Kotoshirodo v. Brennan (In re Lull)
| Decision Date | 30 December 2011 |
| Docket Number | CIVIL NO. 11-00349 SOM-BMK,Adversary No. 10-90084,Bankr. Case No. 06-00898 |
| Parties | In re: JAMES WILLIAM LULL, Debtor, RONALD KOTOSHIRODO, Chapter 7 Trustee, Appellant, v. WILLIAM F. BRENNAN, Appellee. |
| Court | U.S. District Court — District of Hawaii |
COURT'S PARTIAL SUMMARY
JUDGMENT IN FAVOR OF TRUSTEE
AND FINAL JUDGMENT IN FAVOR
OF TRUSTEE, AND REMANDING CASE
ORDER REVERSING BANKRUPTCY COURT'S PARTIAL
SUMMARY JUDGMENT IN FAVOR OF TRUSTEE AND FINAL
Before the court is an appeal from a judgment entered by the United States Bankruptcy Court for the District of Hawaii ("Bankruptcy Court"). The question on appeal is whether Appellant William F. Brennan ("Brennan") had an "insider" relationship with Debtor James Lull ("Lull") such that Appellee Ronald Kotoshirodo, United States Trustee ("Trustee"), may recover, as avoidable preferences, funds transferred to Brennan. A determination that a person or entity has "insider" status allows recovery from that insider of funds preferentially transferred up to a year before the filing of a bankruptcypetition. Absent "insider" status, such recovery is typically limited to transfers made within 90 days of the filing of the bankruptcy petition. The transfers in issue on this appeal (totaling $371,500.00 plus a mineral collection) occurred nearly nine months before Lull filed his bankruptcy petition.
The Bankruptcy Court granted summary judgment to the Trustee, ruling that Brennan was indeed an insider. This court REVERSES the Bankruptcy Court's ruling, concluding that the Trustee does not meet his burden of establishing that Brennan was an insider. The court REMANDS the case to the Bankruptcy Court for further proceedings.
The United States Bankruptcy Court's Findings of Fact and Conclusions of Law, filed on April 26, 2011 in Bk. No. 06-00898, Adv. No. 10-30084, set forth the basic facts of this case. See Findings of Fact and Conclusion of Law, Apr. 21, 2011, Adv. No. 10-90084, ECF No. 65; In re James William Lull (Kotoshirodo v. Brennan), Bk. No. 06-00898, Adv. No. 10-90084, 2011 WL 1587359 (Bankr. D. Haw. Apr. 26, 2 011). To the extent those facts are undisputed, the court here incorporates that statement of facts, supplementing it as appropriate.
Lull was charged with having run a Ponzi scheme in which victims lost millions of dollars. He pled guilty in 2008 to a federal charge of wire fraud, but died, in what appears tohave been a suicide, on May 14, 2009, the day he was to appear to be sentenced by this very district judge. See Findings of Fact and Conclusion of Law 2, Adv. No. 10-90084, ECF No. 65; see also Docket Sheet in Crim. No. 08-00564SOM. There is neither an allegation nor any evidence that Brennan engaged in any deceitful or illegal conduct or knowingly collaborated with Lull in fraudulent activities.
Lull had filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on December 8, 2 0 06, and the Trustee was thereafter appointed. Findings of Fact and Conclusions of Law 3, Adv. No. 10-90084, ECF No. 65. On March 27, 2007, Brennan and his wife filed a proof of claim in the amount of $410,724.39, based on loans they had made to Lull. Id. The Bankruptcy Court found that, in the year preceding the filing of Lull's bankruptcy petition, Lull had made transfers to, or for the benefit of, Brennan totaling $371,500. Id. at 4. The Bankruptcy Court's finding does not include any reference to Mrs. Brennan with respect to these transactions. The Bankruptcy Court found that, within that same time period, Lull also transferred a mineral collection to Brennan. Id. Again, there is no mention of Mrs. Brennan in this finding.
At the time of the transfers to Brennan, Lull was an officer, director, and 50-percent owner of Kauai Lease and Loan, Inc. ("KLL"), which was the managing member and owner of morethan 20 percent of Kapaa 382 LLC ("K382 LLC"), a Hawaii limited liability company. Id.
The parties disagree as to the extent of Brennan's connection to K382 LLC. The documentary evidence on this point consists of two purported agreements.
The first agreement, bearing the title "Subscription Agreement," is not signed by either William Brennan or his wife, Judith Brennan. See Subscription Agreement (May 2, 2000), attached as Exhibit "A" to Supp. Br. of Def. William F. Brennan Regarding The Subscription Agreement And Joint Ownership Interests, Adv. No. 10-90084, ECF No. 59-1. Their names, without any description, appear in handwriting on the "Name of Subscriber" line, but nowhere else in the document. Id. at 1. The text of the Subscription Agreement repeatedly refers to "the undersigned," stating, for example, that "the undersigned hereby subscribes for and agrees to purchase" certain interests, that "The undersigned understands that the Company [K3 82 LLC] is relying upon the accuracy and completeness of this Subscription Agreement" and that "The undersigned hereby indemnifies and holds the Company . . . harmless." See id. at 1-6. Curiously, there is not even a signature line for "the undersigned" subscriber! The only signature is that of William Hancock, the President of KLL, acknowledging the "Company's" acceptance of the subscription on May 2, 2009. Id. at 8.
The first page of the Subscription Agreement contains handwriting that fills in blanks and that notes changes with differing effective dates. Id. at 1. The President's (but not Brennan's) initials or signature accompanies the various edits. Id. The document states that $50,000 is the price of each "Membership Interest." Id. It appears that 8 interests were at one time to be purchased for $400,000.00, but the "8" was changed to "10," then to "15," and the price correspondingly changed to "$500,000.00," then to "$750,000.00." Id. The Company's acceptance of the subscription was not changed and reflects acceptance of a subscription for only 8 units.
The effect of the Subscription Agreement is unclear. Characterizing himself as a victim of Lull's schemes, Brennan says that, while he and his wife did pay for 15 units, they never actually received anything evidencing ownership. See Appellant's Opening Br. 17-18, ECF. No. 5. Apparently relying on a declaration by William Hancock stating that the Brennans owned 24.5 percent of K382 LLC and a corroborating statement by Brennan in a memorandum he filed ("There is evidence consistent with Defendant's understanding, that he and his wife each owned $12.25% individually"), the Bankruptcy Court found that each of the Brennans "owned a 12%% interest, so those 15 membership interests represented 25% of the voting securities of K382 LLC."Findings of Fact and Conclusions of Law 4.1 (The Bankruptcy Court's reference to 25 percent instead of 24.5 percent appears to be an inadvertent error that does not affect this court's analysis.)
In finding that the 24.5 percent interest that the Brennan's had was "25% of the voting securities of K382 LLC," the Bankruptcy Court may have been relying on K382 LLC's Amended and Restated Operating Agreement or on the second critical document in this appeal, a document with the simple title "Agreement." See Agreement (Aug. 30, 2006), attached as Exhibit "1" to Pl.'s Post-Hr'g Br. on the Extent of Def. William F. Brennan's Ownership in K382, Adv. No. 10-90084, ECF. No. 60. The Agreement resolved claims by the Brennans against K3 82 LLC, effective August 30, 2006, a little less than nine months before Lull filed his bankruptcy petition. In this document, K3 82 LLC agreed to buy back the Brennans' shares in K3 82 LLC and to make periodicpartial payments of the purchase price from the proceeds of the anticipated sale of certain condominium units. The document also stated that each "Remaining Member" of K382 LLC (i.e., members after the Brennans released their Membership Interests) was "entitled to that number of votes determined in accordance with that Remaining Member's percentage of shares in the company pursuant to Kapaa 382's Amended and Restated Operating Agreement." Id. at 5.
The Bankruptcy Court paid particular attention to the statement in the 2006 Agreement that "William F. Brennan and Judith E. Brennan are Class B members of Kapaa 3 82 and presently jointly own fifteen (15) Class B shares in Kapaa 382." Findings of Fact and Conclusions of Law 4-5, Adv. No. 10-90084, ECF No. 65. The nature of Brennan's membership and the manner in which he held the interests were vigorously contested by the parties in the Bankruptcy Court.
The Trustee's motion for summary judgment came before the Bankruptcy Court on January 20, 2011. Id. at 3. The Bankruptcy Court granted the motion as to all elements of avoidable preferences, except the question of whether Brennan was an "insider" as defined in 11 U.S.C. § 101(31). Id. See Order Granting in Part Pl.'s Mot. for Partial Summ. J. as to Def. William F. Brennan's Receipt of Preferences and for Subordination or Disallowance of Claim Filed Nov. 16, 2010, Adv. No. 10-90084,
A hearing on the "insider" issue that the Bankruptcy Court had reserved was held on March 17, 2011. The Trustee argued, and the Bankruptcy Court agreed, that Brennan had an insider relationship with Lull, meaning that any transfer within a year of the filing of Lull's bankruptcy petition from Lull to Brennan could be avoided and recovered by the Trustee. Findings of Fact and Conclusions of Law 5-9, Adv. No. 10-90084, ECF No. 65. Specifically, the Bankruptcy Court constructed an "'insider' chain connecting Debtor to Defendant[,]" with KLL and K382 LLC as intermediate "links." Id. at 6-8. The Bankruptcy Court's reasoning can be summarized as follows:
(1) Lull, an individual, was the debtor;
(2) KLL is an "insider" with respect to Lull, who was a director, officer, and 50-percent shareholder in KLL. KLL is also an "affiliate" with respect to Lull, as Lull owned 50 percent of KLL's shares. As an affiliate, KLL is...
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