In re Dealers Agency Services, Inc.

380 B.R. 608

In re DEALERS AGENCY SERVICES, INC., Debtor Douglas N. Menchise, Trustee, Plaintiff, v. Terry S. Clark, Ellen Deane, and DAS 2, LLC, Defendants.

Bankruptcy No. 8:01-bk-17391-PMG, Adversary No. 8:03-ap-310-PMG.

United States Bankruptcy Court, M.D. Florida, Tampa Division.

March 30, 2007.

COPYRIGHT MATERIAL OMITTED

John P. Holsonback, Lee Harang, Fuller Holsonback Bivins & Malloy, Joseph E. Launikitis, Tampa, FL, for Plaintiff.

Barbara C. Leon, Buddy D. Ford, PA, Buddy D. Ford, Tampa, FL, for Defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OPINION

PAUL M. GLENN, Chief Judge.

THIS CASE came before the Court for a final evidentiary hearing in the above-captioned adversary proceeding.

The Plaintiff, Douglas N. Menchise, as Chapter 7 Trustee, commenced this adversary proceeding by filing a Complaint to avoid the transfer of substantially all of the assets of the Debtor, Dealers Agency Services, Inc., to a limited liability company known as DAS 2, LLC, within one year before the filing of the Debtor's bankruptcy petition. The issue in this case is whether the transfer was a fraudulent transfer within the meaning of § 548 of the Bankruptcy Code and § 726.105 of the Florida Statutes, or a preferential transfer within the meaning of § 547 of the Bankruptcy Code.

Background

The Debtor was incorporated on September 8, 1998. Its initial officers and directors were Larry O'Blander (O'Blander) and Ellen Deane (Deane). (Plaintiff's Exhibit 6). O'Blander was the Debtor's sole shareholder.

The Debtor was a specialty insurance agency that was primarily engaged in the business of providing certain insurance and bonding services, known as garage liability, to automobile dealerships.

Terry Clark (Clark) became employed by the Debtor in 1998, initially as the property and casualty manager. He later signed certain documents as the Debtor's Vice President. (Transcript, Vol. I, p. 86).

In 1999, Sandra Phillips filed a lawsuit against the Debtor and O'Blander in the Circuit Court for Hillsborough County, Florida, Case No. 99-7963. (Transcript, Vol. I, p. 76; Plaintiff's Exhibit 4). In the action, Sandra Phillips sought to recover certain commissions that were owed to her deceased husband pursuant to a Commission Agreement that had been entered by her husband and the Debtor. (Plaintiff's Exhibit 3).

On April 2, 2001, while Sandra Phillips' lawsuit remained pending, O'Blander and an entity known as DAS 2, LLC entered into an Assets and Liabilities Purchase Agreement (the Agreement), pursuant to which O'Blander, as the owner of all of the Debtor's stock, sold "all of the assets and certain of the liabilities" of the Debtor to DAS 2, LLC. (Plaintiffs Exhibit 10).

Specifically, the Agreement stated that it was entered "by and between DAS 2, LLC, a limited liability company in formation, owned by The Deane/Clark Trust (which is owned by Ellen L. Deane and Terry S. Clark), hereinafter referred to, as `purchasers' or `buyers', and Larry A. O'Blander, an individual, hereinafter referred to as `seller' or `LAO'."

The assets that were the subject of the sale were listed on Exhibit A to the Agreement. The liabilities that were assumed by DAS 2, LLC were listed on Exhibit B to the Agreement. The liabilities included a debt owed to North American Specialty Insurance Company in the amount of $50,599.40, and a debt owed to RLI Insurance Company in the amount of $45,826.20.

The Agreement was signed by O'Blander as the Seller, by Clark as president of DAS 2, LLC, and by Deane as vice president, secretary, and treasurer of DAS 2, LLC.

A separate Bill of Sale was also executed by O'Blander and Clark on April 2, 2001. (Plaintiff's Exhibit 12).

On April 9, 2001, O'Blander, Deane, and Clark executed an Addendum to the Agreement, which provided that Deane and Clark also assumed all of O'Blander's legal and accounting expenses, in addition to the other liabilities listed in the Agreement (Plaintiff's Exhibit 11).

On April 16, 2001, approximately one week after the Agreement was entered, DAS 2, LLC, was formed as a limited liability company under the laws of the state of Delaware. (Plaintiff's Exhibit 8).

On June 20, 2001, DAS 2, LLC was authorized to transact business in the state of Florida. (Plaintiff's Exhibit 9).

On September 18, 2001, the Debtor filed a petition under Chapter 7 of the Bankruptcy Code. The "sale of assets/certain liabilities of Dealers Agency Services, Inc." to DAS 2, LLC in April of 2001 was disclosed on the Debtor's Statement of Financial Affairs.

On May 27, 2003, the Trustee in the Debtor's Chapter 7 case filed a Complaint against Clark, Deane, and DAS 2, LLC (collectively, the Defendants). In the Complaint, the Trustee seeks to avoid the transfer of the Debtor's assets to the Defendants as a fraudulent transfer pursuant to § 548 of the. Bankruptcy Code and § 726.105 of the Florida Statutes, or a preferential transfer pursuant to § 547 of the Bankruptcy Code.

Discussion

The subject of this adversary proceeding is the transfer of virtually all of the Debtor's assets to DAS 2 pursuant to the Assets and Liabilities Purchase Agreement dated April 2, 2001. In Count I and Count III of the Complaint, the Plaintiff asserts that the transfer should be avoided because it was made with the actual intent to hinder, delay, or defraud the Debtor's creditors. In Count II and Count IV of the Complaint, the Plaintiff asserts that the transfer should be avoided because the Debtor received less than a reasonably equivalent value in exchange for the transfer.

The Plaintiff bears the burden of proving that the transfer was fraudulent under both theories of action. In re Ramsurat, 361 B.R. 246, 252 (Bankr.M.D.Fla. 2006).

I. Actual intent to hinder, delay, or defraud

Count I of the Complaint is based on § 548(a)(1)(A) of the Bankruptcy Code. As applicable to this case, that section provided:

11 USC § 548. Fraudulent transfers and obligations

(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted.

11 U.S.C. § 548(a)(1)(A)(Emphasis supplied).

Count III of the Complaint is based on § 726.105(1)(a) of the Florida Statutes. That section provides:

726.105. Transfers fraudulent as to present and future creditors

(1) A transfer made or 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:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.

Fla. Stat. 726.105(1)(a)(Emphasis supplied).

Section 548 of the Bankruptcy Code and § 726.105 of the Florida Statutes are substantially the same, with the result that "the analysis of what must be shown to prove actual fraud under both the bankruptcy and state law fraudulent transfer provisions is the same." In re McCarn's Allstate Finance, Inc., 326 B.R. 843, 849 (Bankr.M.D.Fla.2005).

To establish a cause of action under § 548(a)(1)(A) and § 726.105(1)(a), the Plaintiff must show (1) that the Debtor transferred property within one year (under § 548) or four years (under § 726.105) of filing the bankruptcy petition, and (2) that the transfer was made with the actual intent to hinder, delay, or defraud any entity to which the debtor was indebted. In re McCarn's Allstate Finance, 326 B.R. at 848.

In this case, it is undisputed that the Debtor's assets were sold to DAS' 2 on April 2, 2001. The Debtor's bankruptcy petition was filed on September 18, 2001. Consequently, the transfer occurred within the time periods set forth in the respective statutes.

The, primary issue in this case, therefore, involves the second element of the cause of action under § 548(a)(1)(A) and § 726.105(1)(a): whether the transfer was made with the actual intent to hinder, delay, or defraud a creditor of the Debtor.

"Because it is difficult to establish a transferor's actual intent, courts generally consider the totality of the circumstances and determine whether any `badges of fraud' are present in connection with a particular transfer." In re Ramsurat, at 253. "The Eleventh Circuit has adopted the badges of fraud contained in the Florida fraudulent transfer statute." In re McCarn's Allstate Finance, 326 B.R. at 850(citing In re Levine, 134 F.3d 1046, 1053, (11th Cir.1998)).

The "badges of fraud" as set forth in § 726.105 are as follows:

726.105. Transfers fraudulent as to present and future creditors

. . .

(2) In determining actual intent under paragraph (1)(a), consideration may be given, among other factors, to whether:

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the property transferred after the transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit.

(e) The transfer was of substantially' all of the debtor's assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.

(k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider

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