Kapila v. Elkhorn Goldfields, Inc. (In re Richert Funding, LLC)

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In re Richert Funding, LLC, as substantively consolidated with Dwight Donald Richert and Holly Berry Richert, Debtor.

Soneet R. Kapila, as Chapter 7 Trustee of the Bankruptcy Estate of Richert Funding, LLC, substantively consolidated with Dwight Donald Richert and Holly Berry Richert, Plaintiff, v. Elkhorn Goldfields, Inc. and Patrick Imeson, Defendants.

No. 6:18-bk-06276-GER

Adv. No. 6:21-ap-00064-GER

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

January 23, 2024

ORDER (1) DENYING MOTION FOR RECONSIDERATION AND (2) CLARIFYING THAT TRUSTEE IS NOT LIMITED IN OTHER PROCEEDINGS

GRACE E. ROBSON, UNITED STATES BANKRUPTCY JUDGE

This matter came before the Court upon the Motion for Reconsideration^[1] (Doc. No. 172) filed by Plaintiff Soneet R. Kapila, Chapter 7 Trustee ("Trustee") and the Response^[2] (Doc. No. 178) thereto filed by Defendants Elkhorn Goldfields, Inc. ("Elkhorn") and Patrick Imeson ("Imeson") (collectively, Imeson and Elkhorn are "Defendants"). For the reasons discussed below the Court clarifies statements made after its oral ruling as to the impact on the Rackwise Adversary and the Black Diamond Adversary (defined hereinafter). However, because the Final Judgment does not contain clear error or result in manifest injustice, and the clarification does not impact the ruling on the Final Judgment, the Motion for Reconsideration is denied.

PROCEDURAL BACKGROUND

On April 9, 2021, Trustee filed a complaint against Defendants. An amended complaint was filed on October 11 2021.^[3] Trustee sought recovery for: (1) breach of contract, or in the alternative, unjust enrichment; (2) foreclosure of liens; and (3) avoidance and recovery of fraudulent transfers. The trial was conducted on September 11, 2023, with closing arguments on September 13, 2023 (the "Trial"). The Court orally rendered its ruling on November 28, 2023, finding in favor of Trustee on Counts VI through IX and in favor of Defendants on all other counts.^[4] The final judgment was entered on November 29, 2023 (the "Final Judgment").^[5] On December 12 2023, Defendants appealed the Final Judgment,^[6] and on December 13, 2023, Trustee filed the Motion for Reconsideration. Defendants filed their Response on December 27, 2023.

JURISDICTION

The Appeal has been docketed with the District Court.^[7] However, this Court may consider the Motion for Reconsideration and enter this Order because the Appeal is not effective until the disposition of the Motion for Reconsideration,^[8] and assertion of jurisdiction over the Motion for Reconsideration furthers the appeal.^[9]

FACTUAL BACKGROUND

Debtor Richert Funding, LLC ("Debtor") was an accounts receivable factoring business. Debtor purchased accounts receivables, i.e., invoices, at a discount from clients, and then advanced a percentage of the face value of the invoice to the client.^[10] Dwight Richert ("Richert") was the 100% owner and managing partner of Debtor, making all important operational decisions for Debtor.^[11] The main bankruptcy case was commenced as an involuntary proceeding on October 11, 2018 (the "Petition Date"); the order for relief was entered on October 29, 2018.^[12] Imeson is an individual who has known Richert for twenty years.^[13] Imeson has been the President of Elkhorn since sometime in 2016 or 2017.^[14] Elkhorn owns a mine in Montana.^[15]Imeson and his investor group, through Black Diamond Holdings, LLC ("Black Diamond Holdings"), got involved with Elkhorn in or around 2000.^[16] Minerals were extracted from the mine in 2011 or 2012, however, it is a development project, and Elkhorn has done nothing other than testing since the 2011 or 2012 mineral extraction.^[17] Elkhorn has generated some revenue but there has been no notable or consistent source of revenue.^[18]

Additionally, Imeson is an officer of Black Diamond Financial Group, Inc. ("Black Diamond Financial") which manages^[19] Elkhorn, the Rackwise Entities,^[20] and Black Diamond Holdings.^[21] Rackwise, Inc. is a software company that provides data center infrastructure management software that helps monitor, manage, and optimize data center assets.^[22] Black Diamond Holdings owns a mine in Colorado that is not operating.^[23] Trustee has also sued the Rackwise Entities and the Black Diamond Entities for breach of contract and fraudulent transfers in Kapila v. Rackwise, Inc. (In re Richert Funding, LLC), Ch. 7 Case No. 6:18-bk-06276-GER, Adv. No. 6:21-ap-00056-GER (Bankr. M.D. Fla. filed Apr. 8, 2021) (the "Rackwise Adversary") and Kapila v. Black Diamond Holdings, LLC (In re Richert Funding, LLC), Ch. 7 Case No. 6:18- bk-06276-GER, Adv. No. 6:21-ap-00055-GER (Bankr. M.D. Fla. filed Apr. 6, 2021) (the "Black Diamond Adversary").

Debtor entered into factoring agreements with both Imeson and Elkhorn,^[24] as well as the Rackwise Entities,^[25] and the Black Diamond Entities.^[26] Debtor was an important source of funding for these entities.^[27] Before discussing the factoring agreements and the specific transactions at issue in this proceeding, detail regarding Debtor's insolvency and financial manipulations provide an important backdrop.

Debtor was Trying to Mask Insolvency During the Four Years Preceding Petition Date

Trustee was qualified as an expert on insolvency and testified at Trial.^[28] The Court found Trustee was credible and established Debtor was insolvent during the period of October 22, 2014 through October 11, 2018 (the "Insolvency Period"). Trustee determined Debtor was insolvent during the Insolvency Period by analyzing whether the fair value of Debtor's assets exceeded Debtor's liabilities or obligations, commonly referred to as a "balance sheet test," which is appropriate under the Bankruptcy Code.^[29] Trustee's analysis reflected that 90% of Debtor's assets consisted of factored receivables.^[30] Trustee determined the factored receivables were disputed or based on anticipated investments from prospective investors, and were therefore not collectible.^[31] Trustee also determined the Rackwise Entities and the Black Diamond Entities (who were liable on the invoices) were not able to pay the receivables.^[32] Based on his analysis and findings, Trustee concluded the fair value of the receivables owed to Debtor from the Rackwise Entities and the Black Diamond Entities was $0.00, thus rendering Debtor insolvent during the Insolvency Period.

In addition, Trustee analyzed Debtor's banking records and found that Debtor engaged in a pattern of "refreshing"^[33] invoices and "round robin"^[34] transactions that camouflaged both the transaction and value of the receivable, such that the factored receivables were valueless.^[35] The refreshing of invoices and round robin transactions created a mirage of business transactions that in reality had no substance.^[36] Based on these and other activities that Trustee examined, Trustee opined that during the Insolvency Period, Debtor was falsifying the aging reports provided to its lenders by grossly overinflating the value of the receivables.^[37]

With Debtor's insolvency and financial deception in mind, the Court turns to the factoring agreements at issue.

The Imeson and Elkhorn Factoring Agreements

Pursuant to the Imeson Agreement and the Elkhorn Agreement, Debtor agreed to purchase invoices that were for "[b]ona fide existing obligations arising from the sale of Goods in which both title and risk of loss has passed."^[38] Debt owed on account of the invoices was to be "[o]wed by a Payor that is not, directly or indirectly, an Affiliate of Seller or in any way not an 'arms-length' transaction."^[39]

Imeson testified that in practice, when Imeson or entities he was involved with had a financial need, he would call Richert and request that Debtor make an advance.^[40] For instance, Imeson, on behalf of Elkhorn, would ask Debtor for an advance, then Elkhorn would create an invoice and would email it to Debtor to be factored. Imeson, on behalf of Elkhorn, would then sign an account purchase addendum^[41] that was made part of and supplemented the Elkhorn Agreement.^[42] Debtor would advance the money sometimes before the purchase addendum was executed, and sometimes after the fact.^[43]

Lack of Reasonably Equivalent Value in Exchange for Advances/Transfers

Trustee testified that Debtor did not receive reasonably equivalent value for the advances/transfers made in exchange for the Elkhorn Invoices^[44] or the Imeson Invoices.^[45] Contrary to the terms of both the Imeson Agreement and the Elkhorn Agreement, none of the invoices admitted at Trial were for the sale of goods. Further, all invoices were subject to risk of loss and were owed by payors that were affiliates of Imeson and Elkhorn and not at arms' length. When asked whether he had seen any evidence that Debtor received reasonably equivalent value in exchange for the transfers at issue in this proceeding, Trustee answered that he did not.^[46] For these and the additional reasons discussed below, the Court found that Debtor did not receive reasonably equivalent value in exchange for the Imeson transfers or the Elkhorn transfers.

Imeson Transactions (Counts II, VIII, and IX)^[47]

During the four-year period preceding the Petition Date, while Debtor was insolvent, Debtor made twelve transfers to Imeson; payments were made on three of the transfers, leaving nine transfers at issue as to Imeson.^[48] Two of the transfers relate to the Imeson Invoices, and Imeson asserts the seven other transfers were payments for commissions. Trustee asserts claims for breach of contract as to the Imeson Invoices (Count II); in addition, Trustee seeks to avoid and recover all nine transfers (including the two advances made on account of the Imeson Invoices) as constructively fraudulent transfers (Counts VIII and IX).

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