In re Lockwood Auto Group, Inc.

• Decision Date: 14 May 2010
• Docket Number: Bankruptcy No. 05-13558-TPA,Adversary No. 06-1100
• Citation: 428 B.R. 629
• Parties: In re LOCKWOOD AUTO GROUP, INC., Debtor. Richard W. Roeder, Plaintiff v. Barbara A. Lockwood and First National Bank of Pennsylvania, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

428 B.R. 629 In re LOCKWOOD AUTO GROUP, INC., Debtor. Richard W. Roeder, Plaintiff v. Barbara A. Lockwood and First National Bank of Pennsylvania, Defendants. Bankruptcy No. 05-13558-TPA. Adversary No. 06-1100. United States Bankruptcy Court, W.D. Pennsylvania. May 14, 2010.

John M. Steiner, Esq., Pittsburgh, PA, for Debtor.

Richard W. Roeder, Esq., Titusville, PA, Chapter 7 Trustee, Plaintiff.

John C. Melaragno, Esq., for Defendant Barbara Lockwood.

James R. Walczak, Esq., Erie, PA, for Defendant First National Bank.

MEMORANDUM OPINION

THOMAS P. AGRESTI, Chief Judge.

Presently before the Court is a Motion for Summary Judgment ("Motion"), Document No. 84, filed by Defendant First National Bank of Pa. ("FNB"). After consideration of the various filings by the Parties, the Court will deny the Motion for the reasons provided below.¹

FACTUAL AND PROCEDURAL BACKGROUND

The relevant, underlying facts were previously set forth by this Court in an opinion on prior cross-motions for summary judgment. See Memorandum Opinion and Order of May 31, 2007 ("2007 Opinion"), Document No. 32.² Familiarity with the facts is assumed and factual details will not be restated here except as necessary. Very briefly, the case involves a series ofsimilar triangular transactions that occurred between 2002 and 2005 among the Debtor Lockwood Auto Group, Inc ("LAG"), its principal shareholder Barbara A. Lockwood ("Lockwood"), and FNB. The transactions arose in the context of LAG's operation of a dealership selling DaimlerChrysler Motors Corporation vehicles which were financed through DaimlerChrysler Financial Services North America, LLC ("Daimler").

In late 2002, early 2003, Daimler became concerned about the financial stability of LAG. In February 2003 Daimler entered into a "Recapitalization Agreement" with LAG and Lockwood that required additional capital to be invested into LAG. Plaintiff, Richard W. Roeder, the Chapter 7 Trustee ("Trustee") alleges that the transactions at issue were done to make it appear that LAG had the necessary additional capital to remain viable when it actually did not.

Generally, the transactions were all structured as follows: Lockwood borrowed funds from FNB and then invested them into LAG, which immediately used the invested funds to secure a certificate of deposit ("CD") from FNB. LAG in turn pledged the CD to FNB as security for the loan that Lockwood had taken out. The invested funds in the form of the CD were shown as capital on LAG's balance sheet, with no indication that it was fully-pledged to FNB. The Trustee alleges that these were financially meaningless transactions whose only purpose was to create the illusion on LAG's financial statements that it possessed additional, available capital to meet the requirements of the Recapitalization Agreement. Shortly after the bankruptcy petition was filed, FNB applied the then-current CD (CD No. 100806034 for $200,000) to satisfy Lockwood's loan obligation.

The Complaint originally filed by the Trustee laid out the key facts and requested turnover from FNB but was rather vaguely written as far as the legal theory being pursued against FNB. In the 2007 Opinion, the Court granted summary judgment in favor of the Trustee on fraudulent transfer grounds pursuant to 11 U.S.C. § 548, requiring FNB to turn over the proceeds of the CD to the Trustee. FNB appealed to the District Court. One of the issues on appeal was whether the basis for the 2007 Opinion was Section 548(a)(1)(A) (actual intent to hinder defraud or delay), or Section 548(a)(1)(B) (constructive fraud). The District Court reversed in an Opinion dated March 20, 2008, Document No. 56 ("District Court Opinion"). The District Court found that the 2007 Opinion was premised on constructive fraud. It then went on to hold that this Court had erred in determining that FNB had not given reasonably equivalent value in exchange for the pledge of the CDs, finding instead, that LAG had received an "indirect benefit" in exchange for its pledge of the CDs to FNB. Since proving a "constructive fraudulent transfer" under Section 548(a)(1)(B) requires that there be no equivalent value, the District Court found that the facts in this case do not support such a claim. However, that was not the end of the matter.

The District Court also noted that during the course of the litigation the Trustee had articulated several other possible theories to support recovery of the CD proceeds from FNB, including actual fraud under Section 548(a)(1)(A) and equitable subordination. The District Court therefore remanded this matter to this Court for consideration of those alternative theories. After the remand, the Trustee was given leave to file an amended complaint.

On September 16, 2008, at Document No. 69, the Trustee filed his Amended Complaint. The Amended Complaint sets forth three counts: Count I (fraudulent transfer (actual fraud) under the PennsylvaniaUniform Fraudulent Transfer Act Law ("PUFTA"), 12 Pa.C.S.A. § 5101, et. seq.), Count II (fraudulent transfer (actual fraud) under Section 548(a)(1)(A)), and Count III (equitable subordination under 11 U.S.C. § 510). The Defendants answered the Amended Complaint, and thereafter, the Parties engaged in discovery.

On June 22, 2009, FNB filed the Motion presently under consideration. The Trustee has responded and both sides have filed briefs. The Trustee was also given leave to hire a financial services consultant to serve as an expert on September 3, 2009. On January 15, 2010, he filed an Offer of Proof, Document No. 114, setting forth the expected testimony of the consultant. The Offer of Proof also listed the areas of inquiry the Trustee plans to explore in a proposed deposition of David Slomski, the FNB Vice President of Business Banking who was involved in the transactions at issue.³ On February 3, 2010, FNB filed a Reply to the Offer of Proof. The Motion is now ripe for decision.

Summary Judgment Standard

For purposes of resolving a summary judgment motion, Fed.R. Civ.P. 56 is made applicable to adversary proceedings through Fed.R.Bankr.P. 7056. Summary judgment is appropriate if the pleadings, depositions, supporting affidavits, answers to interrogatories and admissions that are part of the record demonstrate that there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Bankr.P. 56(c), Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Summary judgment is appropriate if no material factual issue exists and the only issue before the Court is a legal issue. EarthData Int'l. of N.C., L.L.C. v. STV, Inc., 159 F.Supp.2d 844 (E.D.Pa.2001); In re Air Nail Co., Inc., 329 B.R. 512 (Bankr.W.D.Pa.2005). The test under Fed.R. Civ.P. 56 is "whether the moving party is entitled to judgment as a matter of law." Med. Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir.1999) (quoting Armbruster v. Unisys Corp., 32 F.3d 768, 777 (3d Cir.1994)).

In deciding a motion for summary judgment, the Court must construe the facts in a light most favorable to the non-moving party. United States v. Isley, 356 F.Supp.2d 391 (D.N.J.2004). Once the moving party satisfies its burden of establishing a prima facie case for summary judgment, the non-moving party must do more than raise some metaphysical doubt as to material facts. Boyle v. County of Allegheny, 139 F.3d 386, 393 (3d Cir.1998) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). No issue for trial exists, in fact, unless the non-moving party can adduce sufficient evidence favoring it on the disputed factual issue such that a reasonable jury could return a verdict in its favor. See Celotex, 477 U.S. at 322, 106 S.Ct. 2548.

DISCUSSION

Insufficient evidence of "knowledge" of, or "participation" in, fraud

FNB first argues that summary judgment should be granted in its favorwith respect to Counts I and II of the Amended Complaint because there is no evidence that it had any knowledge of or participated in the alleged fraud perpetrated by Lockwood and LAG against Daimler.⁴

FNB contends that in order for the Trustee to prove a claim of a fraudulent transfer based on actual fraud he must show that FNB had knowledge of the alleged fraud upon Daimler by LAG and/or Lockwood, and that FNB knew its actions would facilitate the alleged fraud. See FNB Brief in Support of Summary Judgment, Document No. 85 at 11 (hereinafter "FNB Brief"). FNB argues that the Trustee has not produced any evidence that shows FNB: was involved in the preparation of the financial statements submitted to Daimler; knew LAG or Lockwood had made misrepresentations of their financial condition to anyone; or, ever communicated with Daimler. FNB Brief at 11. FNB points out that the only evidence of record as to any of these points is an affidavit by Slomski which denies any such knowledge or involvement.

The Trustee does not really dispute that claimed lack of any evidence to show that FNB was an active participant in or intended to engage in fraud against Daimler. Rather, the Trustee claims that the alleged "actual fraud" necessary in this case to support a fraudulent transfer claim was that done by the transferor, Lockwood/LAG.

The Bankruptcy Code and PUFTA mirror each other with respect to a cause of action to avoid a transfer based on the Debtor's transfer of assets with an actual intent to hinder, defraud or delay creditors. See 11 U.S.C. § 548(a)(1)(A), 12 Pa.C.S.A. § 5104(a). The Trustee is correct that the "actual intent" at issue here is that of the transferor, i.e., Lockwood and LAG. See In re Pers. & Business Ins. Agency, 334 F.3d 239, 242 (3rd Cir.2003) (actual fraud under Section 548 occurs when the debtor makes the transfer with the intent to hinder, delay or defraud); In re Rubin Bros. Footwear, Inc., 119 B.R. 416, 423 (S.D.N.Y.1990) (plaintiff must show fraudulent intent on the part of the transferor rather than the...