Angell, Trustee v. First Eastern, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
CAREMERICA, INC., 	CASE NUMBER: 06-02913-8-JRL
CHAPTER 7
DEBTOR.
IN RE:
JAMES B. ANGELL, CHAPTER 7 	ADVERSARY PROCEEDING
TRUSTEE, 	NO. 08-00157-8-JRL
Plaintiff,
v.
FIRST EASTERN, LLC,
Defendant.
ORDER
This matter came before the court on cross motions for summary judgment. A hearing
was held in Raleigh, North Carolina, on February 1, 2011.
JURISDICTION
This court has jurisdiction over the parties and the subject matter of this proceeding
SO ORDERED.
SIGNED this 15 day of April, 2011.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the
United States District Court for the Eastern District of North Carolina on August 3, 1984. This
is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), which this court may hear and
determine.
PROCEDURAL BACKGROUND
On September 15, 2006, Caremerica, Inc., Caremerica Adult Care, Inc., The Meadows of
Hermitage, Inc., The Meadows of Fayetteville, Inc., and The Meadows of Wilmington, Inc. filed
petitions for relief under chapter 11 of the Bankruptcy Code. The cases were subsequently
converted to cases under chapter 7. On February 4, 2008, the court entered an order allowing the
substantive consolidation of the cases and appointed James B. Angell as trustee. The
consolidated cases are administered under the name Caremerica, Inc., Case No. 06-02913-8-JRL.
On September 14, 2008, the plaintiff filed the instant action. On November 4, 2008, the
defendant filed a motion to dismiss the complaint. On December 23, 2008, prior to the filing of
a responsive pleading, the plaintiff filed an amended complaint. On January 30, 2009, the
defendant again filed a motion to dismiss. After a hearing, the court entered an order dated July
28, 2009, granting the motion to dismiss but allowing the plaintiff leave to replead. The plaintiff
filed a second amended complaint on August 26, 2009, and again the defendant filed a motion to
dismiss. The court entered an order denying the motion to dismiss the second amended
complaint on January 5, 2010. An answer was filed by the defendant to the second amended
complaint on February 10, 2010.
UNDISPUTED FACTS
1. Ron Burrell (“Burrell”) and Mike Elliott (“Elliott”) are shareholders of numerous
corporations and limited liability companies that operate assisted living facilities. The names of
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the Burrell/Elliott entities often included the words Caremerica or Meadows. Only five of the
Burrell/Elliott entities filed chapter 11. One of the five original debtors, Caremerica,
Inc.(“Caremerica”), was a management company that maintained a centralized operating account
from which all of the Burrell/Elliott entities’ bills were paid.
2. Stephen Powell (“Powell”) and his sisters are shareholders of three limited liability
companies: Powell Properties of Durham County, LLC; Powell/Rhoades, LLC; and Rose Hill
Enterprises, LLC (the “Powell Entities”). The Powell Entities own the real properties leased by
the debtor and non-debtor Burrell/Elliott entities.
3. Further complicating the facts of this case is the joint ownership by Burrell, Elliott,
and Powell of four of the non-debtor Burrell/Elliott assisted living facilities. Powell holds an
interest in: Greenville Assisted Living, LLC; Raleigh Assisted Living, LLC; Rocky Mount
Assisted Living, LLC; and Grifton Assisted Living, LLC (the “Assisted Living LLCs”). Each of
the Assisted Living LLCs operated an adult care facility on property leased from the Powell
Entities, specifically Rose Hill.
4. Management agreements were executed by Caremerica and the Assisted Living LLCs.
5. The defendant, First Eastern, LLC (“First Eastern”) is owned by Powell and his
sisters. In many respects, First Eastern is analogous to Caremerica in that it is a management
company created to handle and centralize money. Powell directed First Eastern to accept monies
owing to the Powell Entities.
6. Within the one year period prior to the petition date, the debtors transferred eight
payments to First Eastern totaling $320,911.82 by funds transfer or wire transfer.
STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 56(c), made applicable in bankruptcy by
Bankruptcy Rule 7056, summary judgment is proper “if the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law.” The “plain language of Rule 56(c) mandates the entry of summary judgment,
after adequate time for discovery and upon motion, against a party who fails to make a showing
sufficient to establish the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.
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Ct. 2548, 2552 (1986). In making this determination, conflicts are resolved by viewing all facts
and all reasonable inferences in the light most favorable to the nonmoving party. United States
v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994 (1962).
ANALYSIS
In his motion for summary judgment, the trustee raised the argument that the subject
transfers were constructively fraudulent pursuant to 11 U.S.C. § 548; however, at the hearing it
was largely conceded that the trustee would not pursue a § 548 argument, and that the transfers
are to be analyzed as preferences pursuant to 11 U.S.C. § 547. The elements of a preference are:
(1) a transfer of an interest of the debtor in property; (2) to or for the benefit of a creditor; (3) for
or on account of an antecedent debt owed by the debtor before such transfer was made; (4) made
while the debtor was insolvent; (5) made within one year before the date of filing if such creditor
at the time of such transfer was an insider; (6) that enables such creditor to receive more than
such creditor would receive if the case were under chapter 7. 11 U.S.C. § 547(b). Section
547(b) furthers one of the overall goals of bankruptcy, equal treatment of creditors, by
authorizing the trustee to recover preferential transfers and preserve property of the bankruptcy
estate. Precision Walls, Inc. v. Crampton, 196 B.R. 299, 302 (E.D.N.C. 1996).
A trustee’s avoidance powers under § 547(b) are subject to the exceptions enumerated in
§ 547(c). The defendant argues that the transfers at issue fit within these exceptions, asserting
that the transfers were not preferential in nature, and may not be recovered by the trustee because
they were made: (1) in a contemporaneous exchange for new value; (2) in the ordinary course of
business; and, (3) that subsequent new value was actually given by the creditor for the benefit of
the debtor. 11 U.S.C. § 547(c)(1)-(2), (4). After review of the record, the court finds that the
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plaintiff has substantially carried his burden under § 547(b). All elements of a preference action
are satisfied with the exception of showing that the defendant was an insider of the debtor. Each
element is addressed in turn.
First, the parties do not dispute that First Eastern received transfers from the debtor. An
interest in property of the debtor is property which would have been part of the estate, as defined
by § 541, had the transfer not occurred. Begier v. IRS, 496 U.S. 53, 110 S.Ct. 2258 (1990); In re
Cybermech, Inc., 13 F.3d 818, 820-821 (4th Cir. 1994). The debtors, and their non-debtor
affiliates, pooled money in one bank account, controlled by Caremerica. Deposition of Stanley
E. Brunson at 35-36, Caremerica, Inc. v. First Eastern, No. 08-000157-8-JRL (Bankr. E.D.N.C.
October 14, 2010). Bank accounts are property in which a debtor has a legal or equitable
interest. 11 U.S.C. § 541. Had the money transferred remained in the debtors’ bank account, it
would have been classified as property of the estate upon the filing of the petition. Thus, First
Eastern received an interest in property of the debtor.
Second, the purpose of the transfers was payment of an antecedent debt for the benefit of
a creditor. First Eastern accepted payments which were owing to the Powell Entities. The
defendant argues that because First Eastern and the Powell Entities were not creditors of
Caremerica, the necessary debtor/creditor relationship is lacking. However, the defendant’s
focus on Caremerica alone is misplaced. Caremerica kept one operating account of pooled
money for all of the debtor and non-debtor Burrell/Elliott facilities; hence, payments made from
Caremerica are attributable to all Burrell/Elliott entities. The Powell Entities were creditors of
all Burrell/Elliott entities, debtor and non-debtor alike. Therefore, the transfers that were lease
payments made on behalf of the four operating debtors that were substantively consolidated with
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Caremerica, Inc. were payments to a creditor on account of an antecedent debt.
This line of reasoning does not render First Eastern a mere conduit. Although First
Eastern only accepted funds of the debtor at Powell’s direction, it is reasonably classified as the
first in a line of transferees. A transferee is one that exercises legal dominion and control over
funds at issue. Bowers v. Atlanta Motor Speedway, Inc. (In re Southeast Hotel Properties L.P.),
99 F.3d 151, 156 (4th Cir. 1996). As evidenced by the defendant’s banking records, First
Eastern maintained one operating account where all payments from the debtor and third parties
were deposited. If First Eastern were a conduit, the funds would have flowed through the
account to the designated party without discretion in distribution. However, account transactions
show payments made on a regular basis from First Eastern to itself, along with disbursements to
the members of First Eastern. These additional disbursements establish that First Eastern had
control over the money in the account, to whom payment was made, and the amount of such
payment; therefore, it is not appropriate to classify the defendant as a conduit.
Third, the transfers at issue were made while the debtor was insolvent. Debtors are
presumed insolvent during the 90-day period prior to the date of petition. 11 U.S.C. § 547(f).
Beyond the 90 day look-back, insolvency is defined as a sum of debts greater than the value of
an entity’s assets. This definition excludes property which was transferred, concealed, or
removed to defraud creditors, and also excludes any property which may be exempt. 11 U.S.C.
§ 101(32)(A). The plaintiff questions eight payments made from the debtor’s bank account. All
of the payments at issue cleared the account between February and August 2006. The debtor’s
petition was filed September 15, 2006; therefore, the four payments made between July and
August are during the period of presumed insolvency. For the June 6, 2006 payment, and other
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remaining payments dating back to February 10, 2006, insolvency must be proven. Schedules for
Caremerica, without considering co-debtors, reveal total assets of $9,842.69 and total liabilities
of $4,686,715.94. Combined assets of the consolidated debtor totals approximately $68,834.20.
Thus far, the claims register shows claims of $15,823,184.00 for Caremerica alone. These
differences falls squarely within the § 101(32) statutory definition of insolvency. Therefore, all
eight payments alleged as preferential by the plaintiff were made while the debtor was insolvent.
Fourth, to deem a transfer a preference, the plaintiff must also show that the transfers
allowed the defendant to receive more that it would have under chapter 7. The defendant
contends that were the transfers not made, it would have posted a bond claim and received full
payment. This argument ignores the plain language of the statute. Under § 547(b)(5) the focus is
“not on whether a creditor may have recovered all of the monies owed by the debtor from any
source whatsoever, but instead upon whether the creditor would have received less than a 100%
payout from the bankruptcy estate.” United Rentals, Inc. v. Angell, 592 F.3d 525, 531 (4th Cir.
2010)(citing, Smith v. Creative Financial Management, Inc. (In re Virginia-Carolina Financial
Corp.), 954, F.2d 193 (4th Cir. 1992)). There are simply not enough assets in the present case to
pay unsecured claims in full. Affidavit of James B. Angell at 2-3, Caremerica, Inc. v. First
Eastern, No. 08-00157-8-JRL (Bankr. E.D.N.C. November 18, 2010). Therefore, those transfers
received by First Eastern placed the creditors for which it managed money in a better position
that they would be under a liquidation analysis.
The last element under a preference action is the determination of whether the defendant
was an insider of the debtor. An insider is defined by § 101(31), though the list is not
exhaustive. 11 U.S.C. § 102(3). Insiders may also be “nonstatutory.” In re Winstar
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Communications, Inc., 554 F.3d 382 (3rd Cir. 2009). Actual control of the debtor is not
necessary for status as an insider on a nonstatutory basis. Winstar, 554, F.3d 382, 396 (3rd Cir.
2009). Instead, the determination of insider status on these terms focuses on two factors: (1) the
closeness of the relationship between parties; and, (2) whether the transaction in question was
arm’s length. Winstar, 554 F.3d at 396-397 (3rd Cir. 2009).
The trustee’s argument for why the defendant is an insider of the debtor appears to be a
nonstatutory one revolving around Powell’s joint ownership of the Assisted Living LLCs, and
the closeness of the relationship between Powell, Burrell, and Elliott which placed Powell, an
insider of First Eastern, in a position to influence the debtor. However, Powell’s testimony
contradicts the notion that he had any control over payments from the debtor to First Eastern. At
the outset of the hearing, the court was skeptical of the idea that the defendant was an insider,
there being no common ownership between these two seemingly independent entities; but, after
closer review, the court finds that there is a viable argument that First Eastern is an insider; not
in the respect argued by the trustee, but under the statutory language.
Section 101(31)(E) states that the term insider includes an “affiliate, or insider of an
affiliate as if such affiliate were the debtor.” An affiliate is defined under § 101(2) as a:
corporation 20 percent or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held with power to vote, by the debtor,
or by an entity that directly or indirectly owns, controls, or holds with power to
vote 20 percent or more of the outstanding voting securities of the debtor. . . .
11 U.S.C. § 101(2)(B). The definition of an entity includes a person. 11 U.S.C. § 101(15). The
Assisted Living LLCs are affiliates of the debtor because Burrell and Elliott hold at least 20
percent voting rights in both the debtor and the Assisted Living LLCs. Therefore, the Assisted
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Living LLCs are insiders of the debtor. This alone does not make First Eastern an insider.
However, an insider of an affiliate may also be an insider of the debtor.
There are not enough facts of record to determine if Powell is an insider of the Assisted
Living LLCs; however, assuming arguendo that Powell is an insider of the Assisted Living
LLCs, then he is an insider of an affiliate. Under the language of § 101(31)(E), an insider of an
affiliate is an insider of the debtor as if the affiliate were the debtor. Along this line of
reasoning, the Assisted Living LLCs are viewed as if they were the debtor. First Eastern then
becomes an affiliate of the Assisted Living LLCs because Powell has at least 20 percent voting
rights in both First Eastern and arguably the Assisted Living LLCs, which under this analysis is
considered the debtor. Therefore, First Eastern is likely an insider of the debtor. The linchpin of
this analysis is the percentage of Powell’s ownership in the Assisted Living LLCs. On the
record it is clear that Powell was a joint owner, but what is not discernable is whether the
percentage of ownership amounts to 20 percent as required to be an insider under the § 101(31)
affiliate rules.
Based on the foregoing, the plaintiff’s motion for summary judgment is ALLOWED as
to all elements of a preference except the insider issue. The motion for summary judgment is
DENIED with regard to the determination of the defendant as an insider of the debtor. The
defendant’s motion for summary judgment is GRANTED to the extent the trustee relies on
§ 548. The defendant’s motion raised several affirmative defenses. However, the court finds
there are genuine issues of material fact with regard to the defenses raised. Therefore, the
defendant’s motion for summary judgment is DENIED on those grounds.
END OF DOCUMENT
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