In re Terry Manufacturing Company, Inc., Case No. 03-32063-WRS (Bankr.M.D.Ala. 5/29/2007)
| Decision Date | 29 May 2007 |
| Docket Number | Case No. 03-32063-WRS.,Adv. Pro. No. 04-3135-WRS. |
| Parties | In re TERRY MANUFACTURING COMPANY, INC., Chapter 7, Debtor. J. LESTER ALEXANDER, III, TRUSTEE, Plaintiff, v. DELONG, CALDWELL, NOVOTNY & BRIDGERS, LLC; DELONG, CALDWELL, LOGUE & WISEBRAM; DELONG & CALDWELL, LLC; and EARNEST H. DELONG, JR., Defendants. |
| Court | U.S. Bankruptcy Court — Middle District of Alabama |
This Adversary Proceeding came before the Court for a four-day trial beginning on January 30, 2007. Plaintiff J. Lester Alexander, III, was present in person and by counsel Brent B. Barriere, T.A. and Catherine E. Lasky. Defendants were present by Earnest H. DeLong, Jr., Michael A. Caldwell, and Charles R. Bridgers. At the conclusion of the trial, the Court took the matter under submission. The parties, at the Court's request, have filed Proposed Findings of Fact and Conclusions of Law. (Docs. 199, 200).
In this Adversary Proceeding, the Chapter 7 Trustee seeks to avoid payments totaling $476,233.67 made by the Debtor Terry Manufacturing to lawyers who represented it in a civil action in Georgia. The Trustee contends that the cash transfers are avoidable as fraudulent conveyances alleging that the payments were constructively fraudulent in that Terry Manufacturing did not receive reasonably equivalent value in exchange for the transfers. The Trustee also seeks to avoid the payments as preferential transfers. The Trustee further alleges that the Defendants committed malpractice by representing both Terry Manufacturing and Rudolph Terry. For the reasons set forth below, the Court enters judgment in favor of the Trustee in the amount of $476,233.67 on the fraudulent conveyance claim. As the malpractice claim is not a core proceeding, the Court enters Proposed Findings of Fact and Conclusions of Law by way of a separate document. As a final matter, the preference claim is dismissed with prejudice.
Terry Manufacturing, Inc., filed a voluntary petition in bankruptcy pursuant to Chapter 11 of the Bankruptcy Code in this Court on July 7, 2003. (Case No. 03-32063, Doc. 1). J. Lester Alexander, III, was appointed Trustee on July 11, 2003. (Case No. 03-32063, Doc. 20). The case was converted to a case under Chapter 7 on May 13, 2004. (Case No. 03-32063, Doc. 579). The Trustee filed a complaint initiating this Adversary Proceeding on December 8, 2004. (Doc. 1).1 The Trustee's complaint alleges claims for fraudulent conveyances, avoidable preferences, and attorney malpractice.
Terry Manufacturing was a textile business specializing in the manufacture of uniforms. Its two most notable contracts were with the United States Department of Defense for combat fatigues and McDonald's for its restaurant workers' uniforms. Terry Manufacturing has its main business and manufacturing location in Roanoke, Alabama and also had a facility in Atlanta, Georgia. By local standards, Terry Manufacturing was a large business employing more than 300 people in its heyday.
The principals of Terry Manufacturing were Roy Terry and Rudolph Terry, who are brothers. Both of Terry brothers have been convicted of crimes relating to their activities at Terry Manufacturing. Roy Terry plead guilty to thirteen counts of bank fraud, wire fraud and mail fraud and has been sentenced to prison for seventy-eight months. United States v. Roy Terry, in the United States District Court for the Middle District of Alabama, Criminal No. 3:05CR141-MEF. Rudolph Terry plead guilty to one count of conspiracy to defraud the United States and was sentenced to prison for forty-one months. United States v. Rudolph Terry, in the United States District Court for the Middle District of Alabama, Criminal No. 3:06CR52-MEF. In addition, Rudolph Terry plead guilty to criminal charges in the Northern District of Georgia for his fraud in connection with the Commercial Factors case.
Rudolph Terry was Vice President of Terry Manufacturing and owned 49% of the common stock. Rudolph Terry lived in Georgia at all times relevant to these proceedings. Moreover, Rudolph worked in the Atlanta, Georgia office. It appears that almost all of the cash transfers were by check written from the Georgia bank account. (Pl. Ex. 12). Moreover, DeLong's law office is in Atlanta, and the Commercial Factors litigation was in Gwinnett County, Georgia. While Terry Manufacturing was based in Roanoke, Alabama, it appears that virtually all of the activities relating to the claims at issue here took place in Georgia.
The activities of the Terry brothers has spawned a considerable amount of litigation, and this Court has become familiar with the workings of Terry Manufacturing and the Terry brothers. Both Rudolph and Roy Terry testified at the trial of this Adversary Proceeding. While the loss to creditors and shareholders has not yet been quantified, the plea agreement entered in Roy Terry's criminal case estimates the loss at between $20 and $50 million, which appears to the undersigned to be a reasonable estimation of the losses. The Terry brothers engaged in a massive fraud which took place over a number of years beginning in the late 1990's and continuing to 2003, when Terry Manufacturing ceased doing business. The fraudulent scheme included the issuance of false financial statements, check kiting, and the massive diversion of funds from Terry Manufacturing.
Rudolph Terry involved himself in a scheme to defraud Commercial Factors of Atlanta, Inc. Floodgates, LTD., had been a supplier of tee shirts to Terry Manufacturing during the 1996 Summer Olympic games, which were in Atlanta. Jon L. Pouncey was the principal of Floodgates, which factored its accounts receivable to Commercial Factors. Floodgates entered into a commercial borrowing arrangement whereby it would transfer its accounts receivable to Commercial Factors in exchange for cash. Pouncey and Rudolph Terry conspired to defraud Commercial Factors by submitting fraudulent invoices which were issued by Floodgates to Terry Manufacturing. That is, Floodgates would issue invoices to Terry Manufacturing for product which was never delivered. Millions of dollars worth of fraudulent invoices were transferred to Commercial Factors. Moreover, Rudolph Terry signed a certification for Commercial Factors, verifying receipt of the invoiced tee shirts, knowing that in reality no such tee shirts had been delivered. Rudolph Terry knew that his certification was false, and he knew that Commercial Factors was advancing money to Floodgates in reliance upon the legitimacy of the invoices.
In December of 1999, Commercial Factors brought a civil action against Terry Manufacturing, Floodgates, and Pouncey. (Pl. Ex. 31). Commercial Factors of Atlanta, Inc., v. Terry Manufacturing Co., et al., in the Superior Court of Gwinnett County, Georgia, Civil No. 99-A10650-5. Rudolph Terry retained Defendant Earnest DeLong, an Atlanta lawyer, to represent Terry Manufacturing, and later himself in the Commercial Factors litigation.2 In his trial testimony, DeLong characterized the original complaint in the Commercial Factors suit as a garden variety collection dispute. On January 31, 2000, DeLong filed an Answer and Counterclaim on behalf of Terry Manufacturing in the Commercial Factors suit. (Pl. Ex. 32). In the original complaint, Commercial Factors alleged that Terry Manufacturing owed approximately $3.3 million on the Floodgate invoices. (Pl. Ex. 31). In the Answer and Counterclaim filed by DeLong on behalf of Terry Manufacturing, it was alleged that Terry Manufacturing owed approximately $2.1 million on the Floodgate invoices. (Pl. Ex. 32). It is significant in that Terry Manufacturing filed a pleading in court to the effect that it owed $2.1 million, when in fact it had never received the first tee shirt, and for that reason owed nothing. As Terry Manufacturing in fact owed nothing on the invoices, the defense of the civil action should have been a relatively straightforward matter.
Commercial Factors undertook extensive discovery beginning in the spring of 2000. Rudolph Terry's deposition was first taken on April 28, 2000. (Pl. Ex. 44A). The deposition was continued and Rudolph Terry was further deposed on May 17, 2000, (Pl. Ex. 45), and again on October 31, 2000. (Pl. Ex. 47). Rudolph Terry's deposition was also taken on October 11, 2001. (Pl. Ex. 48). When Rudolph Terry's appeared for a scheduled deposition on April 28, 2000, he did not bring documents relating to the invoices, as requested by the lawyers representing Commercial Factors. It is noteworthy that DeLong had filed a pleading alleging that Terry Manufacturing owed Floodgates $2,130,628.91 on the invoices in question. (Pl. Ex. 32). Such a precise figure implies that an accounting was undertaken to arrive at that figure. Rudolph Terry testified, on April 28, 2000, as follows:
Q. What search did you engage in to find documents responsive to request No. 2?
A. I have not — I have not had the opportunity to do any such search.
Q. And do you plan to make such search in the future?
A. I plan to consult with my attorney and make a decision as it relates to that. I have not assessed any of these as it relates to relevancy, applicability. So I just physically have gone beyond reason so to make myself available here.
(Pl. Ex. 44A, 11:3-11:14). Thus, it appears that Rudolph Terry was stonewalling Commercial Factor's efforts to discover the facts relating to the invoices in question.3 Indeed, the record in the Commercial Factors litigation is replete with stonewalling and obfuscation.
Commercial Factors took Rudolph Terry's deposition again on May 17, 2000, and Rudolph Terry did not produce any documents. (Pl. Ex. 45, 153:22-155:12). Following a ruling by the Court in Gwinnett County, Rudolph Terry produced eighteen boxes of documents at a deposition held October 31, 2000. (Pl. Ex. 47, 287:5-287:14). In Rudolph Terry's lengthy deposition testimony, it...
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