In re National Audit Defense Network
| Decision Date | 24 April 2007 |
| Docket Number | Adversary No. 05-1152-BAM.,Adversary No. 05-1151-BAM.,Adversary No. 04-1230-BAM.,Adversary No. 04-1221-BAM.,Bankruptcy No. BK-S-03-17306-BAM. |
| Citation | 367 B.R. 207 |
| Parties | In re NATIONAL AUDIT DEFENSE NETWORK, Debtor. William A. Leonard, Jr., Chapter 7 Trustee, Plaintiff, v. Weston J. Coolidge; WJC Enterprises, Inc.; Bridgeway Corp.; and Pacific Northwest, Inc., Defendants. William A. Leonard, Jr., Chapter 7 Trustee, Plaintiff, v. Weston J. Coolidge; WJC Enterprises, Inc.; Bridgeway Corp.; and Pacific Northwest, Inc., Defendants. William A. Leonard, Jr., Chapter 7 Trustee, Plaintiff, v. Alan Rodriguez, also known as Alan Rodrigues; Alan II, Inc.; R and R Financial, Inc.; Diamond Marketing, Ltd.; M.J. Sales, Inc.; and Elite Solutions USA, Inc., Defendants. William A. Leonard, Jr., Chapter 7 Trustee, Plaintiff, v. Alan Rodriguez, also known as Alan Rodrigues; Alan II, Inc.; R and R Financial Inc.; Diamond Marketing, Ltd.; M.J. Sales, Inc.; and Elite Solutions USA, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — District of Nevada |
Barton L. Jacka, Sullivan Hill Lewin Rez & Engel, Las Vegas, NV, for Plaintiff.
Darrell Lincoln Clark, Las Vegas, NV, for Defendants.
OPINION AFTER TRIAL
National Audit Defense Network ("NADN" or "debtor") engaged in the selling of tax shelters and other products designed to take advantage of people's disdain for paying taxes. Its products were close to worthless, leading ultimately not only to this bankruptcy on June 11, 2003,1 but to a permanent injunction against NADN's further dissemination of taxavoidance schemes and against its activities as a federal income tax return preparer. NADN's bankruptcy also left thousands of its customers with unsupported and unsupportable tax positions.
At trial, the plaintiff in this action, William Leonard ("Trustee") established that, at the times relevant to this action, defendant Weston Coolidge ("Coolidge") was NADN's chairman and president, and that defendant Alan Rodrigues ("Rodrigues")2 was NADN's executive vice president and general manager. The Trustee also produced evidence that Coolidge operated NADN through his own actions, and through his manipulation of Bridgeway Corporation ("Bridgeway"), WJC Enterprises, Inc. ("WJC") and Pacific Northwest, Inc. ("PNI"), and that Rodrigues operated NADN through his own actions and through his manipulations of Alan II, Inc. ("Alan II"), R and R Financial, Inc. ("RR"), Diamond Marketing, Ltd. ("Diamond"), M.J. Sales, Inc. ("MJ"), and Elite Solutions USA, Inc. ("Elite").3 Bridgeway, WJC and PNI are also defendants in this action, and are collectively referred to as the "Coolidge Defendants"; Alan II, RR, Diamond, MJ and Elite are also defendants in this action, and are collectively referred to as the "Rodrigues Defendants."4
The Trustee seeks to avoid $1,046,585 in transfers from NADN to Coolidge and the Coolidge Defendants, and to avoid $3,718,192.39 in similar transfers to Rodrigues and the Rodrigues Defendants. The Trustee seeks to avoid the transfers on essentially four types of claims for relief: as actual fraudulent transfers under 11 U.S.C. § 548(a)(1)(A) and NEV.REV.STAT. § 112.180.1;5 as constructive fraudulent transfers under 11 U.S.C. § 548(a)(1)(B) and NEV.REV.STAT. § 112.190.1; as preferences under 11 U.S.C. § 547; and as unauthorized post-petition transfers under 11 U.S.C. § 549. The Trustee also seeks to hold Coolidge and Rodrigues liable for the debts of the Coolidge Defendants and the Rodrigues Defendants, respectively, and vice versa. In short, the Trustee seeks to pierce the corporate veil of each of the Coolidge Defendants and the Rodrigues Defendants, and to hold Coolidge and Rodrigues responsible for the debts of, respectively, the Coolidge Defendants and the Rodrigues Defendants.
The Trustee essentially alleged that the defendants knowingly participated in a wide-ranging scheme which used NADN to extract money from NADN's customers for the ultimate benefit of Coolidge and Rodrigues, among others. This action seeks to recover for the estate the transfers the defendants used to enrich themselves at creditors' expense.6 Although a full trial was held in this matter, neither Coolidge nor Rodrigues testified, having elected early on to invoke the Fifth Amendment with respect to any question asked of them that related to NADN, the Coolidge Defendants, or the Rodrigues Defendants. As a result, trial was conducted according to this district's alternate direct testimony rule, under which the plaintiff submits its direct testimony by declaration, and then makes the declarants available for cross-examination. NEV. Lo-CAL BANKR.RULE 9017.7 After two days of trial and argument under this procedure, the parties submitted the matter, subject to post-trial briefing.
The court finds that the Trustee has met his burden of showing that all of these transfers, regardless of whether they were made pre- or postpetition,8 were fraudulent transfers made by NADN with the actual intent to hinder, delay or defraud creditors, and that no defendant has any viable defense. The court also finds that the Rodrigues Defendants were essential instrumentalities of that fraud, and thus Rodrigues and the Rodrigues Defendants are jointly and severally liable for all claims against each other; it makes the similar finding for Coolidge and the Coolidge Defendants. Given these findings, there is no need to further assess whether a smaller subset of the transfers were also avoidable as preferences or as constructively fraudulent transfers.
The Trustee introduced four declarations: one from a forensic accountant; one from NADN's former controller who had worked with the defendants both pre- and postpetition; one from a personal property appraiser; and one from the Trustee himself.9 Collectively, these declarations paint a grim picture of an enterprise run primarily to bilk gullible taxpayers out of their hard-earned money. Although technically not a Ponzi scheme, the declarations present a picture of a business designed to maximize sales of dodgy tax products through high-pressure sales tactics and overblown advertising, all to the benefit of the defendants.
In addition, the Trustee adduced credible evidence that Coolidge and Rodrigues were officers and managers of NADN and could control a significant array of NADN activities. He also introduced evidence tending to indicate that each had significant experience in tax or accounting matters. From this, the Trustee argued that the human defendants, as insiders, of the business, knew, or should have known, that most — if not all — of the advice NADN sold was bogus or unlawful.
With respect to the nature, and character of NADN's business, Dana Basney, the Trustee's forensic accountant, testified as follows:
My review of NADN's operations reveals that NADN ran a tax-scam boiler room that sold three primary products: (a) bogus home-based businesses; (b) a phony website-modification plan called "Shopn2000" that falsely claim[ed] an American with Disabilities. Act related tax credit; and (c) worthless incorporation services.
... It is my opinion that NADN's tax scams could be compared with a "Ponzi" scheme: NADN offered unrealistic tax saving[s] to customers, which its representatives knew could never be delivered as promised.... Although not a classic Ponzi scheme in the sense that new money was the source of paying earnings on prior money, NADN had many characteristics of a Ponzi scheme. NADN utilized customer payments to fund extensive advertising services to attract new customers for its tax products and services NADN spent most of this money for an increased telemarketing presence and never provided adequate resources to do the tax return work it had promised customers . . .
... In my opinion, NADN was able to survive for the period 2001 to its demise because it took the majority of its receipts on the premise that it would perform future services which were never performed. The receipts for future services were then utilized for sales and boiler-room operations. The resources needed to perform the future services required of the company were never set aside or adequately funded. NADN, in my opinion, was a boiler room fraud scheme; it was not a legitimate accounting firm for the years which I reviewed .... NADN masked the nature of its operations and represented itself to be a solvent company through the use of improper revenue-recognition procedures, which were not in accordance with Generally Accepted Accounting Principles.
Declaration of Dana A. Basney, ¶¶ 19-22. Mr. Basney also testified that up to twothirds of NADN's staff were salesmen and saleswomen, and that only 3% of the staff were directly involved in tax return preparation. Id. ¶ 21.
Mr. Basney also opined that NADN was insolvent during all relevant periods. In particular, he found that NADN had a negative stockholder equity of approximately $4.7 million in January 2001, and a negative stockholder equity of approximately .3 million in May 2004. To arrive at his conclusion, Mr. Basney had to significantly revise NADN's financial reports, as they had shown a positive net worth at all relevant times, ranging from a low of approximately $800,000 on January 31, 2001, to a high of over $1.8 million by May 2004.
What accounts for these massive differences? Many things, none of which are particularly savory. The chief subterfuge, however, was a standard ingredient in the traditional recipe for cooked books: NADN took long-term revenue and booked it as short-term income. More particularly, it sold memberships and other packages that related to the long-term provision of services, but booked all of that revenue as income in the year in which received, instead of deferring a portion of it (thereby creating an offsetting liability for...
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