In re Rood

• Decision Date: 22 March 2011
• Docket Number: Civil Action No. DKC 10–0995.
• Citation: 448 B.R. 149
• Parties: In re Robert F. ROOD, IV, et al.Gary A. Rosen, Trustee, et al., Appellantsv.Kore Holdings, Inc., et al., Appellees.
• Court: U.S. District Court — District of Maryland

448 B.R. 149

In re Robert F. ROOD, IV, et al.Gary A. Rosen, Trustee, et al., Appellants

v.Kore Holdings, Inc., et al., Appellees.

Civil Action No. DKC 10–0995.

United States District Court, D. Maryland.

March 22, 2011.

Nelson C. Cohen, Zuckerman Spaeder LLP, Washington, DC, for Appellant.Paul Sweeney, Jeffrey S. Evans, Logan, Yumkas, Vidmar & Sweeney, LLC, Annapolis, MD, James R. Schraf, Logan Yumkas, LLC, Annapolis, MD, for Appellant Southern Management Corporation Retirement Trust.Jeffrey M. Orenstein, Goren Wolff and Orenstein LLC, Rockville, MD, for Appellees.

MEMORANDUM OPINION

DEBORAH K. CHASANOW, District Judge.

Pending before the court is an appeal filed by Chapter 7 Trustee Gary A. Rosen and Southern Management Corporation Retirement Trust (“SMCRT”) from a March 12, 2010, order of the United States Bankruptcy Court for the District of Maryland granting summary judgment in favor of Robert F. Rood, III, and Grace Ann Rood and denying their cross-motion for summary judgment. Because the facts and legal arguments are adequately presented in the briefs and record, oral argument is deemed unnecessary. See Fed.R.Bankr.P. 8012; Local Rule 105.6. For the reasons that follow, the order of the bankruptcy court granting summary judgment will be affirmed in part and reversed in part, the appeal from the denial of summary judgment will be dismissed, and the case will be remanded for further proceedings.

I. Background

On May 29, 2008, Robert F. Rood, IV (“Debtor”), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. At that time, Debtor owned and held one hundred percent interests in a number of business entities (collectively, “the Debtor Entities”), including Blue Horseshoe Portfolio Services, LLC (“Blue Horseshoe”), Level One Capital Partners, LLC (“Level One”), and The Source, LLC (“The Source”). On December 29, 2008, the bankruptcy court administratively consolidated the Debtor Entities' cases with Debtor's bankruptcy case.

On April 1, 2009, Mr. Rosen and SMCRT (together, “Appellants”) commenced an adversary proceeding within the bankruptcy case by filing a complaint for injunctive relief, declaratory relief, and damages against fifteen defendants: Debtor, Kore Holdings, Inc. (“Kore”), seven wholly-owned Kore subsidiaries— i.e., Arcadian, Inc., First Washington Financial Corporation, Level One Mortgage Capital, Mortgage American Bankers, Source Bio–Plastics, Inc., Sunvolt, and Whiplash Motor Sports, LLC—Charles Timothy Jewell, Nik Hepler, Warren A. Hughes, Jr., First Washington Equities, LLC, and Debtor's parents, Grace Ann Rood and Robert F. Rood, III (together, “Appellees” or “Mr. and Mrs. Rood”).¹ (ECF No. 1, Attach. 4). The complaint alleged a Ponzi scheme orchestrated by Debtor, who, with the assistance of the individual defendants, misappropriated millions of dollars entrusted to him by SMCRT as loan investments by diverting the money through an elaborate network of business entities under his control. As to Appellees, the complaint set forth causes of action for fraud, conversion, civil conspiracy, unauthorized post-petition transfer of assets, and fraudulent conveyance. As relief, Appellants sought an accounting and turnover of estate property, injunctive relief, and a declaration that the corporate defendants were the alter egos of Debtor and the individual defendants.

On the same date they filed their complaint, Appellants also filed an emergency motion for temporary restraining order, preliminary injunction, and request for emergency hearing. On April 2, 2009, the bankruptcy court held a hearing on the emergency motion for temporary restraining order. At the outset of that hearing, counsel for Mr. Rosen advised the court that an agreement had been reached with respect to Appellees:

Your Honor, with respect to Grace and Robert Rood, III, they will agree pending further order of this Court to not transfer or encumber any of their property. They will agree to make no transfers, direct or indirect, to their son, the debtor, Robert Rood, IV, or Kore Holdings, Inc. or any affiliates of Kore Holdings, Inc., and they will agree not to transfer a Dodge Viper which is an asset the trustee believes is an asset of the debtor's estate. Mr. Rood, III, has asserted that he owns that vehicle.

In re Rood, 426 B.R. 538, 544 (D.Md.2010). At the conclusion of the hearing, the bankruptcy court issued an order temporarily restraining the remaining defendants, with the exception of Mr. Jewell, from “[t]ransferring, encumbering, or impairing any property (real or personal) in their possession, custody or control,” and from “engaging in any business operations, directly or indirectly, that in any way involves the sale, transfer, impairment or encumbering of any asset of their businesses.” Id. at 544–45. The order set a date of April 13, 2009, for a hearing on the motion for preliminary injunction.

Shortly thereafter, Appellees filed a motion to dismiss. (ECF No. 1, Attach. 5). At the conclusion of a May 28, 2009, hearing, the bankruptcy court orally granted in part and denied in part Appellees' motion. Specifically, the court dismissed five counts as to both Mr. and Mrs. Rood— i.e., those alleging fraud, civil conspiracy, post-petition transfer of assets, accounting, and declaratory judgment/alter ego—and the count alleging conversion as to Mrs. Rood alone. The bankruptcy court's oral ruling was followed by a written order dated June 5, 2009. Mr. Rosen and SMCRT noted an appeal from that decision, and this court subsequently affirmed. See In re Rood, 426 B.R. 538 (D.Md.2010). ²

The preliminary injunction motion was considered, along with a number of other motions, at court proceedings held on a series of dates in or around April 2009. On one of those dates, April 29, 2009, Appellants withdrew their request for a preliminary injunction as to Appellees after Mr. and Mrs. Rood agreed, on the record, not to make any further transfers to Debtor or any business entity affiliated with him. On August 19, 2009, the bankruptcy court issued a memorandum of decision granting Appellants' motion for preliminary injunction as to the remaining defendants. The court found, in relevant part:

Jewell and [Debtor] had no apparent source of income other than the SMCRT funds.... [Appellants' expert's] testimony established that $1,083,803.06 was paid to [Debtor] out [of] the Blue Horseshoe and Level One accounts and these same accounts were the source of $1,281,629.55 paid for the benefit of Kore Holdings, Inc., and its subsidiaries.... There was no evidence of consideration for any payment made from the Blue Horseshoe and Level One funds to the Rood entities. These entities handled the transferred funds as their own.

The record keeping by the Rood entities (to the extent there was such) was wholly inadequate. There were no formal records or financial statements for Blue Horseshoe or Level One entities, and such information that had been supplied to SMCRT and the Receiver did not match actual events that could be verified. The Rood entities operated in no less than 40 bank accounts. The payroll records of the various entities were commingled, and such compensation as was paid to the Rood associates was typically paid outside of the payroll. Generally, what [Debtor] would do is take money out of Blue Horseshoe and Level One accounts and convert the funds to money orders. In short, [Debtor] used the SMCRT funds that were entrusted to him to invest on its behalf as his personal piggy bank.

In re Rood, Adv. No. 09–0188PM, 2009 WL 2923429, at *2 (Bankr.D.Md. Aug.19, 2009) (footnote omitted).

On February 5, 2010, Appellees moved for summary judgment as to the six remaining counts against them. (ECF No. 1, Attach. 11). Appellees primarily challenged the opinion of Appellants' expert that a series of purchases, payments, and wire transfers made by Blue Horseshoe, Level One, The Source, and Kore were fraudulent conveyances to Appellees that were recoverable by the bankruptcy estate. Appellees argued that the evidence in the case conclusively showed that the purchases ( e.g., of vehicles and furniture) and some of the payments ( e.g., of rent and legal fees) were improperly attributed to them. While they conceded that they received a number of checks and/or wire transfers from the Debtor Entities, they argued that these payments were “fair consideration” for an antecedent debt 6 owed to them by Debtor. (ECF No. 1, Attach. 13, at 28, 32–33). Specifically, they asserted that Debtor incurred a $250,000 debt to them by virtue of payments they made on his behalf in or around 2004 to cover a bounced check and to satisfy a defaulted (and fraudulently obtained) loan obligation. According to Appellees, even assuming they received all the property and money attributed to them by Appellants' expert:

[t]he entirety of the transfers that [Appellants'] Expert Report reflects as having been made to or for the benefit of [Appellees] during the period from January 31, 2006, through and including December 21, 2007, are less than the amounts that the Debtor owed to [Appellees] and did not satisfy the antecedent debt that the Debtor owed to [Appellees]. Fair consideration was provided for the transfers.

(ECF No. 1, Attach. 13, at 29).

Appellees anticipated that Appellants would respond by arguing that “the debts were owed by the Debtor, but that the payments came from the Debtor's entities and, therefore, fair consideration was not provided by the entities that made the payments.” ( Id.). They addressed that hypothetical argument as follows:

[Appellants] have consistently argued, and their Expert has concluded, that the Debtor's entities are all “alter egos” of the Debtor. The deposition testimony of the Trustee and SMCRT further bears this out. Indeed, [Appellants] have obtained injunctions against a number of the defendants in this case by making the “alter ego argument.” Having made that argument, [Appellants] are now...