Maxwell v. United States (In re Horizon Grp. Mgmt., LLC)

• Decision Date: 19 June 2020
• Docket Number: Adversary No. 16ap00465,Case No. 14bk41230
• Citation: 617 B.R. 581
• Parties: IN RE: HORIZON GROUP MANAGEMENT, LLC, Debtor. Andrew J. Maxwell, trustee for the estate of Horizon Group Management, LLC, Plaintiff, v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

617 B.R. 581

IN RE: HORIZON GROUP MANAGEMENT, LLC, Debtor.Andrew J. Maxwell, trustee for the estate of Horizon Group Management, LLC, Plaintiff,

v.United States of America, Defendant.

Case No. 14bk41230

Adversary No. 16ap00465

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed June 19, 2020

Paul M. Bauch, Carol Y. Sales, Lakelaw, Chicago, IL, Attorneys for Andrew J. Maxwell :

Bradley A. Sarnell, United States Department of Justice, Washington, DC, Attorney for the United States of America:

MEMORANDUM DECISION

TIMOTHY A. BARNES, Judge.

The matter before the court is the Defendant United States' Motion for Summary Judgment [Adv. Dkt. No. 69] (the "Motion") brought by the defendant, the United States of America (the "United States"), seeking summary judgment on the United States' affirmative defense under 11 U.S.C. § 548(c) to both of the two counts in the Complaint [Adv. Dkt. No. 1] (the "Complaint"), filed by the plaintiff Andrew J. Maxwell (the "Trustee"), as chapter 7 trustee for the estate of Horizon Group Management, LLC (the "Debtor"). The Motion has been fully briefed and argued before the court on May 11, 2020 (the "Hearing").

In the above-captioned adversary proceeding (the "Adversary Proceeding"), the Trustee seeks to avoid and recover a series of five prepetition payments made by the Debtor to the Internal Revenue Service (the "IRS") as fraudulent transfers, under theories of actual (count I) and constructive (count II) fraud. See Compl., at pp. 87–89. The United States has answered, in pertinent part, that it is a good faith transferee for value under 11 U.S.C. § 548(c) and therefore has an affirmative defense to both counts. See Defendant United States' Answer, at p. 1 [Adv. Dkt. No. 14] (the "Answer").

For the reasons set forth more fully below, upon review of the respective filings, the court concludes that the United States is entitled to summary judgment on the first element of the section 548(c) defense, that the IRS received the transfers in good faith, but that the United States is not entitled to judgment as a matter of law on the second element of the section 548(c) defense, that the Debtor received value in exchange for the transfers. The Motion will, therefore, by separate order entered concurrently herewith, be granted in part and denied in part.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred has statutory authority to enter final judgment on any proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1), (c). Absent consent, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

In addition to the foregoing considerations, a bankruptcy judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 464, 131 S.Ct. 2594, 180 L.Ed.2d 475, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in noncore matters, where the matter is either one that falls within the public rights exception, id. , or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g., Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S. Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

As a proceeding to determine, avoid or recover fraudulent transfers pursuant to section 548 of the Bankruptcy Code is a matter arising under the Bankruptcy Code, the Adversary Proceeding is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(H). It follows that a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, made applicable by Rule 7056 of the Federal Rules of Bankruptcy Procedure to adversary proceedings, is also a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) & (2).¹ Further, in accordance with Stern , 564 U.S. at 499, 131 S.Ct. 2594, the bankruptcy court has constitutional authority to determine fraudulent transfer claims as such claims "are at the core of the federal bankruptcy power." KHI Liquidation Tr. v. Wisenbaker Builder Servs., Inc. (In re Kimball Hill, Inc. ), 480 B.R. 894, 907 (Bankr. N.D. Ill. 2012) (Barnes, J.); see also Bodenstein v. Univ. of N. Iowa (In re Peregrine Fin. Grp., Inc. ), 589 B.R. 360, 364–65 (Bankr. N.D. Ill. 2018) (Doyle, J.). Each of the parties has also either expressly or impliedly consented to this court's exercising authority over this matter. In light of the foregoing, the court concludes that it has constitutional authority to finally decide the Motion either directly or through the parties' consent.

Accordingly, the court has the jurisdiction, statutory authority and constitutional authority to hear and determine the Motion.

BACKGROUND

The following background reflects the undisputed facts contained in the submissions of the parties and the uncontroverted facts contained in the Defendant United States' Statement of Material Facts Not in Dispute [Adv. Dkt. No. 69-1] (the "United States' Statement of Facts") and the Trustee's Response to Statement of Material Facts Not in Dispute [Adv. Dkt. No. 75-1] (the "Trustee's Statement of Facts"). Bankr. N.D. Ill. R. 7056-2.

The Debtor made five payments totaling $50,073.00 to the IRS during the two-year period preceding the filing of the Debtor's petition on account of tax liabilities for the 2012 and 2013 tax years owed by the Debtor's principal and manager, Daniel Michael ("Daniel") and his wife, and by one of the Debtor's officers and Daniel's son, Jeffrey Michael ("Jeffrey") and his wife. Specifically, the Debtor made the following payments to the IRS in the two years preceding the filing of the Debtor's petition: $5,300.00 to the IRS on December 5, 2020 for Daniel and his wife's 2012 taxes, U.S. Stmt. of Facts, at ¶ 11a; $9,000.00 on April 15, 2013 for Daniel and his wife's 2012 taxes, id. , at ¶ 11b; $20,000.00 on April 15, 2013 for Jeffrey and his wife's 2013 taxes, id. , at ¶ 11c; $8,573.00 on June 14, 2013 for Daniel and his wife's 2013 taxes, id. , at ¶ 11d; and $7,200.00 on September 9, 2013 for Daniel and his wife's 2013 taxes. Id. , at ¶ 11e; see also Tr. Stmt. of Facts, at ¶ 11.

The sole member of the Debtor, an Illinois LLC, is the Daniel Michael Living Trust u/t/a/d March 4, 1998, for which Daniel is the sole trustee. U.S. Stmt. of Facts, at ¶¶ 5–6. Daniel nonetheless holds himself out as the owner of the Debtor. Id. During the two years prior to the filing of the Debtor's petition, Daniel was the sole manager of the Debtor, id. , at ¶¶ 7–9, and Jeffrey was the chief operating officer and general counsel for the Debtor. Id. , at ¶ 10. During such period, the Debtor did not issue any ownership interests or securities. Id. , at ¶ 12. The Debtor held no manager or member meetings and did not keep records of any consent in lieu of such meetings during such period. Id. , at ¶ 14. Likewise, the Debtor failed to document material transactions, id. , at ¶ 15, and failed to keep capital account records for its members. Id. , at ¶ 16. The Debtor also failed to prepare contemporaneous profit and loss statements and failed to keep complete records of its accounts payable and receivable. Id. , at ¶¶ 17–19. The Debtor also failed to keep records of services provided to other entities owned and operated by Daniel. Id. , at ¶ 20. During the same two-year period, the Debtor paid personal expenses of Daniel and Jeffrey using funds commingled with the funds of other entities owned and operated by Daniel, and Daniel and Jeffrey each caused the Debtor to divert its assets for each of their personal benefit, to the detriment of the Debtor's creditors. Id. , at ¶¶ 21–23. The Debtor and the related entities owned and operated by Daniel were, therefore, the alter ego of Daniel and Jeffrey during the two years preceding the filing of the Debtor's petition. Id. , at ¶ 24.

PROCEDURAL HISTORY

The Debtor filed its bankruptcy petition on November 14, 2014 (the "Petition Date"). In re Horizon Mgmt. Grp., LLC , Case No. 14bk41230 (Bankr. N.D. Ill. filed Nov. 14, 2014) (Barnes, J.).

On July 15, 2016, the Trustee commenced the Adversary Proceeding against the United States in order to recover the transfers made by the Debtor to the IRS in the two years preceding the Petition Date. The United States filed its answer on November 16,...