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Lee v. The William R. Lee Irrevocable Trust

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

February 17, 2017

LESTER L. LEE, Appellant,
LESTER L. LEE, Defendant. Bankruptcy No. 12-90007-JJG-7A Adversary Proceeding 13-59056



         Chapter 7 debtor Lester L. Lee appeals a summary judgment order entered against him by the Honorable Jeffrey Graham of the United States Bankruptcy Court for the Southern District of Indiana. The William R. Lee Irrevocable Trust and its co-Trustees, Donald Eugene Lee and Robert Earl Lee, (collectively, the “Trust”) initiated this adversary proceeding against Lester, seeking to hold him personally liable for a $7, 522, 879.73 judgment entered on December 30, 2008 against Lees Inns of America, Inc. (“LIA”), a dissolved Indiana corporation that Lester presided over, directed, and solely owned. The Bankruptcy Court found in favor of the Trust and pierced the corporate veil. Lester maintains that this was in error. For the reasons set forth below, the court AFFIRMS the judgment of the Bankruptcy Court.

         I. Facts[1]

         A. The LIA Merger and the Subsequent Appraisal Proceeding[2]

         Lester and the Trust were the shareholders of LIA, which was created in 1974 as a public company to build and operate hotels. (Findings and Conclusions at Finding of Fact (“FF”) 1). LIA also had subsidiary companies including Lees Inns Management Corporation, Hospitality Designers and Consultants, Inc., Prime Construction Management, Inc., and State Mortgage Corporation (collectively, the “LIA Subsidiaries”). (Id. at FF 3). Lester was president and chairman of the board of directors of LIA. (Id. at FF 4).

         Lester gained sole ownership of LIA by “merging out” the Trust. (Id. at FF 11). On April 4, 2000, Lester, as the majority shareholder of LIA and the sole shareholder of LLL Acquisition, approved a merger of the two entities. (Id.). On June 26, 2000, LIA was merged into LLL Acquisition, the Trust's shareholder status ceased, and Lester became the sole shareholder of LIA. (Id.). The Trust dissented to the merger, asserted its rights, and demanded payment for the value of its shares, all pursuant to Indiana's Dissenters' Rights Statute, Ind. Code § 23-1-44-1 et seq. (Id. at FF 12). LIA filed a Petition for Determination of Fair Value, and in September and October 2008, the Jennings Circuit Court held a bench trial. (Id. at FF 13).

         On December 30, 2008, the Jennings Circuit Court issued its Findings and Conclusions. (Id.). The court entered judgment in favor of the Trust and against LIA in the amount of $7, 522, 879.73. (Id. at FF 14). The Indiana Court of Appeals affirmed in March 2010. (Id. at FF 15).

         B. Lester's Post-Merger Conduct

         After the merger, Lester sought to devalue LIA in order to render the Trust's claims worthless. (Id. at Conclusion of Law (“CL”) 20). To this end, on November 1, 2000, approximately four months after the merger date, Lester executed a Real Estate Conditional Sales Contract with LIA, pursuant to which he purchased from LIA forty-one acres of real property located in Shelbyville, Indiana for $1.3 million.[3] (Id. at FF 21). Lester was not required to make any annual principal payments towards the purchase price for thirty years. (Id. at FF 22). Instead, Lester was merely required to make interest only annual payments of $76, 577.44. (Id.). In addition, Lester could prepay the purchase price without penalty. (Id.).

         On November 26, 2002, 25.5 acres of the Shelbyville property was sold to Wal-Mart Stores East, L.P. for $1.7 million. (Id. at FF 23). Upon consummation of the sale, Lester personally profited approximately $400, 000 and still retained 17.5 acres of the Shelbyville property. (Id. at FF 24). Lester sold a portion of the remaining real estate to Ritter's of Shelbyville LLC for $395, 472. (Id. at FF 25).

         As of the Merger Date, LIA owned all of the stock in the LIA Subsidiaries. (Id. at FF 26). During the pendency of the Dissenters' Rights action, the LIA Subsidiaries were transferred from LIA to the Lee Group Holding Company, LLC, a limited liability company owned by Lester's immediate family but controlled by Lester, for little or no consideration. (Id. at FF 27-28, 34, 39).

         Just five weeks before the trial began in the Dissenters' Rights action, Lester, the Lee Group, Johnson County Motel Corporation (“JCMC”), and Lees Real Estate Investments, LLC filed a Complaint against LIA in the Jefferson Circuit Court. (Id. at FF 29). In addition to serving as LIA's president, Lester was also the president of JCMC, the managing member of the Lee Group, and the managing member of Lees Inns Real Estate Investments. (Id. at FF 33-34). He therefore controlled all the parties named in the Complaint. (Id. at FF 35). Notably, this suit was filed in Jefferson County, as opposed to the preferred venue, Jennings County. (Id. at FF 29).

         The Complaint alleged defaults by LIA on notes secured by all of LIA's property (including notes receivable, inventory, equipment, intellectual property, and all general intangibles) and on various leases. (Id. at FF 30-31). Lester made no investigation into any possible defenses to the allegations contained in the Complaint. (Id. at FF 32). 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 in favor of the plaintiffs and against LIA for $7, 846, 686.87. (Amended Agreed Judgment; Findings and Conclusions at ¶ 36-37). This sum included $3, 380, 396.14 owing to Lester, $2, 121, 777.71 owing to the Lee Group, $1, 466, 153 owing to JCMC, and $878, 360 owing to Lees Real Estate Investments. (Findings and Conclusions at ¶ 37). Contrary to the terms of the Amended Agreed Judgment, on or about August 20, 2008, Lester caused LIA to transfer all of its assets (valued at $7, 732, 921 in the Amended Agreed Judgment) to just the Lee Group. (Id. at FF 39).

         On September 2, 2008, Lester, as sole shareholder and president of LIA, voted to dissolve the corporation. (Id. at FF 40). He subsequently filed Articles of Dissolution with the Indiana Secretary of State on November 13, 2008. (Id.). Thus, LIA ceased its legal existence on that date. (Id.).

         The Amended Agreed Judgment, the LIA Subsidiaries transfer, and the transfer of the Shelbyville property were each unknown and not disclosed to the Trust until discovery during proceedings supplemental in March 2009 through April 2009. (Id. at FF 41).

         II. Procedural History

         On January 3, 2012, Lester filed his voluntary petition under Chapter 7 of the United States Bankruptcy Code. In August 2013, the Trust initiated this adversarial proceeding to pierce the corporate veil and hold Lester personally liable for the Jennings Circuit Court judgment. The Trust ultimately moved for summary judgment, arguing that Lester's pre-merger and post-merger conduct each warranted veil piercing. The Bankruptcy Court granted summary judgment in favor of the Trust in December 2015. The court held that the exclusivity provision of Indiana's Dissenters' Rights Statute barred the Trust from piercing the corporate veil based on Lester's pre-merger conduct. However, the court went on to hold that Lester's post-merger conduct ...

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