Federal Refinance Co., Inc. v. Klock, CIV.A. 98-12638-WGY.

• Decision Date: 25 October 2002
• Docket Number: No. CIV.A. 98-12638-WGY.,CIV.A. 98-12638-WGY.
• Citation: 229 F.Supp.2d 26
• Parties: FEDERAL REFINANCE CO., INC., Plaintiff, v. Deborah KLOCK; and Frank Romano, Jr., Defendants.
• Court: U.S. District Court — District of Massachusetts

229 F.Supp.2d 26

FEDERAL REFINANCE CO., INC., Plaintiff, v. Deborah KLOCK; and Frank Romano, Jr., Defendants.

No. CIV.A. 98-12638-WGY.

United States District Court, D. Massachusetts.

October 25, 2002.

Judd L. Peskin, Weiner & Rothschild, Gary M. Weiner, Weiner and Rothchild, P.C., Springfield, MA, for Plaintiff.

Richard J. D'Agostino, D'Agostino, Downey, & Assoc., Valerie S. Carter, Boston, MA, for Defendants.

Irving D. Labovitz, Cooley, Shrair, Alpert, Labovitz & Dambrov, Springfield, MA, for Movant.

MEMORANDUM AND ORDER

YOUNG, Chief Judge.

On March 3, 1997, the Plaintiff in this action, Federal Refinance Co., Inc. ("Federal Refinance") secured a judgment against the Defendant in this action, Frank Romano, Jr. ("Romano") for $331,608.78. Federal Refinance Co. v. Romano, No. 95-10941, slip. op. (D.Mass. March 3, 1997) (Bowler, M.J.). Federal Refinance then sought to collect on its judgment, only to discover that Romano's chief asset — part ownership of a series of nursing homes — was gone. Romano had transferred his 17,500 shares (constituting 43.75 per cent of the voting shares) of the Essex Group (the holding company operating the nursing homes) to a trust, in which his children were the designated beneficiaries. Federal Refinance then brought this suit, alleging that the transfer to the trust was fraudulent and therefore ought be voided. After a two-day trial, this Court entered findings of fact and conclusions of law, wherein it held the transfer of the stock to the trust to be in violation of the Massachusetts General Laws, Chapter 109A, Section 4 (the Uniform Fraudulent Transfer Act ("UFTA")). Findings and Rulings Tr. at 2-5. The Court ordered the trust instrument set aside and voided, and the shares to be deemed held in Romano's hands. Id. at 5-6.

Subsequent to entry of that judgment, with the shares now back in Romano's hands, Romano transferred the Essex Group shares to Essex Group,¹ in return for $85,000.00 credit towards an indebtedness, evidenced by Romano's promissory note held by Essex Group. See Ex. H to Pl.'s Mot. to Reconsider Denial of Pl.'s Mot. to Appoint Receiver [Docket No. 103]. The promissory note relates to an approximately $15,000,000.00 judgment obtained by the FDIC in separate litigation, FDIC v. Elder Care Services, Inc., No. 91-12739, slip. op. (D. Mass August 4, 1995) (Gertner, J.), aff'd 82 F.3d 524 (1st Cir. 1996), and entered against Romano in his personal capacity. The FDIC subsequently sold the judgment to CNF First Associates Limited Partnership ("CNF"). The Essex Group — the company controlled by Romano through his 43.75 percent ownership interest and almost wholly owned (91 percent) by his mother and himself — subsequently purchased the judgment from CNF for $85,000.00. Thus, Romano transferred his shares to his and his mother's company in return for a partial discharge of his personal debt.

The UFTA, unlike its predecessor the Uniform Fraudulent Conveyance Act, permits the undoing of transfers by insolvents, even if made for fair consideration, not to hinder creditors, and without fraudulent intent, if the transfer was preferential. Mass. Gen. L. ch. 109A § 6(b); e.g., Prairie Lakes Health Care Sys., Inc. v. Wookey, 583 N.W.2d 405, 413 (S.D.1998). See generally Paul P. Daley & Mitchel Appelbaum, The Modernization of Massachusetts Fraudulent Conveyance Law: The Adoption of the Uniform Fraudulent Transfer Act, 83 Mass. L.Rev. 337, 342-44 (1998).

Section 6(b) establishes four requisites to holding a preferential transfer fraudulent, and hence void. First, the claim of the protesting creditor must arise before the transfer. Mass. Gen. L. ch. 109A § 6(b). In this case, it is undisputed that Federal Finance's debt arose before the April 2002 stock transfer.

Second, the transfer must have been made to an insider for an antecedent debt. Id. In this case, at the time of transfer, Romano owned 43.75 percent of Essex Group's voting stock. As such, he was a controlling shareholder. Section 1 defines "insider" in part as a "corporation of which the debtor is a ... person in control." Id. § 2. Accordingly, Essex Group was an insider of Romano. Moreover, section 2 defines "insider" alternatively as "an affiliate, or an insider of an affiliate," and defines "affiliate" as "a corporation twenty percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the debtor ...." Id. Thus, Essex Group is also an affiliate — and therefore, an insider — of Romano. Accordingly, this transfer was made to an insider. It is undisputed that the debt the stock transfer partially paid arose before the April 2002 stock transfer. Accordingly, this transfer was to an insider for an antecedent debt.

Third, the transferor must have been insolvent at the time of the transfer. Id. § 6(b). It is undisputed that the $15,000,000.00 debt is still outstanding, along with the $331,000.00 judgment (on both of which interest presumably accrues). It is also undisputed that these liabilities far exceed any assets of Romano. Accordingly, it is beyond peradventure that Romano is insolvent.

The last requirement is that "the insider had reasonable cause to believe that the debtor was insolvent." Id. § 6(b). In this case, it is obvious that Essex Group knew that Romano was insolvent. Why else would it not seek to enforce its promissory note? Moreover, Essex Group itself has argued that it negotiated...