Morrisanderson & Assocs. Ltd. v. Redeye II LLC (In re Swift Air, L.L.C.)

IN THE MATTER OF: Swift Air, L.L.C. Debtor.

MorrisAnderson & Associates Limited, Plaintiff, v. Redeye II LLC, et al., Defendants.

No: CV-20-02219-PHX-JAT

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

December 1, 2020

ORDER

Before the Court are the Report and Recommendation (the "Report and Recommendation"), (Doc. 19-2 at 65-262),¹ containing the proposed findings of fact and conclusions of law of the United States Bankruptcy Court for the District of Arizona (the "Bankruptcy Court"). Defendants Redeye II LLC, et al. ("Defendants") object to specific portions of the Report and Recommendation and filed Objections to the Report and Recommendation. (Doc. 1 at 6-83). Plaintiff MorrisAnderson & Associates Limited ("Plaintiff" or the "Trustee") filed a Response. (Doc. 1 at 87-125). After reviewing the filings and the record, the Court issues the following order.²

I. BACKGROUND

The below is a brief summary of the background of this case. A more extensive discussion of the background can be found in the Report and Recommendation, (Doc. 19-2 at 75-116), and the appellants' Opening Brief in the Redeye Appeal, (Doc. 19 at 10-14).

Prior to December 21, 2011, Swift Air, LLC ("Swift" or the "Debtor") operated as an aviation management company under a combined 14 CFR Part 121/135 Certificate ("Part 121 Certificate" and "Part 135 Certificate") issued by the Federal Aviation Administration ("FAA"). (Doc. 19 at 10). Swift's business involved managing aircraft owned by other parties and booking charter contracts. (Id.). Swift maintained a Part 135 Certificate business which managed corporate/individual charter flights (the "Part 135 Business"), and Swift also maintained a Part 121 Certificate business which consisted of flying large charter groups, in particular, professional sports teams (the "Part 121 Business"). (Id. at 11). Keeping the Part 121 Certificate operational required that certain criteria be satisfied, such as having five specific positions filled by qualified employees (the "Five Wise Men").³ (Doc. 19-5 at 173-74).

Swift was a wholly owned subsidiary of Swift Aviation Group, Inc. ("SAG"). (Doc. 19-2 at 260). SAG also held all the equity interests in Swift Aviation Sales, Inc. ("Sales"), Swift Aviation Management, LLC ("SAVM"), and Swift Aviation Services, LLC ("Services"). (Id.). SAG was wholly owned by the Jerry and Vickie Moyes Family Trust (the "Moyes Trust"). (Id.). Jerry Moyes ("Moyes") was the sole trustee of the Moyes Trust. (Id.). The Moyes Trust also held all the equity interests in Transjet, Inc. ("Transjet"), Transjet's three subsidiaries (the "Transjet Subsidiaries"), Transpay, Inc. ("Transpay"), and SME Steel Contractors, Inc. ("SME"). (Id.). Moyes also personally owned fifty percent of Redeye II, LLC ("Redeye"). (Id.). Moyes served as Swift's president, and Kevin Burdette ("Burdette") served as Swift's vice-president. (Id. at 78). The companies owned by Moyes and the Moyes Trust regularly did business with one another and through this business incurred significant accounts receivable and accounts payable that were outstanding on December 21, 2011. (Id. at 77-87).

In 2011, Swift's balance sheet reflected liabilities greater than assets by more than $3 million. (Id. at 88). In the latter half of 2011, Burdette met with two potential buyers for Swift who ultimately did not purchase the company. (Id.). Then, in October 2011, Jeff Conry ("Conry"), on behalf of Avondale Aviation II, LLC and Jordan Gunthorpe Holdings, LLC (collectively, the "Buyers"), approached Burdette about purchasing Swift's Part 121 Business (the "Transaction"). (Doc. 19 at 11). Notably, the Buyers told Burdette that they only wanted to acquire the equity in Swift's Part 121 Business and that they intended to merge it with their recently acquired business, Direct Air, which needed a Part 121 Certificate. (Doc. 19-2 at 88-89). The Buyers also told Burdette that they planned to obtain a $5 million investment in Swift after its acquisition. (Id. at 90).

The Transaction moved forward, terms were solidified, and the Buyers closed on the purchase of the equity interest in Swift for a de minimis payment of $100 on December 21, 2011 (the "Transaction Date"). (Doc. 19 at 11-12). Swift's Part 135 Business was not included in the Transaction, so it was transferred into a newly created entity, Swift Aircraft Management, LLC ("SAM"). (Id. at 12). As part of the Transaction, Swift transferred certain assets and liabilities, including accounts receivable and accounts payable, associated with the Part 135 Business to SAM and SAG pursuant to the Part 135 Assignment and Assumption Agreement and Guarantee (the "Assignment and Assumption Agreement"). (Id. at 13). After the closing of the Transaction, Swift and the other Moyes owned companies executed an Inter-Company Settlement Agreement and Mutual Release (the "Settlement Agreement"). (Id.). The Settlement Agreement released Swift from any debts or obligations to the other Moyes owned companies and facilitated a transfer of assets and liabilities between Swift and certain other Moyes owned companies (the "Transfers"). (Id.). The Transfers included a receivable from SAVM (the "SAVM Receivable") and a receivable from Redeye (the "Redeye Receivable"). (Id.).

After the Transaction, the newly acquired Swift ("New Swift") experienced cashflow shortages. (Doc. 19-2 at 105). The $5 million investment that the Buyers planned to obtain for New Swift never materialized, and New Swift never merged with Direct Air. (Id. at 107). New Swift also entered into new post-Transaction contracts that exacerbated its money problems. (Id.). These and other problems led New Swift to commence a Chapter 11 bankruptcy proceeding on June 27, 2012. (Id.). New Swift emerged from its Chapter 11 bankruptcy proceeding through a confirmed restructuring plan in October 2013 after receiving approximately $6.3 million from Nimbos Holings, LLC ("Nimbos") in exchange for the equity interests in the reorganized New Swift. (Doc. 19 at 14).

On June 27, 2014, Plaintiff initiated the underlying adversary proceeding. (Id.). Plaintiff's Third Amended Complaint (the "Complaint") (Doc. 19-2 at 2-27) asserted, among other things, preference, fraudulent transfer, and breach of fiduciary duty claims against Defendants. (Id.). The Bankruptcy Court held a trial after which the Bankruptcy Court issued the Report and Recommendation. (Id. at 8, 14). During the trial, Defendants' expert, Grant Lyon ("Lyon") testified as did Plaintiff's expert, Michael Spindler ("Spindler"). (See id. at 23-24).

Defendants filed Objections to the Report and Recommendation. (Doc. 1 at 6-83). Plaintiff filed a Response in Support of the Report and Recommendation. (Doc. 1 at 87-125). The Bankruptcy Court then transmitted the Report and Recommendation to the Court for review. (Doc. 1).

II. LEGAL STANDARD

Matters referred to a bankruptcy court are classified as either "core" or "non-core" proceedings. 28 U.S.C. § 157(b). Core proceedings are those "arising under title 11, or arising in a case under title 11," and non-core proceedings are those that are "otherwise related to a case under title 11." In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 558 (9th Cir. 2012), aff'd sub nom. Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25 (2014). Bankruptcy court judges may enter final orders on all core proceedings and may submit proposed findings of fact and conclusions of law to the district court for entry of final orders on all non-core proceedings. See 28 U.S.C. § 157(b)-(c). Bankruptcy courts may enter final judgments in non-core proceedings "with the consent of all the parties to the proceeding." Id. § 157(c)(2).

Regarding proposed findings of fact and conclusions of law by a bankruptcy court, "any final order of judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1). The Court may "accept, reject or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instruction." Fed. R. Bankr. P. 9033(d). In conducting a de novo review, the Court must consider a bankruptcy court's findings and conclusions and afford them no presumption of validity. 10 Collier on Bankruptcy ¶ 9033.09[3] (16th ed. Rev. 2020).

III. ANALYSIS

Defendants filed numerous objections to the proposed findings of fact and conclusions of law submitted by the Bankruptcy Court. (Doc. 1 at 15-82). These objections include objections to factual findings, objections to omissions of fact, objections to conclusions of law, and objections to the Bankruptcy Court's use of judicial notice. (See id.). These objections are addressed below.

A. Objections to Factual Findings

After thoroughly reviewing the parties' submissions, the record, and the proposed findings of fact issued by the Bankruptcy Court, the Court finds that the Bankruptcy Court's proposed findings of fact should be adopted, save the finding that Moyes and Burdette were not officers of Swift. In making this determination, the Court overrules each of the objections made by Defendants to the Bankruptcy Court's proposed findings of fact, save Defendants' one successful objection. The Court will address each objection to the factual findings in turn.

1. ". . . . Moyes needed to continue the 135 Business to service and manage the corporate aircraft he and Honigfeld still used."

Defendants object to the Bankruptcy Court's finding that Moyes needed to continue the Part 135 Business to service and manage the corporate aircraft used by Moyes and his Redeye associate, Brad Honigfeld ("Honigfeld"), arguing that there is "no basis in the evidentiary record for this statement." (Doc. 1 at 16). The record shows that the corporate aircraft used by Moyes and Honigfeld was managed by Swift's Part 135 Business....