In the Matter of Shelton, Case No. 07-81534-JAC-7 (Bankr. N.D. Ala. 11/4/2009), Case No. 07-81534-JAC-7.
| Decision Date | 04 November 2009 |
| Docket Number | A.P. No. 07-80096-JAC-7.,Case No. 07-81534-JAC-7. |
| Parties | In the Matter of: TIMOTHY D. SHELTON SSN: XXX-XX-8676, Chapter 7, Debtor(s). AAFCOR, LLC, Plaintiff(s), v. TIMOTHY SHELTON, FRANK SPIRES, JIM POPE, KENNETH SHELTON, and LAUDERDALE COUNTY TEACHER CREDIT UNION, Defendant(s). |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
This case is before the Court on cross motions for summary judgment filed by defendant, Kenneth Shelton, and plaintiff, AAFCOR, LLC, and on cross motions for summary judgment filed by plaintiff and debtor, Timothy Shelton.1 The Court having reviewed the submissions of the parties and considered the oral arguments presented by counsel for all parties, hereby finds that for the reasons set forth below, partial summary judgment in favor of Kenneth Shelton is due to be and is GRANTED on the fraud and conspiracy claims asserted by AAFCOR against Kenneth Shelton. By separate order, the Court will set the partnership claims asserted by AAFCOR against Kenneth Shelton for status conference. As to defendant, Timothy Shelton, the Court finds for the reasons set forth below, summary judgment is due to be and is GRANTED in favor of the debtor on all claims asserted by AAFCOR. There being no just cause for delay, pursuant to Fed. R. Civ. P. 54 and Fed. R. Bankr. P. 7054, the COURT hereby certifies this ORDER as FINAL.
Pursuant to Federal Rule of Civil Procedure 56(c) and Federal Rule of Bankruptcy Procedure 7056, summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986); Gray v. Manklow (In re Optical Tech., Inc.), 246 F.3d 1332, 1334 (11th Cir. 2001); and Fitzpatrick v. City of Atlanta, 2 F.3d 1112 (11th Cir. 1993). "In making this determination, the court must view all evidence and make all reasonable inferences in favor of the party opposing summary judgment." Chapman v. A1 Transp., 229 F.3d 1012, 1023 (11th Cir. 2000). Where both parties seek summary judgment, the court must consider each motion independently and apply the applicable standards to each motion to determine whether summary judgment is appropriate under either motion. Smith v. Fendley (In re Allied Sign Co., Inc.), 280 B.R. 694 (Bankr. S.D. Ala. 2001).
1. AAFCOR is comprised of two individuals, Donna Zerbo and David Hirsch, who are sophisticated and experienced in complex financing transactions involving personalty and realty. (Id. at 26, 37).
2. Donna Zerbo has specialized in tax and securities law in New York for over 25 years. (Id. at 15-16, 56, 265-67). Ms. Zerbo has an LLM in tax, and is a certified public accountant. (Id. at 56, 265-67). Ms. Zerbo has vast experience in real estate transactions, structuring loans secured by real and personal property, providing complex financing, and auditing business financials. (Id. at 17-21, 82-83, 258).
3. For three decades, David Hirsch's main profession has been asset purchasing and restructuring debt for distressed multi-million dollar companies. (Depo. of David Hirsch, pp. 12-21). He has actively invested in such companies, including purchasing the assets of an airline, for the purpose of making them profitable and then reselling them. (Id. at 28-36). In prior business dealings, Hirsch always independently verified through his CPA the financial condition and assets of any prospective company to be purchased to ensure that company's representations were accurate. (Id. at 34-35). Hirsch is experienced in conducting due diligence and has done so on numerous occasions. (Id. at 28-36).
4. Plaintiff, AAFCOR, LLC, is an entity formed for the purpose of interacting with the debtor in this bankruptcy proceeding, Timothy Shelton, and his various water businesses, including Springfield Premium Natural Water, Inc. ("SPNW"). (Depo. of Donna Zerbo, pp. 30-32, 45, 109-10). The debtor engaged AAFCOR to make working capital loans, to provide business advice, and to increase the profitability of his water businesses. The goal was to obtain rural development loans to take out the approximately $6.5 million debt the debtor owed on the debtor's water business. Ultimately, pursuant to two promissory notes AAFCOR loaned in excess of $1.5 million to the debtor using as collateral the debtor's assets. While AAFCOR denies that it is a venture capitalist or vulture investor, it appears that AAFCOR's plan was to eventually take an ownership position in SPNW, a heavily indebted business, which some commentators have referred to as loan-to-own investments. Regardless of how one characterizes AAFCOR, the plaintiff was compromised of highly sophisticated individuals who were well aware of the risk involved in the loans it made to the debtor.
5. The debtor was sole shareholder and owned one-hundred percent of the stock of SPNW. (Exhibit 5 to the Depo. of Donna Zerbo; Affidavit of Timothy Shelton, ¶ 4). SPNW was in the business of providing water to municipalities and bottling water. (Affidavit of Timothy Shelton, ¶ 4). The debtor also owned a plastic water bottling company called Tennessee Valley Bottling Company, LLC ("TVBC").
6. Kenneth Shelton, the debtor's brother, owns a forty-acre parcel of property containing an ADEM permitted water well and two metal buildings, and the two adjoining parcels of land, all known in this litigation by the name "Springfield property." (Affidavit of Kenneth Shelton, ¶ 13).
The water well, buildings, and all other improvements are located on one, undivided 40 acre parcel of property. (Affidavit of Kenneth Shelton, ¶ 13).2 The buildings, which are directly adjacent to the well, occupy less than an acre of land on that 40 acre parcel. (Affidavit of Kenneth Shelton, ¶ 4). While the plaintiff, AAFCOR, often refers to the buildings as the Springfield plant property and the ADEM water well as the Springfield well property, both the Springfield office buildings and the well are located on the same 40 acre parcel of land used by the debtor in operating SPNW.
7. Kenneth Shelton purchased the Springfield property from the debtor on August 31, 2000 and properly recorded the deed to the Springfield property at the Lauderdale County, Alabama Probate office on September 1, 2000. (Depo. of David Hirsch, pp. 138, 244-46; Depo. of James Pope, pp. 138-41, 162-64, Affidavit of Kenneth Shelton, ¶ 10, Exhibit 1). Kenneth Shelton's deed to the property is properly recorded and is a matter of public record. (Depo. of Timothy Shelton, pp. 286-87; Affidavit of Kenneth Shelton, ¶¶ 10 and 11; Affidavit of James Pope, ¶ 9). Kenneth Shelton borrowed $470,000.00 from the Federal Land Bank to purchase the Springfield property, and in return granted the Federal Land Bank a mortgage on both the Springfield property and a separate 60 acres of land that he owned.3 The debtor did not receive any actual sale proceeds from the transfer, other than the satisfaction of his loan to First Southern Bank which was threatening foreclosure prior to the sale. There have been no subsequent transfers of the property.
8. AAFCOR alleges that Timothy Shelton presented a written financial statement to plaintiff which debtor signed on April 5, 2006. AAFCOR alleges that the financial statement is replete with erroneous values reflecting that the debtor was worth in excess of $15 million dollars, and that the statement incorrectly reflects that the debtor owned the Springfield well and plant property. Although Kenneth Shelton owned the Springfield property, AAFCOR asserts that the debtor held it out as his own. AAFCOR admits, however, that it learned early on that the Springfield property, at least the well, was owned by Kenneth Shelton.
9. AAFCOR alleges that Kenneth Shelton, the debtor's brother, was a partner with his brother in the water businesses; that Kenneth defrauded AAFCOR by telling the plaintiff that his brother owned the business property on which the debtor operated SPNW and, thereby, enticed AAFCOR to loan money to the debtor even though Kenneth actually owned the property upon which the debtor's business sat; or that Kenneth fraudulently suppressed the fact that he owned same. Alternatively, AAFCOR contends that Kenneth Shelton conspired with the other defendants to conceal the true ownership of the business property.
10. With Kenneth Shelton's consent, SPNW continued to operate on the Springfield property subsequent to the transfer. (Affidavit of Timothy Shelton, ¶ 13). There was, however, no written lease or other written agreement between Kenneth, the debtor, or SPNW as to the use of the Springfield property. As it was in the business of supplying water to municipalities and bottling water, SPNW could not operate without water from the water well located on the Springfield property, which was its sole water source. With the water from the Springfield well, SPNW provided water to the Town of Lexington and TVBC, debtor's water bottling business. SPNW collected revenues of approximately $140,000.00 per year from the Town of Lexington.
11. Immediately, subsequent to the transfer of the Springfield property to Kenneth Shelton, AAFCOR asserts that Timothy and Kenneth executed a contract with the Town of Lexington to provide water to the town in which the parties were represented as "Partners." While counsel for Kenneth Shelton argued at the summary judgment hearing that the contract was merely a draft, AAFCOR asserts that SPNW supplied water to the Town of Lexington under same for more than three years. In 2003, a new contract was negotiated between Timothy Shelton and the Town of Lexington without Kenneth's signature.
12. Subsequent to the Springfield property transfer, AAFCOR...
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