In re Triple S Restaurants, Inc.

• Decision Date: 30 August 2005
• Docket Number: No. 04-5297.,04-5297.
• Citation: 422 F.3d 405
• Parties: In Re: TRIPLE S RESTAURANTS, INC., Debtor, J. Baxter Schilling, Trustee, Appellee, v. Donald M. Heavrin, Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

422 F.3d 405

In Re: TRIPLE S RESTAURANTS, INC., Debtor,

J. Baxter Schilling, Trustee, Appellee, v. Donald M. Heavrin, Appellant.

No. 04-5297.

United States Court of Appeals, Sixth Circuit.

Argued: May 31, 2005.

Decided and Filed: August 30, 2005.

COPYRIGHT MATERIAL OMITTED

ARGUED: James A. Earhart, Louisville, Kentucky, for Appellant. J. Baxter Schilling, Louisville, Kentucky, for Appellee. ON BRIEF: James A. Earhart, Louisville, Kentucky, for Appellant. J. Baxter Schilling, Louisville, Kentucky, for Appellee.

Before: BOGGS, Chief Judge; GILMAN, Circuit Judge; and CLELAND, District Judge.^*

OPINION

GILMAN, Circuit Judge.

Donald M. Heavrin appeals from the judgment of the district court, which affirmed a decision of the bankruptcy court permitting J. Baxter Schilling, the Trustee for Triple S Restaurants (TSR), to avoid the fraudulent transfer of a life insurance policy and to recover the value of the transfer on behalf of TSR's creditors. The policy on the life of Heavrin's stepfather, Robert Harrod, was transferred from TSR to a trust benefitting Heavrin and his stepsister, Bobbie Bridges, shortly before TSR filed for bankruptcy. When the bankruptcy court determined that the transfer could be avoided, Heavrin and Bridges were ordered to pay the TSR Trustee the $250,000 that they had received from the insurance carrier, plus interest. The district court affirmed this decision, as well as the bankruptcy court's denial of the motion that Heavrin filed seeking to recuse the bankruptcy court judge.

On appeal, Heavrin argues that the transfer was not fraudulent because all of the proceeds from the life insurance policy had previously been assigned by TSR to the McDonnell Douglas Finance Corporation (MDFC), one of TSR's creditors, and therefore the policy was of no value to either TSR or the Trust. He also claims that the payment from MDFC, which he received through the Trust, was in settlement of unrelated lender-liability claims that Harrod's estate had against MDFC. For the reasons set forth below, we AFFIRM the judgment of the district court.

I. BACKGROUND

A. Factual background

In 1988, Michael Macatee and Robert Harrod formed TSR to obtain a franchise for the operation of Sizzler restaurants in Louisville, Kentucky. Each of them owned 50% of TSR's stock. Heavrin, a Kentucky lawyer who was Harrod's stepson, served as TSR's attorney.

Prior to the formation of TSR, negotiations regarding a loan had taken place between MDFC and S & B of Indiana, Inc., a predecessor in interest of TSR. The terms of a December 1987 commitment letter issued to S & B by MDFC required "Robert E. Harrod and Michael R. Macatee . . . to obtain Key Man Life Insurance in the minimum amount of $3,560,000.00 naming MDFC Equipment Leasing Corporation as beneficiary." When the loan agreement was actually executed three months later, in March of 1988, TSR was substituted for S & B. Harrod, Macatee, and TSR were all co-signers on the $3.56 million loan from MDFC, for which all three were jointly and severally liable.

Three days after securing the loan from MDFC, S & B purchased an insurance policy on Harrod's life from Transamerica Occidental Life in the amount of $2 million. S & B then transferred all of its interest in the Harrod policy to TSR. (Four policies were also obtained on the life of Macatee, each in the amount of $500,000, although the details regarding these policies are not reflected in the record.) In November of 1991, the Harrod policy from Transamerica was replaced by a $2 million policy issued by Jackson National. TSR made this substitution in order to save money on the premium payments for the Harrod policy. Shortly after the Transamerica policy was replaced by the Jackson National policy, Michael Forrester, an insurance agent and friend of Heavrin, completed a collateral assignment of the Harrod policy proceeds from TSR to MDFC.

Harrod and Macatee informed Heavrin in August of 1992 that TSR was in dire financial straits and that they wanted TSR to file a Chapter 11 bankruptcy petition. Heavrin advised them against filing for bankruptcy, instead counseling them to attempt to reach an arrangement with TSR's creditors that would enable TSR to remain in business. Less than a month later, a lawyer who shared office space with Heavrin drafted an irrevocable trust agreement (the Trust) in which Harrod was the grantor and trustee. The beneficiaries of the Trust were Heavrin and Bridges. Harrod transferred his 500 shares of TSR stock to the Trust in September of 1992.

TSR's financial condition continued to deteriorate, and, by November of 1993, it did not have the resources to make the quarterly premium payments on the Harrod policy. As a result, MDFC began to pay the premiums to ensure that the policy would not lapse. Making certain that the premium payments were submitted promptly became even more crucial in March of 1994, when MDFC was informed that Harrod had been diagnosed with lung cancer.

In June of 1994, Heavrin told MDFC that Harrod's cancer was terminal. Shortly thereafter, TSR transferred its ownership of the Harrod policy to the Trust without receiving any financial consideration. This transfer was executed on TSR's behalf by Macatee. At the time of the transfer, TSR owed hundreds of thousands of dollars in outstanding unsecured debts and was insolvent.

Three days after the Trust became the owner of the Harrod policy, Heavrin began negotiating with MDFC for a settlement on behalf of the Trust. On September 2, 1994, while these negotiations were ongoing, Harrod died. MDFC and Heavrin signed a settlement agreement a month later, on November 3, 1994. In accordance with this agreement, MDFC, as the beneficiary of the policy, instructed Jackson National to pay $250,000 of the proceeds to the Trust. Jackson National subsequently paid the Trust the $250,000 plus a small amount of post-death interest as required by the policy. Although Heavrin and Bridges were equal beneficiaries of the Trust, they apparently agreed that Bridges would receive $75,000 and that Heavrin would keep the remainder.

B. Bankruptcy court proceedings

In September of 1994, TSR filed for bankruptcy protection. MDFC filed a proof of claim against TSR for $3,304,165.63 two months later. No mention is made in this document of the $2 million in life insurance proceeds that were paid as a result of Harrod's death. At oral argument, however, counsel for Heavrin acknowledged that MDFC eventually credited TSR for the $1.75 million payment that MDFC received from the proceeds of the Harrod policy. But MDFC did not credit TSR for the entire $2 million of the policy proceeds, presumably because it subtracted the $250,000 payment that it directed Jackson National to pay to the Trust.

In July of 1996, the Trustee for TSR filed suit in the United States Bankruptcy Court for the Western District of Kentucky, seeking to avoid the transfer of the Harrod policy to the Trust under 11 U.S.C. §§ 544(b) and 548(a), and to recover the $250,000 plus interest paid to the Trust by Jackson National. The TSR Trustee alleged that the payment directed by MDFC to the Harrod Trust was facilitated by the Trust's ownership of the Harrod policy. Heavrin insisted, however, that the payment was in settlement of certain lender-liability claims that he had considered bringing against MDFC on behalf of Harrod's estate.

The bankruptcy court ordered the avoidance of the transfer under 11 U.S.C. §§ 544(b) and 548(a) on the grounds that the transfer was made without valuable consideration and with the intent to defraud TSR's creditors. Pursuant to 11 U.S.C. § 550(a), which permits a trustee to recover the property or the value of the property whose transfer was avoided under § 544 or § 548, the bankruptcy court held that the payment from Jackson National to the Trust was recoverable by the Trustee for the benefit of TSR and its creditors. Heavrin and Bridges were therefore ordered to pay the TSR Trustee the money that they had received through the Harrod Trust, together with interest at 8% per annum.

The bankruptcy court also directed Heavrin to disgorge approximately $46,000 of the roughly $153,000 in attorney fees that he was paid by TSR during the year preceding TSR's bankruptcy because Heavrin had failed to report these payments to the bankruptcy court as required by the Federal Bankruptcy Rules. See 11 U.S.C. § 329; Fed. R. Bankr.P.2016. Finally, the bankruptcy court denied Heavrin's petition requesting that Bankruptcy Judge David T. Stosberg recuse himself on the grounds of his alleged bias against Heavrin.

C. District court proceedings

Heavrin appealed the bankruptcy court's decision to the United States District Court for the Western District of Kentucky. The district court upheld the decision of the bankruptcy court with respect to the avoidance of the transfer, but did so under a different theory. It held that the transfer was avoidable under 11 U.S.C. § 548(a) on the basis of constructive fraud rather than actual fraud. The district court also upheld the denial by the bankruptcy court of Heavrin's recusal motion, but concluded that the bankruptcy court had erred in requiring Heavrin to disgorge approximately $46,000 of the attorney fees that he had received from TSR prior to the bankruptcy.

Heavrin timely appealed to this court, claiming that the district court had erred in affirming the avoidance of the transfer to the Trust and in upholding the bankruptcy court's denial of his recusal motion. He also argues, apparently for the first time, that the bankruptcy court erred in requiring him to pay prejudgment interest at a rate of 8% per annum on the attorney fees that he was ordered to disgorge.

D. Other appeals

Two previous appeals have been heard by this court in connection with the TSR bankruptcy. In Schilling v. Heavrin (In re Triple S Restaurants), 131 Fed.Appx. 486, Nos. 04-5194/5402, 2005 WL 1140625 (6th Cir. May 10, 2005) (unpublished) (per curiam) [herein...