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Lee v. Walro

United States District Court, S.D. Indiana, New Albany Division

February 13, 2017

BRENDA R. LEE, Appellant,
v.
MICHAEL J. WALRO, as Trustee of the Bankruptcy Estate of Lester L. Lee, Appellee. IN RE LESTER L. LEE, Debtor. MICHAEL J. WALRO, as Trustee of the Bankruptcy Estate of Lester L. Lee, Plaintiff,
v.
BRENDA R. LEE, Defendant. Bankruptcy No. 12-90007-JJG-7A Adversary Proceeding No.13-59041

          APPEAL FROM THE UNITED STATES BANKRUPTCY COURT

          RICHARD L. YOUNG, JUDGE UNITED STATE DISTRICT .

         Brenda R. Lee, wife of Chapter 7 debtor Lester L. Lee, appeals a final judgment entered against her by the Honorable Jeffrey Graham of the United States Bankruptcy Court for the Southern District of Indiana on various counts of a Complaint filed by the bankruptcy trustee, Michael J. Walro. The Trustee sought to avoid fraudulent transfers made to Brenda by Lester, and to recover the transferred property or the value thereof for the benefit of the estate. The transfers at issue on appeal involve real estate and stock in two companies. For the reasons set forth below, the court AFFIRMS the judgment of the Bankruptcy Court.

         I. Facts[1]

         Before recounting the material facts, it is necessary for the court to define a few of the key parties. The Lee Group Holding Company, LLC is an Indiana limited liability company owned by Lester's three adult children and Brenda. (Findings and Conclusions at Finding of Fact (“FF”) 3). Lester served as the “manager” of the Lee Group. (Id. at FF 5). Lees Inns of America (“LIA”) is a regional network of motels. (Id. at FF 45). At all times relevant, Lester was a shareholder, the President, and the Director of LIA. (Id.). The William R. Lee Irrevocable Trust was created in the name of William Lee, Lester's brother; William's sons serve as trustees. Lees Inns of Am., Inc. v. William R. Lee Irrevocable Tr., 924 N.E.2d 143, 148 (Ind.Ct.App. 2010). The Trust was a minority shareholder in LIA until Lester bought it out in 2000, thereby making himself the sole shareholder. Id. at 149. Johnson County Motel Corporation (“JCMC”) and Bi-Rite Oil Company, Inc. are Indiana corporations, and prior to the transfers at issue in this adversary proceeding, Lester was the sole shareholder of both companies. (Findings and Conclusions at ¶ 14-15). Lastly, Lee's Real Estate Investments, LLC is an Indiana limited liability company, and, at all times relevant, Lester was the managing member. (Trustee's Exhibit 63, Amended Agreed Judgment at 6).

         Following Lester's buyout of the Trust in 2000, many years of bitter family litigation ensued. On December 8, 2008, the Trust obtained a judgment against LIA for the sum of $7, 522, 879.73 in the Jennings Circuit Court (the “Trust Judgment”). (Findings and Conclusions at ¶ 45). In the Trust Judgment, the state court found that Lester deliberately harmed the Trust by certain acts and omissions, and that such acts and omissions constituted fraud. (Id. at FF 46). The court emphasized a public statement made by Lester wherein he promised that he would “screw [the Trust] at every opportunity” and “do everything to make sure [the Trust] never receive[d] one dime from this company.” (Id.).

         Unfortunately for the Trust, LIA no longer had any assets by the time that judgment was entered. A few months earlier, in July 2008-while the Trust lawsuit was pending and shortly before trial in that matter-Lester, the Lee Group, JCMC, and Lee's Real Estate Investments filed an action against LIA to foreclose on alleged security interests. (Id. at FF 47). Most of the claims arose from a note issued by LIA just a month earlier, in June 2008. (Trustee's Exhibit 62). In October 2008, Lester obtained an Amended Agreed Judgment-signed by himself on behalf of every party in that case (i.e., each plaintiff and the defendant)-that granted a judgment against LIA in favor of the plaintiffs for $7, 846, 686.87. (Amended Agreed Judgment; Findings and Conclusions at ¶ 48). By way of an assignment, Lester then conveyed all of LIA's assets to the Lee Group in satisfaction of the Amended Agreed Judgment. (Findings and Conclusions at ¶ 49). At the trial in this matter, Lester testified that his actions were “absolutely” intended to prevent the Trust from recovering against LIA. (Id. at FF 50).

         While the Trust Judgment was not against Lester personally, the Bankruptcy Court “readily conclude[d] that [Lester] anticipated that it was likely just a matter of time before the Trust pursued him personally.” (Id. at Conclusion of Law (“CL”) 15). On January 2, 2009, just a month after the Trust Judgment was issued, Lester conveyed by quitclaim deed four parcels of land in Shelby County, Indiana to Brenda. (Id. at FF 7-10). Brenda did not provide any consideration beyond what she describes as “love and affection” as Lester's wife. (Id. at FF 11). The quitclaim deeds were all recorded on May 25, 2010. Prior to that recording, on April 28, 2010, one of these lots (“Property No. 2”) was sold to SHIV Development, LLC for $550, 000.00, with $202, 345.86 in net proceeds to the seller. (Id. at FF 12). On the Seller's Closing Statement, Lester, not Brenda, was listed as the seller. (Id.). SHIV Development recorded its Warranty Deed on May 17, 2010. (Trustee's Exhibit 11). The deed is signed by Lester, and it lists Lester as the “Grantor.” (Id.). The proceeds of the transaction were immediately “loaned” to the Lee Group, as evidenced by a note payable to both Brenda and Lester. (Findings and Conclusions at ¶ 13).

         On January 5, 2009, Lester transferred to Brenda all of his shares in JCMC and Bi-Rite. (Id. at FF 16). Brenda did not provide any consideration beyond what she describes as “love and affection” as Lester's wife. (Id. at FF 17). According to its own balance sheet, JCMC had assets of $2, 218, 879.32 and liabilities of $0 as of December 31, 2008. (Id. at FF 18). Brenda testified that she could not dispute the accuracy of those figures. (Tr. I 29:8-16).[2] In his Final Statement of Financial Position (“Financial Statement”)[3], Lester valued his ownership interest in JCMC as of October 31, 2008 at $2, 631, 242.00. (Trustee's Exhibit 54). According to Brenda, JCMC was “basically a dead corporation” at the time of trial, in February 2015. (Tr. I 29:11-12).

         According to its own balance sheet, Bi-Rite had assets of $2, 058, 192.33 and liabilities of $723, 632.23, for a net worth of $1, 334, 560.10, as of December 31, 2008. (Findings and Conclusions at ¶ 20). Brenda testified that she could not dispute the accuracy of those figures. (Tr. I 29:17-23, 30:5-11). In his Financial Statement, Lester valued his ownership interest in Bi-Rite as of October 31, 2008 at $2, 634, 231.00. (Trustee's Exhibit 54). According to Brenda, Bi-Rite was worth “significantly less” at the time of trial. (Tr. I 29:24-25). This was due, in large part, to environmental issues associated with leaking oil tanks. (Id. 30:1-4; Tr. II 24:11-23). Lester testified that he discovered the leaks “after 2008.” (Tr. II 24:11-25:1).

         In December 2010, the Trust filed a petition to pierce the corporate veil in an effort to collect the Trust Judgment from Lester personally. (Findings and Conclusions at ¶ 51). Lester filed for Chapter 7 bankruptcy approximately one year later, in January 2012. (Id. at FF 1).

         II. Procedural History

         The Trustee filed an Adversary Proceeding against Brenda on July 3, 2013, alleging that Brenda received fraudulent transfers from Lester. Count I of the Second Amended Complaint sought to avoid and recover four real estate parcels transferred from Lester to Brenda. Count II sought the turnover of property, alleging certain sums transferred to Brenda belonged to the estate. Counts III and IV sought to avoid and recover certain notes transferred from Lester to Brenda. Count V sought to avoid and recover shares of stock in Bi-Rite and JCMC transferred from Lester to Brenda. Count VI sought to avoid and recover interest in a bank account transferred from Lester to Brenda.

         The Bankruptcy Court held a trial on February 18-19, 2015. The parties stipulated to many of the relevant facts and the admissibility of many exhibits the day before trial. The Bankruptcy Court rendered its Findings of Fact and Conclusions of Law and Judgment on June 16, 2015. The court entered judgment for the Trustee on the transfers of real estate, notes, and shares of stock, and judgment for Brenda on the money transfers and the bank account interest.

         In its Findings and Conclusions, the court held that there was “overwhelming evidence” that Lester transferred the real estate and shares of stock with fraudulent intent. The Bankruptcy Court therefore avoided the transfers pursuant to 11 U.S.C. § 544(a)(1) and the Indiana Uniform Fraudulent Transfer Act, Ind. Code §§ 32-18-2-1 et seq. It then concluded that the Trustee was entitled to recover certain property and a total of $3, 755, 785.28. That sum included $202, 345.86 for Property No. 2, $2, 058, 192.33 for the JCMC shares, and $1, 334, 560.10 for the Bi-Rite shares. The Bankruptcy Court awarded the value of that property rather than ordering its return because Property No. 2 had already been sold and the shares of stock had depreciated.

         This appeal ensued.

         III. Questions Presented and Standards of Review

Brenda presents four issues on appeal, which the court restates as follows:
1. Did the Bankruptcy Court err by citing the Trust Judgment as support for its finding that Lester committed actual fraud pursuant to the IUFTA? A bankruptcy court's evidentiary decisions are reviewed deferentially for abuse of discretion. See First Weber Grp., Inc. v. Horsfall, 738 F.3d 767, 777-78 (7th Cir. 2013).
2. Did the Bankruptcy Court err by choosing to award the Trustee the value of the Bi-Rite and JCMC shares instead of ordering Brenda to return them? A bankruptcy court's decision to award money in place of the transferred property is reviewed deferentially for abuse of discretion. Hebenstreit v. Kaur, 619 F. App'x 529, 531 (7th Cir. 2015); Bank of Am., N.A. v. Veluchamy, 535 B.R. 783, 800 (N.D. Ill. 2015).
3. Did the Bankruptcy Court err in determining the value of the Bi-Rite and JCMC shares? Valuation is a question of fact that is subject to clear error review. In re Vitreous Steel ...

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