Bakst v. United States (In re Kane)

• Decision Date: 16 July 2012
• Docket Number: Adversary No. 10–01022–EPK.,Bankruptcy No. 09–15556–EPK.
• Citation: 479 B.R. 617
• Parties: In re KANE & KANE, A Partnership, Debtor. Michael R. Bakst, Trustee in Bankruptcy for Kane & Kane, A Partnership, Plaintiff, v. United States of America, Charles J. Kane and Harley N. Kane, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Florida

479 B.R. 617

In re KANE & KANE, A Partnership, Debtor.Michael R. Bakst, Trustee in Bankruptcy for Kane & Kane, A Partnership, Plaintiff,

v.United States of America, Charles J. Kane and Harley N. Kane, Defendants.

Bankruptcy No. 09–15556–EPK.

Adversary No. 10–01022–EPK.

United States Bankruptcy Court,

S.D. Florida,

West Palm Beach Division.

July 16, 2012.

Michael R. Bakst, West Palm Beach, FL, G. Steven Fender, West Palm Beach, FL, for Plaintiff.

Katherine P. Walsh, Washington, DC, for Defendants.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

ERIK P. KIMBALL, Bankruptcy Court.

Michael R. Bakst, as chapter 7 trustee (the “Trustee”) for the bankruptcy estate of Kane & Kane, a Partnership (the “Debtor”), commenced this adversary proceeding by filing a complaint [ECF No. 1] (the “Complaint”) against the United States of America (the “Defendant”). In the Complaint, the Trustee seeks (a) in Count I (Actual Fraud) avoidance and recovery of certain fraudulent transfers under §§ 544(b), 548(a)(1)(A) and 550, and Fla. Stat. §§ 726.105(1)(a) and 726.108(1); (b) in Count II (Constructive Fraud) avoidance and recovery of certain fraudulent transfers under §§ 548(a)(1)(B) and 550; (c) in Count III (Constructive Fraud) avoidance and recovery of certain fraudulent transfers under §§ 544(b)(1) and 550, and Fla. Stat. §§ 726.105(1)(b), 726.106(1) and 726.108; and (d) in Count IV, recovery of the avoided transfers pursuant to § 550. ¹

Before the Court are the United States of America's Motion for Summary Judgment and Memorandum of Law in Support [ECF No. 227] (the “United States Motion”) and the Plaintiff/Trustee's Motion for Partial Summary Judgment, Motion to Exclude Various Expert Testimony, and Incorporated Memorandum of Law in Support Thereof [ECF No. 228] (the “Trustee Motion”).² For the reasons that follow, the Court (a) denies the United States Motion; (b) grants the Trustee's request for summary judgment in part, ruling that the Defendant was an “initial transferee” within the meaning of § 550(a)(1) and thus the Defendant cannot rely on the defense presented in § 550(b), and otherwise denies the Trustee's request for summary judgment; (c) denies the Trustee's request to exclude the expert witness report and deposition testimony of James Reda; and (d) grants the Trustee's request to exclude the expert witness report and deposition testimony of William Michaelson.

BACKGROUND

The Debtor was a general partnership formed in the mid–1990s pursuant to Fla. Stat. § 620.81001 et seq. The Debtor operated as a law firm specializing in plaintiffs' Personal Injury Protection (“PIP”) litigation, representing primarily medical service providers. Charles J. Kane and Harley N. Kane (together, the “Kanes”) were the Debtor's only equity partners. The Debtor maintained detailed accounting records, including ledgers for partner capital accounts for each of the Kanes.

This adversary proceeding focuses on six monetary transfers (the “Transfers”) from the Debtor to the Defendant between April 14, 2008 and October 17, 2008. In each instance, funds were paid directly from the Debtor's operating account at the direction of one or both of the Kanes and were received and applied by the Defendant in satisfaction of the Kanes' personal income tax obligations. The Transfers aggregate $727,871.90. The Kanes had routinely paid their personal income tax liabilities by directing the Debtor to issue checks payable to the Defendant. The Debtor's accounting records reflect each of such payments, including the Transfers, in the relevant partner capital account as distributions to the Kanes.

The Transfers were as follows:

+--------------------------------------------------+
                ¦                  ¦Tax Amount     ¦               ¦
                +------------------+---------------+---------------¦
                ¦Date              ¦Paid           ¦Taxpayer       ¦
                +------------------+---------------+---------------¦
                ¦April 14, 2008    ¦$310,000.00    ¦Charles J. Kane¦
                +------------------+---------------+---------------¦
                ¦April 14, 2008    ¦$290,000.00    ¦Harley N. Kane ¦
                +------------------+---------------+---------------¦
                ¦August 28, 2008   ¦$ 7,706.00     ¦Charles J. Kane¦
                +------------------+---------------+---------------¦
                ¦September 15, 2008¦$ 60,000.00    ¦Charles J. Kane¦
                +------------------+---------------+---------------¦
                ¦September 15, 2008¦$ 60,000.00    ¦Harley N. Kane ¦
                +------------------+---------------+---------------¦
                ¦October 7, 2008   ¦$ 165.90       ¦Charles N. Kane¦
                +--------------------------------------------------+
                

On June 18, 2004, the law firms of Stewart Tilghman Fox & Bianchi, P.A., William C. Hearon, P.A., and Todd S. Stewart, P.A. (collectively, “Stewart Tilghman”) filed a lawsuit (the “State Court Litigation”) in Palm Beach Circuit Court (the “State Court”) against the Firm, the Kanes and others. The State Court Litigation proceeded to a bench trial between September and November of 2007 on claims of fraudulent inducement, quantum meruit/unjust enrichment and constructive trust. Stewart Tilghman asked the State Court to enter judgment against the Debtor in the amount of $5,250,000.00, plus prejudgment interest, less an acknowledged set-off of $1,130,884.80. The Debtor contended it was not liable for any sums and asked the State Court to enter judgment in its favor and against Stewart Tilghman. The State Court took the matter under advisement at the conclusion of trial.

On April 14, 2008, while the State Court Litigation was still under advisement, the Debtor made the first two of the Transfers to the Defendant.

On April 24, 2008, the State Court entered a final judgment against the Debtor and the Kanes, jointly and severally, for $2,000,000.00, plus prejudgment interest of $769,534.25, for a total of $2,769,534.25.

On May 5, 2008, the Debtor filed in the State Court a motion for reconsideration and for a new trial. While that motion was pending before the State Court, the Debtor made the remaining Transfers to the Defendant.

On November 7, 2008, the State Court entered an order denying the Debtor's motion for rehearing and for a new trial.

Ten days later, on November 17, 2008, the Debtor and the Kanes filed chapter 11 petitions in this Court. Stewart Tilghman filed a motion to dismiss the chapter 11 cases as having been filed in bad faith. After a full evidentiary hearing, this Court ruled on March 20, 2009 that the chapter 11 petitions of the Debtor and the Kanes were filed in bad faith and dismissed the cases effective March 30, 2009.

The Debtor and the Kanes filed chapter 7 petitions on March 30, 2009. This adversary proceeding is filed in the Debtor's chapter 7 case.

SUMMARY JUDGMENT STANDARD

Federal Rule of Civil Procedure 56(a), made applicable to this matter by Federal Rule of Bankruptcy Procedure 7056, provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “An issue of fact is ‘material’ if it is a legal element of the claim under the applicable substantive law which might affect the outcome of the case.” Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir.1997). In considering a motion for summary judgment, the Court must construe all facts and draw all reasonable inferences in the light most favorable to the non-moving party. Id.

The moving party has the burden of establishing that there is an absence of any genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. Once the moving party meets that burden, the burden shifts to the non-movant, who must present specific facts showing that there exists a genuine dispute of material fact. Walker v. Darby, 911 F.2d 1573, 1576 (11th Cir.1990) (citation omitted). “A mere ‘scintilla’ of evidence supporting the opposing party's position will not suffice; there must be enough of a showing that the jury could reasonably find for that party.” Id. ( citing Anderson, 477 U.S. at 252, 106 S.Ct. 2505).

At the summary judgment stage, the Court will not weigh the evidence or find facts; rather, the Court determines only whether there is sufficient evidence upon which a reasonable juror could find for the non-moving party. Morrison v. Amway Corp., 323 F.3d 920, 924 (11th Cir.2003).

RELIEF REQUESTED

The Trustee requests summary judgment in his favor on Counts II, III and IV of the Complaint. These are the counts alleging that the Transfers were constructively fraudulent under § 548(a)(1)(B) and Fla. Stat. § 726.106(1), brought pursuant to § 544(b), and requesting recovery of any avoided Transfers. The Trustee also requests that the Court exclude the expert reports and deposition testimony of two experts offered by the Defendant: James F. Reda, whose testimony is offered as evidence demonstrating that the Debtor received reasonably equivalent value in exchange for the Transfers, and William M. Michaelson, whose testimony is offered as evidence demonstrating that the Debtor was solvent when the Transfers were made.

The Defendant requests summary judgment in its favor. In support of this request, the Defendant argues that the Kanes were the initial transferees of the Transfers, thus making the Defendant a subsequent transferee, that the Defendant took for value in good faith and without knowledge of the voidability of the Transfers, and that the Defendant thus has a complete defense to this action under § 550(b)(1).

MOTIONS TO EXCLUDE EXPERT REPORTS AND DEPOSITION TESTIMONY

The trial judge serves a gatekeeping role with regard to the admissibility of expert testimony. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). He or she is tasked, pursuant to the Federal Rules of Evidence, with “ensuring that an expert's...