In re Woodford

• Decision Date: 14 April 2009
• Docket Number: Adversary No. 06-1233.,Bankruptcy No. 06-10437-JNF.
• Parties: In re Peter J. WOODFORD, Debtor Blacksmith Investments, LLC, Plaintiff v. Peter J. Woodford, Defendant.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

403 B.R. 177

In re Peter J. WOODFORD, Debtor

Blacksmith Investments, LLC, Plaintiff v. Peter J. Woodford, Defendant.

Bankruptcy No. 06-10437-JNF.

Adversary No. 06-1233.

United States Bankruptcy Court, D. Massachusetts.

April 14, 2009.

COPYRIGHT MATERIAL OMITTED

David B. Madoff, Stacie D. McHale, Madoff & Khoury LLP, Foxboro, MA, for Plaintiff.

Anthony McGuinness, Jeffrey J. Cymrot, Sassoon and Cymrot, Boston, MA, for Defendant.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the Complaint filed by Blacksmith Investments, LLC ("Blacksmith" or the "Plaintiff") against the debtor, Peter J. Woodford ("Woodford" or the "Debtor"). Through its Complaint, Blacksmith seeks, pursuant to 11 U.S.C. § 523(a)(2)(A), to except from discharge an obligation relating to an "Agreement for Judgment and Issuance of Execution" ("Agreement for Judgment") executed by the Debtor before the commencement of his Chapter 7 case. Pursuant to the Agreement for Judgment, the Debtor and MacSteel Erectors, Inc. ("MacSteel"), a now-defunct corporation that was wholly owned by the Debtor, agreed to the entry of judgment, jointly and severally, in the sum of $200,000. The Agreement for Judgment pertained to Counts II, III, IV, and V of a Verified Complaint which Blacksmith filed against Boston Steel & Precast Erectors Holdings Trust, Boston Steel and Pre-Cast [sic] Erectors, Inc., Kathleen MacInnis, MacSteel, and Woodford in the Suffolk Superior Court Department of the Trial Court. In that proceeding, Blacksmith contended, among other things, that the Debtor conspired with Bernard MacInnis, Jr. ("MacInnis"), who served as one of two officers of Boston Steel and Precast Erectors, Inc. ("BSPE"), to create MacSteel and to transfer all of BSPE's assets to MacSteel to avoid paying its creditors.

The Court consolidated trial of Blacksmith's Complaint with its "Objection to Debtor's Exemption of Retirement Annuity." On Schedule C-Property Claimed as Exempt, the Debtor initially chose the federal exemptions under 11 U.S.C. § 522(b)(2) and claimed the annuity as exempt in the sum of $205,796.72, referencing 11 U.S.C. §§ 522(d)(10)(E), (d)(12), as well as 11 U.S.C. § 541(c)(2). Blacksmith objected to the claim of exemption. Following Blacksmith's objection to his exemption of the annuity, the Debtor moved to amend Schedule C and filed an Amended Schedule C on April 24, 2006, electing the Massachusetts exemptions pursuant to 11 U.S.C. § 522(b)(3), and specifically claiming the annuity exempt pursuant to Mass. Gen. Laws 234, § 34A [sic]. Blacksmith never filed an objection to the Debtor's amended Schedule C.

On January 13, 2009, the Court conducted a trial at which two witnesses testified and seven exhibits were introduced into evidence. Following the trial, the parties submitted briefs. The issues presented are whether certain transfers, which the Debtor conceded were fraudulent transfers voidable under Mass. Gen. L. Ch. 109A, § 5(a)(1) as part of the Agreement for Judgment, amounted to a debt for money, property, or services obtained by "false pretenses, a false representation, or actual fraud" which would except the $200,000 debt from discharge under 11 U.S.C. § 523(a)(2)(A); and whether the Debtor should be denied his claim of exemption with respect to the annuity because he borrowed funds from his annuity based upon a false representation.

The Court now makes its findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.

II. FACTS

BSPE was in the business of erecting large scale buildings and structures. It was organized on November 21, 2001 and dissolved involuntarily on May 31, 2007. MacInnis served as president, treasurer and sole director of BSPE, and his spouse, Kathleen MacInnis, served as the assistant treasurer.

On January 15, 2002, BSPE entered into a transaction whereby it purchased certain assets, including tools and equipment, from Boston Steel Erectors, Inc. ("BSE"). Following the transaction, BSPE entered into a consulting contract with Robert J. Saraceno ("Saraceno"), BSE's president and treasurer. Saraceno testified that BSPE granted him a security interest in all assets of BSPE.

Approximately two weeks after the sale transaction, on January 29, 2002, BSE, through Saraceno, and BSPE, through MacInnis, as well as Boston Steel Erectors Holdings Trust and Boston Steel & Precast Erectors Holdings Trust, executed and delivered a Demand Revolving Line of Credit Note (the "Note") in the amount of $1,200,000 to Citizens Bank of Massachusetts ("Citizens"). The Note required monthly payments and the full outstanding balance was due and payable on demand. The Note was secured by a lien on all of assets of BSPE and Boston Steel & Precast Erectors Holdings Trust and was guaranteed by Saraceno and MacInnis.

The Debtor, a union ironworker, had been an employee of BSE since the late 1990s and became an employee of BSPE in 2002. During the course of his employment he had advanced to the position of foreman and had become involved in estimating jobs, using a computer program owned by BSPE for that purpose.

According to Saraceno, BSPE had sales, "in the neighborhood of six, seven million dollars," and employed about 110 workers. Despite its sales, in early 2003, it encountered serious financial difficulties. Saraceno advised MacInnis to refrain from drawing down BSPE's line of credit with Citizens and to concentrate on collection of its accounts receivable. On or about August 13, 2003, BSPE stopped making payments to Citizens.

Facing unemployment, the Debtor was receptive to MacInnis's idea to start a new company. With the assistance of MacInnis, the Debtor incorporated MacSteel on April 11, 2003. The Debtor was the sole officer and director of MacSteel, which employed MacInnis. In addition to shepherding the Debtor through the process of obtaining an attorney to incorporate MacSteel, MacInnis assisted him in opening a bank account for the company at Sovereign Bank, and both he and MacInnis had check signing authority.

MacSteel appropriated the tools, equipment, office files, computers and computer programs, including billing and estimating software, owned by BSPE for no consideration. Further, MacSteel used BSPE's office before moving its operations to the basement of MacInnis's home. MacSteel did not pay rent to MacInnis for use of space in the basement. MacSteel also employed BSPE's former office assistant, Renee Coyne, whom MacSteel paid "under the table." The Debtor also caused MacSteel to complete one of BSPE's contracts without any rebidding of the job. The Debtor received compensation in the sum of $130,000 from MacSteel. MacSteel eventually paid MacInnis the same salary.

In order to fund MacSteel's operations, the Debtor borrowed money from MacInnis. Additionally, he borrowed $50,000 from his annuity with the Iron Workers District Council of New England by representing that the purpose of the loan was to purchase a residence rather than to fund his new business. The Debtor repaid the loan in full in 2005.

As noted, MacSteel operated from BSPE's Saugus office, but later moved to McGinnis's basement. Saraceno visited BSPE's Saugus office to collect receivables and had the opportunity to observe operations. It is unclear whether he realized that MacSteel was utilizing BSPE's furniture, printers, computers, and software located there for its business operations. In March of 2004, MacSteel changed the location of its principal office from MacInnis's basement to Malden, Massachusetts.

The Debtor had no experience operating or managing a company before incorporating MacSteel. He continued with his responsibilities as foreman and relied upon MacInnis to assist him with office work and estimating jobs for fabricators. While the Debtor's self-interest in remaining employed and receiving a lucrative salary were evident from his testimony, his lack of sophistication with respect to business matters also was evident.

On August 14, 2003, after BSPE defaulted on the Note, Citizens delivered a written demand for payment to BSPE. It also demanded payment from Saraceno on his guaranty. Blacksmith paid the full balance due under the Note, and, in consideration for repayment, Citizens, on November 6, 2003, executed an Allonge pursuant to which it assigned to Blacksmith all its rights under the Note. The principal amount due under the Note as of August 29, 2003 was $387,100, exclusive of interest, late charges, costs and expenses.

On or about February 23, 2004, Blacksmith commenced an action in Suffolk Superior Court, captioned Blacksmith v. Boston Steel & Precast Erectors, Inc., et al, Civ. No. 04-0775, seeking to recover approximately $387,000 from BSPE, Boston Steel & Precast Erectors Holdings Trust, Kathleen MacInnis, MacSteel, and the Debtor under a variety of legal theories. Blacksmith's Verified Complaint set forth the following counts: Count I: Action on the Note; Count II: Successor Liability — MacSteel; Count III: Actual Fraudulent Transfer — MacSteel (citing Mass. Gen. Laws ch. 109A, § 5(a)(1));¹ Count IV: Constructive Fraudulent Transfer — MacSteel (citing Mass. Gen. Laws ch. 109A, § 6(a));² Count V: Personal Liability for Fraudulent Transfers — Woodford (citing Mass. Gen. Laws ch. 109A, §§ (5)(a)(1) and 6(a)); Count VI: Actual Fraudulent Transfer — Kathleen MacInnis; Count VII — Constructive Fraudulent Transfer — Kathleen MacInnis; Count VII — Turnover of Collateral — MacSteel; and Count IX: Preliminary Injunction — MacSteel. Saraceno testified that after filing suit, MacSteel turned over some of the tools and equipment that it obtained from BSPE to Blacksmith, which sold them for an indeterminate sum.

On or about September 30, 2005, Blacksmith, Saraceno, MacSteel, and the Debtor entered into a Settlement Agreement pursuant to which the Debtor agreed to entry of a judgment against him in the amount of $200,000 on Counts II, III, IV and V. The Settlement...