In re THE 1031 TAX GROUP LLC.

• Decision Date: 27 August 2010
• Docket Number: Adversary No. 09-01129 (MG).,Bankruptcy No. 07-11448 (MG).
• Citation: 439 B.R. 47
• Parties: In re THE 1031 TAX GROUP, LLC, et al., Debtors. Gerald A. McHale, Jr., not individually but solely in his capacity as Chapter 11 trustee for The 1031 Tax Group, LLC, et al., Plaintiff, v. Boulder Capital LLC, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

439 B.R. 47

In re THE 1031 TAX GROUP, LLC, et al., Debtors Gerald A. McHale, Jr., not individually but solely in his capacity as Chapter 11 trustee for The 1031 Tax Group, LLC, et al., Plaintiff v Boulder Capital LLC, et al., Defendants.

Bankruptcy No. 07-11448 (MG).

Adversary No. 09-01129 (MG).

United States Bankruptcy Court,S.D. New York.

Aug. 27, 2010.

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Golenbock Eiseman Assor, Bell & Peskoe LLP, New York, NY, by Jonathan L. Flaxer, Esq., David J. Eiseman, Esq., Jacqueline G. Veit, Esq., for the 1031 Debtors Liquidation Trust.

Klestadt & Winters, LLP, New York, NY, by Ian R. Winters, Esq., The Gordon Law Firm LLP, Boston, MA, by Stephen F. Gordon, Esq., Todd B. Gordon, Esq., for the Defendants.

MEMORANDUM OPINION AND ORDER GRANTING TRUSTEE'S MOTION FOR PARTIAL SUMMARY JUDGEMENT

MARTIN GLENN, Bankruptcy Judge.

Gerald A. McHale, Jr., the former chapter 11 trustee of the debtors in this case and now the trustee of the 1031 Debtors Liquidation Trust (the “Trustee”), seeks partial summary judgment on a fraudulent conveyance claim under section 548(a) of the Bankruptcy Code. The Trustee alleges that, between September 2005 and September 2006, approximately $29 million was misappropriated from the debtors in these related bankruptcy cases (the “1031 Debtors”) ¹ and fraudulently conveyed to the Boulder defendants (collectively “Boulder”) ² in four transactions. (Trustee'sMem. for Partial Summ. J. at 1 (ECF # 28).)

The parties' positions have evolved throughout the briefing of this dispute. Despite these oscillations in the parties' arguments, the core dispute on this summary judgment motion may be distilled to a simple question: Whose property-the Debtors' or the Debtors' customers-was conveyed to Boulder? Boulder maintains that the 1031 Debtors merely held the property in trust for the benefit of certain customers. The Trustee responds, arguing that the transferred funds belonged to the 1031 Debtors, and that Boulder does not have standing to argue that the funds were held in trust for the benefit of others. For the reasons explained below, the Court agrees with the Trustee. Boulder does not have standing to make its trust arguments and the transferred property clearly belonged to the 1031 Debtors. Stripped of arguments regarding the ownership of the transferred property, it becomes clear that the Trustee has satisfied his burden to succeed on his motion for partial summary judgment.

I. BACKGROUND

A. Procedural History

This motion has generated a small mountain of paper. The action was commenced on March 20, 2009 when the Trustee filed his Complaint against Boulder. (ECF # 1.) Shortly thereafter, on April 22, 2009, the Trustee filed an Amended Complaint. (ECF # 4.) The Amended Complaint included claims for (i) fraudulent conveyance; (ii) constructive trust; (iii) equitable lien, and (iv) unjust enrichment. Boulder answered the Amended Complaint on June 12, 2009 and moved the district court to withdraw the reference of the proceeding from this Court. (ECF # s 8, 10.) Judge Sullivan denied Boulder's request on June 16, 2009 without prejudice. (ECF # 16.) The Trustee then requested, and the Court granted, permission to move for partial summary judgment on count two, the fraudulent conveyance claim with actual intent to hinder, delay, or defraud with Boulder as an initial transferee. ( See ECF # 25.) The Trustee filed an opening brief in support of his motion, supporting declaration, and Local Rule 7056-1 statement on February 1, 2010. (ECF # s 28, 29.) One month later Boulder filed an opposition, an accompanying declaration, a response to the Trustee's Local Rule 7056-1 statement, and an affidavit in support of a request for further discovery pursuant to Rule 56(f) of the Federal Rules of Civil Procedure. (ECF # s 35-38.) The Trustee filed a reply in support of his motion, an objection to Boulder's response to his Local Rule 7056-1 statement, and additions to his opening declaration. (ECF # s 40-42.) On the eve of argument Boulder filed an additional declaration in support of its Rule 56(f) request. (ECF # 44.)

Following argument, despite the already voluminous papers, the Court requested additional briefing on questions of express trusts and the impact of the confirmed plan of reorganization on the motion for partial summary judgment. In response, Boulder filed a second supplemental declaration in support of its position as well as two memoranda of law regarding express trust and plan issues. (ECF # s 49, 50, 54, 59.) The Trustee also filed two additional memoranda of law regarding expresstrust and plan issues. (ECF # s 52, 54, 62.)

B. 1031 Exchanges and the Debtors Generally

Section 1031 of the Internal Revenue Code permits owners of investment property to defer capital gains tax that is ordinarily due on sale by applying the sale proceeds to the purchase of an identified replacement investment property. These so-called 1031 Exchanges are popular methods of deferring capital gains taxes on real estate investments. A commercial property owner (“Exchanger”) sells a parcel of real estate while identifying a replacement property to purchase. The proceeds from the initial sale (the “Exchange Deposit”) are delivered to a “qualified intermediary” or “QI” that holds the Exchange Deposit to close on the sale of the replacement property within 180 days of the initial sale. An “Exchange Agreement” sets forth the responsibilities and obligations of the QIs with respect to the Exchange Deposit (Trustee's Mem. for Partial Summ. J. at 3 (ECF # 35)), and governs how the funds will be used. ( See Boulder Defendant's Response to the Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶ 45-46 (ECF # 36).)

Prior to bankruptcy, the 1031 Debtors acted as QIs, holding the Exchange Deposits used for the 1031 Exchanges. (Trustee's Mem. for Partial Summ. J. at 2.) As discussed in other opinions in this case, Edward H. Okun (“Okun”), the owner of the 1031 Debtors, with the assistance of others, misappropriated hundreds of millions of dollars from the 1031 Debtors between August 2005 and May 2007. While the parties dispute who owned the Exchange Deposits in the 1031 Debtors' accounts-the Exchangers or the 1031 Debtors-it is undisputed that the funds were stolen. ( Compare Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶¶ 5, 7 (ECF # 28) with Boulder Defendant's Response to the Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶¶ 5, 7.) From August 2005 to December 2006, Okun and entities owned by Okun purchased control of the 1031 Debtors. From March 2005 through April 2007, Okun and his cohorts engaged in an elaborate mail and wire fraud conspiracy, taking funds from the 1031 Debtors' bank accounts into which the Exchange Deposits had been deposited, to “(a) pay for Okun's lavish lifestyle; (b) pay large salaries and bonuses to themselves; (c) purchase additional QI companies; (d) pay operating expenses for Okun's various companies; and (e) invest in commercial real estate.” (Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶ 7.) Okun was indicted for his acts on March 17, 2008 and convicted on March 19, 2009. (Trustee's Mem. for Partial Summ. J. at 4-5.) Okun was thereafter sentenced to 100 years in federal prison. The indictment alleged that Okun fraudulently wired between $80 million and $135 million from the 1031 Debtors' accounts into his personal bank accounts, accounts of other Okun-related entities, and third-party accounts. (Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶ 10.) The Trustee claims that between September 2005 and September 2006, a portion of the misappropriated funds were used to pay off loans Boulder made to Okun and Okun-related entities (but not to the 1031 Debtors). (Trustee's Mem. for Partial Summ. J. at 7-8.) The Trustee identifies four separate transfers of misappropriated funds. (Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶¶ 20-43.) Boulder does not dispute that these transfers were made, but it maintains that the misappropriated funds belonged to the 1031 Debtors' Exchanger customers andnot to the 1031 Debtors. (Boulder Defendant's Response to the Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶¶ 10, 20-43.)

C. The Transfers ³

1. The September 7, 2005 Transfers

On July 8, 2005, Boulder Columbus, a Boulder entity, loaned $18 million to Columbus Works Virginia Trust (the “First Columbus Works Loan”). (Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶ 20.) Boulder Columbus made a second loan to Columbus Works Virginia Trust on August 22, 2005 in the amount of $4 million (the “Second Columbus Works Loan”). The loan recipients then loaned the funds to Okun to enable him to acquire AEC. ( Id. at ¶¶ 21-22.) On September 7, 2005, two transfers of $4,400,000 and $18,369,000, respectively, were made from an AEC account to a Boulder Capital/Boulder Columbus account to repay the First Columbus Works Loan and the Second Columbus Works Loan, plus interest. ( Id. at ¶ 23.) The AEC account was located at Bank of America and was a so-called “Business Interest Maximizer” account. Statements for this AEC account were sent to AEC at a Richmond, Virginia address. ( See AEC Account Statement (Flaxer Decl. Ex. 16).) The Trustee claims that AEC received no consideration from Boulder for the September 7, 2005 transfers. (Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶ 27.) Boulder contests this position. (Boulder Defendant's Response to the Trustee's Statement Pursuant to Local Bankruptcy Rule 7056-1 at ¶ 27.)

2. The June 26, 2006 Transfer

The next transfer at issue relates to a loan of $77,625,000.00 (the “Wachovia WOM Loan”), issued by Wachovia-related entities, and a mezzanine loan of $18 million from Boulder West Oaks (the “Boulder WOM Loan”) used to purchase...