In re Commercial Loan Corp., Bankruptcy No. 04 B 18946.
| Citation | 396 B.R. 730 |
| Decision Date | 19 November 2008 |
| Docket Number | Bankruptcy No. 04 B 18946.,Adversary No. 05 A 2538. |
| Parties | In re COMMERCIAL LOAN CORPORATION, Debtor. CLC Creditors' Grantor Trust, Plaintiff, v. Howard Savings Bank; Lincoln State Bank; HSB Development Corporation; Howard Liquidation Corporation; and LSB Financial Services, Inc., Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
David K. Welch, Arthur G. Simon, Jeffrey C. Dan, Crane, Heyman, Simon, Welch & Clar, Chicago, IL, for plaintiff CLC Creditors' Grantor Trust.
Thomas Wilson Waters, Kemp & Grzelakowski, Ltd., Oak Brook, IL; Michael L. Molinaro, Blair R. Zanzig, Loeb & Loeb LLP, Chicago, IL, for defendants.
Before the court for ruling in this adversary proceeding is the amended motion of defendants Howard Savings Bank ("Howard"), Lincoln State Bank ("Lincoln"), HSB Development Corp. ("HSB"), and LSB Financial Services, Inc. ("LSB") (collectively "the banks") for partial summary judgment on seven counts of the amended adversary complaint of plaintiff CLC Creditors' Grantor Trust (the "Trust").1 The amended complaint seeks to recover as fraudulent certain transfers that debtor Commercial Loan Corporation ("CLC") made to the banks. On six of the counts, the banks assume the voidability of the transfers but contend that the transfers cannot be recovered from them under either section 550(a)(1) or (2) of the Bankruptcy Code. On the remaining count, the banks challenge the merits of the fraudulent transfer claim itself.
During briefing on the summary judgment motion, the banks filed motions in limine with respect to two affidavits the Trust had submitted in opposition, the affidavits of Richard Fogel ("Fogel") and Patrick O'Malley ("O'Malley"). The motions in limine (which have been separately briefed) will be treated as motions to strike the affidavits. See Federal Deposit Ins. Corp. v. Meyer, 781 F.2d 1260, 1267 (7th Cir.1986) ().
For the reasons that follow, the banks' motion to strike the Fogel affidavit will be granted, the banks' motion to strike the O'Malley affidavit will be denied, and the banks' motion for partial summary judgment will be granted in part and denied in part.
The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (H).
The Trust and the banks have filed statements of facts and responses pursuant to Local Rules 7056-1 and 7056-2. (See Adv. Docket Nos. 80, 93, 94, 110). The following material facts are not in dispute.
CLC was incorporated in Illinois in November 1999. (P. 7056-2 Resp. ¶ 12). Its principal business was to originate and service commercial loans secured by real and personal property. (D. 7056-2 Resp. ¶ 23). Peter M. Hueser ("Hueser") was one of CLC's original shareholders and also served as its president and chairman. (P. 7056-2 Resp. ¶¶ 13-14).
CLC funded some of the loans it made in its own right but funded the vast majority by selling participation interests to various banks. (D. 7056-2 Resp. ¶ 24). Howard and Lincoln purchased participation interests in some of these CLC loans. Howard and Lincoln were also among CLC's original shareholders, along with two other banks. (Id. at ¶ 25; P. 7056-2 Resp. ¶ 13). Each of the shareholder banks had a representative on CLC's board of directors.2 (P. 7056-2 Resp. ¶ 13).
Around August 2000, Howard transferred all of its CLC stock to HSB, a subsidiary of Howard.3 (Id. at ¶ 15). At nearly the same time, Lincoln transferred all of its CLC stock to LSB, a corporation wholly-owned by Lincoln. (Id. at ¶ 16).
At some point, Hueser caused CLC to extend an $850,000 unsecured line of credit to MFC, LLC ("MFC"), a non-existent entity that Hueser fabricated. (Id. at ¶¶ 27-28). CLC made advances on this line of credit of $225,000 on or about December 27, 2001, and $250,000 on or about November 6, 2002. (D. 7056-2 Resp. ¶¶ 33, 39). The funds were not directed to MFC—not surprisingly, since there was no such company—but were instead deposited in the account of WK Financial ("WK") at Hinsdale Bank & Trust. (P. 7056-2 Resp. ¶ 30).
WK was a corporation Hueser created in the late 1990s to fund a bank acquisition. (P. 7056-2 Resp. ¶ 31; D. 7056-2 Resp. ¶ 43). Hueser served as both an officer and a shareholder of WK. (P. 7056-2 Resp. ¶ 31). The advances on the MFC loan were commingled with WK's other funds in its account at Hinsdale Bank & Trust. (Id. at ¶ 32). Neither Howard nor Lincoln was a signatory on the WK account. (Id. at ¶ 33).
On November 29, 2001, LSB and Hueser entered into a stock purchase agreement under which LSB sold its 2,000 shares of CLC stock to Hueser for $225,000. (Id. at ¶ 34). On December 28, 2001, Lincoln (not LSB) received payment for the stock in the form of a wire transfer from Hinsdale Bank & Trust, with WK listed as the originator and Hueser listed as the beneficiary. (Id. at ¶ 36; D. 7056-2 Resp. ¶ 34). Nothing in the confirmation indicated that the wired funds originated from CLC. (P. 7056-2 Resp. ¶ 37). Lincoln's internal records of the wire transfer, however, reflected receipt of $225,000 "[f]rom Commercial Loan Corporation." (D. 7056-2 Resp. ¶ 36). Lincoln then transferred the funds to LSB's money market account at Lincoln. (D. 7056-2 Resp. ¶ 37). The deposit ticket read: "Wire Transfer From Commercial Loan Corporation."4 (Id.).
A few months later, on February 12, 2002, CLC held a board meeting where Hueser presented an independent auditors' report on CLC's financial affairs as of December 31, 2001. (P. 7056-2 Resp. at ¶¶ 20-21). According to the financial statements, CLC had net income for 2001 of $260,593. (Id. at ¶ 22). The board members discussed the payment of a dividend and eventually voted to have CLC pay a dividend of $0.06 per share, or a total of $130,000. (Id. at ¶¶ 23-24; D. 7056-2 Resp. ¶ 53). HSB received a dividend of $30,748. (P. 7056-2 Resp. ¶ 25).
On November 8, 2002, HSB and Hueser entered into a stock purchase agreement under which HSB sold its 500,000 shares of CLC stock to Hueser for $250,000. (Id. at ¶ 38). Hueser had WK pay HSB the $250,000 in the form of a cashier's check drawn on Hinsdale Bank & Trust. (Id. at ¶ 39). The check listed "CLC Stock Purchase" as the remitter rather than Hueser. (Id.). By early 2003, Hueser had purchased all the outstanding shares of CLC stock from the original shareholders. (D. 7056-2 Resp. ¶ 4).
On May 13, 2004, CLC filed this chapter 11 bankruptcy case. (Bankr.Docket No. 1).5 Within two weeks, Fogel was appointed chapter 11 trustee. (Id. at No. 63). Fogel hired O'Malley as his financial advisor for the purpose of analyzing CLC's assets, liabilities, financial affairs, and business operations. (Id. at Nos. 100, 110, 123). On December 15, 2004, the court confirmed the Creditors' Second Amended Plan of Liquidation, which provided for the creation of the Trust. (Id. at No. 396). Under the Plan, Fogel assigned all of CLC's assets to the Trust, including the claims asserted here. (P. 7056-2 Resp. at ¶ 5).
The following year, the Trust commenced this adversary proceeding to avoid certain allegedly fraudulent transfers from CLC to the banks (Adv. Docket No. 1), filing what became a fifteen-count amended complaint (id. at No. 20). Six counts of the amended complaint (Counts I, II, III, X, XI, and XII) were later voluntarily dismissed. (Id. at Nos. 73, 74). Howard, HSB, Lincoln, and LSB have now moved for summary judgment on Counts VII, VIII, IX, XIII, XIV, and XV, the counts alleging that the payments to HSB and LSB for the CLC stock were fraudulent. Howard and HSB have also moved for summary judgment on Count IV, one of the counts alleging that CLC's payment of the February 2002 dividend was fraudulent.
The banks' motion for partial summary judgment will be granted on the claims in Counts VII, VIII, and IX against Howard and HSB concerning the stock purchase payments, but the motion will be denied on the stock purchase claims against Lincoln and LSB in Counts XIII, XIV, and XV. The banks' motion will also be granted on the claim in Count IV against Howard and HSB concerning the 2002 dividend payment.
Before considering the claims on the merits, it is necessary to address the banks' motions to strike the Fogel and O'Malley affidavits. The banks object to the Fogel affidavit on the grounds (1) that the affidavit is offered as expert testimony (a point the Trust disputes), and Fogel lacks the qualifications to provide the testimony in his affidavit; and (2) that even if Fogel is qualified to serve as an expert, he was not timely disclosed as one. The banks object to the O'Malley affidavit (which the Trust acknowledges is offered as expert testimony) on the ground that it contains inadmissible legal conclusions.
The motion to strike Fogel's affidavit will be granted because Fogel was not disclosed as an expert witness.6
Although the Trust contends otherwise, Fogel's affidavit contains expert testimony. The Federal Rules of Evidence divide opinion testimony into lay and expert testimony. Expert testimony is founded on "scientific, technical, or other specialized knowledge," Fed.R.Evid. 702; lay testimony consists of opinions or inferences "rationally based on the perception of the witness," Fed.R.Evid. 701. Put more concretely, lay opinions are based on "a process of reasoning familiar in everyday life," whereas expert opinions result from "the process of reasoning which can be mastered only by specialists in the field." Fed.R.Evid. 701 advisory committee note (2000) (internal quotations omitted)...
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