Guttman v. Fabian (In re Fabian)

• Decision Date: 13 September 2011
• Docket Number: Adv. Proc. No. 09-0443-JS,Case No. 08-27450-JS
• Parties: In re: ALAN BRIAN FABIAN, Debtor ZVI GUTTMAN, Chapter 11 Trustee for Strategic Partners Int., Inc., Plaintiff v. ALAN BRIAN FABIAN, Defendant
• Court: U.S. Bankruptcy Court — District of Maryland

In re: ALAN BRIAN FABIAN, Debtor

ZVI GUTTMAN, Chapter 11 Trustee for Strategic Partners Int., Inc., Plaintiff

v.ALAN BRIAN FABIAN, Defendant

Case No. 08-27450-JS

Adv. Proc. No. 09-0443-JS

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND

Date signed September 13, 2011

JAMES F. SCHNEIDER

U. S. BANKRUPTCY JUDGE

MEMORANDUM OPINION GRANTING A NONDISCHARGEABLE

JUDGMENT AGAINST THE DEBTOR IN THE AMOUNT OF $3,046,644.00

The instant complaint to determine nondischargeability of debt came on for trial on the merits on December 6, 2010. For the reasons set forth, the complaint will be granted and the Court will enter a nondischargeable judgment against the Chapter 7 debtor in favor of the plaintiff in the amount of $3,046,644.

This opinion holds that the trustee of an involuntary Chapter 11 corporate debtor who sued the sole insider for the recovery of fraudulent transfers¹ made with actual intent to defraud creditors, has standing as a creditor on behalf the Chapter 11 estate to obtain a nondischargeable judgment against the insider in his subsequently-filed voluntary Chapter 7 bankruptcy case in the amount of the avoided transfers.

FINDINGS OF FACT

1. On August 31, 2004, an involuntary Chapter 7 bankruptcy petition was filed (Case No. 04-30227-ESD)² by petitioning creditors Fleet Business Credit LLC and DeLage Landen Financial Services, Inc., against Strategic Partners International, Inc. (hereafter "SPI"), a Wyoming corporation doing business in Maryland. On September 27, 2004, the debtor consented to an order for relief and moved to convert the case toChapter 11, which was granted by order [P. 28] dated October 6, 2004. On December 15, 2004, Zvi Guttman, Esquire, was appointed Chapter 11 trustee ("Guttman," or "Chapter 11 trustee") by order [P. 95].

2. Alan Brian Fabian (hereafter "Fabian") was the sole officer, shareholder and person in control of SPI.

3. The Trustee filed 11 adversary proceedings in the SPI case against Fabian and others for the recovery of fraudulent conveyances, and for various other causes of action that alleged injury to SPI.³ Among the other defendants were Fabian'sspouse, Jacqueline Richards-Fabian; the Centre for Management and Technology, Inc. ("Centre"), and CMAT International, entities that Fabian created and wholly-owned, as well as Ocean Quest LLC ("Ocean Quest") and Ocean Quest Investors, Inc. ("Investors"), limited liability companies organized under the law of Maryland and owned and controlled by Fabian. Five of these adversary proceedings, designated bythe Trustee as the "Remaining Proceedings," form the basis for the instant complaint against Fabian to determine debt to be nondischargeable.

4. Claims filed by creditors in the SPI case exceed $25 million. Claims Register, Case No. 04-30227-NVA.

5. During the course of administering the bankruptcy case, Guttman discovered that Fabian had operated SPI as a "scam" to defraud creditors. The scam involved sales of nonexistent computer equipment by SPI to Solarcom, Inc. ("Solarcom"), and the lease-back of the equipment by SPI from Solarcom, which assigned its rights under the leases to certain financial institutions that financed the transactions. Guttman also discovered that Fabian had diverted millions of dollars of funds received by SPI from these transactions and converted them to his own use.

6. Between December 3, 2002 and the Petition Date, more than $9.5 million was transferred from SPI to Fabian and his entities, of which only $1,675,000 was repaid. Therefore, Fabian owed SPI at least $7.8 million, in addition to substantial sums that were transferred to Fabian through numerous intermediate transfers to entities that he owned or controlled.

7. Fabian caused false and misleading financial statements to be filed in the SPI case. Specifically, in the various Statements of Financial Affairs ("SOFAs"), Fabian claimed that he received no compensation or distributions from SPI, other thanexpense reimbursements. The Second Amended SOFA contained a reconciliation for the period from January 9, 2002 though October 5, 2004, which indicated that on the Petition Date, Fabian's net indebtedness to SPI for expenses was $155,920.27. However, the Trustee determined that transfers made to Fabian between December 3, 2002 and the Petition Date totaled approximately $3,700,000; that transfers made by SPI during the same period to entities that Fabian owned and controlled totaled approximately $5,580,000; and that SPI received nothing in return. While the reconciliations attached to the First and Second Amended SOFAs stated that Fabian repaid all of the advances made to him by SPI, Fabian did not list all of the advances. The Trustee's investigations led him to conclude that Fabian's fraudulent behavior continued during the pendency of the SPI bankruptcy case and that it included the filing of false financial documents in the bankruptcy case and the giving of false testimony regarding the assets and obligations of SPI. These discoveries led Guttman to refer Fabian to the U.S. Attorney for the District of Maryland for criminal prosecution.

8. On August 8, 2007, Fabian was indicted by a Federal grand jury in the District of Maryland on nine counts of mail fraud, nine counts of engaging in monetary transactions with proceeds of specified unlawful activity, two counts of bankruptcy fraud, two counts of perjury and one count of obstruction of justice, inconnection with the sale-leaseback scheme that defrauded creditors of SPI. Indictment issued in United States v. Alan B. Fabian, Criminal No. RDB-07-0355 [Plaintiff's Ex. No. 1]. A Superseding Indictment was issued on November 28, 2007, that added two counts of filing false income tax returns and one count of making a false statement to the Internal Revenue Service by filing a 1040 income tax return that contained a false statement.⁴ [Plaintiff's Ex. No. 2]. The criminal prosecution effectively halted the progress of the Trustee's adversary proceedings pending against Fabian in the SPI case.

9. On August 10, 2007, the U.S. District Court (Garbis, J.) issued a protective order that prohibited Fabian from transferring, encumbering or otherwise disposing of property of the SPI estate.

10. In May 2008, Fabian pleaded guilty in the U.S. District Court to one count of mail fraud (18 U.S.C. § 1341) and one count of subscribing a false tax return (26 U.S.C. § 7206(1), at which time he admitted having committed fraud in connection with the sale-leaseback scheme. Plea Agreement with Statement of Facts dated May 12, 2008 [Plaintiff's Ex. No. 3]. Fabian acknowledged the criminal nature of hisconduct in his sworn affidavit to the U. S. District Court in support of his guilty plea, as follows:

Count 9 - Mail Fraud

In approximately 1998, Alan Fabian and a business partner created a limited liability company called Strategic Partners International, Inc. LLC ("SPI LLC"). Fabian was the Managing Partner of SPI LLC. SPI LLC specialized in IT and activity-based costing consulting services. In July 2000, Fabian and his partner sold their ownership interests in SPI LLC to MAXIMUS, Inc., ("MAXIMUS"), a publicly traded government consulting company. SPI LLC became a wholly-owned subsidiary of MAXIMUS, a status it retained until September 2001. In September 2001, MAXIMUS merged SPI LLC out of existence. Fabian signed the Articles of merger on behalf of SPI LLC, which explicitly stated that SPI LLC ceased to exist. On March 14, 2002, Fabian incorporated a new company called Strategic Partners International Incorporated ("SPI, Inc."). He did not inform MAXIMUS that he had incorporated SPI, Inc. and MAXIMUS had no ownership interest in SPI, Inc. Rather, Fabian was the 100 percent owner of SPI Inc.

Beginning in approximately March 2001, Fabian caused SPI LLC and later SPI, Inc. (collectively referred to as "SPI") to enter into a series of sale-leaseback transactions of computer equipment and software with a leasing broker, Solarcom, Inc. ("Solarcom"). Fabian specified the equipment and software that was to be the subject of each sale-leaseback transaction. Solarcom in turn located third-party funding sources for the transactions. Solarcom then purchased the specified computer equipment and software from SPI using funds made available by the funding sources, and leased the equipment and software back to SPI. SPI paid three months' rent (plus tax) to Solarcom and then owed the remaining monthly payments to the funding sources. Solarcom mailed a check to SPI to purchase the equipment specified under each particular lease. The funding sources to which Solarcom directed the SPI sale-leaseback transactions between 2001 and 2004 included the following financial institutions: Deutsche Financial Services Corporation("Deutsche"), DeLage Landen Financial Services, Inc. ("DLL"), Fleet Business Credit LLC ("Fleet"), and Key Equipment Finance ("Key").

Between approximately March 2001 and June 2004, SPI obtained approximately $32,000,000 in funds from Solarcom after Deutsche, DLL, Fleet and Key funded the sale-leaseback transactions. All $32,000,000 was deposited into SPI bank accounts over which Fabian had sole signatory authority. Between March 2001 and June 2004, Fabian caused SPI to pay approximately $3,300,000 to Solarcom and approximately $12,900,000 to the funding sources in rent payments.

In connection with the above-described sale-leaseback transactions, Fabian provided Solarcom with equipment itemization spreadsheets describing the equipment to be sold and executed various documents prepared by Solarcom. Beginning in 2003, in response to requests from Solarcom, Fabian also provided Solarcom with invoices and wire transfer advices of debit, which Solarcom transmitted to the funding sources. These documents contained material misrepresentations that Fabian made with knowledge of their falsity.

With respect to most of the transactions that took place between March 2001 and the Fall of 2003, SPI did not purchase the Dell servers,

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