David Cutler Indus., Ltd. v. Bank of Am., And, Marix Servicing, LLC. (In re David Cutler Indus., Ltd.)

• Decision Date: 19 November 2013
• Docket Number: Adversary No. 11–0792 ELF.,Bankruptcy No. 09–18716 ELF.
• Citation: 502 B.R. 58
• Parties: In re DAVID CUTLER INDUSTRIES, LTD., Debtor. David Cutler Industries, Ltd., Plaintiff, v. Bank of America, and, Marix Servicing, LLC., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

502 B.R. 58

In re DAVID CUTLER INDUSTRIES, LTD., Debtor.David Cutler Industries, Ltd., Plaintiff,

v.Bank of America, and, Marix Servicing, LLC., Defendant.

Bankruptcy No. 09–18716 ELF.

Adversary No. 11–0792 ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

Nov. 19, 2013.

Doron A. Henkin, Law Offices of Doron A. Henkin, Radnor, PA, for Plaintiff.

Howard Gershman, Gershman Law Offices, PC, Jenkintown, PA, for Defendant.

OPINION

ERIC L. FRANK, Chief Judge.

I. INTRODUCTION

Plaintiff David Cutler Industries, Ltd. (“DCI”), the chapter 11 liquidating debtor herein, seeks to avoid $155,313.84 in pre-petition transfers it made to Defendants Bank of America and Marix Servicing, LLC.¹ DCI made the transfers were made on account of a loan owed by its then-president, Darryl Cutler and secured by a mortgage on his personal residence. In its Amended Complaint, DCI asserts that the transfers are avoidable pursuant to the actual and constructive fraud provisions of the Bankruptcy Code, 11 U.S.C. §§ 544(b), 548(a), and 550, and the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa.C.S. §§ 5104 and 5105.

Based on the evidence presented during the two (2) day trial of this adversary proceeding, I conclude that DCI has proven that all of the transfers to BOA at issue were constructively fraudulent under PUFTA § 5104(a)(2)(i) and § 5105. Accordingly, judgment will be entered in favor of DCI and against BOA and Marix Servicing, LLC in the amount of $155,313.84.²

II. JURISDICTION

This court unquestionably has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and the Standing Orders of the District Court dated July 25, 1984 and November 8, 1990. However, since the United States Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), courts in this Circuit are divided on the question whether a bankruptcy court may enter a final order in an adversary proceeding brought pursuant to 11 U.S.C. §§ 544 and 548. Compare In re Int'l Auction & Appraisal Services, LLC, 493 B.R. 460, 463–65 (Bankr.M.D.Pa.2013), with In re DBSI, Inc., 467 B.R. 767, 772–73 (Bankr.D.Del.2012). If the bankruptcy court lacks the authority to enter a final judgment, it is also unclear whether the parties may consent to the entry of a final judgment by the bankruptcy court or waive the right to an Article III tribunal. Compare In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir.2012), cert. granted sub nom., Exec. Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 133 S.Ct. 2880, 186 L.Ed.2d 908 (2013), with Wellness Int'l Network, Ltd. v. Sharif, 727 F.3d 751, 771–73 (7th Cir.2013); Waldman v. Stone, 698 F.3d 910, 917–18 (6th Cir.2012).

DCI and BOA have agreed that the fraudulent transfer claims in the Amended Complaint are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(H). ( See Pretrial Statements, Doc's. # 47, 48). BOA's agreement on that point may constitute consent to the entry of a final order. See In re Wash. Coast I, LLC, 485 B.R. 393, 408–09 (9th Cir. BAP 2012). However, in the event that it is determined that the bankruptcy court lacks the authority to enter a final judgment in this proceeding, this Opinion should be treated as proposed findings of fact and conclusions of law. See In re Scheffler, 471 B.R. 464 (Bankr.E.D.Pa.2012); see also In re Universal Mktg., Inc., 459 B.R. 573, 576–77 (Bankr.E.D.Pa.2011) (even if bankruptcy court lacks constitutional authority to enter final judgment in matter designated by Congress as “core,” court nonetheless has subject matter jurisdiction and may enter proposed findings of fact and conclusions of law). Contra Wellness Int'l Network, 727 F.3d at 776–77 (if bankruptcy court lacks constitutional authority to enter final judgment in matter designated by Congress as “core,” there is no statutory authority for bankruptcy court to enter proposed findings of fact and conclusions of law).

III. PROCEDURAL HISTORY

DCI filed its voluntary chapter 11 bankruptcy petition on November 16, 2009. By order dated May 2, 2012, the court confirmed the Joint Chapter 11 Liquidating Plan filed by DCI and the Official Committee of Unsecured Creditors (“the Confirmed Plan”). Pursuant to § 6.3 of the Confirmed Plan, the post-confirmation Debtor, acting through a Plan Administrator, is serving as the disbursing agent. Section 7.4 of the Confirmed Plan provides expressly for the preservation of the Debtor's avoidance actions under chapter 5 of the Bankruptcy Code.

On October 11, 2011, prior to confirmation, DCI commenced this adversary proceeding by filing a complaint pursuant to 11 U.S.C. §§ 544(b), 548(a)(1)(A), 548(a)(1)(B), 550, and 551, and 12 Pa.C.S. §§ 5104(a)(1), 5104(a)(2), and 5105. DCI later amended its complaint (“the Amended Complaint”). (Doc. # 3). On December 6, 2011, BOA answered the Amended Complaint, (Doc. # 5), and asserted a Third Party Complaint against Darryl Cutler and Amy Cutler alleging that the Cutlers were jointly liable to DCI for indemnification and contribution on the mortgage, (Doc. # 6). Subsequently, the Third Party Complaint was dismissed for lack of subject matter jurisdiction. ( See Doc. # 15). BOA filed an amended answer on February 21, 2012. (Doc. # 18).

On June 21, 2012, BOA filed a motion for summary judgment. (Doc. # 22). After briefing, the court denied the motion on the ground that material facts were in dispute. ( See Doc. # 41).

Trial of this matter was held on December 7 and 10, 2012. The parties submitted stipulated facts (“the Stipulated Facts”) (Doc. # 57), and supplemented the Stipulated Facts with testimonial and documentary evidence. ³ This evidence included the testimony of and several expert reports prepared by Ira M. Feldman (“Feldman”). Post-trial briefing was completed on March 21, 2013.

IV. FINDINGS OF FACT

I make the following findings of fact based upon the Stipulated Facts and the documentary and testimonial evidence presented at trial.

DCI's Stock

DCI is a Pennsylvania corporation that purchased and resold waste paper and paper rolls. At the outset, David Cutler (“David”) was the President and sole shareholder of DCI. His son, Darryl Cutler (“Darryl”), began working for DCI in the mid–1980's as a salesman. Later, Darryl assumed the role of President in 1992 or 1993, while David remained the sole director of DCI. (Stipulated Facts ¶ 9). Michael Flitter (“Flitter”) served as DCI's corporate accountant/comptroller from 1990 until 2009. (2 N.T. 61).

Darryl became a shareholder when DCI reorganized its capital structure in 1987. (1 N.T. 168–69). In that restructuring, David redeemed some or all of the nonvoting stock of DCI in exchange for a $3.7 million promissory note (“the Note”). (More on the promissory note in a moment). Through some mechanism that was not fully explained, some or all of the nonvoting stock was gifted to a trust for Darryl's benefit (“the Darryl Trust”). (Stipulated Facts ¶ 9; 1 N.T. 169).⁴ David retained the voting stock of DCI until his death in September 2004, at which time it passed to his decedent's estate (“the David Estate”). Jonathan Gayl (“Gayl”) and Hannah Cutler (“Hanna”) were named the David Estate's executors. ( Id.).

In his will, David bequeathed the voting stock to the Darryl Trust, provided that the Trust pay the David Estate fair market value for the stock. (Stipulated Facts ¶ 9). Despite negotiations, the Darryl Trust ( i.e., Darryl) and the David Estate ( i.e., Gayl and Hannah) could not reach an agreement on the voting stock's fair market value. As a result, after David's death, transfer of the stock to the Daryl Trust did not occur, ( id.), and it appears that the David Estate remained in control of the stock. Meanwhile, Darryl continued to run DCI in his capacity as its President.

In May 2009, the David Estate called a shareholders meeting and elected Gayl and Hannah as DCI's directors. ( See Ex. 508). In June 2009, the Board of Directors of DCI, limited Darryl's total compensation to $250,000.00 per year and revoked his authority to control DCI's financial accounts, including check writing. ( See Ex. 509).

On August 11, 2009, the Board elected Gayl as President and Treasurer, and Hannah as Vice–President and Secretary. ( See Ex. 512). On August 12, 2009, Darryl resigned from DCI. ( See Ex. 513). The chapter 11 bankruptcy case was filed slightly more than three (3) months later.

The Promissory Note

In connection with the redemption of David's stock as part of the February 1987 “recapitalization,” see n. 4, supra, DCI issued a $3.7 million promissory note payable to David with a March 1, 1993 maturity date (“the Note”). ( See Ex. 305.23; 1 N.T. 168–69). The Note obligated DCI to tender interest-only payments for the first year and then commence principal and interest payments on June 1, 1988. The Note also provided that it is governed by Pennsylvania law. ( See id.).

David, signing in his capacity as President and Secretary, executed the Note on DCI's behalf. The Note is stamped with DCI's corporate seal directly above the notation: “[Corporate Seal]” and directly to the left of David's signatures. ( See id.).

In October 1991, the Note was modified, inter alia, to extend the maturity date until September 30, 1994. ( See Ex. 305.24). David signed the modification as President. The Note modification was not imprinted with DCI's corporate seal.

DCI paid regular interest payments pursuant to the Note from 1987 through September 2004. (1 N.T. 183). Prior to 2004, only one (1) principal payment was made on the Note. DCI continued to carry the Note on its corporate books through the chapter 11 bankruptcy filing in November 2009. ( Id. at 78). The Note was the subject of a subordination agreement among Bryn Mawr Trust Company (“BMT”), David, and DCI. ( Id. at 179). DCI reaffirmed the subordination agreement in a modification to its loan agreement with BMT in April 2008. ( See Ex. 305.20B, ¶ 9(f)).

The BOA Mortgage

In 2002, Darryl and his...