Barstow v. Ingaldson Maasen & Fitzgerald, P.C. (In re Avery)

• Decision Date: 31 March 2011
• Docket Number: Bankruptcy No. A06–00455–DMD.,Adversary No. A08–90039–DMD.
• Citation: 461 B.R. 798
• Parties: In re Mark J. AVERY, Debtor.William M. Barstow, Trustee and Security Aviation, Inc., an Alaska corporation, Plaintiffs, v. Ingaldson Maasen & Fitzgerald, P.C., Defendant.
• Court: U.S. Bankruptcy Court — District of Alaska

461 B.R. 798

In re Mark J. AVERY, Debtor.William M. Barstow, Trustee and Security Aviation, Inc., an Alaska corporation, Plaintiffs,

v.Ingaldson Maasen & Fitzgerald, P.C., Defendant.

Bankruptcy No. A06–00455–DMD.

Adversary No. A08–90039–DMD.

United States Bankruptcy Court, D. Alaska.

March 31, 2011.

Gary A. Spraker, Christianson & Spraker, Anchorage, AK, for Plaintiffs.

Matthew K. Peterson, Thomas V. Van Flein, Clapp, Peterson, Van Flein, Tiemessen & Thorsness LLC, Anchorage, AK, for Defendant.

SUMMARY JUDGMENT MEMORANDUM

DONALD MacDONALD IV, Bankruptcy Judge.

This is an action for recovery of damages of $150,000.00 based upon a variety of state and federal law theories. It is a core proceeding as to the plaintiffs' counts which allege violations of federal bankruptcy law. The plaintiffs' state law claims are not core proceedings, but the defendant has consented to the bankruptcy court's jurisdiction to enter orders and judgments regarding such claims.¹ Jurisdiction arises pursuant to 28 U.S.C. § 1334(b), the district court's order of reference and the consent of the parties.

The plaintiffs' amended complaint alleges nine causes of action: (1) professional negligence; (2) breach of fiduciary duty; (3) unjust enrichment; (4) conversion; (5) actual fraudulent conveyance— § 548(a)(1)(A); (6) actual fraudulent conveyance— § 34.40.010; (7) constructive fraudulent conveyance— § 548(a)(1)(B); (8) constructive fraudulent conveyance— § 548(a)(1)(B)(ii)(IV); ² and (9) violation of automatic stay and avoidance of post-petition transfers— §§ 362 and 549. The plaintiffs have filed a motion for summary judgment as to the following counts: (1) breach of fiduciary duty, (2) unjust enrichment, (3) conversion, (4) constructive fraudulent conveyance, and (5) illegal post-petition transfers. I will grant partial summary judgment to the plaintiffs on their count for conversion and full summary judgment on their count for illegal post-petition transfers. The balance of the plaintiffs' motion will be denied.

The defendant has filed a cross-motion for partial summary judgment as to the plaintiffs' claim for unjust enrichment. The defendant's cross-motion for partial summary judgment will be granted. Further, this court will grant summary judgment to the defendant on the plaintiffs' second cause of action—breach of fiduciary duty.

Background ³

Debtor Mark Avery is the son of the late Luther Avery, a prominent San Francisco trust attorney. Luther was one of three named trustees for various trusts set up by Stanley Smith, a wealthy Australian mining magnate, and his wife, May Wong Smith. Stanley Smith died in 1968 but his wife continued to live long after his death. The trusts the Smiths established had substantial assets. The May and Stanley Smith Charitable Trust had assets of $350 million and the May Smith Trust had assets of $150 million.

When Luther Avery died in 2001, Mark Avery (“Avery”) succeeded to his position as trustee of the Smith trusts. Avery, an attorney and former prosecutor, earned $600,000.00 a year as a trustee. He was also entitled to bill the trusts for legal services. After becoming trustee, Avery bought an expensive home in Eagle River in 2004. Around the time of this purchase, he met Robert Kane through Kane's mother, a real estate broker. With Kane's assistance, Avery moved May Smith from the Island of Guernsey, off the coast of France, to the Bahamas. May Smith suffered from dementia and needed full-time care. Yet she remained a trustee of her trust along with Avery and two other trustees, John Collins and Dale Matheny. All of the assets of the May Smith Trust were held by Avenco Ltd., a Bahamian Corporation. Avery, Collins and Matheny were the sole shareholders of Avenco.

After May Smith was relocated to the Bahamas, Avery, Collins and Matheny began to investigate options for providing reliable air transportation services for May Smith in case she needed to be moved from the Bahamas for medical treatment or other emergencies. In early May of 2005, Avery approached his co-trustees about a prospective business arrangement with Douglas Gilliland and his company, World Air, Inc. Under the proposal, Gilliland would use the assets of Avenco to secure a line of credit for the purchase of two to three long-range aircraft for use with a government contract. It was contemplated that the aircraft would also be available to provide any needed air transportation for May Smith.

On May 11, 2005, the trustees met in San Francisco and considered Avery's proposal. They agreed to make $50 million in trust assets available to use as collateral for the purchase of the aircraft. Avery was put in charge of making all the arrangements. Instead of utilizing the trust assets for the Gilliland venture, however, Avery used the assets for his own purposes. He opened a margin account in Avenco's name and immediately began taking massive draws on the account. On June 7, 2005, he directed $15 million from the margin account to an account belonging to one of his wholly owned businesses, Avery & Associates. From June 16 through October 5, 2005, he directed an additional $37.125 million from the margin account to an account belonging to Regional Protective Services, another entity he controlled.

Avery went on a wild spending spree with the trust money. He spent nearly $10 million to acquire Security Aviation, Medic Air, Premier Aviation and Medical Training Institute. These entities were all established businesses at the time of purchase. Avery purchased a wide variety of fixed and rotor-wing aircraft, including Czech L–39 fighters, with over $28.2 million in disbursements from the Avery & Associates and Regional Protective Services accounts. Avery also purchased numerous costly personal assets, including a $500,000.00 mooseboat, a yacht, several vehicles, and motorhomes for himself and Kane.

Around the same time the Czech fighters were purchased, Security Aviation bought some rocket launchers to install on these aircraft. The FBI raided Security Aviation's offices and seized documents concerning the rocket launchers and the fighters. Federal criminal charges were filed against Robert Kane and Security Aviation for possession of unregistered destructive devices on February 22, 2006. Paul Stockler was retained as a criminal defense attorney for Kane. Wells Fargo pulled its line of credit for Security Aviation. Avery, after receiving $52 million from the May Smith Trust just months before, was broke. He had to liquidate aircraft to pay for the cost of defending against the criminal charges. Between April 17 and July 27, 2006, $8,442,351.05 of the proceeds from the sale of aircraft was transferred to Stockler's trust and e-trade accounts.

Security Aviation retained the law firm of Dorsey & Whitney to represent it in the criminal case. Dorsey & Whitney received a retainer of $400,000.00 from Avery's law firm, Avery and Associates, on February 2, 2006.⁴ Kane retained Kevin Fitzgerald, an attorney in the firm of defendant Ingaldson, Maasen & Fitzgerald (“IMF”), to assist Stockler during the criminal trial. ⁵ Dorsey & Whitney transferred a portion of their retainer, $50,000.00, to IMF for IMF's representation of Kane during the criminal trial. The payment was made on February 24, 2006.⁶

Shortly after the criminal charges were brought against Kane and Security Aviation, the May Smith Trust retained the California firm of Townsend, Townsend & Crew to represent it in its efforts to obtain an accounting and recovery of the $52 million from Avery and Security Aviation. On March 9, 2006, Maureen Sheehy, an attorney in this firm, wrote a letter to Security Aviation's counsel, Robert Bundy at Dorsey & Whitney, to confirm recent phone conversations in which she had requested an accounting of trust assets from Avery and Security Aviation.⁷ Sheehy also advised that until such an accounting was made, none of the property purchased with funds from the trust was to be sold without the written consent of the trust. The letter was sent via facsimile to Dorsey & Whitney the same day it was written.

Five days after Sheehy's letter was sent, on March 14, 2006, Security Aviation entered into an agreement for floor plan with Bell Aviation, Inc., for the sale of a S–550 Citation (N460–M).⁸ This agreement provided $1,450,000 to Security Aviation for interim financing. These funds went to Stockler's trust account on March 22, 2006.⁹ IMF received $150,000.00 from Stockler's trust account on April 13, 2006.¹⁰ Avery testified at his § 341 meeting that proceeds from the sale of Security Aviation's aircraft were placed in Stockler's accounts in order to protect them, and that he believed the funds were being held in trust for Security Aviation.¹¹

The criminal trial ran from May 15 to 26, 2006. Fitzgerald and Stockler represented Kane at the trial, and Robert Bundy represented Security Aviation. The jury acquitted Kane and Security Aviation of all charges. At the conclusion of the trial, IMF applied a portion of its retainer against its fees and costs. A balance of $100,302.92 remained in its trust account as of June 11, 2006.¹²

Two days before the jury entered its verdict, Louise Ma, another attorney with the California firm representing the May Smith Trust, wrote a letter to Robert Bundy regarding several issues.¹³ First, she advised that the trust had decided it would oversee the care of May Smith, in place of Regional Protective Services, another Avery entity. Second, she noted that Avery had not yet responded to the firm's earlier requests for an accounting, and demanded repayment of the $52.125 million that Avery had received from the trust. Finally, she informed Bundy that Avery would no longer serve as counsel to the trust, and demanded return of any trust files in Avery's possession.

Ma wrote a second letter to Bundy on June 9, 2006.¹⁴ In this letter, she stated, “As you know, [Avery] personally committed to repay [the $52 million] by March 31,...