In re All Terrain, LLC

• Decision Date: 07 December 2020
• Docket Number: Bankruptcy Case No. 17-40999-JMM
• Citation: 625 B.R. 462
• Parties: IN RE: ALL TERRAIN, LLC Debtor.
• Court: U.S. Bankruptcy Court — District of Idaho

625 B.R. 462

IN RE: ALL TERRAIN, LLC Debtor.

Bankruptcy Case No. 17-40999-JMM

United States Bankruptcy Court, D. Idaho.

Signed December 7, 2020

Thomas D. Smith, Pocatello, Idaho, Attorney for Chapter 7 Trustee.

Jason R. Naess, Attorney for Gary Rainsdon.

MEMORANDUM OF DECISION

JOSEPH M. MEIER, CHIEF U. S. BANKRUPTCY JUDGE

Introduction

Before the Court is the chapter 7¹ trustee's ("Trustee") objection to Claim Number 7. Dkt. No. 294. Gary Rainsdon ("Rainsdon")² is the chapter 7 trustee in a separate, but related, case. See In re Hathaway Homes Group, LLC , Case No. 17-40992-JMM. Rainsdon filed Claim Number 7 in this case on behalf of the In re Hathaway Homes Group, LLC bankruptcy estate. Trustee in this case objected to that claim. Dkt. No. 294. Rainsdon filed a response to that objection. Dkt. No. 295. Rainsdon and Trustee stipulated to forgo oral argument and submit written briefs only. Dkt. No. 339. The parties stipulated to the admission of Trustee's exhibits 100 through 111 and Rainsdon's exhibits 201 through 223, and filed pre-trial and closing memorandums in support of their positions, Dkt. Nos. 322, 325, 339, 343, 345, and 347–348. The Court has considered the evidence and arguments put forth, and this Memorandum Decision sets forth the Court's findings, conclusions, and reasons for its disposition of the motion. Rules 7052; 9014.

Facts

Between April 2013 and January 2018, Paul Hathaway was the sole owner of Hathaway Homes Group, LLC ("HHG") as well as the Debtor, All Terrain, LLC ("All Terrain"). During this time, HHG advertised, offered for sale, and sold new and used manufactured and modular homes to consumers. All Terrain moved, set up, and completed the interior finishing work on the manufactured and modular homes that HHG sold. All Terrain's primary customer was HHG, which comprised approximately eighty percent of the All Terrain's business. All Terrain provided the labor and materials to complete the homes HHG sold. All Terrain and HHG shared several of the same employees who were paid by both All Terrain and HHG.

Mr. Hathaway moved funds between the All Terrain, HHG, and himself personally. Unfortunately, Mr. Hathaway also had a gambling problem between 2015 and 2017 and used funds from All Terrain and HHG to finance his gambling. In some instances, money was withdrawn out of the All Terrain Wells Fargo bank account at casinos and those funds were used for gambling. Paul Hathaway and his spouse, Mikki Hathaway (collectively, "the Hathaways"), reported gambling winnings and losses on their 2015 and 2016 tax returns of $3.5 million and $3.1 million respectively. Mr. Hathaway only reported the gambling losses up to the amount of the winnings. As a result, the Hathaways, All Terrain, and HHG experienced financial troubles.

The Hathaways, along with All Terrain and HHG, filed separate bankruptcy petitions in November 2017. In re Paul J. Hathaway and Mikki J. Hathaway , Case No. 17-40989-JMM ("the Hathaway Case"), In re All Terrain , Case No. 17-40999-JMM, and In re Hathaway Homes Group, LLC , Case No. 17-40992-JMM ("the HHG Case). Rainsdon filed Claim Number 7 in this case on behalf of the HHG bankruptcy estate asserting a claim to damages for his right to avoid transfers on three bases: 1) avoidable post-petition transfers; 2) avoidable fraudulent transfers within two years prior to commencement of the case; and 3) avoidable fraudulent transfers within four years prior to commencement of the case. Dkt. No. 325. Claim Number 7 includes $145,653.24 in pre-petition transfers and $4,111.36 in post-petition transfers. Trustee, however, does not object to the post-petition transfer amount of Claim Number 7. Only the pre-petition transfer amounts remain in dispute. Id .³

Analysis and Disposition

"Under Rule 3001(f), a filed proof of claim constitutes prima facie evidence of the validity and amount of the claim which, via § 502(a), is deemed allowed unless a party in interest objects." In re Davis , 554 B.R. 918, 921 (Bankr. D. Idaho 2016) (citing Lundell v. Anchor Constr. Specialists, Inc. , 223 F.3d 1035, 1039 (9th Cir. 2000) ; In re Morrow , 03.2 IBCR 100, 101, 2003 WL 25273857 (Bankr. D. Idaho 2003) ). This Court addressed claim objections in In re Davis :

If an objection to a proof of claim is made, the Code instructs the Court to conduct a hearing, to determine the amount of the claim, and to allow the claim, except to the extent that "such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured[.]" § 502(b)(1).

The prima facie validity of the proof of claim afforded to a creditor by Rule 3001(f) does not allocate the burden of proof concerning the validity of the debt; it merely operates as a rebuttable evidentiary presumption in favor of the creditor. In other words, while the Rule satisfies the creditor's "burden of going forward" in support of its claim, In re Garvida , 347 B.R. 697, 706 (9th Cir. BAP 2006), the applicable "burden of proof is an essential element of the claim itself [and] one who asserts a claim is entitled to the burden of proof that normally comes with it." Raleigh v. Illinois Dept. of Revenue , 530 U.S. 15, 20–21, 120 S. Ct. 1951, 147 L.Ed. 2d 13 (2000).

In re Davis , 554 B.R. 918, 921 (Bankr. D. Idaho 2016).

This Court addressed the burden of persuasion in In re Gray :

The party objecting to the allowance of a claim bears the burden "to produce evidence sufficient to negate the prima facie validity of the filed claim. If the objector produces evidence sufficient to negate the validity of the claim, the ultimate burden of persuasion remains on the claimant to demonstrate by preponderance of the evidence that the claim deserves to share in the distribution of the debtor's assets."

In re Gray , 522 B.R. 619, 625 (Bankr. D. Idaho 2014) (quoting Spencer v. Pugh (In re Pugh) , 157 B.R. 898, 901 (9th Cir. BAP 1993) (citing In re Allegheny Intern., Inc. , 954 F.2d 167, 173 (3d Cir. 1992) ); see also In re Parrott Broadcasting Ltd. P'ship , 492 B.R. 35, 38 (Bankr. D. Idaho 2013) )).

In this case, the applicable law defining Rainsdon's burden of proof for his claim under § 502(b)(1) is § 548(a)(1)(B) and § 544(b)(1), as well as Idaho Code §§ 55-913 and 55-914. Rainsdon argues that the HHG estate is entitled to recover $145,653.24 transferred from HHG to All Terrain pre-petition because those funds were used by All Terrain for gambling, and HHG did not receive reasonably equivalent value in exchange for those transfers. As noted above, Trustee objects to allowance of Rainsdon's claim because, he argues, "(1) HHG received reasonably equivalent value in exchange for the transfers and (2) the Debtor may offset any amount in excess of any avoidable transfers." Dkt. No. 345. While Rainsdon's claim enjoys prima facie validity under the Rules, given Trustee's objection, Rainsdon must ultimately prove, by a preponderance of the evidence, that HHG did not receive reasonably equivalent value in exchange for the transfers. In re Gray , 522 B.R. at 625.

1. § 548(a)(1)(B)

In support of his claim, Rainsdon states he can avoid transfers on behalf of the HHG estate pursuant to § 548(a)(1)(B).⁴ This Court addressed the elements of this Code provision in In re Miller :

There are multiple elements that must be established by a plaintiff to sustain a cause of action under § 548(a)(1)(B). There must be a "transfer" of property of the debtor that occurs within two years of the filing of the bankruptcy petition. The debtor must have received less than "reasonably equivalent value in exchange for the transfer" and the transfer had to have occurred when the debtor was insolvent or the debtor had to be rendered insolvent as a result of the transfer.

Miller v. Kerstein (In re Miller) , 536 B.R. 863, 868 (Bankr. D. Idaho 2015) (quoting Jordan v. Kroneberger (In re Jordan) , 392 B.R. 428, 440 (Bankr. D. Idaho 2008) ). The party seeking to avoid the transfer bears the burden of proving all these elements in order to recover under § 548. Jordan v. Kroneberger (In re Jordan) , 392 B.R. at 440. The Court will address each element.

i. HHG's Insolvency

The Court will first address HHG's insolvency and the date on which HHG became insolvent. "Insolvency is defined in § 101(32)(A) as a ‘financial condition such that the sum of such [debtor]'s debts is greater than all of such [debtor]'s property, at a fair valuation[.]’ A ‘balance sheet’ standard applies in § 548(a) litigation." Miller v. Kerstein (In re Miller) , 536 B.R. at 869 (citing Akers v. Koubourlis (In re Koubourlis) , 869 F.2d 1319, 1321 (9th Cir. 1989) ). In other words, to determine whether HHG was insolvent at the time of the transfers, this Court must determine whether HHG's debts were greater than its assets, at a fair evaluation, exclusive of exempted property. Akers v. Koubourlis (In re Koubourlis) , 869 F.2d at 1321.

As of December 31, 2014, HHG had $3,820,422 in assets. Ex. 208. At the same time, HHG had $4,138,306 in liabilities. Id. As of December 31, 2015, HHG had $4,707,700 in assets, and $5,556,536 in liabilities. Id. As of June 30, 2016, HHG had $5,316,438 in assets, and $6,631,796 in liabilities. Ex. 210. As of the date of the bankruptcy petition filing, HHG had $681,549.51 in assets, and $7,703,141.19 in liabilities. Ex. 211. As far as the Court can tell, Trustee does not dispute that HHG was insolvent on the date of the transfers. On this record, the Court finds that HHG was insolvent as of December 31, 2014, and remained insolvent throughout the entire transfer period until the bankruptcy petition was filed on November 13, 2017.

ii. Transfer Occurred within Two Years of Filing

A transfer is defined in § 101(54) as each "mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property, or (ii) with an interest in property." § 101(54). Here, Rainsdon has the initial burden to...