United States District Court, S.D. Indiana, Indianapolis Division
MICHAEL J. WALRO, as Trustee of the Bankruptcy Estate of Lester L. Lee, Plaintiff,
ROBERT N. HATFIELD and THE LEE GROUP HOLDING COMPANY, LLC, Defendants. IN RE LESTER L. LEE, Debtor. Adversary Proceeding No. 14-59038 Bankruptcy No. 12-90007-JJG-7
FINDINGS OF FACT AND CONCLUSIONS OF LAW
RICHARD L. YOUNG, United States District Judge.
J. Walro, as Trustee of the Bankruptcy Estate of Lester L.
Lee, initiated this adversary proceeding against Robert N.
Hatfield and The Lee Group Holding Company, LLC, seeking to
avoid a fraudulent transfer made to Hatfield by a subsidiary
of the Lee Group pursuant to the Indiana Uniform Fraudulent
Transfer Act. The bankruptcy court below held a trial and
issued Proposed Findings of Fact and Conclusions of Law. The
Trustee and Hatfield now object to various portions of those
proposed findings. Having reviewed those objections, the
court now adopts the bankruptcy court's proposed findings
and conclusions in substantial part, and holds that the
Trustee is entitled to avoidance of the transfer.
Standard of Review
bankruptcy judge determines that an adversary proceeding is
related to the underlying bankruptcy but not a “core
proceeding” over which it can exercise full
jurisdiction, the judge may hear the matter and then submit
proposed findings of fact and conclusions of law to the
district court. 28 U.S.C. § 157(c)(1). “[A]ny
final order or judgment shall be entered by the district
judge after considering the bankruptcy judge's proposed
findings and conclusions and after reviewing de novo those
matters to which any party has timely and specifically
objected.” Id. The district court may accept,
reject, or modify the bankruptcy court's proposed
findings and conclusions, receive further evidence on them,
or remand the matter to the bankruptcy judge. Fed.R.Bankr.P.
9033(d). For ease of reading, the parties' objections are
discussed as endnotes to the findings and conclusions at
Findings of Fact
Lester L. Lee filed a voluntary petition under Chapter 7 of
the United States Bankruptcy Code on January 3, 2012.
Lee Group is an Indiana limited liability company that was
managed by Lee and owned by Lee's wife, Brenda Lee, and
their children, Larry L. Lee, Melinda Gabbard, and Debra
Lee's Real Estate Investments, LLC (“LREI”)
was the owner of real property located at 130 N. State Street
in North Vernon, Indiana (the “Real Estate”).
LREI is a wholly-owned subsidiary of the Lee Group, which is
the sole member of LREI.
Real Estate consists of two parcels: an office building that
had long served as office space for the Lee Group and some of
its subsidiary companies (the “Office Building”),
and an adjacent single-family home that has been converted to
retail space (the “Retail Unit”). During its
conversion, the Retail Unit's full bathroom and kitchen
were removed, leaving only a half bath.
Hatfield is a resident of Jennings County and, at all times
relevant to this proceeding, was employed by Lee's Ready
Mix and Trucking, Inc. He currently serves as the
company's Vice President of Sales. ii
Lee's Ready Mix is owned by Lee's family members,
including Brenda and Larry. Larry serves as its President.
and his related business entities are well known within
February 19, 2014, Hatfield and LREI entered into a Purchase
and Sell Agreement (the “Purchase Agreement”),
whereby LREI transferred the Real Estate to Hatfield (the
Hatfield testified that he had long been interested in buying
commercial property as part of his retirement plan-something
that was commonly known within Lee's Ready Mix. At the
time of the Transfer, Hatfield was 57 years old and testified
that he hoped to retire between the ages of 62 and 65.
Hatfield further testified that Larry-knowing of
Hatfield's interest- approached him about buying the Real
Hatfield later discussed the sale with Lee and eventually
inspected the Real Estate. Hatfield also checked the tax
assessment valuation of the Real Estate, which was $342, 000
at that time. Significantly, Hatfield did not have the Real
Estate independently appraised or professionally inspected.
It does not appear that Hatfield asked for or reviewed the
rental history for the Real Estate; nor did he obtain a title
Hatfield testified that he likes to conduct business on the
strength of a handshake. iv
Neither LREI nor the Lee Group listed the Real Estate for
sale with a broker. The Real Estate was never formally
marketed in any way.
According to Lee, one of the primary motivations for selling
the Real Estate was to pay attorney's fees for the Lee
Group. He also testified that “everybody” in town
was aware of his bankruptcy, including Hatfield.
Hatfield testified that he believed he could purchase the
Real Estate for a “good price.” He acknowledged
knowing that Lee “needed money” around the time
of the Transfer, and that he had witnessed the Lee Group
dwindle from a once vibrant company to almost nothing.
Hatfield also noted that while the Real Estate had once been
“full of people, ” it was only being used by a
handful of people at the time of the Transfer. Hatfield had
also heard rumors about litigation between Lee and some of
his family members v
Initially, Lee asked for $145, 000 to $150, 000 for the Real
Estate. Hatfield countered with an offer of $125, 000. That
offer was accepted (the “Purchase Price”).
Pursuant to the Purchase Agreement, Hatfield was to pay $10,
000 to LREI upon execution of the contract. Hatfield further
agreed to give LREI a mortgage on the Real Estate for the
remainder of the Purchase Price (the “Mortgage”),
along with a promissory note (the “Note”).
Hatfield paid the initial $10, 000 deposit with a check made
payable to the Lee Group. He testified that while he had
sufficient funds to pay the entire Purchase Price upon
execution of the Purchase Agreement, he preferred to pay over
five to ten years.
Note was to be paid in annual installments over 20 years. The
first installment was not due until February 2015. The Note
also provided for the payment of interest, but
contradictorily indicated that interest would be paid at the
rate of 3.5% “per annum, ” as well as 3.5%
“per month or any partial month.” vi
Immediately following the Transfer, Lee and LREI obtained
appraisals of both the Office Building and the Retail Unit
(the “Appraisals”). The Appraisals provided a total
fair market value of the Real Estate of $190, 000, and a
liquidation value of $135, 000. The Appraisals define
“Liquidation Value, ” in part, as the value in a
transaction “where [a] normal marketing effort is not
possible due to the brief exposure time” and
“[p]ayment will be made in cash . . . or in terms of
financial arrangements comparable thereto.” The value
of the Real Estate at the time of the Transfer within the
meaning of Indiana Code § 32-18-2-18 was $190, 000.
Within two days of the Transfer, Larry formed a new business
entity named Epifany Investments, LLC. Hatfield entered into
a verbal lease agreement with Epifany upon being asked by Lee
“if it was alright if they stayed in the
building” until Hatfield was able to lease it (the
Pursuant to the Verbal Agreement, Epifany was allowed to
occupy the Office Building rent free but was to pay taxes,
insurance, and utilities for the property. In other words,
Hatfield received no stream of income under the Verbal
23. Exactly one year after the Transfer, on February 19,
2015, Hatfield entered into a written lease with Epifany for
the Office Building (the “Lease”). Although
Epifany was the signatory under the Lease, Hatfield testified
that he dealt with Lee. Like the Verbal Agreement, Epifany
was only responsible for taxes, insurance, and utilities, and
otherwise paid no rent to Hatfield. The term of the Lease was
for an initial five years, plus several additional
five-year terms. The Lease also provided that it could only
be canceled by Hatfield in the event of a default by Epifany.
Lease contains an integration clause, but Hatfield and Larry
also insisted that there was a verbal side agreement whereby
Hatfield could terminate the Lease if he located another
lessee, regardless of whether Epifany was in default.
Hatfield made minimal efforts to secure another tenant for
the Office Building. Hatfield did show the Retail Unit to a
potential tenant, but she eventually lost interest because
the property lacks a kitchen. ix
Approximately five months after the Transfer, Lee and
Hatfield entered into a Consulting Agreement whereby Hatfield
agreed to pay Lee $1.00 in exchange for Lee's services.
Purportedly as an outgrowth of the Consulting Agreement, Lee
worked with Jerry Lamb, a real estate broker, to list the
Real Estate with a listing price of $450, 000.
Hatfield stated that he entered into the Consulting Agreement
to generate interest in the Real Estate for leasing purposes.
He conceded that no interest was, in fact, generated. Lee
stated that he entered into the Consulting Agreement because
of his “extensive experience” in commercial real
estate, and that he was looking to help Hatfield. Lee
acknowledged, however, that Hatfield could have easily
retained the broker himself. x
for the $450, 000 listing price, Hatfield testified that Lee
and the broker came up with the figure. Hatfield did not
think the figure was unusual based on the sale prices of
other properties in the area, and in light of a state
redevelopment grant that the city of North Vernon had
received. Lamb reiterated the significance of the grant
during his testimony, but he also indicated that he threw the
listing price against the wall to see if it would stick. The
court notes the $450, 000 listing price was substantially
higher than the fair market value of $190, 000 indicated in
Consulting Agreement did not result in a sale of the Real
Estate, and Hatfield remains the fee-simple owner of the
Notwithstanding the 20-year term of the Note and
Hatfield's stated intention to pay the balance of the
Purchase Price over five to ten years, Hatfield purportedly
paid the balance of the Purchase Price in cash within about
eight months of the Transfer. xi
According to Hatfield, between July and October 2014, Lee
periodically asked Hatfield to make payments toward the
Purchase Price because Lee or one of his related entities
needed the money.
Hatfield did not receive a receipt of any kind when he made
these payments. Instead, the Lee Group's administrative
assistant, Ruthy Large, placed bundles of cash on a photocopy
machine and created an image of the cash purportedly received
from Hatfield. Some of the photocopies also include a bank
deposit slip. Large testified that these photos were created
solely for the Lee Group's records. xii
Many of the photos show stacks of cash held together by the
bands that banks often use to bundle cash. Some of ...