Crawford v. Zambrano (In re Zambrano Corp.)

• Decision Date: 17 September 2012
• Docket Number: Adversary Nos. 09–2045JAD, 11–2123JAD, 11–2122JAD.,Bankruptcy No. 09–20453JAD.
• Citation: 478 B.R. 670
• Parties: In re ZAMBRANO CORPORATION, Debtor. Rosemary C. Crawford, Trustee of the Estate of Zambrano Corporation, Plaintiff, v. Eugene Zambrano, III, Defendant. Rosemary C. Crawford, Trustee of the Estate of Zambrano Corporation, Plaintiff, v. Hillcrest Development Associates, LP, Defendant. Rosemary C. Crawford, Trustee of the Estate of Zambrano Corporation, Plaintiff, v. Eugene Zambrano, Jr., Individually and Jointly with Mary Zambrano, his wife, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

478 B.R. 670

In re ZAMBRANO CORPORATION, Debtor.

Rosemary C. Crawford, Trustee of the Estate of Zambrano Corporation, Plaintiff,

v.Eugene Zambrano, III, Defendant.

Rosemary C. Crawford, Trustee of the Estate of Zambrano Corporation, Plaintiff,

v.Hillcrest Development Associates, LP, Defendant.

Rosemary C. Crawford, Trustee of the Estate of Zambrano Corporation, Plaintiff,

v.Eugene Zambrano, Jr., Individually and Jointly with Mary Zambrano, his wife, Defendants.

Bankruptcy No. 09–20453JAD.

Adversary Nos. 09–2045JAD, 11–2123JAD, 11–2122JAD.

United States Bankruptcy Court, W.D. Pennsylvania.

Sept. 17, 2012.

Donald R. Calaiaro, Calaiaro & Corbett, P.C., Douglas Anthony Campbell, Campbell & Levine, LLC, Pittsburgh, PA, for Debtor.

Owen W. Katz, Pittsburgh, PA, for Plaintiff.

Robert O. Lampl, Pittsburgh, PA, for Defendants.

JEFFERY A. DELLER, Bankruptcy Judge.

This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. The matters before this Court are three jointly tried adversary proceedings commenced by Rosemary C. Crawford, Chapter 7 trustee (the “Trustee”) of the estate of Zambrano Corporation (the “Debtor”), against Eugene Zambrano, III (“EZIII”), Hillcrest Development Associates, LP (“Hillcrest”), and Eugene Zambrano, Jr. (“EZJr”) and his wife, Mary Zambrano (“Mary”). Pursuant to adversary proceeding 09–02045–JAD, the Trustee contends that EZIII breached his fiduciary duty to the Debtor under Pennsylvania law and that EZIII deepened the Debtor's insolvency under Pennsylvania law. Pursuant to adversary proceeding 11–02123–JAD, the Trustee contends that Hillcrest was the transferee of an avoidable fraudulent transfer from the Debtor under 11 U.S.C. § 548. Pursuant to adversary proceeding 11–02122–JAD, the Trustee contends that EZJr and Mary were the beneficiaries of avoidable fraudulent transfers from the Debtor under 11 U.S.C. §§ 548 and 550.

Adversary proceedings 11–02122–JAD and 11–02123–JAD are core proceedings over which this Court has jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(A) and (H) and 28 U.S.C. § 1334. This Court has jurisdiction over adversary proceeding 09–02045–JAD pursuant to 28 U.S.C. § 157(c) and 28 U.S.C. § 1334. The matters within adversary proceeding 09–02045–JAD are not core proceedings but are otherwise related to a case under title 11; all parties have consented to this Court to hear and determine the proceedings related to a case under title 11 and to enter appropriate orders and judgments pursuant to 28 U.S.C. § 157(c)(2). ( SeeAdv. No. 09–02045–JAD, Doc. # 79, Order Approving Joint Discovery Plan, ¶ 4).

In his Pre–Trial Statement, EZIII relies on the recent Supreme Court decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), to argue that this Court lacks the ability to enter a final judgment on the Trustee's state law claims. (Adv. No. 09–2045–JAD, Doc. # 109, pp. 4–5). This Court rejects EZIII's assertion because both parties have consented to the entry of a final judgment by this Court. ( SeeAdv. No. 09–02045–JAD, Doc. # 79). Such consent is sufficient to allow this Court to hear and finally determine the instant matters, regardless of whether they are statutorily defined as “core” or “non-core,” pursuant to 28 U.S.C. § 157(c)(2). ARDI Limited Partnership v. The Buncher Company, (In re River Entertainment Co.), 467 B.R. 808 (Bankr.W.D.Pa.2012) (parties' consent to entry of final judgment by the bankruptcy court permits final adjudication by non-Article III bankruptcy courts of non-core and core matters alike as Stern v. Marshall did not impact the consent provision of 28 U.S.C. § 157).

For the reasons set forth below, the Court finds EZIII liable for the Trustee's count of breach of fiduciary duty to the Debtor. However, the Court finds the Trustee's argument concerning EZIII's liability as to deepening insolvency unpersuasive. Additionally, the Court finds Hillcrest liable for the value of the fraudulent transfer it received from the Debtor, and the Court finds EZJr liable for the value of the fraudulent transfers, from which he benefited, from the Debtor. Lastly, the Court finds the Trustee's argument that Mary is also liable as a beneficiary of the fraudulent transfers from the Debtor unpersuasive.

I.

The Debtor is a Pennsylvania corporation that previously engaged in the business of general contracting, construction, and real estate development. EZJr was the principal of the Debtor from the Debtor's inception until 2003. In December of 2003, EZIII purchased his father's interest in the Debtor and several related entities by means of a private annuity contract (“Annuity Contract”) between Hillcrest and EZJr. (Adv. No. 09–2045–JAD, Defendant's Exhibit S) ¹. EZIII was the principal of the Debtor and the Debtor's one-hundred percent shareholder from 2003 through the bankruptcy filing on January 26, 2009 (the “Petition Date”). ( See Doc. # 105, Plaintiff's Statement of Facts to be Proved, ¶ 6).²

On the Petition Date, five of the Debtor's unsecured creditors commenced an involuntary Chapter 11 in this Court. ( See id. at p. 5). After the entry of an order for relief, the Debtor's bankruptcy case was later converted from a Chapter 11 reorganization to a Chapter 7 liquidation. ( See Case No. 09–20453–JAD, Doc. # 256). The Trustee was appointed as the trustee for the bankruptcy estate of the Debtor following conversion of the Debtor's bankruptcy case to a case under chapter 7 of the Bankruptcy Code on June 26, 2009. ( See Case No. 09–20453–JAD, Doc. # 257).

A.

In addition to acting as the sole shareholder and director, as well as the controlling officer and President of the Debtor, EZIII also owned a 50% interest in Hillcrest. ( See Plaintiff's Exhibit 7, pp. 13–37). Various other members of EZIII's family owned 49% of Hillcrest. EZIII also owned directly, or indirectly through Hillcrest, an interest in several other entities (collectively, the “Affiliated Entities”). ( See Audio Recording of Hearing Held in Courtroom D, February 13, 2012 (10:31–10:39 AM); see also Plaintiff's Exhibit 7).

Until January 1, 2007, Hillcrest owned a 50% interest in 151 First Side Associates, LLC (“First Side”). First Side was a partner in 151 First Side Associates, LP, a condominium development located in Pittsburgh, Pennsylvania. As of January 1, 2007, EZIII's interest in First Side was reduced to a 33.3% interest and assigned to the Debtor. ( See Audio Recording of Hearing Held in Courtroom D, February 13, 2012 (10:38–10:40 AM)). Notwithstanding the reduction of his equity interest, EZIII still maintained a significant continuing interest with respect to First Side's operations as he personally guaranteed certain bank loans to fund the First Side Associates, LP project. ( See id.).

Each of the Affiliated Entities was linked to a development project in which the Debtor acted as the general contractor, or provided construction services. The practice of the Debtor providing benefits to the entities linked to the development projects for which the Debtor provided construction services was allegedly long established and predated EZIII's 2003 takeover of the Debtor. ( See id.). Among the types of benefits the Debtor regularly bestowed on the Affiliated Entities was allowing account receivables (“ARs”) to go uncollected for a period of time and to accrue unbilled work in progress (“WIP”). Stated in other terms, it appeared that the Debtor provided substantial construction related services to the Affiliated Entities for little or no remuneration during the time period at issue. Additionally, the Debtor made undocumented, uncollateralized, interest free loans to insiders of the Debtor and to the Affiliated Entities (the “Loans”).

B.

Hillcrest was one of the Affiliated Entities that received benefits from the Debtor. Hillcrest is the estate planning vehicle through which EZIII purchased all of the assets, including the interest in the Debtor, held by EZJr. ( See Audio Recording of Hearing Held in Courtroom D, February 13, 2012 (1:20–1:23 PM)).

On or about July 11, 2007, the Debtor transferred $150,000 to Hillcrest so that Hillcrest could become a partner in a hotel development project. ( See Plaintiff's Exhibit 15, unnumbered p. 1). The Hillcrest check register shows a payment of $150,000 that same date to “Hot Metal Bridg....” ( See id.). Hillcrest alleges that it intended to repay the money with interest upon the first partnership distribution. (Adv. No. 11–2123, Doc. # 8, Pretrial Statement Required by April 11, 2011, Scheduling Order, ¶ 5).

Subsequently, Hillcrest's partner allegedly breached its obligations under the partnership and Hillcrest demanded dissolution of the partnership. ( Id.). The Hillcrest check register shows the $150,000 as the first and last distribution of the partnership as the return of the investment to Hillcrest on September 11, 2008. (Plaintiff's Exhibit 15, unnumbered p. 7).

Hillcrest did not return any funds to the Debtor. Rather, the entire balance of the returned loan funds were dissipated, with Hillcrest distributing $80,420.77 to members of the Zambrano family over the ensuing thirty day period. ( See id.; see alsoAdv. No. 11–2123–JAD, Doc. # 8, ¶ 10).

C.

Not only did Hillcrest and the other Affiliated Entities receive benefits from the Debtor, but EZJr, the former principal of the Debtor, also received benefits. Under the arrangement whereby EZIII purchased all of the assets held by EZJr, EZJr received monthly cash payments of $21,400 from Hillcrest pursuant to the terms of the Annuity Contract. In addition to the monthly cash payments from Hillcrest, the Debtor paid EZJr's real estate and income taxes, health insurance premiums, and vehicle lease payments. ( See Audio Recording of Hearing Held in Courtroom D, February 13, 2012 (2:33–2:35 PM)).

In 2008 and 2009, the Debtor also paid for EZJr's leased vacation condominium unit known as Unit No. 3H of the Marbella...