In re Lindell, Bankruptcy No. 04-41269.

• Decision Date: 29 September 2005
• Docket Number: Bankruptcy No. 04-41269.,Adversary No. 04-4353.
• Parties: In re Michael J. LINDELL and Karen A. Lindell a/s/f Twin Silver, Inc., Debtors. Dwight R.J. Lindquist, Trustee for the Chapter 7 Bankruptcy Estate of Michael J. Lindell and Karen A. Lindell, Plaintiff, v. JNG Corporation, Robert J. Weierke, and Twin Silver, Inc., Defendants.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota

334 B.R. 249

In re Michael J. LINDELL and Karen A. Lindell a/s/f Twin Silver, Inc., Debtors.

Dwight R.J. Lindquist, Trustee for the Chapter 7 Bankruptcy Estate of Michael J. Lindell and Karen A. Lindell, Plaintiff, v. JNG Corporation, Robert J. Weierke, and Twin Silver, Inc., Defendants.

Bankruptcy No. 04-41269.

Adversary No. 04-4353.

United States Bankruptcy Court, D. Minnesota.

September 29, 2005.

COPYRIGHT MATERIAL OMITTED

Michael C. Mjoen, Eden Prairie, MN, for Debtors.

MEMORANDUM OPINION AND ORDER

ROBERT J. KRESSEL, Bankruptcy Judge.

This proceeding came on for trial on August 15, 2005. Patrick B. Hennessy appeared for the plaintiff and William Nordstrom appeared for defendant JNG Corporation. This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and 1334, and Local Rule 1070-1. This is a core proceeding within the meaning of 28 U.S.C. § 157(b).

FACTUAL BACKGROUND

Twin Silver, Inc., a wholly owned corporation of Michael J. and Karen A. Lindell, owned and operated Schmitty's Tavern in Victoria, MN.¹ Twin Silver leased the real property and its improvements from the debtors.² In July 2003 the debtors and Twin Silver entered into an agreement to sell the business, the real property, and the building to Craig Glynn. Glynn later assigned his interest under the purchase agreement to Block One Hospitality, LLC. Under the agreement Block One paid $500,000.00 for the business, building and real property. The parties valued the equipment, good-will and a non-compete agreement at $174,000.00 and allocated $326,000.00 to the real property.

The purchase of the building and real property closed on July 30, 2003. Block One paid the debtors $50,000.00 in cash and an additional $180,000.00 financed by Victoria Street, LLC., secured by a security interest in the equipment and a first mortgage on the real property. The balance of the purchase was financed by two promissory notes, one in the amount of $123,400.00 payable to Karen Lindell and one in the amount of $146,600.00 payable to Twin Silver. According to the promissory notes to both Karen Lindell and Twin Silver, Block One was to pay $1,265.00 and $1,485.00 respectively to the note holders at the beginning of each month. The Twin Silver note was secured by a security agreement on the equipment and both notes were secured by a mortgage on the real property second to that held by Victoria Street, LLC. Both notes include interest at the rate of 8%.

At some time shortly after the debtors and Twin Silver sold the property and the business to Block One, the debtors closed down Twin Silver's only bank account and liquidated Twin Silver. All payments on the notes went directly to Karen Lindell or Karen and Michael Lindell.

In November 2003, the debtors paid Nathan Neff $2,500.00 to find a new business for the debtors to acquire, but no business was ever located. In December 2003, Michael Lindell agreed to sell the notes from the sale of Schmitty's to JNG Corporation which is wholly owned by Neff. The sale closed on December 13, 2003. Under the terms of the sale, JNG paid $50,000.00 to Carver County Abstract and Title Company which handled the closing. Karen Lindell executed an assignment of the second mortgage to JNG and received $48,955.00 after reductions for closing costs. Between December 13, 2004 and March 10, 2004, Michael Lindell lost all the money gambling. The debtors filed a case under Chapter 7 on March 10, 2004.

At the time of the sale of the notes to JNG, the unpaid balance owed on the notes totaled $263,398.10. The property securing the notes was worth $339,000.00. JNG held the notes for five months and received payments on the notes each month that totaled $4,533.40. JNG retained $2,750.00 and paid $1,783.40 to Victoria Street LLC. as payment on the first mortgage. JNG netted $13,750.00 from December 2003 through May 2004.

In early May 2004, JNG sold the notes for $71,389.00 and assigned the second mortgage to Robert J. Weierke. Weierke is an associate of Michael Lindell whom he has known as a patron of Schmitty's for many years. Weierke has also loaned Michael Lindell money at various times over a period of fifteen years. Neff testified that Michael Lindell coerced him into selling the notes to Weierke and that he believed the notes to be worth more than the sale price.,³ Weierke loaned Michael Lindell $20,000.00 on the day of the sale and an additional $10,000.00 two weeks later. Michael Lindell had made no payments on the loans from Weierke as of April 7, 2005.

The trustee initiated this adversary proceeding on December 16, 2004 seeking to avoid the transfer of the notes and the second mortgage from the debtors to JNG pursuant to 11 U.S.C. § 548 and to recover the equivalent value of the property under 11 U.S.C. § 550. The trustee settled his claims against Robert J. Weierke and filed a stipulation of dismissal on August 9, 2005. The terms of the settlement with Weierke are not part of the record.

DISCUSSION

The Corporate Entity

The trustee claims that the debtors operated Twin Silver, Inc. as an alter ego and ignored corporate formalities. He seeks declaratory judgment that Twin Silver's note was actually property of the debtors when it was transferred to JNG on December 13, 2003.

It is state law that governs the extent of the debtor's interest in property. Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 371 F.3d 397, 401 (8th Cir.2004); N.S. Garrott and Sons v. Union Planters Nat'l Bank (In re N.S. Garrott and Sons), 772 F.2d 462, 466 (8th Cir.1985). "Once that determination is made, federal bankruptcy law dictates to what extent that interest is property of the estate." N.S. Garrott and Sons, 772 F.2d at 466.

The Minnesota Supreme Court has articulated a two-prong test to determine when a shareholder can be liable for corporate obligations. Barton v. Moore, 558 N.W.2d 746, 749 (Minn.1997). The first prong focuses on the shareholder's actions with regard to the corporation. Factors considered include: a failure to observe corporate formalities, absence of corporate records, and whether the existence of the corporation is merely a facade for individual dealings. Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc., 283 N.W.2d 509, 512 (Minn.1979). The second prong requires that the moving party show that piercing the corporate veil is necessary to avoid injustice or fundamental unfairness. Id. To prove the second prong, it is sufficient to show that the corporation has been operated as a constructive fraud or in an unjust manner. West Concord Conservation Club v. Chilson, 306 N.W.2d 893, 898 fn. 3 (Minn.1981).

The debtors disregarded formalities and maintained Twin Silver as a facade for individual dealings. Michael Lindell testified at trial and the parties stipulated that the debtors commingled personal and business funds and used Twin Silver funds to pay personal expenses. It would be fundamentally unfair to find that the note in question was not held by Twin Silver solely for the benefit of the debtors. I find that the debtors operated Twin Silver as an alter ego for their personal dealings and therefore the Twin Silver Note was the debtors' property on December 13, 2003 when the debtors transferred it to JNG.

Fraudulent Transfer

The trustee seeks to avoid the December 13, 2004 transfer of the notes to JNG pursuant to 11 U.S.C. § 548. Section 548 of the Bankruptcy Code provides in pertinent part:

(a) (1)The trustee may avoid any transfer of an interest of the debtor in property ... that was made ... on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily (B)(i) received less than a reasonably equivalent value in exchange for such transfer... and (B)(ii)(I) was insolvent on the date that such transfer was made or became insolvent as a result of such transfer. Whether a transfer is made for reasonably equivalent value is a question of fact. Jacoway v. Anderson (In re Ozark Rest. Equip. Co.), 850 F.2d 342, 344 (8th Cir.1988). Reasonably equivalent value depends on the market conditions faced by a willing seller and a willing buyer, and not the financial demands of the seller. Id. at 345. The debtors sold the notes to JNG on December 13, 2004 and filed bankruptcy on March 10, 2004, well within the one year specified in the statute.

Insolvency

The debtors were insolvent at the time of the transfer of the notes to JNG. "Insolvent" is defined as a:

financial condition such that the sum of such entity's debts is greater than all of such entity's property at a fair valuation, exclusive of (i) property transferred, concealed, or removed with intent to hinder, delay or defraud such entity's creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title. 11 U.S.C. § 101(32)(A).

The debtors schedules indicate that at the time of filing they were insolvent. They indicate that they had total assets of $26,012.00 and claimed exemptions of $8,010.00. The debtors' total liabilities amounted to $147,345.00 which included $18,711.00 in secured claims, $2,730.00 in priority claims and $125,904.00 in unsecured claims. The difference between non exempt assets of $18,002.00 and liabilities of $147,345.00 clearly demonstrates insolvency at the time of filing.

The debtors were also insolvent months earlier when they sold the notes. After the sale of Schmitty's to Block One, the payments from the notes constituted the debtors' main source of income. When they sold the notes to JNG in December 2004, they lost that source of income. Michael Lindell's other source of income came from gambling professionally by counting cards. This profession however, did not provide him with a positive cash flow. Michael Lindell testified that he lost $6,000.00 more than he made not including travel expenses in the year and two or three months he did this full time. He estimated his travel expenses to...