In re Carr & Porter, LLC

• Decision Date: 17 March 2009
• Docket Number: Adversary No. 08-07051-SCS.,Bankruptcy No. 07-70238-SCS.
• Citation: 416 B.R. 239
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re CARR & PORTER, LLC, Debtor. Tom C. Smith, Jr., Chapter 7 Trustee, Plaintiff, v. J. Ridgely Porter, III, Defendant.

416 B.R. 239

In re CARR & PORTER, LLC, Debtor Tom C. Smith, Jr., Chapter 7 Trustee, Plaintiff, v. J. Ridgely Porter, III, Defendant.

Bankruptcy No. 07-70238-SCS.

Adversary No. 08-07051-SCS.

United States Bankruptcy Court, E.D. Virginia, Norfolk Division.

March 17, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert V. Roussos, Roussos, Lassiter, Glanzer & Marcus, PLC, Norfolk, VA, for Plaintiff.

Laura C. Pyle, Willcox & Savage, P.C., Norfolk, VA, for Defendant.

Richard E. Biemiller, Wolcott Rivers Gates, Virginia Beach, VA, for SunTrust Bank.

MEMORANDUM OPINION

STEPHEN C. ST. JOHN, Bankruptcy Judge.

This matter comes before the Court upon the Motion for Summary Judgment filed by the Defendant, J. Ridgely Porter, III ("Porter"), and upon the Motion to Amend the Complaint filed by the Plaintiff, Tom C. Smith, Jr., Chapter 7 Trustee ("Trustee") for the Debtor, Carr & Porter, LLC ("Debtor"). A hearing was conducted on each matter, on November 2, 2008, and December 11, 2008, respectively, and the matters were taken under advisement. Because the Motion for Summary Judgment and the Motion to Amend, as explained herein, are closely interrelated, this Memorandum Opinion will address both pleadings. This constitutes the conclusions of law of this Court respecting the Motion for Summary Judgment of Porter and the Motion to Amend of the Trustee.

The Complaint of the Trustee

The Trustee filed his Complaint on May 7, 2008 (hereinafter "Complaint"). According to the Complaint's preamble, the Trustee requests that this Court "set aside the transfer of assets to Porter from the Debtor and to compel him to turnover those assets to the Estate" pursuant "to 11 U.S.C. §§ 547(b), 548(A), 548(B)(i) and (ii)(I) and 11 U.S.C. § 544 and Va.Code 55-81."

The factual allegations of the Complaint are as follows. Prior to commencement of this Chapter 7 case, the Debtor was a Virginia professional limited liability company engaged in the practice of law. Complaint ¶ 1. Until March 31, 2005, Porter, a licensed Virginia attorney, was the sole owner and managing member of the Debtor. Id. ¶ 2. On February 14, 2005, Porter entered into an agreement, a copy of which is appended to the Complaint, with the Debtor, Kelly Daniels-Sheeran, and Matthew D. Pethyridge (hereinafter "February 14 Agreement"). Id. ¶ 3. The February 14 Agreement provided as follows:

a. Porter was to withdraw from the Debtor as an "equity partner" as of March 31, 2005;

b. Porter was to continue to be employed by the Debtor, with his compensation to be determined by a formula based on his collected fees;

c. Porter's "equity interest" in the Debtor was to be purchased from him by the Debtor for the sum of $1,000,000.00, which amount was allocated to various categories, including "imputed interest" of $87,690.25;

d. The purchase price for Porter's "equity" was to be paid over a period of five years, in 119 installments of $8,333.33, plus a final installment of $8,333.73, pursuant to a promissory note ...; and

e. Sheeran and Pethybridge agreed to guarantee the payment to Porter ....

Complaint ¶ 4. Pursuant to the February 14 Agreement, the Debtor began making semi-monthly payments of $8,333.33 to Porter on April 15, 2005, and continued to do so until July 15, 2006.¹ The Trustee argues that beginning March 31, 2005, and at all times thereafter through and including the Petition Date (February 8, 2007), the Debtor was insolvent, or was rendered insolvent by the February 14 Agreement. Id. ¶ 6.

Count One of the Complaint seeks a recovery against Porter pursuant to § 547(b) of the Bankruptcy Code, alleging that a transfer of $80,499.97 was made by the Debtor to Porter within one year of the filing of the bankruptcy petition by the Debtor.² Count Two of the Complaint alleges that transfers of $255,500.00 by the Debtor to Porter are voidable as voluntary conveyances which were not for consideration deemed valuable at law, by an insolvent transferor or by a transferor who was thereby rendered insolvent by the transfers.³

Porter answered the Complaint and affirmatively pled that "at the time of the negotiation and transfer of his equity interest in the Debtor, the Debtor was solvent and the value paid for the equity interest was a fair value obtained in arms length negotiations with sophisticated purchasers and is fully justified by the financial performance of the Debtor up to the time of conveyance." Answer ¶ 17. Porter further denied he was an insider, that the transfer was voidable, and that any such transfers were not for consideration deemed valuable at law. Id. ¶¶ 19-21. An initial pretrial conference was conducted by the Court on July 10, 2008. A trial date of November 18, 2008, was established.

On October 10, 2008, Porter filed his Motion for Summary Judgment (hereinafter "Summary Judgment Motion") and Memorandum in Support of the Motion for Summary Judgment (hereinafter "Porter Memorandum"), arguing that summary judgment is appropriate to all issues in the case. Summary Judgment Motion at 1. Porter argues that, in order to find liability under 11 U.S.C. § 547(b), relied upon by the Trustee for Count One, it is required that Porter be an insider at the time of the transfer, which he was not. Porter Memorandum at 4-5. Porter next argues that, under Virginia Code § 55-81, relied upon by the Trustee for Count Two, there must be no consideration received by the Debtor and that the Debtor received valuable, even if not equivalent, consideration as a result of the February 14 Agreement. Porter Memorandum at 6-8.

Appended to the Memorandum in Support is an affidavit from Porter (hereinafter "Porter Affidavit") and an affidavit from Christine G. Tribble ("Tribble"), the former administrator of the Debtor (hereinafter "Tribble Affidavit"). The Porter Affidavit provides that Porter entered into the February 14 Agreement and, pursuant to its terms, relinquished all executive authority to the purchasers and ceased to be an officer, director, or a person in control of the Debtor as of March 31, 2005. Porter Affidavit ¶¶ 2-3. Further, the Porter Affidavit states that as of the date of the sale, all the Debtor's outstanding indebtedness had been paid, the Debtor had no debt of any kind due to anyone, and the Debtor retained a number of tangible and intangible assets. Id. ¶¶ 5, 9-13, 15, 16.⁴ The Tribble Affidavit provides that, pursuant to an employment agreement executed between Tribble and the Debtor, Tribble continued as administrator of the Debtor after the sale of Porter's interest. Tribble Affidavit ¶ 3. The Tribble Affidavit further states the Debtor had no debt at the time of sale and that Porter did not possess, nor did he attempt to exercise, any management authority other than to offer advice. Id. ¶¶ 4, 9, 11.

The Trustee responded to the Summary Judgment Motion on October 29, 2008, and presented two arguments as to why Porter was not entitled to summary judgment. Plaintiff's Answer to Motion for Summary Judgment (hereinafter "Trustee Response").

1. ... [O]n the issue [of] whether the transaction should be set aside as a voluntary conveyance[, the] Debtor maintains that the transfer of March 31, 2005 of the Defendant's interest in Carr & Porter, LLC, Matthew Pethybridge and Kelly Daniels-Sheeran for which the Debtor became obligated on was not made for consideration given to the Debtor. The consideration was given to Pethybridge and Sheeran according to paragraph 2 of the Declaration made by the Defendant Porter.

2. The Trustee denies the allegations that the defendant J. Ridgely Porter Jr. was not an insider and states that under applicable case law the actions of Porter prior and subsequent to the sale establishes his insider status. These actions include dictating the terms of the sale, arranging the loan on behalf of the law firm, continuing to work as an attorney for the firm, being the Responsible Attorney and point of contact for the firms [sic] major client, arranging a new loan for the firm with Suntrust when the firm was suffering financially, and generally being involved in the ongoing financial affairs of the law firm.

Trustee Response at 1-2. In addition to the Trustee Response, the Trustee submitted Plaintiff's Memorandum in Opposition to Motion for Summary Judgment (hereinafter "Trustee Memorandum") and an affidavit from Kelly Daniels-Sheeran, one of the two purchasers of Porter's interest in the Debtor (hereinafter "Sheeran Affidavit"). The Sheeran Affidavit provides, in pertinent part:

3. That the loan with SunTrust Bank was arranged by Porter as well as the subsequent line increase in March 2006.

4. That Porter met on a regular basis with the firm's bookkeeper, Christine G. Tribble, and gave her directions regarding the firm's finances.

5. That Porter continued to do this from the time of the purchase of the membership interest until July 2006 when payments ceased to Porter.

6. That Porter remained the responsible attorney and point of contact for all dealings with the Office of the Attorney General on cases involving the Virginia Department of Transportation ("VDOT") until April 2006.

7. That the VDOT work was the primary source of income for Carr & Porter, LLC.

8. That on or about May 2006, Porter contacted SunTrust Bank and requested that SunTrust Bank loan Carr & Porter, LLC funds to buy out his note.

9. That after the sale of the interest in the LLC, Porter continued on as an attorney for which he was paid with Carr & Porter maintaining an office, sharing staff, and assisting with financial matters concerning the firm.

10. That the firm Carr & Porter, LLC received nothing new from Porter after the sale other than the note obligation to Porter.

Sheeran Affidavit ¶¶ 3-10. In the Trustee Memorandum, the Trustee argues that "[n]o value was given to the [the Debtor] and therefore the transfer [to Porter] is void for lack of consideration" pursuant to Virginia Code § 55-81. Trustee Memorandum at 4. The Trustee also argues that...