Fort v. Kudeviz (In re, Genesis Press, Inc.)

• Decision Date: 03 October 2016
• Docket Number: Adv. Pro. No. 15-80024-HB, Adv. Pro. No. 15-80027-HB,C/A No. 13-01376-HB, Adv. Pro. No. 15-80026-HB
• Citation: 559 B.R. 445
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re, Genesis Press, Inc., Debtor(s). John K Fort, Chapter 7 Trustee for Genesis Press, Inc., Plaintiff, v. Larry Kudeviz, Defendant. John K Fort, Chapter 7 Trustee for Genesis Press, Inc., Plaintiff, v. Bruce Kudeviz, Defendant. John K. Fort, Chapter 7 Trustee for Genesis Press, Inc., Plaintiff, v. Michael Kudeviz, Defendant.

559 B.R. 445

In re, Genesis Press, Inc., Debtor(s).

John K Fort, Chapter 7 Trustee for Genesis Press, Inc., Plaintiff,

v.Larry Kudeviz, Defendant.

John K Fort, Chapter 7 Trustee for Genesis Press, Inc., Plaintiff,

v.Bruce Kudeviz, Defendant.

John K. Fort, Chapter 7 Trustee for Genesis Press, Inc., Plaintiff,

v.Michael Kudeviz, Defendant.

C/A No. 13-01376-HB

Adv. Pro. No. 15-80024-HB

Adv. Pro. No. 15-80026-HB

Adv. Pro. No. 15-80027-HB

United States Bankruptcy Court, D. South Carolina.

Signed October 3, 2016

Filed October 4, 2016

Robert A. Pohl, POHL, P.A., Greenville, SC, for Debtor.

James L. Bruner, Joey R. Floyd, Bruner Powell Wall & Mullins LLC, Columbia, SC, for Plaintiff.

Adam C. Bach, Eller Tonnsen Bach, LLC, Greenville, SC, for Defendant.

ORDER

Helen E. Burris, US Bankruptcy Judge

THIS MATTER came before the Court for a consolidated trial on John K. Fort, Chapter 7 Trustee for Genesis Press, Inc.'s Complaints alleging Defendants Larry Kudeviz, Bruce Kudeviz, and Michael Kudeviz (collectively, “Defendants”)¹ received fraudulent transfers that are recoverable pursuant to 11 U.S.C. § 544(b)² and S.C. Code Ann. § 27–23–10(A) (the “Statute of Elizabeth”). After considering the pleadings, the joint stipulation of facts,³ the evidence presented, and applicable law, the Court makes the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52, made applicable to this adversary proceeding pursuant to Fed. R. Bankr. P. 7052.⁴

I. FINDINGS OF FACT

Genesis Press, Inc. (“Genesis”) was a South Carolina corporation that printed books and pamphlets. Genesis was previously located in Florida, but moved to Greenville, South Carolina around 2007. Larry was Genesis' Chief Executive Officer and a shareholder. Bruce was the Chief Financial Officer of Genesis and Michael was an employee.

A. THE 2007 MEMORANDUM LOANS

Prior to December 31, 2007, Larry and Michael loaned money to Genesis. These loans were not evidenced by contemporaneous written promissory notes, but were memorialized and acknowledged by Genesis in two separate memorandums drafted by Bruce dated December 31, 2007. They included identical language and only differed with regard to the number of loans made by each Defendant and their amounts. Each memorandum was signed by the relevant party (Larry or Michael). They are collectively referred to herein as the “2007 Memorandum.” Although Bruce drafted the 2007 Memorandum as a representative of Genesis, it was not signed by any party on behalf of Genesis. The 2007 Memorandum provides the following:

The following Loans (with corresponding General Ledger Account numbers) are due and payable 15 months from this date (March 31, 2009). I hereby agree to waive any interest payments and thus will not accrue during this time period. Thirty days before March 31, 2009 the interest rate and payment plan will be negotiated in good faith reflecting the borrowing environment for an ‘arms length’ transaction. The Company, at its sole discretion may prepay in part or in whole without any penalty any of the Notes listed below ... I also agree to 30 day LIBOR as the interest rate for these Loans.

....

Total Amount of Note Payables (Principal Amounts) deferred: [applicable amount].

The 2007 Memorandum states that Michael was owed $325,000.00, and Larry was owed $1,486.115.01. A portion of Larry's loan amount ($907,500.00) was borrowed from his brother Bruce, his father Abraham Kudeviz, and his friend Helen Hemphill (collectively, the “Friends & Family Loans” or “FFLs”). The parties stipulated at trial that as of December 31, 2007, Genesis owed Michael $325,000.00 (as stated in the 2007 Memorandum) and Larry $578,615.01 (the principal balance set forth in the 2007 Memorandum less the FFLs).

The 2007 Memorandum's language is contradictory and vague at best. The greater weight of the evidence shows that neither Larry nor Michael intended to waive the accrual of interest during the 15-month period stated therein and they intended to negotiate repayment terms in the future should the loans remain outstanding after March 31, 2009.

B. SUBSEQUENT LOANS FROM LARRY AND BRUCE DURING THE HARTFORD LITIGATION

In April 2008, Genesis' printing facility suffered substantial damage from a fire, including damage to the primary printing machines. Larry, Bruce, and Christopher Petrone (an employee of Genesis) were arrested and charged with arson, but the charges were later dropped. The fire caused Genesis to stop its production entirely. Genesis filed a claim with its insurer Hartford Insurance Company (“Hartford”), which was ultimately denied. Genesis filed a lawsuit against Hartford in federal court to collect damages for breach of its insurance contract.⁵

At the time of the fire, Genesis had a backlog of work and was able to contract with other companies to complete this work in exchange for a small portion of the profits. However, the cash flow was insufficient to keep the company in business and Genesis was in need of additional operating capital while the Hartford litigation was pending. When March 31, 2009, arrived Genesis was experiencing significant turmoil and, consequently, Larry and Michael's loans referenced in the 2007 Memorandum were not repaid on the due date. Genesis was also unable to find a lender to meet its cash flow needs and, as a result, Bruce made loans to Genesis and Larry made additional loans as well. Larry's loans are evidenced by promissory notes; Bruce's are not. Bruce's loans were in the principal amounts of $25,000 and $12,000. Bruce's loans were made in April 2010— shortly before the scheduled trial date of May 2010. Bruce testified that these funds were borrowed from his ex-wife and she demanded to be repaid with interest of twice the principal balance. Bruce discussed the loans with Larry before they were made. Larry told him to do whatever was necessary to keep Genesis operating through the trial since this was a critical time for the company. Bruce testified that he was unable to obtain loans anywhere else and he had exhausted all possibilities.

On May 20, 2010, the jury rendered a verdict in the Hartford litigation in favor of Genesis for $14,500,000.00. Hartford appealed and on June 25, 2010, the case was settled in exchange for payment from Hartford of $18,000,000.00. This resolution also included a settlement of any claims of Larry, Bruce, and Petrone, and a portion of the settlement proceeds was distributed directly to them. Those direct distributions are not challenged in this lawsuit.

C. JULY 2010 TRANSFERS

Genesis received $11,942,793.84 from the settlement proceeds. The majority was used to pay unrelated creditors and the FFLs. Bruce then calculated the amounts necessary to repay the principal and interest owed on the various loans made by Defendants. Bruce sent his calculations by email to Larry and Kathy Stefanalli, Genesis' controller. Stefanalli then sent the information to Genesis' bank to complete the wire transfers. On July 6, 2010, Genesis transferred funds to Defendants according to Bruce's calculations. Thereafter, approximately $1,100,000.00 remained from the settlement proceeds.

1. TRANSFERS TO BRUCE

Bruce received $37,000.00 designated as repayment of principal and $74,000.00 designated as repayment of interest. The evidence shows that the parties entered into an agreement with Bruce for loans of $25,000.00 and $12,000.00 during the Hartford litigation when Genesis could not obtain necessary operating capital. The agreement was for repayment of principal and interest in the amount of double the principal. Genesis then repaid the loans per this agreement. From the testimony, it appears that some, but not all of these amounts transferred to Bruce were then repaid by Bruce to his ex-wife.

2. TRANSFERS TO MICHAEL

Michael received $325,000.00 designated as repayment of principal and $65,010.00 designated as repayment of interest at the rate of 7.5% compounded annually, including interest accrued during the 15-month “waiver” period referenced in the 2007 Memorandum. Bruce chose this rate because he believed it was fair to Genesis and its shareholders and ensured that the other creditors would be repaid.

3. TRANSFERS TO LARRY

Larry received $887,733.00 designated as repayment of principal and $222,326.00 designated as repayment of interest. Bruce attempted to calculate Larry's loan balance acknowledged in the 2007 Memorandum with 7.5% interest, including interest accrued during the 15-month “waiver” period, but he did not compound interest. Genesis then transferred funds to Larry according to Bruce's calculations. However, Bruce miscalculated the amount owed to Larry. The evidence shows that excess funds were transferred by Genesis to Larry as a result of the following errors:

• When applying an interest rate of 7.5%, Bruce calculated interest of $238,155.00 due on Larry's loans as of December 31, 2009.⁶ This calculation was based, in part, on a principal balance of $1,486,115.00 as stated in the 2007 Memorandum, which improperly includes the FFLs of $907,500.00.⁷ The parties' stipulation at trial establishes a principal balance of $578,615.01 owed to Larry as of December 31, 2007. Therefore, the interest calculation is inflated by the amount of interest that was calculated for the FFLs.

• When later calculating interest owed on Larry's loans as of July 7, 2010, Bruce used $882,172.00 as the starting point for the principal balance owed on the 2007 Memorandum loan.⁸ This amount included the prior error of incorrectly calculated accrued interest of $238,155.00.

• When calculating interest owed on Larry's loans as of July 7, 2010, Bruce should have calculated interest owed only from January 1, 2010—July 7, 2010, rather than reaching back to add interest beginning on January 1, 2008, because the principal balance already included accrued interest through December 31, 2009 (at an incorrect amount of $238,155.00).⁹

• Bruce failed to account for other loans made by Larry—an error found by Fort in Larry's

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