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Walro v. Hatfield

United States District Court, S.D. Indiana, Indianapolis Division

June 27, 2017

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


          RICHARD L. YOUNG, United States District Judge.

         Michael 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.

         I. Standard of Review

         If a 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 issue. i

         II. Findings of Fact

         1. Lester L. Lee filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code on January 3, 2012.

         2. The 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 Brown.

         3. 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.

         4. The 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.

         5. 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

         6. Lee's Ready Mix is owned by Lee's family members, including Brenda and Larry. Larry serves as its President.

         7. Lee and his related business entities are well known within Jennings County.

         8. On 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 “Transfer”).

         9. 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.

         10. Hatfield further testified that Larry-knowing of Hatfield's interest- approached him about buying the Real Estate.

         11. 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 search. iii

         12. Hatfield testified that he likes to conduct business on the strength of a handshake. iv

         13. 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.

         14. 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.

         15. 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

         16. 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”).

         17. 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”).

         18. 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.

         19. The 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

         20. Immediately following the Transfer, Lee and LREI obtained appraisals of both the Office Building and the Retail Unit (the “Appraisals”).[1] 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. vii

         21. 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 “Verbal Agreement”).

         22. 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 Agreement. viii

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[2] additional five-year terms. The Lease also provided that it could only be canceled by Hatfield in the event of a default by Epifany.

         24. The 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.

         25. 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

         26. 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.

         27. 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

         28. As 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 the Appraisals.

         29. The Consulting Agreement did not result in a sale of the Real Estate, and Hatfield remains the fee-simple owner of the property.

         30. 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

         31. 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.

         32. 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

         33. Many of the photos show stacks of cash held together by the bands that banks often use to bundle cash. Some of ...

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