Kaler v. Hebert (In re Hebert)

In re Phillip Sean Hebert and Shannon Lori Hebert, f/k/a Shannon Lori Peterson, Debtors.

Kip M. Kaler, as Bankruptcy Trustee for the Bankruptcy Estate of Phillip Sean Hebert and Shannon Lori Hebert, Plaintiff, v. Shannon Lori Hebert, Stacy Lofton, Robin Jemtrud, Atashia Jemtrud, Judith Jemstrud, and Troy Peterson, Defendants.

No. 20-30069

Adversary No. 21-07003

United States Bankruptcy Court, D. North Dakota

April 22, 2022

Chapter 7

MEMORANDUM AND ORDER

SHON HASTINGS, UNITED STATES BANKRUPTCY COURT JUDGE

I. INTRODUCTION

Kip M Kaler, Chapter 7 Trustee, filed an Adversary Complaint seeking denial of Debtor/Defendant Shannon Hebert's discharge under 11 U.S.C. § 727(a)(4) and (5).^[1]The Trustee alleges that Hebert failed to disclose prepetition transfers of $5, 000 to Defendant Judith Jemtrud and $25, 000 to Defendant Troy Peterson with the intent to hinder, delay or defraud creditors. The Trustee also claims that the $25, 000 transfer to Peterson was a fraudulent transfer under 11 U.S.C. § 548(a)(1) and seeks a money judgment against Peterson in that sum.^[2]

Hebert and Peterson filed an Answer to the Complaint, denying that Hebert transferred $25, 000 to Peterson, failed to explain the transfer, or made a false oath about it in her bankruptcy. Hebert and Peterson affirmatively allege that the $25, 000 transfer to Peterson included a $10, 000 payment to Peterson for work he performed for Hebert and repayment of a $15, 000 loan he made to her.

The Trustee filed an Amended Complaint on October 18, 2021. In his Amended Complaint, the Trustee alleges an additional $26, 200 in transfers from Hebert to Peterson related to the section 548 cause of action and requests a money judgment against Peterson in the sum of $51, 200. Hebert and Peterson did not file an Amended Answer.

The Court tried this case on January 13, 2022. For the following reasons, the Court finds in favor of the Trustee on most of his claims and causes of action.

II. FACTUAL BACKGROUND

Peterson is Hebert's son and Debtor Phillip Hebert's stepson.^[3] After graduating from college with a business degree, Peterson began working for Debtor Phillip Hebert. Debtor Phillip Hebert and Peterson formed Midwest Value Pros, LLC (MVP), a consulting firm for small businesses, in August 2016. According to Peterson, their “ultimate plan” was for MVP to provide consulting services to Second Chance Foundation, the nonprofit organization that Debtors and Peterson formed shortly after MVP began operating.^[4] At the time, Debtors expected a large inheritance that they planned to use to fund both MVP and Second Chance. Peterson explained that they created Second Chance to "do good" with the expected inheritance. More specifically, Second Chance focused on helping other area nonprofit organizations address issues related to homelessness and disadvantaged families.

MVP hired Peterson as a consultant. Hebert served as the business manager. Hebert described Peterson's work for MVP as follows:

He had multiple roles. He worked as a business consultant for a car detailing company which consisted of marketing strategies for sales and employment recruiting. He worked on employee and time management strategies to eliminate bottlenecks and maximize efficiency and on pricing with their management. He also worked as a consultant for a small fast food place which was mainly focused on financials, building projections, breakeven points and overall debits and credits.

Ex. T-7 at 3.^[5] Peterson's work for MVP also included building the organizational model for Second Chance. Peterson did not sign an employment contract with MVP, but he understood that his compensation would be $150, 000 per year.

In addition to Peterson and Hebert, MVP employed Troy White. Initially, MVP used a payroll service to pay its three employees. For reasons that are not clear from the evidence, MVP discontinued using the payroll service at some point, and Debtors began paying employees from Hebert's personal account.^[6] Hebert also paid rent for the entities from her personal bank account.

Without ever generating income, MVP ceased operating in late 2017, and Peterson's and White's employment shifted to Second Chance. Second Chance also employed Laura Viozzi and Carol Nowers. As with MVP, Peterson did not sign an employment contract with Second Chance. For reasons that he did not explain, Peterson reduced his expected annual compensation from Second Chance to $100, 000.

Peterson's role at Second Chance included determining how to use Second Chance's anticipated financial resources to support disadvantaged members of the community. He met with area nonprofit organizations to assess existing community services and to identify unmet needs related to homelessness, incarceration and disadvantaged individuals. He also began working on a youth initiative for Second Chance. Additionally, Peterson "did branding for . . . Second Chance including but not limited to websites, financial projections, company roles and responsibilities and short/long term plans and goals." Ex. T-7 at 3.

Hebert was also "part of the team" that met with area nonprofit organizations. Although she received no compensation, she characterized herself as an employee of Second Chance.

Behind the scenes, Debtor Phillip Hebert's father, Richard Hebert, provided large sums of money to Debtors to fund both MVP and Second Chance as well as to pay Debtors' household expenses.^[7] Debtors never received the large inheritance they expected. Consequently, Richard Hebert's capital contributions were the only funds available for operating both MVP and Second Chance. According to Hebert, Richard Hebert originally loaned Debtors the money he contributed but later forgave the debt.^[8]

Debtors paid Second Chance's employees from Hebert's personal account, and the employees knew Debtors paid them from her account. According to Peterson, he and the other employees were under the impression they worked for Debtors personally-and Debtors would pay them personally-because that was the agreement among everyone involved. Peterson's understanding derived from conversations with Debtors. Although Debtor Phillip Hebert was "basically the head of all of [MVP and Second Chance]" and "was making a lot of these decisions for the entities," Peterson discussed compensation with Hebert, and she was "on the same page." When asked whether any of Peterson's work for MVP or Second Chance benefitted Hebert personally, Peterson responded, "Maybe in the way that she positioned herself in the community, but not in gaining income."

The problem with this arrangement was that Hebert only paid the employees intermittently because Richard Hebert provided funding intermittently. According to Hebert, "We paid when we could." Peterson testified he never received compensation on a regularly recurring basis from either MVP or Second Chance. Peterson expressed frustration with the unpredictable compensation, claiming that "there were lots of conversations about compensation because I wasn't being compensated." White, Viozzi and Nowers ultimately left Second Chance, presumably due to dissatisfaction with their compensation. Peterson left Second Chance in early 2018.

White, Viozzi and Nowers sued Debtors, Peterson and his wife, MVP and Second Chance in state court in June 2018.^[9] According to Debtors' schedules, the former employees obtained a money judgment against Debtors in the sum of $359, 489.12 on October 23, 2018. Hebert explained that the lawsuit related to unpaid wages. According to Peterson, the state court found him liable for Debtors' improper business practices because he was a co-owner of MVP. Peterson paid $300, 000 in damages to the plaintiffs, selling his house to make the payment. At trial, Peterson argued Hebert is personally responsible for failing to pay the compensation she owes him for the same reason she is personally responsible for paying the judgment White, Viozzi and Nowers obtained.

A. Transfers

Hebert transferred $5, 000 from her personal account to Judith Jemtrud, her mother, on May 9, 2018. Hebert also transferred $25, 000 to Peterson from the same account on the same date. The following day she transferred an additional $10, 000 to Peterson. Hebert also transferred the following sums to Peterson: $1, 200 on May 31, 2018; $5, 000 on August 21, 2018; and $10, 000 on August 22, 2018. Hebert was insolvent at the time of all the transfers at issue in this case.^[10]

Peterson testified that he did not request any of these transfers. Rather, he asserted the transfers were money that Debtors owed him because they only paid him a "small portion" of what they agreed to compensate him. As for the dates of the transfers, Peterson speculated that Debtors paid him when "the money came." For example, Debtors paid Peterson $25, 000 on May 9, the same date they received a $200, 000 deposit by wire transfer.

The five transfers to Peterson at issue total $51, 200. Peterson testified he did not receive any other transfers from Hebert in the two years before Debtors' bankruptcy petition, February 2018 to February 2020. Before February 2018, Peterson received some payments for his services, but he was unable to recall how much they totaled. To the best of Peterson's recollection, all the compensation he received came from Hebert's personal account. Over the course of his employment, he never knew when he would receive payment or how much a payment would be, characterizing the payments to him as "very irregular." He insisted he did not receive money from Hebert for anything other than compensation and the loan repayment.

When asked how she decided when to transfer money to Peterson Hebert explained that if Debtors had money in the account, Debtor Phillip Hebert would...