In re American Basketball League, Inc.

• Decision Date: 13 October 2004
• Docket Number: Adversary No. 00-5216.,Bankruptcy No. 98-60354-MM.
• Citation: 317 B.R. 121
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re The AMERICAN BASKETBALL LEAGUE, INC., a California corporation, Debtor. Uecker & Associates, Inc., Plan Administrator, Plaintiff, v. L.G. Hunt & Associates, Inc, a Georgia Corporation, Larry B. Hunt, and the United States of America, Defendants.

317 B.R. 121

In re The AMERICAN BASKETBALL LEAGUE, INC., a California corporation, Debtor.

Uecker & Associates, Inc., Plan Administrator, Plaintiff, v. L.G. Hunt & Associates, Inc, a Georgia Corporation, Larry B. Hunt, and the United States of America, Defendants.

Bankruptcy No. 98-60354-MM. Adversary No. 00-5216.

United States Bankruptcy Court, N.D. California.

October 13, 2004.

COPYRIGHT MATERIAL OMITTED

Andrea T. Porter, Foley & Lardner LLP, San Francisco, CA, for Plaintiff.

Richard A. Rogan, Jeffer, Mangels, Butler and Marmaro, Stephen L. Johnson, Office of United States Trustee, San Francisco, CA, for Defendants.

OPINION

MARILYN MORGAN, Bankruptcy Judge.

INTRODUCTION

In this adversary proceeding, Uecker & Associates, Inc., the debtor's plan administrator, asserts its avoidance powers to recover over one million dollars in pre-petition payments that the American Basketball League made to reacquire its stock. The United States received the bulk of these payments in connection with ongoing forfeiture proceedings. The government requests summary judgment in its favor because the estate's interest in the forfeited funds cannot be pursued outside of the already concluded forfeiture proceedings.

For the reasons set forth below, the United States' motion for summary judgment is granted.

P ROCEDURE ON SUMMARY Judgment

Summary judgment obviates the need for trial where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). To determine whether any genuine issue of fact exists, the court must pierce the pleadings and assess the proof as presented in depositions, answers to interrogatories, admissions and declarations that are part of the record. Fed. R.Civ.P. 56, Notes of Advisory Committee on Rules. The party seeking summary judgment bears the initial burden of proving there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). In response, the non-moving party cannot rest on bare pleadings alone but must use the same evidentiary tools to designate specific material facts showing that there is a genuine issue for trial. Id. at 324, 106 S.Ct. at 2553. Although a bare contention that an issue of fact exists is insufficient to create a factual dispute, the non-moving party's evidence is to be believed and all reasonable inferences from the facts must be viewed in that party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986).

B ACKGROUND

I. Facts

The American Basketball League was a women's professional basketball league founded in 1995. During the league's first years, an investor named Bobby Johnson paid $1.5 million to purchase shares of ABL Series A-l preferred stock. Over time, Johnson transferred all of his shares to L.G. Hunt & Associates, Inc., a corporation owned and controlled by Larry G. Hunt (collectively "Hunt"), without obtaining the ABL's approval of the transfers.

In the fall of 1996, the United States began investigating Johnson and Hunt for Medicaid fraud. The ABL learned of the investigation in early November when it received a subpoena to search the ABL's offices for evidence of Johnson and Hunt's criminal activity. The government informed the ABL that the stock originally issued to Johnson but transferred to Hunt might be subject to forfeiture as proceeds of unlawful activity. In light of both the government's criminal investigation and the unauthorized transfer of stock from Johnson to Hunt, the ABL decided to take steps to reacquire its stock from Hunt. In June 1997, it filed a state court action against Johnson and Hunt to resolve the dispute over ownership of the stock.

On September 12, 1997, the United States filed a civil forfeiture action in the United States District Court for the Northern District of Georgia that named Hunt's ABL stock as a defendant, along with various other assets. The government alleged that the ABL stock was forfeitable because either Johnson or Hunt acquired the stock using funds wrongfully obtained from the Medicaid system. Within a week, the United States also commenced a parallel criminal proceeding against Hunt and Johnson. The criminal indictment alleged that Hunt and Johnson had engaged in Medicaid fraud, money laundering and mail fraud and also requested forfeiture of Hunt's assets, including the ABL stock.

With the initiation of the forfeiture actions, the ABL and some of its other investors became increasingly concerned that Johnson and Hunt's continued involvement in the ABL would negatively affect its ability to attract new investors. They were also troubled by the possibility that Hunt's ABL stock, which the ABL had been trying to reacquire, would pass to the government and ultimately be sold at a public auction. Both to resolve the claims of stock ownership at issue in the state court litigation and to avoid the potential adverse consequences of a public auction, the ABL negotiated and entered into a Stock Repurchase and Settlement Agreement dated September 18, 1997 with Johnson and Hunt.

Under the settlement agreement, the ABL and one of its existing investors agreed to repurchase all of the ABL stock held by Hunt for $3.5 million. The purchasers paid $700,000 cash at closing. However, only $100,000 was paid directly to Hunt. The remaining $600,000 was paid according to written instructions presented by Hunt. In addition to the cash payment, the ABL executed two promissory notes in favor of Hunt, or its assigns. The first note was in the amount of $1.5 million. It required the ABL to make monthly installment payments of $100,000, of which $10,000 would be paid directly to Hunt with the remaining $90,000 to be paid as specified in an instruction letter signed jointly by Hunt and the United States.

Because Hunt's ABL stock, as a defendant in the forfeiture actions, was in the possession of the United States Marshal Service, the parties could not effectuate the stock sale without the government's consent. To obtain the necessary consent, on December 12, 1997, Hunt entered into a second agreement with the United States, entitled Stipulation for Sale of Stock. The stipulation provided that the United States consented to the sale but, in exchange for the stock, it would receive $600,000 of the initial cash payment and $90,000 of each installment paid under the first note. The stipulation further stated that It is in the best interests of all concerned to seek approval of the Court to sell the subject ABL stock in accordance with the above-mentioned Stock Purchase and Sale Agreement and to accept the proceeds of the sale as a substitute res in the civil forfeiture action and to acknowledge that the sales proceeds ... are subject to forfeiture to the same degree and extent as the ABL stock that was listed as a defendant in Civil Action No. l:97-Cv-2682-JTC and as a forfeitable asset in Criminal Indictment No. l:97-Cr-426.

On February 17,1998, the district court, as part of the civil forfeiture proceeding, entered an order authorizing the sale of the stock pursuant to the parties' agreements. The order approved the sale and declared the proceeds from the sale to be "the substitute res for the defendant stock."

Following court approval, the sale transaction between the ABL and Hunt closed. Between March 3, 1998 and September 14, 1998, the ABL made payments pursuant to the settlement agreement as modified by the Stipulation for Sale of Stock and regained title to its stock. The United States received a total of $1,230,000 from the ABL and deposited the funds into a "seized asset account" pending further order of the district court. Thereafter, on December 28, 1998, Hunt pled guilty to the crimes alleged in the indictment against him. Pursuant to the negotiated plea agreement, he consented to the forfeiture of his assets, specifically including the proceeds of the ABL stock sale.

Three days later, on December 31, 1998, the ABL filed a chapter 11 petition, having succumbed to operational, competitive and financial difficulties. In February 1999, the ABL retained Uecker & Associates, Inc. to act as liquidating agent, and Uecker began to work investigating and disposing of the ABL's assets.

On March 22, 1999, the district court entered a Consent Decree of Forfeiture based on Hunt's guilty plea in the criminal case against him. The consent decree directed the United States Marshal to retain custody of the seized assets, including the proceeds from the sale of the ABL stock, and to publish notice as required by 21 U.S.C. § 853 to advise third parties of their right to file claims of any alleged interest in the assets to be forfeited and of the statutory deadline for filing any such claim. The required three week publication process began on April 8,1999.

On the day before the publication process began, the ABL, as debtor in possession, filed an application to approve the retention of Uecker as liquidating agent. The application identifies an avoidance action against the United States as one of the ABL's principal assets. In a June 29, 1999 status report, Uecker noted that it had received documents concerning the potential preference claim against the United States but indicated that it planned to wait to pursue the claim within the structure of a plan of reorganization. Neither the ABL nor Uecker ever filed or attempted to file a third party claim of interest in the proceeds from the sale of the ABL stock in the forfeiture proceedings before the district court.

Almost a year later, the district court concluded the criminal forfeiture proceedings by entering a Final Order of Forfeiture on March 10, 2000. The Final Order acknowledges that two persons filed third party claims to the seized property and that the United States and the third party claimants had resolved their competing interests. Pursuant to the terms of the Final Order, the...