Jadco Enters., Inc. v. Fannon

• Decision Date: 08 January 2014
• Docket Number: Civil Action No. 6:12–225–DCR.
• Citation: 991 F.Supp.2d 947
• Court: U.S. District Court — Eastern District of Kentucky
• Parties: JADCO ENTERPRISES, INC., Plaintiff, v. James D. FANNON, et al., Defendants.

991 F.Supp.2d 947

JADCO ENTERPRISES, INC., Plaintiff,

v.James D. FANNON, et al., Defendants.

Civil Action No. 6:12–225–DCR.

United States District Court,

E.D. Kentucky,

Southern Division,

(at London).

Jan. 8, 2014.

Stanton L. Cave, Law Office of Stanton L. Cave & Associates, P.S.C., Lexington, KY, for Plaintiff.

William W. Allen, Gess, Mattingly & Atchison, P.S.C., Lexington, KY, for Defendants.

MEMORANDUM OPINION AND ORDER

DANNY C. REEVES, District Judge.

Defendants James Fannon, Benjamin Fannon, C & F Contractors, LLC (“C & F”), J and H Enterprises of Virginia, LLC (“J & H”), and Fannon Brothers Tire, Inc. (“FBT”) have filed a Motion for Reconsideration of the Court's November 15, 2013, Memorandum Opinion and Order. [Record No. 67] Alternatively, they request a separate trial for FBT. For the reasons discussed below, the motion will be granted, in part, and denied, in part.

I.

Plaintiff Jadco Enterprises, Inc., (“Jadco”) is a Kentucky corporation involved in the mining and selling of coal. [Record No. 34, p. 2] Defendant C & F is in the business of hauling coal and Defendant J & H is a coal transportation subcontractor with James and Benjamin Fannon as its sole members and managers. [Record No. 53–2, p. 2] C & F transports coal through various subcontractors such as J & H. [Record No. 53–2, p. 2] Defendant FBT is a Virginia corporation that sells tires to various companies including J & H. [ Id., p. 3] FBT is wholly-owned by David Fannon, the father of James and Benjamin Fannon. [ Id.]

This case involves a purchase order for coal involving Jadco and some of the defendants. Jadco alleges that James Fannon committed fraud by issuing the purchase order with no intent to pay. It further contends that James Fannon made preferential transfers and that the defendants made fraudulent conveyances involving the proceeds of the transaction. Jadco also claims that the corporate veil of C & F and J & H should be pierced and that James Fannon may be held personally liable for the alleged fraudulent conduct.

According to Jadco, this dispute commenced when C & F breached a contract with Century Coal, LLC (“Century Coal”), a limited liability corporation involved in mining and selling coal. In early 2009, Century Coal was experiencing financial problem, causing James Fannon and C & F to make multiple attempts to obtain payment for hauling services previously provided by C & F to Century Coal. [Record Nos. 54–2, p. 87 and 54–3, pp. 55–80] Around this time, C & F was also experiencing financial problems, as reflected by a 50% reduction in deposits (from April 2009 to May 2009). [Record No. 54–9] C & F was also indebted to J & H for trucking services, while J & H owed FBT for tires it had purchased. [Record No. 54–10]

On June 10, 2009, James Fannon attempted to issue another purchase order to Century Coal. [Record No. 54–12] However, the transaction was declined by Larry Heatherman, an employee of Century. Heatherman advised Fannon that Jadco was mining on the same property so he could issue the purchase order to Jadco. [Record No. 54–13, pp. 1–2] The purchase order in question was issued to Jadco on June 11, 2009, for 2,500 tons of coal for a purchase price of $60.00 per ton. [Record Nos. 54–15 and 34, p. 3]

Jadco delivered the coal to C & F after the purchase order was issued. But after paying the first invoice for $7,989.00, C & F did not pay the remainder of the amount due. [Record No. 53–2, p. 2] Instead, C & F sold the coal for $138,536.13. [ Id.] C & F then issued several checks to J & H for $160,800 and two checks to James and Benjamin Fannon each for $3,875. The defendants claim that these checks reflected payment of valid, preexisting debt to J & H and James and Benjamin Fannon. [Record No. 53–2, p. 4] And they further contend that the payments made to Benjamin and James Fannon were compensation, made in the ordinary course of business. [ Id.]

From June 15, 2009, to February 22, 2010, J & H also issued several checks to FBT. [Record No. 34, pp. 5–6] The defendants claim that these checks were payments of valid, preexisting debts for tires and other services provided by FBT. J & H also issued several checks to FBT. The defendants claim that this was in payment of a valid pre-existing debt.

On August 30, 2013, the defendants moved for summary judgment. [Record No. 53] This Court denied the motion, in part, and granted it, in part. [Record No. 66] The Court dismissed Jadco's preferential transfer claim against J & H and Benjamin Fannon as being time-barred. The Court also dismissed Jadco's attempt to pierce the corporate veil regarding Benjamin Fannon, but allowed piercing for James Fannon. The Court denied the remainder of the defendants' motion for summary judgment. Those rulings are the subject of the defendants' current motion.

II.

Motions to reconsider under Rule 60(b) give an “opportunity for the court to correct manifest errors of law or fact and to review newly discovered evidence or to review a prior decision when there has been a change in the law.” United States v. Davis, 939 F.Supp. 810, 812 (D.Kan.1996). Rule 60(b) motions fall within the sound discretion of the district court. FHC Equities, L.L.C. v. MBL Life Assurance Corp., 188 F.3d 678, 683 (6th Cir.1999). Such motions seek extraordinary judicial relief and can be granted only upon a showing of exceptional circumstances. McAlpin v. Lexington 76 Auto Truck Stop, Inc., 229 F.3d 491, 502–03 (6th Cir.2000) (citing Dickerson v. Bd. of Educ. of Ford Heights, 32 F.3d 1114, 1116 (7th Cir.1994)).

The defendants raise four issues in their motion for reconsideration. They contend that: (i) the Court erred by applying the badges of fraud analysis to the fraudulent conveyance issue because of the existence of a pre-existing debt; (ii) the standard for rebutting badges of fraud should not be heightened; and (iii) there was no genuine issue of material fact regarding the preexisting debt. In addition, the defendants argue that a separate trial should be ordered for FBT. For the reasons explained below, the Court agrees with the defendants regarding the second issue raised in their motion.

III.

A. Effect of Pre–Existing Debt

The defendants claim that when there is proof of a valid, underlying pre-existing debt there can never be a fraudulent conveyance, even if badges of fraud are present and even if there is actual intent to defraud a creditor. Precedent in Kentucky is mixed on this issue.

The Kentucky Revised Statutes defines a fraudulent conveyance broadly, as “[e]very gift, conveyance, assignment or transfer of, or charge upon, any estate, real or personal, or right or thing in action, or any rent or profit thereof, made with the intent to delay, hinder or defraud creditors, purchasers or other persons[.]” KRS § 378.010. The defendants urge the adoption of the rule that repayment of debt to a pre-existing creditor can never constitute a fraudulent conveyance and can only constitute a preferential transfer. Yet, if there is a payment of a preexisting debt, but it is done with the intent to “delay, hinder or defraud creditors, purchasers or other persons” it meets the explicit standard in the statute. Id.

A transfer between two related parties is typically a badge of fraud. Bolling v. Adams, 296 S.W.2d 696, 699 (Ky.Ct.App.1956) (citing Howard v. First Nat'l Bank of Harlan, Ky., 270 Ky. 586, 110 S.W.2d 293 (Ky.Ct.App.1937); Campbell v. Dixon, 308 Ky. 476, 214 S.W.2d 996, 997 (Ky.Ct.App.1948); Daniels v. Harp, 300 Ky. 867, 190 S.W.2d 664 (Ky.Ct.App.1945); Hager v. Coleman 307 Ky. 74, 208 S.W.2d 518, 519 (Ky.Ct.App.1948)). However, the defendants argue that the “payment of pre-existing debt is, in effect, a safe harbor from a fraudulent conveyance action.” [Record No. 67–1, p. 8] They cite Seiler v. Walz, 100 Ky. 105, 29 S.W. 338 (Ky.Ct.App.1895), in support of their position.

In Seiler, George A. Seiler purchased land from his father, George F. Seiler, for $268, even though the value of the land was $1,300. The remainder of the amount paid offset a debt owed to George A. Seiler by his father. Id. Walz sued the Seilers, alleging that the conveyance was fraudulent. However, the court held that, “to the extent the father was indebted to the son there could have been no fraudulent intent in the meaning of the section under which this suit was brought.” Id. at 339.

In Farmer's Bank of Fountain Run v. Hagan, the Kentucky Court of Appeals held that, “[a]s a general rule, pre-existing indebtedness is a sufficient consideration to uphold a conveyance given in payment of or as security of such indebtedness; and such a conveyance in payment of bona fide antecedent indebtedness should not be set aside unless the fair and reasonable value of the property is greatly in excess of the amount of the indebtedness.” 242 Ky. 535, 46 S.W.2d 1084, 1087 (Ky.Ct.App.1932). However, the Hagan court also found that “[i]n the absence of fraud, a conveyance to a wife by the husband, in satisfaction of or as security for such indebtedness, will be upheld when attacked as fraudulent, even though it may be preferential.” Hagan, 46 S.W.2d at 1087 (emphasis added). Notably, the Court inquired into the attendant badges of fraud. Id. (asserting that a husband to wife conveyance is a badge of fraud which the defendant rebutted upon the shifting of the burden.).

Next, in First National Bank v. Williamson, the court held that “it appears that the ‘badges of fraud’ which the appellant maintains were disclosed were fairly and clearly explained away and the transaction shown to have been for a valuable consideration and in good faith as measured by the terms of [the fraudulent conveyance statutes].” 273 Ky. 116, 115 S.W.2d 565, 567 (Ky.Ct.App.1938). The court analyzed the badges of fraud, the valuable consideration for the preexisting debt, and the good faith of the transaction and found that the defendants had rebutted the badges of fraud.

Contrary to the defendants' argument, the court's...