In re the Lovesac Corp.

• Citation: 422 B.R. 478
• Decision Date: 15 January 2010
• Docket Number: Bankruptcy No. 06-10080 (CSS).,Adversary No. 08-50250 (CSS).
• Parties: In re THE LOVESAC CORPORATION, et al., Debtors. The Liquidating Trust of the Lovesac Corporation, et al., Plaintiff, v. Craig Cox, Powder Mountain Group Holdings, LLC, and Nielson Livestock, LLC, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

422 B.R. 478

In re THE LOVESAC CORPORATION, et al., Debtors.

The Liquidating Trust of the Lovesac Corporation, et al., Plaintiff, v. Craig Cox, Powder Mountain Group Holdings, LLC, and Nielson Livestock, LLC, Defendants.

Bankruptcy No. 06-10080 (CSS).

Adversary No. 08-50250 (CSS).

United States Bankruptcy Court, D. Delaware.

January 15, 2010.

Richard M. Beck, Klehr Harrison, Harvey Branzburg LLP, Wilmington, DE, for Plaintiff.

Kathleen Miller, Smith, Katzenstein & Furlow LLP, Wilmington, DE, and Noel S. Hyde, South Ogden, UT, for Defendants.

OPINION¹

CHRISTOPHER S. SONTCHI, Bankruptcy Judge.

INTRODUCTION

Before the Court is the Liquidating Trust of The Lovesac Corporation's Motion for Summary Judgment as to Real Estate Transfer. For the reasons set forth below, the Court finds that summary judgment is inappropriate due to the existence of triable issues of fact surrounding the land transfer at issue in the instant adversary proceeding. Accordingly, the Court will deny the Motion.

STATEMENT OF FACTS

The Lovesac Corporation ("Lovesac") engaged in the manufacture and retail sale of high-end bean bag furniture. On January 30, 2006, Lovesac and affiliated Debtors filed voluntary Chapter 11 petitions in this Court. On July 28, 2006, a Joint Plan of Liquidation filed by the Debtors and the Official Committee of Unsecured Creditors (the "Plan") was confirmed. The Plan subsequently became effective on August 11, 2006. Upon the effectiveness of the Plan, the Liquidating Trust was established and all of the Debtors' assets were transferred to the Liquidating Trust for liquidation. Pursuant to the terms of the Plan, the Liquidating Trust enjoys all rights of the Debtors with respect to the instant cause of action.

At issue in this case is the transfer and reconveyance of title to certain real property consisting of approximately 100 acres of the Powder Mountain Ski Resort, Cache County, Utah, known as Powder Mountain Parcel 5 (the "Property"). On May 27, 2004, Lovesac executed a document entitled "Financing and Relationship Agreement" (the "Agreement").² The Agreement states that Defendant Powder Mountain Group Holdings, LLC ("PMGH") "has real property which it is willing to permit to be pledged by Lovesac to obtain debt financing under the terms and conditions hereinafter set forth."³ Specifically, PMGH agreed to:

convey legal title to [the Property] to Lovesac in fee to permit Lovesac to use said lands as collateral for financing required by Lovesac for its ongoing operations and for its planned expansion activities, but PMGH shall retain beneficial title to said lands. In connection with such conveyance PMGH agrees that PMGH does not have nor will it ever claim an interest in said lands which is superior to the interest of a lender to Lovesac which has taken a security interest in [the Property] as collateral for the funds advanced to Lovesac. PMGH's compensation for such conveyance is set out in a Memorandum of Understanding of even date herewith involving the parties to this agreement.⁴

The Agreement also contains a clause purporting to limit the extent of Lovesac's interest in the Property:

Regardless of the conveyance of legal title to the [Property] to Lovesac contemplated by this Agreement, and while Lovesac shall enjoy the right to pledge the same for the financing of its business activities as contemplated by this Agreement, PMGH, as the beneficial title holder, shall retain the exclusive right to market the [Property], and may actively pursue the sale or other disposition of the [Property] as if it were the owner of the legal title thereof.⁵

In addition, the Agreement also requires Lovesac to reconvey the Property to a third-party:

At such time as Lovesac has fully repaid any financing for which [the Property] were used as collateral, which shall not be not later [sic] than May 15, 2005, Lovesac shall reconvey legal title to [the Property] to PMGH's nominee, POWDER MOUNTAIN GROUP II, LLC, and shall not retain any interest therein.⁶

On May 25, 2004, two days prior to the execution of the Agreement, PMGH executed a warranty deed conveying title to the Property to Lovesac. The deed was recorded on May 26, 2004. On or about May 24, 2004, Lovesac also entered into a financing agreement with Triple Net Investments, Ltd. wherein Lovesac borrowed $2.5 million, the repayment of which was secured by trust deed on the Property.⁷

On December 6, 2004, Lovesac conveyed the Property back to PMGH by executing a quit claim deed. The quit claim deed was recorded on December 7, 2004. The books and records of Lovesac reflect that no consideration was received for the quit claim deed. The appraisal value of the Property, as of February 23, 2004 was approximately $15 million.

The Liquidating Trust filed the instant adversary proceeding on January 29, 2008, alleging, inter alia, that Lovesac's conveyance of the Property by quit claim deed constitutes an avoidable fraudulent transfer pursuant to 11 U.S.C. § 548. Subsequently, the Liquidating Trust filed a Motion for Summary Judgment. The Defendants' oppose the Motion. The issues have been fully briefed and are ripe for decision.

LEGAL DISCUSSION

A. Summary Judgment Standard

Rule 56(c) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Rule 7056 of the Federal Rules of Bankruptcy Procedure, directs that summary judgment "should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law."⁸

Summary judgment is designed "to avoid trial or extensive discovery if facts are settled and dispute turns on issue of law."⁹ Its purpose is "to pierce the boilerplate of the pleadings and assay the parties' proof in order to determine whether trial is actually required."¹⁰ Furthermore, summary judgment's operative goal is "to isolate and dispose of factually unsupported claims or defenses"¹¹ in order to avert "full-dress trials in unwinnable cases, thereby freeing courts to utilize scarce judicial resources in more beneficial ways."¹²

When requesting summary judgment, the moving party must "put the ball in play, averring an absence of evidence to support the nonmoving party's case."¹³ In order to continue, the burden shifts to the nonmovant to identify "some factual disagreement sufficient to deflect brevis disposition."¹⁴ Not every discrepancy in the proof, however, is enough to forestall a properly supported motion for summary judgment; the "disagreement must relate to some genuine issue of material fact."¹⁵ In other words, the summary judgment standard "provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment."¹⁶

In order to demonstrate the existence of a genuine issue of material fact in a jury trial, the nonmovant must supply sufficient evidence (not mere allegations) for a reasonable jury to find for the nonmovant.¹⁷ The same principles apply in a bench trial where the judge is the ultimate trier of fact; the nonmovant must obviate an adequate showing to the judge to find for the nonmovant.¹⁸ At the summary judgment stage, the court does not "weigh the evidence and determine the truth of the matter;" rather, the court determines "whether there is a genuine issue for trial."¹⁹ A material fact is one which "could alter the outcome" of the case. It is genuine when it is "triable," that is, when reasonable minds could disagree on the result.²⁰ Importantly, all reasonable inferences must be drawn in favor of the nonmoving party²¹ and any doubt must be read in favor of the nonmovant.²²

The requirement that the movant supply sufficient evidence carries a significant corollary: the burden of proof is switched to the non-movant who "must present definite, competent evidence to rebut the motion."²³ Such evidence "cannot be conjectural or problematic; it must have substance in the sense that it limns differing versions of the truth which a factfinder must resolve at an ensuing trial."²⁴ Furthermore, evidence that "is merely colorable or is not significantly probative" cannot deter summary judgment.²⁵ In response, "the non-moving party must adduce more than a mere scintilla of evidence in its favor;"²⁶ it cannot simply reassert factually unsupported allegations contained in its pleadings.²⁷ In other words, the non-moving party must do more than "simply show that there is some metaphysical doubt as to the material facts."²⁸ Conversely, in a situation where there is a complete failure of proof concerning an essential element of the nonmoving party's case, Rule 56(c) necessarily renders all other facts immaterial and mandates a ruling in favor of the moving party.²⁹

B. Constructively Fraudulent Transfers Under 11 U.S.C. § 548(a)(1)(B).

The Liquidating Trust asserts it is entitled to avoid the transfer of the Property pursuant to 11 U.S.C. § 548(a)(1)(B), which provides in relevant part:

The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily:

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.³⁰

Section 548(a)(1)(B) prohibits constructively fraudulent transfers. Although the section does not contain an intent element, fraud is presumed once the plaintiff establishes the requisite elements.³¹ The elements of a constructively fraudulent transfer are: (1) the debtor had an interest in property; (2) a transfer of that interest occurred within two years of the bankruptcy filing; ...