Herron Jr Trustee v. Whiteheart

OCR transcription for search; preserved printed pages are authoritative

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 1 of 10

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF FLORIDA

ORLANDO DIVISION
In re: *
*
ROY C. ESTES, JR., * Case No. 6:04-bk-12265-ABB
* Chapter 7
Debtor. * F | L E D
*
* OCT 18 2005
KENNETH HERRON, TRUSTEE, *
tk CLERK, U.S. BANKRUPTCY
Plaintiff, # ORLANDO DIVISION
*
Vs. * Adv. Pro. No 6:04-ap-00274-ABB
*
JAMIE WHITEHEART, A/K/A *
JAMIE LYNCH, *
*
Defendant. *
*

MEMORANDUM OPINION

This case came before the Court on the Complaint to Set Aside Fraudulent Transfers
Pursuant to 11 U.S.C. §§544 and 550! filed by Plaintiff Kenneth D. Herron. Jr.. the Chapter 7
Trustee and Plaintiff (“Plaintiff or “Trustee’). against Jamie Whiteheart, a/k/a Jamie Lynch, the
Defendant (“Defendant”). This is an action to set aside and recover the value of certain transfers
of real property and a mortgage made by the Debtor, Roy C. Estes, Jr. (‘Debtor’’). to the
Defendant. A trial was held on August 10. 2005. After reviewing the pleadings and evidence,
and hearing live testimony and argument of the parties, the Court finds that the Plaintiff has
established the transfers are fraudulent and avoidable pursuant to applicable Florida state law and
11 U.S.C. §§544 and 550, and judgment will be entered for the Plaintiff.

The following Findings of Fact and Conclusions of Law are made:

AUTHENTICATED
U.S. GOVERNMENT.
INFORMATION

GPO

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 2 of 10

FINDINGS OF FACT

The Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on
November 12, 2004 (“Petition Date”)! The Debtor's Schedules set forth total assets valued at
$13.095.00 and total unsecured claims in excess of $3.000.000.00.

The Debtor transferred substantially all of his assets to the Defendant approximately
fourteen months before the Petition Date through a series of transactions. The transferred assets
include: (1) two parcels of real property located in Citrus County. Florida (“Citrus Lots’); (2) a
mortgage and promissory note secured by real property located in Citrus County. Florida
(“Citrus Mortgage”): (3) thirty-six acres of real property located in Putnam County, Tennessee
(“Tennessee Property”); and (4) a parcel of real property located in Sumter County. Florida
(‘Sumter Lot’) (collectively, the ~Transfers”). The transfers of the real property were
accomplished by the Debtor through quitclaim deeds.

The Defendant sold the Citrus Lots and refinanced the Citrus Mortgage shortly after
receiving these assets. She continues to own the Tennessee Property, the Sumter Lot. and the
Citrus Mortgage. The total value received by the Defendant as a result of the Transfers was
$211.054.79.? The Defendant provided no consideration for the Transfers.*

The Debtor was heavily in debt when he made the Transfers. He had been sued by

several creditors and three state court lawsuits were actively pending against him involving

' Dac. No. |.
* The Citrus Lots were valued at $54,000, as shown the by the sale proceeds received by the Defendant when she sold the two
lots. The Citrus Mortgage was valued at $133,804.79. This value comprises the principal amount of the mortgage when the
Defendant refinanced it afier receiving it. plus $20,000.00 received by the Defendant as part of the refinancing. The Tennessee
Property is valued at $18,000.00, and the Sumter County lot is valued at $5,250.00.
3 The Defendant and the Debtor testified that the Defendant gave consideration for the Transfers by allegedly paying back a
$90,000 loun--a loan which the Debtor purportedly made to the Defendant in August 2001. Their testimony is not credible.
Neither the Defendant nor the Debtor ever produced any evidence of such payment. When deposed by the Trustee’s counsel as
to what he had done with the alleged loan proceeds, the Debtor responded, “none of your damn business, boy.”

2

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 3 of 10

unsecured claims totaling more than $3,000.000.00. The Debtor's liabilities greatly exceeded his
assets at the time of the Transfers and the Debtor became further insolvent as a result of the
Transfers.

The Defendant is an experienced mortgage broker who lives in and conducts her
mortgage business from an RV. She and the Debtor were romantically and financially involved
at the time of the Transfers. The Debtor and the Defendant were involved in many financial
transactions that were not at arms length. including the Transfers. The romantic relationship
existed before the Transfers occurred and continued through the Petition Date. The Debtor and
the Defendant were living together in the Defendant's RV at the Bryn Mawr Campground near
St. Augustine, Florida on the Petition Date and for at least one month thereafter. The Debtor has
no permanent physical address and has used multiple addresses on publicly recorded documents

The Debtor paid many of the Defendant's expenses including the campground rental
charges. insurance for the RV, a campground membership, cellular telephone bills. homeowner's
dues on real property owned by the Defendant in Arkansas. and a credit card balance in the
amount of $4,295.00. The Defendant has allowed the Debtor use of a mobile telephone on her
Verizon account since April 2004 to the present.

The Debtor often used the Defendant's last name as an alias. The Debtor and the
Defendant were involved in selling artwork over the Internet and he used the name “Raul
Whiteheart” in their business ventures. The Debtor identified himself as “Raul Whiteheart™ in a
website he created for the Defendant's company Forever Sunrizes. The Debtor stated in his
company's website that he. Raul Whiteheart, and “his wife Jamie Whiteheart” were living

together full time in the Defendant’s RV and gave the Defendant's mailing address as the

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 4 of 10

mailing address for his company. The Debtor also used the Defendant's home address as his
address in official documents, including two deeds that were recorded in the public records. The
Defendant signed one deed as the grantee and the second as a witness. The Defendant was well
aware of the Debtor’s use of her address as his own.

The Debtor continued to exercise management and control of the assets after he made the
Transfers. He: (i) negotiated a refinancing of the Citrus Mortgage with the mortgagor and
prepared a mortgage modification agreement pursuant to which the Defendant received
$20,000.00 in cash; (ii) paid real property taxes for several tax years on the Sumter Lot and the
Tennessee Property: (iii) generally assisted with management of the transferred properties: and
(iv) advertised the Tennessee Property for sale using, with the Defendant's permission, the
website for Forever Sunrizes.

The close financial dealings between the Debtor and the Defendant included a transaction
on April 8. 2003 in which the Debtor transferred $90,000.00 from his personal bank account with
SunTrust Bank to a company owned by the Defendant. The Defendant paid no consideration for
the transfer... The Defendant explained she took the funds to hold and “clear” them for the
Debtor until he requested she return them. She further testified that the money “was not hers.”
The Debtor stated he “parked” the funds with the Defendant’s company. The funds were repaid
to the Debtor at some point, with some of the repayment funds going to Setse. Inc.. a company

formed by the debtor.> The Trustee asked the Debtor during a deposition why he formed Setse.

* These funds represented the proceeds from the sale of real property in Georgia on which the debtor held a mortgage. The
debtor received these funds at a time when he was being sued by creditors in the state court lawsuits discussed above.

+ “Setse” is “Estes” spelled backwards.

fe

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 5 of 10

Inc., and he responded, “because you're suing me.” The Debtor failed to disclose the existence
of Setse, Inc. in his original Schedules and Statement of Financial Affairs.°

The Defendant and the Debtor attempted to conceal their personal and financial
relationship from the Trustee and the Debtor's creditors. They obstructed the Trustee's efforts to
investigate their relationship and dealings. The Defendant gave false testimony at her Federal
Rule of Bankruptcy Procedure 2004 examination by failing to disclose the many dealings
between her and the Debtor and the nature of their relationship. The Defendant testified that she
did not have a current phone number for the Debtor, but the Debtor's cell phone was on her
Verizon account. The Defendant testified she held a security interest in the transferred
properties, but did not produce evidence of her alleged interest. The Defendant failed to produce
documents requested by the Trustee pursuant to Federal Rule of Bankruptcy Procedure 2004.
The Debtor testified at his §341 meeting of creditors he knew the Defendant as “Jamie Lynch”
and he had not spoken to her in three or four months. However. he was living with the
Defendant in her RV at the time. The Debtor did not disclose in his bankruptcy papers he was
living in the RV at the campground on the Petition Date.

The Debtor, while insolvent and with litigation pending, transferred substantially all of
his assets, including the Citrus Lots, the Citrus Mortgage. the Tennessee Property. and the
Sumter Lot to the Defendant. The Defendant is an insider and the initial transferee. The

transferred assets could have been applied to payment of the Debtor's creditors’ claims. He

© The Court does not address in this opinion whether the $90,000.00 transfer to Whiteheart is subject to avoidance as a

fraudulent transfer. The Trustee discovered the transfer within 30 days of the trial. The Trustee made a motion to amend the
Complaint to add a recovery claim for the $90,000 transfer. The Court denied the motion at the trial without prejudice. Although
the $90,000 transfer is not the subject of this action, it evidences the closeness and extensive financial relationship between the
Defendant and the Debtor. It also evidences the Defendant's cooperation in helping the Debtor to keep his assets out of the reach
of his creditors.

°)

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 6 of 10

transferred the assets in order to protect them from his creditors. The Defendant did not pay
reasonably equivalent value in exchange for the Transfers; in fact, she gave no consideration to
the Debtor. The Debtor, with the Defendant's complicity, retained control of the properties and
the mortgage after the Transfers and concealed the Transfers. The Transfers were carried out by
the Debtor with the actual intent to hinder, delay and defraud his creditors.

CONCLUSIONS OF LAW

The Trustee alleges that the Transfers are fraudulent pursuant to Florida Statutes
§726.105(1)(a). which provides that:

(1) A transfer made or obligation incurred by a debtor is fraudulent as to a

creditor. whether the creditor’s claim arose before or after the transfer was made

or the obligation incurred. if the debtor made the transfer or incurred the

obligation:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor... .
FLA. STAT ANN. §726.105(1)(a) (West 2004). Section 544(b) of the Bankruptcy Code allows a
trustee to stand in the shoes of an existing unsecured creditor and permits the trustee to bring
state law fraudulent conveyance and other similar actions that such a creditor could bring. 11
U.S.C. §544(b). The Trustee is empowered by §544(b) to bring this action against the
Defendant.

Because direct evidence of actual intent rarely exists in a fraudulent conveyance case.

courts generally look at the totality of circumstances and the badges of fraud surrounding the

transfers. In re World Vision Entm't, Inc.. 275 B.R. 641. 656 (Bankr. M.D. Fla. 2002): Toy

King Distrib., Inc., 256 B.R. 1, 127-8 (Bankr. M.D. Fla. 2000). “Badges of fraud” are factors

strongly indicating the existence of fraudulent intent. In re Ingersoll, 124 B.R. 116, 121-2 (M.D.

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 7 of 10

Fla. 1991). The eleven badges of fraud to be used in determining “actual intent” pursuant to the
Florida fraudulent transfer statute are set forth in §726.105(2):

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the property transferred after the
transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or obligation was incurred, the debtor had been sued or
threatened with suit.

(e) The transfer was of substantially all the debtor’s assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor was reasonably equivalent to
the value of the asset transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly after the transfer was made or
the obligation was incurred.

(j) The Transfer occurred shortly before or shortly after a substantial debt was incurred.

(k) The debtor transferred the essential assets of the business to a lienor who transferred
the assets to an insider of the debtor.

FLA. STAT ANN. §726.105(2) (West 2004). This list is nonexclusive based upon the plain
language of the statute and courts should look at the circumstances surrounding a conveyance.
In re Stewart. 280 B.R. 268, 279 (Bankr. M.D. Fla. 2001).

The presence of a single badge of fraud is not sufficient to prove intent, but “the
confluence of several can constitute conclusive evidence of an actual intent to defraud... .” In re

Toy King. 256 B.R. at 128 (quoting Max Sugarman Funeral Home, Inv. V, A.D.B. Investors,

926 F.2d 1248, 1254-5 (1st Cir. 1991). The standard used to determine whether a transfer is
fraudulent as to creditors is proof by preponderance of the evidence. In re Stewart, 280 B.R. at
281.

Nearly every badge of fraud set forth in §726.105(2) is present in this case. (i) The

Debtor made the Transfers to his girlfriend. with whom he had extensive financial and business

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 8 of 10

dealings. The Defendant is the initial transferee and an insider.’ (ii) He retained substantial
control over all of the assets after making the Transfers. (iii) The Debtor concealed the Transfers
from his creditors and the Trustee. He resisted the Trustee’s efforts to obtain information
regarding his financial affairs and his relationship with the Defendant. (iv) The Transfers were
made when the Debtor was heavily in debt and involved in litigation with creditors holding
substantial claims against him. (v) The Transfers conveyed substantially all of the Debtor's
assets. (vi) The Debtor concealed assets to shelter them from creditors, including his interest in
Setse, Inc., which he failed to disclose in his original Schedules and Statement of Financial
Affairs. (vii) The Defendant paid no consideration for the Transfers. (viii) The Debtor was
insolvent at the time of the Transfers and the Transfers rendered him further insolvent.
Additionally. the possibility of the Debtor absconding was high with him having no permanent
physical address, living in the Defendant's RV, and using multiple addresses on publicly
recorded documents.

There are substantial. additional indicia of the Debtor's fraudulent intent including: (1)
the Debtor and the Defendant made misleading statements to the Trustee and obstructed his
investigation. in an effort to conceal the true nature of their relationship and financial dealings.
(2) The purported security interest held by the Defendant in the transferred properties was not
recorded. (3) The Defendant willingly held assets for the Debtor to keep them from his creditors.
(4) The debtor has shown a propensity to lie when it serves his financial interests and to hide

assets from his creditors. These indicia of fraud were punctuated by the Debtor telling the

7 See In re O'Connell. 119 B.R. 311, 316 (Bank. M.D. Fla. 1990) (finding transferees were “insiders”
where the debtor and the transferees were good friends and they engaged in financial dealings that were
not at “arms-length”).

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 9 of 10

Trustee’s counsel that it was “none of [his] damn business” how the proceeds of the alleged
$90,000 loan were used.

The Trustee has established by a preponderance of the evidence the Debtor made the
Transfers with actual intent to hinder, delay and defraud his creditors pursuant to Florida Statutes
§726.105(1)(a). The Transfers are therefore avoidable.

Section 550 of the Bankruptcy Code. made applicable through §544. addresses the
liability of the transferee of an avoidable transfer. The purpose of §550(a) is “to restore the
estate to the financial condition it would have enjoyed if the transfer had not occurred.” In re

Green. 268 B.R. 628, 652 (Bankr. M.D. Fla. 2001) (quoting In re American Way Service Corp..

229 B.R. 530-1 (Bankr. S.D. Fla. 1999)). Section 550(a) provides:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided
under section 544, 545. 547, 548. 549, 553(b). or 724(a) of this title, the trustee may
recover, for the benefit of the estate, the property transferred. or. if the court so orders,

the value of such property. from—

(1) the initial transferee of such transfer or the entity for whose benefit such transfer was
made; or

(2) any immediate or mediate transferee of such initial transferee.
11 U.S.C. §550(a). Section 550 makes no exception for innocence. An initial transferee is liable
for the fraudulent transfer even if he or she is completely innocent in the matter. Id.

The Defendant is the initial transferee of the Debtor's three parcels of real property and
the Citrus Mortgage. The Transfers removed assets worth $211,054.79 from the estate. The

Trustee is entitled to judgment of $211,054.79 against the Defendant individually pursuant to

11U.S.C. §550(a).

Case 6:04-ap-00274-ABB Doc62 Filed 10/18/05 Page 10 of 10

The Court concludes that: (1) the Transfers constitute fraudulent transfers and are
avoidable; (2) the Defendant is strictly liable for all avoided Transfers; (3) the Plaintiff is entitled
to recover from the Defendant the Citrus Mortgage, the Tennessee Property, and the Sumter Lot;
and (4) the Trustee is entitled to recover from the Defendant the amount of $74,000.00, the value
of the Citrus Lots sold by the Defendant and the $20,000.00 she received through the refinance
of the Citrus Mortgage, plus prejudgment interest at the statutory rate.

A separate judgment consistent with these Findings of Fact and Conclusions of Law shall
be entered contemporaneously.

we
4

Dated this \ day of October, 2005.

Sy BRISKMAN
United States Bankruptcy Court

10