IN RE CF FOODS, LP, Bankruptcy No. 99-15996 KJC. Adversary No. 00-451.

• Decision Date: 03 August 2001
• Docket Number: Bankruptcy No. 99-15996 KJC. Adversary No. 00-451.
• Parties: In re C.F. FOODS, L.P., Debtor. Arthur Liebersohn, Trustee, Plaintiff, v. Internal Revenue Service, et al., Defendants.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

265 B.R. 71 (2001)

In re C.F. FOODS, L.P., Debtor Arthur Liebersohn, Trustee, Plaintiff, v. Internal Revenue Service, et al., Defendants.

Bankruptcy No. 99-15996 KJC. Adversary No. 00-451.

United States Bankruptcy Court, E.D. Pennsylvania.

August 3, 2001.

COPYRIGHT MATERIAL OMITTED

Michael H. Kaliner, Jackson, Cook, Caracappa & Bloom, Fairless Hills, PA, for debtor.

Paul B. Maschmeyer, Ciardi, Maschmeyer & Karalis, PC, Philadelphia, PA, for plaintiff/trustee.

Christopher R. Zaetta, U.S. Department of Justice, Washington, DC, for defendant/Internal Revenue Service.

MEMORANDUM OPINION

KEVIN J. CAREY, Bankruptcy Judge.

An involuntary chapter 7 bankruptcy petition was filed against C.F. Foods, L.P. on May 6, 1999.¹ An order for relief was entered on July 1, 1999 and the chapter 7 trustee was appointed as interim trustee on July 15, 1999. On June 20, 2000, the trustee filed an adversary proceeding against the Internal Revenue Service ("IRS") to recover pre-petition payments made by the debtor to the IRS on the theory that the payments were fraudulent transfers. The trustee's complaint was amended twice to add Edward Stillman, Patrick Stillman, Karen Stillman and First Union National Bank (the "Bank") as defendants. Presently before this Court are cross motions for summary judgment filed by the IRS and the trustee.² For the reasons which follow, both motions shall be denied.

BACKGROUND

The IRS has admitted the following facts as alleged in the trustee's Second Amended Complaint³:

1. On January 1, 1994, David Burry and Edward Stillman, formed a limited partnership in Chadds Ford, Pennsylvania known as C.F. Foods, L.P.

2. C.F. Foods was created for the stated purpose of engaging in the purchase, sale and distribution of wholesale candies from large candy manufacturers and wholesale distributors to local purchasers, such as supermarkets, candy stores, and other retailers.

3. David Burry was a general partner who managed and operated C.F. Foods.

4. Edward Stillman was an alleged limited partner and investor in C.F. Foods.

5. David Burry solicited investors in C.F. Foods by promising them that his expertise in the wholesale candy distribution business resulted in high profits for C.F. Foods and, as a result, C.F. Foods could provide returns of 18-30% to investors.

6. The returns paid to C.F. Foods\' early investors were paid for with the proceeds derived from investments made by later investors.

7. Over time, David Burry, Edward Stillman and others eventually attracted over $25 million in investments in C.F. Foods.

8. David Burry represented to investors, Edward Stillman, financial institutions and his accountant that he was very successful at purchasing very large quantities of candy from wholesalers and manufacturers at "close-out" prices and then reselling these large quantities in the marketplace for a significant mark-up.

9. C.F. Foods purportedly conducted two types of sales transactions.

10. The portion of the business dubbed by David Burry as "Sales One" was completely fictitious and fraudulent in nature.

11. David Burry was solely responsible for managing Sales One and no one at C.F. Foods other than David Burry had any personal involvement in this aspect of the business.

12. Sales One, essentially, involved the purchase of large quantities of "close out products" and subsequent re-sale to customers through direct shipment orders. In reality, no such transactions ever occurred.

13. The other portion of the business, known as "Sales Two," was the "legitimate" aspect of C.F. Foods with real employees, real inventory, and real sales deliveries.

14. In 1988, Sales Two reflected actual sales totaling less than $5 million, out of total reported sales of more than $140 million.

15. Using the invoices, shipping documents and related business records acquired from the small amount of real candy business conducted by C.F. Foods, David Burry systematically created phony "business records" by whiting out old information, typing in new information, and then photocopying the forged records so that it would be indistinguishable from a copy of authentic business records reflecting real transactions.

16. David Burry then logged hundreds and hundreds of fictitious transactions into the computerized general ledger system for C.F. Foods, which generated false balance sheets, income statements, and accounts receivable listings, among others.

17. Based upon the false information provided by David Burry, C.F. Foods reported the following total sales figures to investors and financial institutions:

                  Year   Sales Reported
                  1994    $  8,699,152
                  1995    $ 19,026,265
                  1996    $ 40,590,990
                  1997    $ 83,985,013
                  1998    $142,990,010
                  Total   $295,291,430
                

18. By David Burry\'s own admission, approximately 97% of these sales never actually occurred.

19. Based upon the fraudulent sales figures, David Burry caused C.F. Foods to make tax payments on behalf of its partners as follows:⁴

                COUNTS OF                          AMOUNT OF
                COMPLAINT              DATE       TAX PAYMENT    NATURE OF TAX PAYMENT
                -------------------------------------------------------------------------------
                I, II, III            04/15/96   $  306,496.00   IRS Tax Payment for Stillman
                -------------------------------------------------------------------------------
                IV, V, VI             06/01/96   $  100,000.00   IRS Tax Payment for Burry
                -------------------------------------------------------------------------------
                VII, VIII, IX         07/26/96   $   73,120.47   IRS Tax Payment for Burry
                -------------------------------------------------------------------------------
                X, XI, XII            10/08/96   $   61,727.72   IRS Tax Payment for Burry
                -------------------------------------------------------------------------------
                XIII, XIV, XV         04/15/97   $  464,222.00   IRS Tax Payment for Stillman
                -------------------------------------------------------------------------------
                XVI, XVII, XVIII      06/23/97   $  103,849.19   IRS Tax Payment for Burry
                -------------------------------------------------------------------------------
                XIX, XX, XXI          04/15/98   $  807,838.00   IRS Tax Payment for Burry
                -------------------------------------------------------------------------------
                XXII, XXIII, XXIV     04/15/98   $  888,019.00   IRS Tax Payment for Stillman
                -------------------------------------------------------------------------------
                XXV, XXVI, XXVII      11/30/98   $  384,987.00   IRS Tax Payment for Burry
                -------------------------------------------------------------------------------
                Total Payments to IRS:           $3,190,259.38
                

20. On September 20, 1999, a Guilty Plea Agreement was reached between the government and David Burry in which, among other things, David Burry pled guilty to an Information charging (1) money laundering, in violation of 18 U.S.C. § 1956; (2) wire fraud, in violation of 18 U.S.C. § 1343; (3) bank fraud, in violation of 18 U.S.C. § 1344; and (4) possession of firearms by a convicted felon, in violation of 18 U.S.C. § 922(g).

In his Second Amended Complaint, the trustee asserts the following:

30. Upon information and belief, in September, 1999, Edward Stillman directed Christopher M. Clair, the former accountant of the estate of C.F. Foods to file amended tax returns for the sole purpose of eliminating the fraudulent sales figures mentioned above, with the effect being that the partners would receive a K-1 from the Debtor which would allow them to obtain a substantial refund from the Internal Revenue Service based on the above-referenced payments.

31. The filing of said tax return was prepared and filed without the approval of the estate, was illegal because it was not signed by the Trustee who had already been appointed in this matter, and was never disclosed to the estate or the Trustee.

32. Upon information and belief, Edward Stillman and Karen Stillman, individually or as tenants by the entirety, have received a substantial refund, and have forwarded some, if not all of the funds, to either Patrick Stillman and/or First Union National Bank for the sole purpose of providing collateral security to First Union National Bank for a personal loan of Patrick Stillman.

In its Answer, the IRS denied the allegations in paragraphs 30, 31 and 32, except to admit that the IRS issued a refund to Edward Stillman in excess of $1.4 million on or about December 15, 1999.⁵

The IRS Motion for Partial Summary Judgment seeks judgment in favor of the IRS on the counts related to avoidance of payments made by the debtor for the benefit of Edward Stillman, because the IRS was but a "mere conduit" for transfers from the debtor to Edward Stillman. The Trustee's Cross-Motion for Summary Judgment seeks judgment in favor of the trustee for all of the payments to the IRS because the IRS admitted in its answer to the Amended Complaint that the payments are avoidable under an "actual fraud" theory of 12 Pa.C.S.A. § 5104(a)(1) of the Pennsylvania Uniform Fraudulent Transfer Act, applicable to this case by virtue of § 544 of the Bankruptcy Code.

LEGAL STANDARD

Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c), made applicable to this adversary proceeding by Fed. R. Bankr.P. 7056.

On motion for summary judgment, the moving party ". . . always bears the initial responsibility of informing the . . . court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). "When a properly supported motion for summary judgment is...