In re Intern. Resorts, Inc.
| Decision Date | 19 January 1984 |
| Docket Number | Civ. A. No. 78-A-0911-E. |
| Parties | In re INTERNATIONAL RESORTS, INC., Bankrupt. CLEAR CREEK, INC., Plaintiff, v. ROYAL AMERICAN CORPORATION, Defendant. |
| Court | U.S. District Court — Northern District of Alabama |
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Edward W. Harwell, Anniston, Ala., Trustee.
Charles Cleveland, Birmingham, Ala., for Clear Creek, Inc.
John C. Anderson, Baton Rouge, La., for Royal American Corp.
GEORGE S. WRIGHT, Special Master.
This is a suit to avoid an alleged fraudulent transfer pursuant to § 70(e) of the Bankruptcy Act of 1898 formerly codified as 11 U.S.C. § 110(e).
On December 16, 1977, an involuntary petition in bankruptcy was filed against International Resorts, Inc. (hereafter IRI), an Alabama corporation. IRI was adjudicated a bankrupt on January 24, 1978. Ed Harwell was appointed trustee of the bankrupt estate on February 28, 1978.
On or about April 19, 1978, the trustee filed two suits: (1) a complaint against Royal American Corporation (hereafter RAC) seeking the avoidance, pursuant to § 70(e), of an alleged fraudulent conveyance from IRI to RAC of 50 lots located in Point Aquarius Subdivision, Talladega County, Alabama; and (2) a similar § 70(e) complaint against the Life Insurance Company of America (hereafter LICA) seeking to set aside as fraudulent IRI's conveyance of other property in the Point Aquarius Subdivision.
On August 14, 1978, suit # 1 against RAC was transferred to the United States District Court for the Northern District of Alabama, pursuant to Bankruptcy Rules of Procedure, Rule 915(b) (1973), based on RAC's objection to the plenary jurisdiction of the Bankruptcy Court.
On October 22, 1981, United States Bankruptcy Judge Chandler Watson entered an order entitled "Order Confirming Compromise of the Controversy." Pursuant to the compromise, the trustee and the State Court Receiver for LICA settled all litigation between themselves. The compromise involved the sale by the trustee to Clear Creek, Inc. (hereafter Clear Creek) the real property which was the subject of the trustee's suit # (2) against LICA with an allocation of $1,150,000 for this property, plus the 50 lots at Point Aquarius and all other right, title and interest in the property, both real and personal, which was the subject of the trustee's suit # (1) against RAC with an allocation of $250,000 for such property. The $250,000 purchase price included any right and interest the trustee had in the real property that was the subject of the action between the trustee and the defendant, RAC.
On March 8, 1982, the District Court granted the motion of Clear Creek to intervene and be substituted as the real party in interest to the claims of the plaintiff-trustee in this action.
On December 15, 1982, the defendant, RAC, filed a motion for summary judgment based upon two primary grounds: (1) the trustee's inability to sell or assign the § 70(e) action to Clear Creek; and (2) the breach by John Carner, principal stockholder of Clear Creek, of a partnership fiduciary duty owed to RAC.
On March 7, 1983, the District Court entered a memorandum opinion and order denying the defendant's motion for summary judgment and holding that the trustee could sell or assign his rights in a pending § 70(e)(1) action. The court also denied the plaintiff's summary judgment motion. This case was set for trial on June 20, 1983.
On May 24, 1983, the District Court appointed pursuant to F.R.Civ.P., Rule 53, George S. Wright, United States Bankruptcy Judge for the Northern District of Alabama, as special master in this case.
A pretrial conference was held on May 18, 1983, and a second pretrial conference on June 15, 1983. Trial began on June 20, 1983, was intermittently recessed and resumed, ending on August 22, 1983. Based on the evidence presented at that trial, the master makes the following findings of fact and conclusions of law.
RAC is a small publicly-held corporation with its principal place of business in Baton Rouge, Louisiana. In the early 1970's RAC invested in a group of affiliated corporations in Alabama by transferring its wholly-owned insurance company, Royal American Life Insurance Company, to the Alabama companies in exchange for controlling stock in the Alabama parent corporation, Pacific American Corporation (hereafter PAC). PAC owned the controlling stock interest in Life Insurance Company of America (LICA), which owned a controlling stock interest in Investors Corporation of America (hereafter ICA), which in turn owned a controlling stock interest in International Resorts, Inc. (IRI), the bankrupt. In addition, IRI owned the controlling stock in Point Aquarius Country Club, Inc. Thus, RAC owned the controlling interest in PAC, the parent corporation which controlled these affiliated Alabama corporations, including IRI. IRI owned a country club and development resort located in Talladega County, Alabama known as "Point Aquarius." Ultimately, IRI became bankrupt, and this litigation arises out of various events leading to the bankruptcy.
PAC and all of the Alabama subsidiaries were operated and controlled by George Pihakis. RAC determined that Pihakis had mismanaged these corporations and requested and received the resignation of Pihakis over the Alabama corporations sometime in December 1975 or January 1976.
IRI's primary business was to sell residential lots and manage the Point Aquarius resort complex. There were various road, water, sewage, lot title and survey defects and other problems existing at the resort which greatly diminished the market for lot sales. The situation was serious enough to involve inquiry by the Department of Housing and Urban Development. Consequently, during this period, i.e., late December 1975 to January 1976, IRI was suffering through a serious cash-flow problem among other financial woes. As RAC's counsel described, "the company was in trouble." RAC had substantial previous real estate development experience and felt that it could better manage the affairs of IRI and the Point Aquarius project.
In January of 1976, a meeting of the boards of directors of the Alabama corporations was held and RAC was given the right to manage ICA, IRI and Point Aquarius Country Club pursuant to a management contract (See Def.Ex. # 4). This management contract provided, inter alia:
The evidence indicates that after the execution of the management contract, RAC controlled and directed the business policy of IRI. Several of RAC's employees, officers and directors were placed in positions of control over IRI. Robert Holloway, a member of the Board of Directors of RAC, became acting president of IRI. Rolfe McCollister, Chairman of the Board of RAC, became Chairman of the Board of IRI. Additionally, Sam Gallo, president of RAC, assumed a substantial role in supervising the management of IRI and the resort development. RAC directed Karl Rodriguez and Lee Fortier to move from Louisiana to the Point Aquarius Project in Talladega, Alabama. Rodriguez assumed the job of president of LICA and Fortier assumed the role of chief operating officer of IRI, a position traditionally referred to as "Land Operations Manager" by RAC. Rodriguez and Fortier were to supervise rehabilitation of the Point Aquarius project and attempt to generate land sales. They primarily handled the large amount of complaints which had arisen concerning the resort's water and sewage systems, road system, residential lot title defects and other problems.
Evidence was presented at trial tending to show that in early 1976, RAC, in connection with its assumption of management control, advanced substantial amounts of funds in working capital to IRI and also paid some of IRI's outstanding debts (See Def.Ex. # 1).
During this same time period, i.e., early 1976, a civil suit against IRI was pending in state circuit court in Talladega, Alabama. This suit was brought by Mr. & Mrs. Wesley Lambert, Jr., purchasers of a residential lot from IRI. The suit alleged fraud and breach of contract by IRI. The jury in the state court suit returned a verdict against the defendant, IRI, late Friday afternoon, April 16, 1976, in the amount of One hundred thousand ($100,000) dollars; however, the judgment was later reduced to Fifty thousand ($50,000) dollars in a remittitur required by the trial court. The judgment was subsequently affirmed on appeal.1 Lee Fortier was present at the civil trial representing IRI. After the verdict was returned, Fortier telephoned Karl Rodriguez and informed him of the judgment. Rodriguez discussed the judgment with McCollister and Gallo. Later that afternoon or early Saturday morning, April 17, 1976, Rodriguez telephoned Fortier and instructed him to prepare a deed and transfer approximately 50 Point Aquarius lots from IRI to RAC. The RAC management group provided Fortier with the description of the specific lots to be transferred. The deed (Pl.Ex. # 9) was dated April 19, 1976, and signed for IRI by Lee Fortier as Land Operations Manager. The deed was filed for record in the Office of the Probate Judge, Talladega, Alabama, on that same day, Monday, April 19, 1976, at 9:00 a.m. The Lambert's certificate of judgment (see Pl.Ex. #7) against IRI was submitted for recordation in the Office of the Probate Judge, Talladega, Alabama on that same day,...
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