C.C.C., filed a Claim for Determination of Interest in Disputed Property pursuant to Connecticut General Statutes § 52-356c(c). C.C.C. maintains that on the date of the execution, it had a recorded security interest in all the assets of Sullivan's Jewelers, Inc. including account #522004199 at Thomaston Savings Bank which had priority over the non-secured creditor Sarco Diamond Corp. That UCC financing statement (Plaintiff's Exh. 1) was filed in the Secretary of State's Office on September 3, 2003.
Mr. John Sullivan, the President of Sullivan's Jeweler's, Inc. testified that prior to his financial difficulties, his business was the subject of a burglary in which $250,000 was stolen for which there was no insurance recovery. He was unable to pay his vendors and was technically insolvent on August 28, 2003. He did not want to file for bankruptcy.
Instead, on behalf of his company and himself personally, he entered into a Debt Restructuring and Fresh Start Agreement with C.C.C. on August 28, 2003. (Plaintiff's Exh. 2). C.C.C. is a business involved in turning around financially troubled companies. It begins by preparing a budget for the client and then approaching the client's creditors to seek concessions on their debt for a reasonably probable prospect of being paid something. C.C.C. approached all of Sullivan's creditors including Sarco (Sarco Exh. D). The basic plan was to reduce the debt as much as possible and the incentive to take less from each creditor was the promise of being paid first. For example, for any creditor willing to take 10.71% of its debt, it would be paid first from funds provided by the debtor before other creditors.
The debtor agreed to pay so much per month to C.C.C. to insure that its debt restructuring could be accomplished. Sullivan's on August 28, 2003 provided a letter to Thomaston Savings Bank advising it that it had entered into an agreement with C.C.C. and authorized C.C.C. to wire transfer funds from Sullivan's account #522004199 to itself to pay off creditors. (Plaintiff's Exh. 3) That device was used more than 100 times.
All but two of Sullivan's creditors came to an accommodation with C.C.C. and one of them that didn't was Sarco, which pursued its own case. Pursuant to that case, an attorney on behalf of C.C.C. wrote Sarco's counsel on October 3, 2003 and among other things, advised Sarco that C.C.C. had a perfected security interest in all the assets of Sullivan's Jewelers and it should therefore cooperate in restructuring its debt. (Exh. 4.).
The method of compensation for C.C.C.'s services was set forth in the Restructuring Agreement. It would be paid 25% of the difference between the amount owed by a creditor and the total settlement for each creditor. The agreement further provided for the granting of a security interest to C.C.C. in the debtor's assets to guarantee its obligations under the agreement including its obligations to pay the reduction fee to C.C.C. That financing statement was filed on September 3, 2003 with the Secretary of State.
Sarco raises several objections to the claimed security interest in all the assets of the debtor claimed by C.C.C. The third issue or argument urged by Sarco in its brief is that the arrangement between C.C.C. and the debtor Sullivan is a violation of Connecticut's Uniform Fraudulent Transfer Act, Connecticut General Statutes § 32-552(a) et seq. especially as it relates to the security agreement. Sarco attaches to its brief the State of Indiana case of Lose Bros. v. Lauer Floral and C.C.C., decided on August 25, 2004. That case involves the same claimant, C.C.C., the same kind of Restructuring and Fresh Start Agreement with the debtor and the same kind of Financing Statement and Security Agreement as exists in this case. That case is attached to this memorandum as Exhibit A.
The court in the Indiana case found that arrangement void as a matter of law as the transfer (the Financing Agreement) was undertaken to delay, hinder and defraud creditors in violation of Indiana's Uniform Fraudulent Transfer Act. This court agrees with the reasoning of the Indiana court and concludes that under the facts of this case, the transfer of a security interest in all of Sullivan's personal assets to C.C.C. was a fraudulent transfer under Connecticut's Uniform Fraudulent Transfer Act. (General Statutes § 52-552(a) et seq.)
When Sullivan's and C.C.C. entered into the Restructuring and Fresh Start agreement, on August 28, 2003, Sullivan's was insolvent. That was admitted by John Sullivan. Its debts exceeded its assets, he was unable to pay his bills and he was contemplating bankruptcy. As a term of the agreement, the debtor is required to grant a security interest to C.C.C. in collateral identified in the UCC-1 financing statement. A review of that document discloses that it is all inclusive as to personal assets. There is no way to determine if fair consideration was provided by C.C.C. because there was no evidence as to the value of the security or the value of the service to be provided by C.C.C.
C.C.C. was obligated to prepare a budget for the debtor and then contact those creditors of the debtor that the debtor supplied to seek a reduction of their debt and thereafter C.C.C. would collect a sum certain from the debtor to make the reduced payments. The agreement does not require C.C.C. to loan money to the debtor or to assume any of the debtor's obligations. If the debtor (Sullivan's) does not make the required payments to pay the reduced debt, C.C.C. has no obligation to do so.
The plan of C.C.C. is quite obvious and it probably works. By taking a security interest in all the debtor's assets it attempts to guarantee its success. It gets the security interest and UCC-1 filing before it approaches the debtor's creditors. Then it then approaches the creditors, it makes it clear that they might as well go along with the debt reduction because if they don't and they pursue their own remedies to judgment, they can't execute on it because C.C.C. is already secured in front of them. That is exactly what C.C.C. did in this case with Sarco when their counsel corresponded directly with Sarco's attorney on October 3, 2003 (Exh. 4)
The transfer of the security interest was not made in full or partial satisfaction of any indebtedness to C.C.C. Although C.C.C. was allegedly required to perform services pursuant to the agreement, that unperformed service does not amount to value for purpose of supplying consideration for the transfer of assets. (See Connecticut General Statutes § 52-552(d). There is simply no evidence before the court to conclude that C.C.C. gave reasonably equivalent value to Sullivan's for the asset transfer.
C.C.C.'s own marketing materials (Exh. A, B) reveal that the underlying purpose of the grant of the security interest was to frustrate the efforts of legitimate creditors who may pursue their legal remedies. C.C.C.'s own materials announce that by their methods they can make the debtor judgment proof. It is obviously referring to its acquisition of the security interest and the filing of the UCC-1 Financing Statement. As the Indiana case held at page 13 of the opinion,
When creditors learn that assets are secured, it decreases their motivation to sue and increases their motivation to settle. The debtor's outlook improves and gives cooperating creditors greater assurance of being paid. C.C.C.'s materials also boast of an alleged favorable judicial track record finding their alleged security interest superior to the liens of subsequent judgment creditors.
The Indiana court again on page 13 of the opinion states:
Indeed, transactions by which the debtors seeks to place its property beyond the reach of creditors are precisely the transaction to which the UFTA (Uniform Fraudulent Transfer Act) is targeted . . . The true intent underlying the security interest is revealed, however in correspondence to uncooperative creditors who disregarded C.C.C.'s overtures and attempt to enforce the debtor's obligation through judicial process. As shown by plaintiff's exhibit 4 they are greeted with claims of the security interest, and threats of C.C.C.'s rigorous defense of same. CT Page 15580
That is exactly what plaintiff's exhibit 4 in this case attempts to do.
This court concludes that based on the exhibits and testimony in the case that the security interest acquired by C.C.C. was undertaken to hinder, delay and defraud creditors in violation of Connecticut Uniform Fraudulent Transfer Act. As the debtor was insolvent at the time of the transfer of assets to C.C.C. said transfer was invalid. Further, the arrangement between C.C.C. and Sullivan's was not for value as defined under Connecticut General Statutes § 52-552(d) as value does not include any unperformed promise or service within the ordinary course of promissor's business. The actions of C.C.C. and Sullivan's violates Connecticut General Statutes § 52-552(e).
Based on these findings, the court concludes that Sarco's execution on the bank account of Sullivan's in the Thomaston bank was valid and superior to any interest of C.C.C.
GORMLEY, JTR
Attachment STATE OF INDIANA COUNTY OF MARION IN THE MARION CO. SUPERIOR COURT CAUSE NO. 49D13-0309-CC-1567 LOSE BROS., INC. Plaintiff, VS. LAUER FLORAL AND GIFT SHOP, INC. d/b/a LAUER FLORAL AND GIFT SHOP d/b/a LAUER FLORAL COMPANY Defendant. COMMERCIAL CREDIT COUNSELING SERVICES, INC. Garnishee Defendant FINDINGS OF FACT AND CONCLUSIONS OF LAW ON PLAINTIFF'S VERIFIED PETITION FOR RULE TO SHOW CAUSEComes now the Court and issues its Findings of Fact and Conclusions of Law upon a Verified Petition for Rule to Show Cause as to the garnishee defendant, Commercial Credit Counseling Services, Inc. (hercafter, "CCCS".)
I. PROCEDURAL HISTORY
1. On June 7, 2004, a consolidated hearing was heard relative to three separate proceedings in which CCCS had been named as garnishee defendant.
2. On October 7, 2003, judgment was granted in favor of Lose Bros., Inc. ("Lose") against Lauer Floral and Gift Shop, Inc., in the sum of $2,477.76 plus costs under cause number 49D13-0309-CC-1567 (hereinafter, "the Superior 13 Action".)
3. On October 6, 2003 judgment was granted in favor of XSE Group, Inc. ("XSE") against Just the Fax, Inc. ('Just the Fax"), in the sum of $10,461.42 plus costs under cause number 49D05-0308-CC-1400 (hereinafter, "the Superior 5 Action").
4. On August 8, 2003, judgment was granted in favor of W.W. Grainger, Inc. ("Grainger") against Performance Electrical Systems, Inc. ("Performance Electrical") in the sum of $26,806.42 plus costs under cause number 49D06-0307-CC-1225 (hereinafter, "the Superior 6 Action".)
5. Lose has received some payments on its judgment from Lauer. Otherwise, the judgments remain unpaid.
6. Grainger, XSE, and Lose are represented by the same counsel, Rubin Levin, P.C.
For the sake of brevity and where appropriate, Grainger, XSE, and Lose will be referenced collectively as "the plaintiffs." Similarly, Performance, Just the Fax, and Lauer where appropriate will be referenced collectively as the "judgment defendants."
7. Grainger, XSE, and Lose, by counsel, filed verified motions for proceedings supplemental in each of the three actions in which orders were issued to CCCS to answer garnishment interrogatories regarding funds or property of the judgment defendants which were in or were to come into its possession or control. The orders also advised that any claim or defense to the proceedings supplemental or garnishment order was required to be presented at the respective proceedings supplemental hearings.
8. In the Superior 13 Action, garnishment interrogatories were served on CCCS on January 13, 2004, directing answers in writing by January 23, 2004, or appearance at the proceedings supplemental heating on February 3, 2004. CCCS did not respond to the interrogatories nor appear at the hearing, did not seek an enlargement of time to respond and in fact responded only after issuance of an Order For Rule To Show Cause.
9. Similarly, in the Superior 5 Action, CCCS was served with an order to answer garnishment interrogatories on December 4, 2003. The order required CCCS's written responses on or before December 30, 2003, or CCCS's appearance at the proceedings supplemental hearing. CCCS did not appear at the hearing, did not seek leave for an enlargement of time to respond, and in fact responded on March 12, 2004, on]y after issuance of an Order For Rule To Show Cause.
10. With regard to the Superior 6 Action, the garnishment interrogatories were served upon CCCS on October 14, 2003. Following a hearing in proceedings supplemental on October 28, 2003, at which CCCS did not appear, a Continuing Order in Asset Garnishment ("Garnishment Order") was directed to CCCS. Grainger, by counsel filed its Verified Petition for Rule to Show Cause and To Restrict Disbursement of Funds As To CCCS, alleging among other things that CCCS had paid over no funds to plaintiff or its counsel pursuant to the Garnishment Order. On January 29, 2004, Superior Court 6 issued an Order to Appear and Show Cause to CCCS.
11. It is the custom and practice in Marion County that all Superior Courts schedule proceedings supplemental hearings (and related show cause hearings) to be heard in one of two sessions held on Tuesday of every week. The matters are heard by Magistrate Caryl Dill.
12. Because CCCS was scheduled to appear on Orders for Rule to Show Cause in three different matters, on two separate dates, counsel for the plaintiffs requested the consolidated hearing by the filing of motions in each of the Courts, all of which were granted.
13. The hearing was held before Magistrate Dill on June 7, 2004, in Marion Superior Court 13, at which plaintiffs appeared by counsel, and CCCS appeared by counsel and by its representatives, Senior Debt Manager Bill Scully, and its New Jersey counsel, Michael Antoniewicz. None of the three judgment defendants appeared, in person or by counsel. Evidence and argument was presented by the plaintiffs and CCCS. Based upon the evidence presented, the Court enters the following findings of fact and conclusions of law.
Mr. Antoniewicz did not actively participate in the hearing as witness or advocate.
This order is limited to the matter before this Court, e.g., the Superior 13 Action. Superior Courts 5 and 6 will, at their discretion, enter their own findings and conclusions.
II. FINDINGS OF FACT
14. Bill Scully is a Senior Debt Manager for CCCS, and is generally familiar with its business practices and procedures.
15. According to Scully, CCCS enters into contracts with debtors such as the judgment defendants. These "Debt Restructuring and Fresh Start Agreements" do not call for CCCS to loan money to the debtor nor to assume any of the debtor's obligations. Rather, the debtor commits to submitting funds to CCCS in installments, who in turn attempts to negotiate with the debtor's creditors to obtain "settlement" of their debts. These settlement agreements likewise are generally paid in installments. CCCS generates fees from this arrangement which are determined as a percentage of the difference between what a particular creditor is actually owed, and the amount for which CCCS is able to obtain settlement. Thus, CCCS's fees are inversely proportionate to the amount which is paid to creditors. The less money paid to creditors, the greater CCCS's fees
16. At the time that CCCS enters into an agreement with a debtor, it has not had any contact with any creditors, nor has it received any commitment from those creditors to accept anything less than the full amount of their claims. Once agreement is reached by CCCS and the debtor, the debtor submits a list of those creditors with whom it wishes CCCS to attempt settlement. CCCS does not approach creditors who are not submitted by the debtor.
17. A submitted creditor who is willing to settle for a smaller percentage of its total claim is given priority, and will receive full payment of the compromised amount before creditors who insist upon a larger percentage. Those who insist on being paid in full are given lowest priority.
18. As part of the debt restructuring agreement, the debtor purportedly grants CCCS a security interest in all of its assets. According to Scully, CCCS takes the security interest in order to ensure the debtor's performance under the restructuring agreement. CCCS asserts that the security interest is intended to secure the debtor's obligation to the cooperating creditors, as well as secure the debtor's obligations for CCCS's fees.
19. The untimely-filed answers in the Superior 13 Action asserted the existence of a security interest of Lauer. However, the interrogatory responses wore not offered into evidence by CCCS.
20. Correspondence from CCCS to Grainger was admitted as Plaintiff's Exhibit "2". This letter states that Performance "has pledged all assets as collateral to enter into this restructuring," resulting in the creditor's claim being "`securitized' upon settlement." Scully testified that it is not the practice of CCCS to file or amend any financing statement to include the "settled" creditors as secured parties of the debtor.
21. Correspondence from CCCS to Rubin Levin was admitted as Exhibit "3." In this letter, CCCS alleges that CCCS "has a perfected security interest on the assets of Performance Electrical Systems, Inc. in the amount of $113,027.82" and that "A bank levy would infringe upon our security interest." An attachment to that letter sets out an offer of settlement.
22. Scully identified and authenticated plaintiff's Exhibit "4," which is a brochure utilized by CCCS in marketing its services. The brochure contains a section titled, "Litigation Asset Protection," which provides in relevant part:
The majority of creditors in a restructuring tend to cooperate. However, there are a few creditors that think they can do better through litigation. They consult with their attorneys.
When debtors have unsecured assets, it is an invitation for those attorneys to sue. If they can gain an advantage for their client by suing and subsequently seizing a debtor's assets, it is their duty to do so . . . Our Asset Protection Strategies can stop litigating creditors from bypassing us and getting paid ahead of cooperating creditors.
When creditors learn that assets are secured, it decreases their motivation to sue and increases their motivation to settle. The debtor's outlook improves and gives cooperating creditors greater assurances of being paid.
(Emphasis in original.)
23. CCCS's marketing materials also reference alleged court decisions which found CCCS's security interest to be superior to subsequent judgment liens obtained by creditors, "proving the validity of [CCCS's] Asset Protection Strategies."
24. CCCS introduced its own Exhibits, Exhibit "A" shows that as of the end of September 2003, approximately two weeks prior to the service of the garnishment interrogatories in the Superior 6 Action, CCCS had received $9,426.51 from Performance. At that time, a total of $1,613.94 had been "disbursed" by CCCS, almost all of it in the form of payments to CCCS. By the end of November 2003, the balance was exhausted. A total of $22.60 had been paid to Performance's creditors. The remaining disbursements were payments to CCCS. Thus, of the nearly $9,500.00 paid by Performance to CCCS, over $9,400.00 was pocketed by CCCS, including over $7,800 after CCCS was served with garnishment interrogatories.
25. Similarly, CCCS's Exhibit "B" shows that of the $27,177.66 paid to CCCS by Just the Fax, $26,038.91 had been disbursed in payments to CCCS. CCCS was served with garnishment interrogatories on December 4, 2003. Exhibit "B" shows that at the time of service, CCCS was holding $21,438.10 in undisbursed funds. The entire amount was dissipated by the end of December 2003 following CCCS's receipt of garnishment interrogatories. The entire amount went to CCCS.
26. In the Superior 13 matter, garnishment interrogatories were served upon CCCS on January 13, 2004. CCCS's Exhibit "C" shows that CCCS collected a total of $24,687.50 from Lauer during the course of their relationship. After service of the garnishment interrogatories, CCCS accumulated as much as $5,222.46 from Lauer. These funds were exhausted shortly thereafter, including a payment of $2,500.00 to CCCS. Exhibit "C" shows that of the approximately $24,000.00 submitted to CCCS by Lauer, a total of $11,742.60 was disbursed to CCCS.
27. Scully testified that any funds paid to CCCS by their clients such as Performance, Lauer, and Just the Fax, are no longer the property of the debtors. He further testified that such funds are not the property of CCCS, but are in fact "property" of the creditors who have entered or will enter into settlement agreements with CCCS. With regard to the funds paid to CCCS by the judgment defendants, Mr. Scully was unaware of any judicial liens or security interest of any of the creditors who had entered settlement agreements with CCCS. Upon inquiry from the bench, Scully stated that in the event a debtor files bankruptcy, CCCS would adhere to the order of the bankruptcy court regarding disposition of the funds.
28. At the hearing, CCCS did not present any evidence other than Scully's testimony to show the existence of its purported security interest in the assets of any of the judgment defendants.
29. CCCS also did not present evidence on how CCCS "earned" or was otherwise entitled to pay itself the substantial sums from the funds submitted by each of the judgment defendants.
30. From the evidence presented, and for reasons set out below, the Court finds that CCCS was in possession of money or property of Lauer at the time that it was served with the garnishment interrogatories, notwithstanding the position asserted by CCCS at the hearing and in its Hearing Brief.
31. The Court further finds that CCCS has failed to show that its alleged security interest had attached to the assets of Lauer, or that any such security interest had been perfected by filing with the Indiana Secretary of State or otherwise.
32. The Court further finds that any purported transfer by Lauer of a security interest and the transfer of its funds to CCCS were undertaken with the intent to hinder, delay, and defraud creditors.
III. CONCLUSIONS OF LAW
33. In Indiana, the law has been established for over a century: a creditor acquires an equitable lien on funds owed by a third party to the judgment debtor from the time the third party receives service of process in proceedings supplemental. Radiotelephone Co. of Indiana, Inc. v. Ford, 531 N.E.2d 238, 240 (Ind.Ct.App., 1988). If the third party pays over the funds to the judgment debtor or otherwise disposes of the funds, then the garnishee defendant is answerable to the judgment creditor for any monies so disbursed. Id. The judgment creditor may pursue the garnishee defendant, to and including judgment, and may proceed with collections against the garnishee defendant's assets. Id.
34. The question before the Court is whether CCCS had property belonging to Lauer at the time that it was served with garnishment interrogatories. The Court finds that it did.
35. There is no dispute that the equitable lien of a judgment creditor may be subject to the competing interests of others, including the purported interest of the garnishee defendant. In this case CCCS has asserted the existence of an Article 9 security interest in the assets of Lauer, and has argued that Lauer had no further interest in funds after they were paid over to CCCS.
36. CCCS's argument is without merit in several respects. I.C. 26-1-9.1-317 provides, in relevant part, "An unperfected security interest . . . is subordinate to the rights of . . . a person that becomes a lien creditor before the earlier of the time the security interest or agricultural lien is perfected." Thus, a lien creditor's interest is superior to that of an unperfected Article 9 secured creditor.
37. A prerequisite to perfection is "attachment." I.C. 26-1-9.1-308. Attachment is described by I.C. 26-1-9.1-203. A security interest attaches when the debtor has received value for the security interest, the debtor has rights in the collateral, and one of the prerequisites of I.C. 26-1-9.1-203(b)(3) is met, e.g., the collateral is covered by a security agreement authenticated by the debtor. I.C. 26-1-9.1-203(b).
38. In this ease, the only evidence of the existence of CCCS's alleged lien on Lauer's assets was Scully's testimony. CCCS did not produce a security agreement nor a financing statement. In the absence of an authenticated security agreement, CCCS's alleged security interest could not have attached, could not have been perfected, and is subordinate to the equitable lien of Lose.
CCCS's assertion that Lauer has no rights in the funds paid to CCCS arguably also defeats CCCS's alleged security interest, as a lien cannot attach unless the debtor has rights in the collateral. I.C. 26-1-9.1-203(b)(3).
39. CCCS's assertion that Lauer retained no rights in the funds paid over to CCCS is also without merit. At the hearing, CCCS acknowledged that the funds did not belong to CCCS. CCCS loaned no money and assumed no debt of Lauer, and simply assumed the role of agent for the debtor to disburse submitted funds to creditors selected by the debtor. Thus, the funds paid over to CCCS are in essence deposited with CCCS, to be disbursed pursuant to the restructuring agreement. In this respect, the relationship between CCCS and the debtor is akin to that of bank and depositor CCCS has legal title to the funds deposited, but Lauer retains an interest which may be reached by creditors. First Bank of Whiting v. Samocki Bros. Trucking Co., 509 N.E.2d 187, 198 (Ind.Ct.App., 1987). CCCS's apparent position is that by virtue of its agreement with Lauer, cooperating creditors achieve a paramount interest in the funds deposited. This is not the case, however, where there is no evidence of a judicial or equitable lien in favor of any of the Lauer's other creditors (cooperating or otherwise) which are superior to the equitable lien of Lose. To the extent that CCCS would attribute a superior interest to those creditors which "flows from" the alleged security interest of CCCS, CCCS failed to offer any authority showing that a security interest can be extended by implication to parties who were not privy to the agreement which created the security interest, and have not independently perfected their interest by filing, or otherwise. Moreover, as noted above, the existence and perfection of CCCS's alleged security interest has not been establishcd.
40. Obviously, Lauer retains a benefit from the monies transferred if CCCS is successful in obtaining settlements with creditors whose claims are paid. Lauer's transfer of bare legal title to its property does not divest Lauer of its equitable interest.
41. Even if CCCS had shown that it met the formal requisites of obtaining a security interest in Lauer's assets, the Court finds that the alleged security interest and the transfer of funds by Lauer to CCCS are void as a matter of law, as the transfers were undertaken to hinder, delay, and defraud creditors.
42. The historic origins of proceedings supplemental are in equity, as remedies to the creditor for discovering assets, reaching equitable and other interests not subject to levy and sale at law and to set aside fraudulent conveyances. Stuard v. Jackson Wickliff Auctioneers, 670 N.E.2d 953, 955 (Ind.Ct.App., 1996). The procedures set forth in T.R. 69 and in the statutes embody the equitable origins of proceedings supplemental. Id. In Indiana, equity may be invoked to prevent one party from injuring another, through fraud and deceit, "by declaring that as done which in good conscience ought to be done." Id., citing Scott v. Scott, 51 Ind.App. 194, 99 N.E. 435 (1912). "Indiana's version of the Uniform Fraudulent Transfer Act states that a creditor may obtain, `subject to applicable principles of equity and in accordance with applicable rules of civil procedure . . . (C) any other relief the circumstances require.'" Id., citing I.C. 32-2-7-17. The Court need not make the determination that a violation of the Fraudulent Transfer Act had occurred prior to making the garnishee a party to the case. Id. at 956. Thus, proceedings supplemental are an appropriate vehicle to employ to discover and set aside alleged fraudulent transfers. Id. at 955.
43. Indiana's codification of the Uniform Fraudulent Transfers Act ("UFTA") provides, in part:
A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(B) intended to incur, or believed or reasonably should have believed that the debtor would incur debts beyond the debtor's ability to pay as the debts became due.
I.C. 32-18-2-14.
44. A "transfer" of property is defined as "any mode of disposing of or parting with an asset or an interest in an asset, whether the mode is direct or indirect, absolute or conditional, or voluntary or involuntary" and "includes payment of money, release, lease, and creation of a lien or other encumbrance." Ind. Code. § 32-18— 2-10 (emphasis added.)
45. For purposes of determining whether the debtor receives "value" for the asset transferred.
Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. Value does not include an unperformed promise made otherwise than in the ordinary course of the promisor's business to furnish support to the debtor or another person.
I.C. § 328-2-13.
46. As noted above, CCCS did not lend any money or assume any debt of Lauer, nor did it transfer any property to Lauer. The transfer of the security interest and the funds were not made in full or partial satisfaction of any indebtedness to CCCS. Although CCCS was allegedly required to perform services pursuant to the contract, an unperformed promise is not value under the UFTA. Moreover, CCCS offered no evidence that the value of the services it actually performed approached the approximately $11,000 it "paid" itself from funds collected from Lauer. Thus, there is no evidence before the Court that CCCS gave reasonably equivalent value to Lauer for the assets transferred.
47. An analysis of "reasonably equivalent value" is largely academic in this case, however, as the Court finds that the transfers were undertaken with the actual intent to hinder, delay, or defraud creditors. The statute is disjunctive — the transfer is fraudulent if the transfer was made for less than reasonably equivalent value, or if there is actual intent to defraud creditors. I.C. 32-18-2-4.
48. CCCS's own marketing materials reveal, that the underlying purpose of the grant of the security interest is to frustrate the efforts of legitimate creditors who may otherwise pursue their legal remedies to obtain payment in full. Those materials boast that CCCS's " Asset Protection Strategies can stop litigating creditors from bypassing [CCCS] and getting paid ahead of cooperating creditors. When creditors learn that assets are secured, it decreases their motivation to sue and increases their motivation to settle. The debtor's outlook improves and gives cooperating creditors greater assurances of being paid." (Emphasis in original). CCCS materials also boast of an alleged favorable judicial track record finding their alleged secured interest superior to the liens of subsequent judgment creditors "proving the validity of our Asset Protection Strategies."
49. Notwithstanding the alleged abundance of legal decisions favorable to CCCS "Asset Protection Strategies," CCCS has not cited to this Court any authority upholding the validity of the transfers such as those in this case. The transfers here were clearly made for the express purpose of hindering and delaying the efforts of creditors from realizing upon the property of the debtor in satisfaction of claims. Indeed, transactions by which the debtor seeks to place its property beyond the reach of creditors are precisely the transactions to which the UFTA is targeted. CCCS promotes to debtors the creation of a security interest as a means to shield the debtor's assets from creditors, while at the same time promoting the security interest as benefitting creditors, as set out in Plaintiffs' Exhibit 2. The true intent underlying the security interest is revealed, however, in correspondence to uncooperative creditors who disregard CCCS's overtures and attempt to enforce the debtor's obligations through judicial process. As shown by Plaintiffs' Exhibit 4, they are greeted with claims of the security interest, and threats of CCCS's vigorous defense of same.
50. There is nothing untoward, per se, in Lauer's mere retention of CCCS to serve as its agent to attempt negotiation of more favorable terms with creditors. Similarly, the mere fact that Lauer would channel funds through CCCS to pay creditors is not in itself unlawful. It is taken too far, however, when the agent becomes a "straw man" of his principal for purposes of shielding assets from creditors. The UFTA specifically addresses not only transfers of property, but the incurrence of obligations which are intended to hinder, delay, or defraud creditors. I.C. 32-18-2-14. The court finds that the obligation which Lauer incurred to CCCS in this case was such a transaction, and is void, as a matter of law.
51. An analogous situation was addressed in Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717 (7th Cir. 2002). In that ease, the creditor was on the verge of taking judgment against its debtor. The debtor was joint tenant in an account with his girlfriend. Shortly before judgment was entered, the account was transferred to the sole ownership of the girlfriend. Thereafter, checks payable to the debtor were endorsed over to the girlfriend, who deposited them in the account. The judgment creditor pursued the girlfriend to set aside the transfer of the account and the subsequent deposits, and to recover the monies from the girlfriend. The Court noted, however, that much if not most of the funds transferred were used by the girlfriend to pay the debtor's creditors.
52. In applying both the Indiana and Illinois versions of the UFTA, the court found the transfers remained fraudulent, notwithstanding that some of the debtor's creditors may have benefitted from the transfer. Id. at 720. "The seeping back of the transferred money or property to the transferor is strong evidence of actual fraud by him . . . The inescapable implication is that you are parking your money in a place where you hope your creditors won't know to look." Id.
53. Such a transfer is "ineffectual," in that the "transferor failed actually to divest himself of ownership of the money transferred." Id. The transferor remained the equitable owner, the transferee the mere holder of bare legal title. Id.
54. Similarly, in this case, the mere fact that the agreement between CCCS and Lauer ostensibly called for the former to pay the latter's debts with the transferred funds does not redeem the transaction. The net effect of the arrangement between CCCS and Lauer is the concealment of Lauer's assets in plain sight, shielded by CCCS's alleged security interest. See In re Penner, 107 B.R. 171, 174 (Bankr.D.Ind., 1989) (recognizing that "concealment" of assets includes "a species of fraudulent transfer in which the debtor apparently divests himself of ownership, while continuing to retain the benefits or use of the property transferred"). The security interest is not merely a shield, it is a sword used to keep Lauer's "uncooperative" creditors at bay and to resist any attempted disruption of Lauer's plan to pay selected creditors in the time, place, and manner it chooses. Notwithstanding any benevolent motive Lauer may have had to pay its creditors, a pure motive on the part of the debtor in making a fraudulent transfer will not cleanse the transaction. Jackson v. Russell, 533 N.E.2d 153, 155 (Ind.Ct.App., 1989).
55. Lauer is not the only culpable party, however. The evidence adduced at the hearing from Scully's testimony indicates that transactions and transfers such as those present in this case are part and parcel of the way that CCCS conducts business, and their marketing materials endorse their methods as legitimate and "court-approved."
56. it is also noteworthy that in the three matters which were subject of the consolidated hearing, the judgment defendants paid to CCCS a total of $61,291.67, ostensibly for payment to creditors under their respective "plans." Of this amount, $47,185.42, or seventy-seven percent (77%), was retained by CCCS, presumably as fees. Of the approximately $24,000 paid to CCCS by Lauer, just over $11,000 went to CCCS. In this case, despite its charge to facilitate the resolution of Lauer's financial difficulties, CCCS has succeeded, largely in diverting Lauer's funds away from creditors and to CCCS's own coffers.
57. To the extent that CCCS might argue that the amounts it paid itself from the remitted funds of Lauer represented "fees" to which it was entitled, CCCS did not establish what precisely it did, if anything, to earn such fees, and whether the fees assessed were reasonable for the alleged services rendered. Moreover, CCCS's alleged right to fees arises from the purported contract by which Lauer defrauded its creditors. The alleged purpose of the contract was to effectuate payment to Lauer's creditors. Because of CCCS's complicity in the fraud, the Court finds it inequitable for CCCS to retain the bulk of the funds paid by Lauer, while Lose and presumptively other creditors of Lauer remain unpaid.
58. At the hearing and in its brief, CCCS asserts that it should not be held in contempt of this Court's order to answer or interrogatories or to appear at a prior proceedings supplemental hearing. The rationale appears to be that CCCS ultimately responded to the interrogatories, indicating that it has no property of Lauer, and plaintiff is not prejudiced by its failure to timely respond.
59. Ultimately, of course, it is the province of this Court to determine whether CCCS has property or assets belonging to Lauer which Lose may reach through proceedings supplemental. As noted above, the Court finds that such assets do exist.
60. It is significant, however, that the order directed to CCCS arising from plaintiff's verified motion for proceedings supplemental specifically directed CCCS to respond in writing to the interrogatories by a prescribed date, or appear at the hearing. The order also expressly stated that any claim or defense to the proceedings supplemental or garnishment order was required to be presented at the originally-scheduled hearing. Had CCCS served timely written responses to the interrogatories, or appeared at the hearing to make its arguments, then the issue of its alleged contempt would not be before the Court.
61. CCCS did neither. Instead, despite being served with the garnishment interrogatories, CCCS chose to "disburse" the remaining funds of Lauer it held on account, much of it to itself, in direct contravention of plaintiff's equitable lien, and demonstrates blatant contempt for this Court.
62. To grant relief to a creditor aggrieved by a fraudulent transfer, the Court may void the transfer or obligation to the extent necessary to satisfy the creditor's claim. Ind. Code § 32-18-2-17. If a creditor has obtained a judgment on a claim against the debtor, the creditor, if the court orders, may levy execution on the asset transferred or its proceeds. Id.
WHEREFORE, IT IS ORDERED ADJUDGED AND DECREED THAT the purported transfer of a security interest in the assets of the judgment defendant, Lauer Floral and Gift Shop, Inc. in favor of the garnishee defendant, Commercial Credit Counseling Services, Inc., be and hereby is declared null and void as fraudulent as to creditors;
IT IS FURTHER ORDERED ADJUDGED AND DECREED THAT the purported transfer of funds from the judgment defendant, Lauer Floral and Gift Shop, Inc., to the garnishee defendant, Commercial Credit Counseling Services, Inc., be and hereby is declared null and void as fraudulent as to creditors, and Commercial Credit Counseling Services, Inc. shall disgorge itself of the funds so transferred up to an amount to satisfy the judgment of plaintiff herein, plus costs and interest accrued as of July 22, 2004, which figure is $1,209.93.
IT IS FURTHER ORDERED ADJUDGED AND DECREED THAT Commercial Credit Counseling Services, Inc. is in contempt of this Court's previously-issued order to answer interrogatories or appear at hearing for a hearing in proceedings supplemental, and that contrary to said order, CCCS disbursed funds of Lauer Floral and Gift Shop, Inc. in its possession or control at the time that said order was served; and CCCS shall cleanse itself of such contempt by disgorgement of $1,209.93 received from Lauer Floral and Gift Shop, Inc. by tendering such sums by certified or cashier's check payable to plaintiff and directed to the office of counsel for the plaintiff, Rubin Levin, P.C., within thirty (30) days of the date of this Order.
IT IS FURTHER ORDERED ADJUDGED AND DECREED THAT should CCCS fail to pay over such sums in the time and manner described herein, upon petition by plaintiff and after hearing, the Court shall enter judgment against CCCS for the amount which Commercial Credit Counseling Services, Inc. has so failed to disgorge up to the unpaid balance of plaintiff's judgment, costs and interest; and any additional relief deemed appropriate.
Recommended for Approval:
Magsitrate Caryl Dill
Date: August 25, 2004
Approved and So Ordered:
S.K. Reid, Judge
Date: August 25, 2004