Paloian v. Dordevic (In re Dordevic)

633 B.R. 553

IN RE: Jelena DORDEVIC, Debtor.

Gus Paloian, not individually, but solely in his capacity as the duly appointed Trustee for the estate of Jelena Dordevic, Plaintiff,

v.Jorgovanka Dordevic, Defendant.

Bankruptcy No. 20 B 09807

Adversary No. 20 A 00340

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed September 22, 2021

Attorney for Plaintiff: J. Scott Humphrey, Seyfarth Shaw LLP, 233 S. Wacker Drive, Suite 8000, Chicago, Illinois 60606.

Attorney for Defendant: Stephen F. Boulton, J. Peraica & Associates, Ltd., 5130 S. Arche Avenue, Chicago, IL 60632.

MEMORANDUM OPINION

Donald R. Cassling, United States Bankruptcy Judge Defendant Jorgovanka Dordevic ("Jorgovanka") is the mother of Debtor Jelena Dordevic ("Debtor"). Jorgovanka claims a 50% membership interest in PHMX LLC ("PHMX"), a Florida company. PHMX owns commercial real estate in Florida on which it is constructing a factory to produce injectable pharmaceuticals. This real estate and the improvements thereon constitute PHMX's sole assets. (Tr. 154:2-11.)¹

Plaintiff Gus Paloian is the Chapter 7 Trustee for Debtor's bankruptcy case. It is his contention that Jorgovanka's membership interest in PHMX is a sham designed to shield this asset from the creditors of Debtor, the true equitable owner. In support of this contention, the Trustee points to the following facts established at trial:

• Jorgovanka, a Serbian immigrant who cannot read, write, or speak English, (Tr. 264:1-6), has no expertise in pharmaceuticals, factory construction, engineering, or any other skill that would be useful in running an enterprise like PHMX. (Tr. 310:19-23.)

• Jorgovanka is employed as a cook at a Serbian restaurant in metropolitan Chicago, earning $36,000 a year. (Tr. 122:17-24.) She lives with her daughter Debtor, who, for at least three years, has claimed Jorgovanka as a dependent on her tax returns. (Tr. 362:5-7 & 363:1-10.) Jorgovanka therefore presumably lacks the financial means to have invested in her purported interest in PHMX.

• Before filing for bankruptcy, Debtor was incarcerated in Wisconsin for several weeks on a charge of immigration fraud, apparently based on allegations that she entered into a sham marriage with her former husband, identified as Steven Wilder, for the purpose of immigrating to this country. (Tr. 366:1-15.) That case is still pending. Several witnesses testified at the trial that Debtor asked the other 50% member of PHMX to list Jorgovanka as co-owner to hide Debtor's actual membership from the immigration authorities. (E.g. , Tr. 30:18-25.)

• Documentary and oral testimony establish that Debtor, not Jorgovanka, caused approximately $773,250 in wire transfers to be made to PHMX's general contractor, Pharmix, Inc. ("Pharmix") to cover the expenses of constructing the factory, (Trustee's Ex. 17; Tr. 340:18-20), and that these funds were the consideration for Debtor's 50% membership interest in PHMX.

• Debtor has been actively involved in the PHMX project, primarily by handling expenditures and funding. This assistance arguably constituted additional consideration for her membership interest, as well as evidence of her efforts to protect her equitable interest in PHMX.

Treating these facts as a whole, the Trustee argues that they clearly establish that he is entitled to recover Jorgovanka's 50% membership interest in PHMX for the benefit of creditors of Debtor's estate.

Jorgovanka counters that, while it might appear from the documents that Debtor made $773,250 in wire transfers to Pharmix, that was not what really happened. Rather, she presented testimony to demonstrate that each wire transfer from Debtor to Pharmix actually reflected the use of the same funds to effect three underlying and separate transactions:

1. Partial payments from Debtor to Nikola Zaric ("Zaric") under an earlier Stock Purchase Agreement (Def.’s Ex. 11);

2. Loans from Zaric to Jorgovanka pursuant to a Nominee Agreement (Trustee's Ex. 49) and Secured Promissory Note (Trustee's Ex. 50); and

3. Investments by Jorgovanka in PHMX.

Jorgovanka also claims to have actively participated in the management of PHMX. (Tr. 291:14-292:7.)

For the reasons stated below, the Court rejects Jorgovanka's argument and finds that Debtor is the true equitable owner of a 50% membership interest in PHMX.

STATEMENT OF LAW

In his three-count complaint, the Trustee seeks: (1) a judgment declaring that Jorgovanka's membership interest in PHMX is property of the estate under 11 U.S.C. § 541 ; (2) turnover of Jorgovanka's membership interest in PHMX under 11 U.S.C. § 542 ; and (3) an injunction enjoining the sale of Jorgovanka's membership interest in PHMX until the Court adjudicates whether that property constitutes property of the estate. The Trustee has met his burden on the first two counts;² the third is moot.

Upon filing her Chapter 7 bankruptcy case, an estate was created comprised of Debtor's property. See 11 U.S.C. § 541(a) ; City of Chi., Ill. v. Fulton , ––– U.S. ––––, 141 S.Ct. 585, 589, 208 L.Ed.2d 384 (2021). Property of the estate is "broad[ly]" defined by the Bankruptcy Code, United States v. Whiting Pools, Inc. , 462 U.S. 198, 204-05, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), encompassing "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Indeed, "every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541." In re Yonikus , 996 F.2d 866, 869 (7th Cir. 1993). "Although what constitutes property of the estate is a question of federal law, under § 541, state law determines whether a debtor has an interest in property in the first instance." In re McInerney , 609 B.R. 497, 503 (Bankr. N.D. Ill. 2019) (citing Barnhill v. Johnson , 503 U.S. 393, 398, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) and Butner v. United States , 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ).

This adversary proceeding concerns who owns the rights in Jorgovanka's record ownership of a 50% membership interest in PHMX. The Trustee argues that Jorgovanka is merely Debtor's nominee and that Debtor holds the equitable interest in the membership arising from her beneficial ownership. In general terms, a "nominee is one who holds bare legal title to property for the benefit of another." May v. United States , 07-10531, 2007 WL 3287513, *1 (11th Cir. Nov. 8, 2007) (citation omitted) (lien attached to property for which taxpayer's wife was titleholder). Because Debtor retains the equitable interests in properties held by her nominees, see Gurley v. United States (In re Gurley) , 357 B.R. 868, 872 (Bankr. M.D. Fla. 2006), the Trustee seeks declaratory relief that the 50% membership interest in PHMX is property of the bankruptcy estate. The Trustee seeks that declaration so that he may seek turnover of that membership and, ultimately, sell it to a potential investor from whom he has received an informal offer.

The Court must look initially to state law to determine what property interests a debtor owns, see Butner , 440 U.S. at 54-55, 99 S.Ct. 914. PHMX was formed in Florida, but there is no bright-line test under Florida law for determining nominee ownership. See United States v. Dornbrock , 06-61669-CIV, 2008 WL 769065, at *5 (S.D. Fla. Jan. 17, 2008), aff'd , 309 Fed.Appx. 359 (11th Cir. 2009). Florida law does provide, however, that legal title alone does not determine all property rights, and someone who is not the property's titleholder may hold an ownership interest for various reasons.³ Because there is no established test for this question under Florida law, it is appropriate for the Court to apply the common-law factors generally applied by federal courts to determine the existence of a nominee relationship. See Grippo v. Perazzo , 357 F.3d 1218, 1222 (11th Cir.2004) ("Because Florida law does not answer the question that we examine today, we look to federal law for guidance."); Daer Holdings, LLC v. Menchise (In re Steffen) , No. 8:13-CV-1700-T-27, 2014 WL 11428827, at *4 n.6 (M.D. Fla. Mar. 13, 2014) ("While the federal courts generally apply the law of the forum state (in this case, Florida) to resolve nominee, alter-ego and similar questions, Florida, like many states, does not have a bright-line test for determining nominee ownership. Therefore, federal common law applies." (internal quotation omitted)), aff'd , 611 F.App'x 677 (11th Cir. 2015) ; Battle v. United States , No. 9:06CV109, 2007 WL 1424553, at *5 (E.D. Tex. Feb. 7, 2007) ("Texas courts have not set forth factors for determining whether an entity is a nominee of another. When Texas law applies to an issue, but Texas law does not address that issue, federal courts will look to federal law for guidance."); Cody v. United States , 348 F.Supp.2d 682, 694 (E.D. Va. 2004) ("[F]ederal courts sitting in states whose law of nominee ownership is similarly undeveloped have typically looked to nominee ownership criteria employed in other federal tax collection cases.").

In applying federal law to this issue, the Seventh Circuit has explained that "[c]ourts consider several factors in determining whether a titleholder is actually serving as a nominee for the benefit of another, including whether: (1) there is a close personal relationship between the nominee and the transferor; (2) the nominee paid little or no consideration for the property; (3) the parties placed the property in the name of the nominee in anticipation of collection activity; (4) the parties did not record the conveyance; and, (5) the transferor continues to exercise dominion and control over the property." United States v. Szaflarski , 614 F. App'x 836, 838-39 (7th Cir. 2015) (citing Oxford Capital Corp. v. United States , 211 F.3d 280, 284 n. 1 (5th Cir. 2000) ). The fourth factor is not relevant to this dispute. As discussed below, based on the evidence heard and facts established at trial, each of the other four factors resolves...