Peterson v. Colony Am. Fin. Lender LLC

634 B.R. 1010

Ronald R. PETERSON, as Chapter 7 Trustee for Mack

v.COLONY AMERICAN FINANCE LENDER LLC et al.

Case No. 17 B 09308

ADVERSARY NO. 19 A 00576

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

Signed March 31, 2021

Attorneys for Plaintiff: Ariane Holtschlag, Jeffrey K. Paulsen, Chicago

Attorneys for Defendant: Jerry L. Switzer, Jr., Anthony C. Porcelli, Trinitee G. Green, Claire Brennan, Chicago

STATEMENT

Carol A. Doyle United States Bankruptcy Judge

Ronald Peterson filed this adversary proceeding as the chapter 7 trustee of three debtors: Mack Industries II LLC, Mack Industries V LLC, and Mack Industries VI LLC (collectively "the Debtors"). They are all related to the principal debtor in this group of cases - Mack Industries, LLC ("Mack"). The trustee sues three defendants: Colony American Finance Lender LLC ("Colony"), CAF REO-1 LLC ("CAF"), and Mack LOC I LLC ("LOC I"). He seeks to avoid transfers of real property from the Debtors to LOC I as fraudulent based on constructive fraud and actual fraud. He also seeks to pierce the corporate veils of CAF and LOC I to recover the value of the transfers from Colony.

The defendants moved to dismiss, arguing that the trustee cannot recover the value of any alleged fraudulent transfer from Colony under § 550(a)(1) of the Bankruptcy Code and that the trustee failed to allege fraud with particularity because the scheme to defraud he alleges is not connected to the transfers. The defendants also contend that the trustee failed to allege facts to support his veil piercing claims against LOC I and CAF. The defendants are correct. The motion to dismiss will be granted.

1. Background

The trustee filed approximately 400 adversary complaints seeking to avoid transfers that were allegedly fraudulent or preferential. In almost all of those cases, he sued as trustee of two chapter 7 debtors: Mack and Oak Park Avenue Realty, Ltd. ("Oak Park"). He alleged that transfers were fraudulent because Mack was trying to deplete its assets to prevent one of its creditors from collecting from it.

According to all of the complaints, Mack had a contract to manage hundreds of properties owned by American Residential Leasing Company LLC. Mack was required to lease the properties, maintain them, pay the property taxes, and pay certain rental and other fees to American Residential. In mid-2014, Mack tried to renegotiate the contract with American Residential. During negotiations, a Mack vice president allegedly threatened that Mack would deplete its assets so American Residential could not collect if it refused to renegotiate. The trustee contends that Mack carried out this plan by using its assets for the benefit of other entities. He seeks to recover from many parties who purchased property from Mack or a related entity and then hired Oak Park to manage the properties, including collecting rent from tenants. Mack often paid those parties even though Oak Park owed them the money. The trustee is also attempting to recover from parties who provided goods and services to Mack that Mack used to improve properties owned by other entities. Thus, in most of his adversary proceedings, the trustee is trying to recover payments made by Mack to parties it did not owe or who improved property owned by others.

This case is different. It does not involve payments or transfers made by Mack. Here, the trustee is suing an entity (Colony) that loaned money to a Mack-related entity - LOC I - secured by mortgages on properties owned by LOC I. The trustee alleges that one way that the McClellands, who owned the various Mack entities, carried out their scheme to defraud American Residential was by organizing LOC I in November 2015. Amended Complaint ¶ 65. LOC I was owned by LOC III, which was owned by James K. McClelland. Am. Compl. ¶ 67. The McClellands caused the transfer of 169 parcels of real property from the Debtors to LOC I to add "a further barrier to prevent American Residential from collecting its debt." Am. Compl. ¶ 68. In December 2015, LOC I entered into a revolving loan agreement with Colony for up to $15 million. The total loan amount was later raised to $30 million. Am. Compl. ¶ 69. The purpose of the loan was to allow LOC I to acquire and renovate real estate. Am. Compl. ¶ 70.

Under the terms of the loan, Colony would advance the lesser of 75% of the value of each parcel of real estate LOC I acquired, or 85% of the cost of the property and its expected renovation. Am. Compl. ¶ 70. Colony's loan to LOC I was secured by the real estate that LOC I acquired. Am. Compl. ¶ 71. To further secure Colony's loan to LOC I, LOC III pledged its membership interests in LOC I to Colony. Am. Compl. ¶ 72.

In 2015, the Debtors owned many parcels of real estate in the Chicago area. Am. Compl. ¶ 73. Between April and October 2016, each of the Debtors transferred multiple parcels of property to LOC I (totaling 169 properties).¹ The trustee defines these transfers of real property from the Debtors to LOC I as the "Transfers" he seeks to avoid and recover. Am. Compl. ¶ 74. By transferring the properties, the Debtors transferred the equity in those properties to LOC I. Am. Compl. ¶ 75. There were valid mortgages on various properties but "the Debtors had an average of 30% equity in the properties they transferred to LOC I." Am. Compl. ¶ 76. Some mortgages asserted against properties were not valid because a Mack entity other than the one that owned the property at the time purported to grant the mortgages. Am. Compl. ¶ 77. The properties transferred by the Debtors to LOC I became collateral for the Colony loan. Am. Compl. ¶ 78.

The Transfers were grouped into eight transactions or draws. Each draw had a closing where all the steps of the transaction occurred as simultaneously as possible. Am. Compl. ¶ 79. For each draw, the Debtors would transfer a group of properties to LOC I, Colony would advance a portion of the total available loan amount, prior mortgages on the properties were paid and released, and Colony would obtain mortgages on the properties transferred. Am. Compl. ¶ 79. The Debtors transferred approximately $12.2 million in equity in the properties to LOC I to secure the Colony loan. Am. Compl. ¶ 89. This estimate of equity is based on "the values that Colony assigned to each property at the time of the draw after obtaining a professional valuation," with three exceptions. Am. Compl. ¶ 90. By January 2017, LOC I had defaulted on the loan and Colony declared a default. Am. Compl. ¶ 91.

Colony then "took steps to liquidate its collateral as quickly as possible and to attempt to insulate itself from future potential liability." Am. Compl. ¶ 92. Colony held a UCC sale of LOC III's membership interests in LOC I. At the UCC sale, Colony credit bid a portion of the outstanding balance on its loan and acquired the membership interests in LOC III. Am. Compl. ¶ 93. At the conclusion of the sale, Colony caused the membership interests to be transferred to CAF, "its designee and wholly owned special purpose entity/subsidiary." "Colony (through CAF) became the holder of 100% of the membership interests" of LOC I, "and it assumed control of management of LOC I and its properties." Am. Compl. ¶ 95. Colony then caused LOC I to sell the real estate "quickly and below market value, and to use the proceeds to pay Colony's debt." Am. Compl. ¶ 96. Colony caused LOC I to sell 136 properties for a total of approximately $12.8 million. Am. Compl. ¶ 98. Just "months earlier," Colony had valued these 136 properties at approximately $24.7 million. Colony then "caused LOC I's status with the Secretary of State to be changed to ‘revoked’ as of May 11, 2018." Am. Compl. ¶ 99.

Colony was aware of the Debtors’ and Mack's bankruptcies and filed a proof of claim in the Mack bankruptcy case seeking $6.9 million for conversion, misappropriation, fraud, aiding and abetting fraud, conspiracy to defraud, tortious interference of contract, fraudulent transfer, and/or unjust enrichment. Am. Compl. ¶ 100. There is "no evidence" that Colony made any attempt to ascertain LOC I's general financial condition "or to pay or even give notice to LOC I's other creditors, including the Debtors." Am. Compl. ¶ 101. In various court filings, "Colony admitted that it was the party in control of LOC I, that it caused LOC I to sell its real estate, and that it applied the net proceeds of the property sales to its debt." Am. Compl. ¶ 102. Creditors existed with standing to bring an action against the Debtors to avoid the transfers described in the complaint under applicable non-bankruptcy law, including American Residential. Am. Compl. ¶ 103.

The trustee asserts claims against Colony and LOC I in Count 1 to avoid the transfers of real property from the Debtors to LOC I as fraudulent based on constructive fraud under 11 U.S.C. §§ 544(b)(1), 548(a)(1)(B), and 550(a) and 740 ILCS 160/5(a)(2), 6(a) and 8(a). In Count 2, he seeks to avoid the transfers as fraudulent based on actual fraud under 11 U.S.C. §§ 544(b)(1), 548(a)(1)(A) and 550(a) and 740 ILCS 160/5(a)(1) and 8(a). In Count 3, the trustee seeks to pierce the corporate veils of LOC I and CAF to hold Colony liable for the allegedly fraudulent transfers made by the Debtors to LOC I.

The defendants move to dismiss on a number of grounds, including: (1) the trustee has failed to state a claim in Counts 1 and 2 that he can recover against Colony under § 550(a)(1) of the Bankruptcy Code because Colony was neither the initial transferee nor a party for whose benefit the transfers were made; (2) the trustee failed to allege an actual fraud claim in Count 2 with particularity, and specifically the trustee failed to connect the fraudulent scheme he alleged to the transfers he seeks to avoid; and (3) the trustee failed to allege facts to support his claims to pierce the corporate veils of LOC I and CAF. The defendants are correct on each of these arguments.

2. Claim under Section 550(a)(1)

The trustee brings the...