Ogle v. JT Miller, Inc. (In re HDD Rotary Sales, LLC)

• Decision Date: 27 June 2014
• Docket Number: Adversary No. 13–03031.,Bankruptcy No. 11–38053.
• Citation: 512 B.R. 877
• Parties: In re HDD ROTARY SALES, LLC, Debtor(s). Robert Ogle, Plaintiff(s) v. JT Miller, Inc., et al., Defendant(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

512 B.R. 877

In re HDD ROTARY SALES, LLC, Debtor(s).Robert Ogle, Plaintiff(s)

v.JT Miller, Inc., et al., Defendant(s).

Bankruptcy No. 11–38053.

Adversary No. 13–03031.

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

Signed June 27, 2014.

Leonard H. Simon, William Kyle Vaughn, Houston, TX, for Debtor(s).

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW AND MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

On February 24, 2013, Robert Ogle, the Plan Agent for HDD Rotary Sales, LLC, filed a complaint to avoid alleged fraudulent conveyances made to Jay Miller and JT Miller, Inc. during the 2009–2010 time period. (Case No. 13–03031, ECF No. 1). On April 4, 2013, the Court bifurcated the trial. An initial trial was held on whether HDD was insolvent on the dates of the alleged transfers and obligations.

In an October 15, 2013 Memorandum Opinion, the Court held that: (i) HDD incurred a $100,000.00 obligation to Mr. Miller on June 30, 2009 and (ii) HDD incurred an obligation to pay Mr. Miller an additional $193,167.00 no earlier than December 31, 2009. (ECF No. 36 at 5–7). The Court held that HDD was solvent when it incurred the $100,000.00 obligation and insolvent when it incurred the $193,167.00 obligation.¹Id. Accordingly, on March 7, 2014, the Court conducted a trial on whether the $193,167.00 obligation is avoidable.

The main issue at the second trial was whether HDD Rotary received reasonably equivalent value in exchange for incurring the $193,167.00 obligation. The parties dispute the origin of this obligation: Jay Miller alleges that the $193,167.00 obligation represents bonus compensation for his sales, while Mr. Ogle maintains that this obligation relates to HDD's redemption of Mr. Miller's equity interest in HDD.

Because the $193,167.00 originated as a bonus to Miller, the Court finds that the obligation is not avoidable. Additionally, none of the transfers made by HDD to Jay Miller and JT Miller Inc. in satisfaction of this obligation are avoidable. Accordingly, the Court recommends that the District Court grant judgment to J.T. Miller and to Miller on Mr. Ogle's fraudulent transfer claims.

Bankruptcy Court's Authority

The Supreme Court's decision in Stern v. Marshall recognized significant limitations on bankruptcy courts' authority. Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Stern concerned a bankruptcy court's authority over a debtor's common-law counterclaim to a proof of claim filed against the estate. The Supreme Court held that a bankruptcy court may not constitutionally enter a final judgment over a counterclaim that would not necessarily be resolved by the resolution of the proof of claim. Id. at 2618. The counterclaim did not constitute a “public rights” dispute. Id. at 2615. Although public rights disputes may be decided by non-Article III tribunals, public rights disputes must involve rights “integrally related to a particular federal government action.” Id. at 2611–12. Entering a final judgment with respect to the counterclaim would be an impermissible exercise of the judicial power of the United States. Id. at 2615.

Other types of disputes frequently decided by bankruptcy courts may also require adjudication by an Article III court. For example, in Granfinanciera, S.A. v. Nordberg, the Supreme Court held that the adjudication of a fraudulent transfer claim against a creditor who had not filed a proof of claim did not fall within the public rights exception. 492 U.S. 33, 54–55, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). Following Stern, it is unclear whether the adjudication of a fraudulent transfer claim against a creditor who has filed a proof of claim falls within the public rights exception.

In this case, the Court need not answer that question because neither of the defendants in this fraudulent transfer lawsuit have filed a proof of claim in HDD Rotary's bankruptcy case. Accordingly, the Court does not have the authority to enter a final judgment in this case. Moreover, the Fifth Circuit has held that parties cannot consent to a bankruptcy court's adjudication of claims that are outside the constitutional scope of a bankruptcy court's authority. In re BP RE, L.P., 735 F.3d 279, 286–87 (5th Cir.2013)(“We adopt the compelling and thorough reasoning of Waldman [v. Stone, 698 F.3d 910 (6th Cir.2012) ], which held that parties cannot consent to such circumvention of Article III that impinges on the structural interests of the Judicial Branch. Waldman was the first post-Stern appellate decision to address consent as it relates to the bankruptcy court's constitutional authority.”).

A dismissal with prejudice is treated as an adjudication on the merits. Anthony v. Marion County General Hosp., 617 F.2d 1164, 1169–70 (5th Cir.1980). In Executive Benefits Ins. Agency, the Supreme Court reiterated that once a bankruptcy court identifies a Stern claim, “[t]he bankruptcy court should hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.” Executive Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014). Accordingly, this Court may not issue a final order or judgment in the Defendants' favor. Pursuant to Rule 9033, this Court submits the following proposed findings of fact and conclusions of law for the District Court's consideration.

Proposed Findings of Fact and Conclusions of Law

At the March 7, 2014 trial, Mr. Ogle's exhibits 1–15 were admitted into evidence. Robert Ogle, Matt Odom, Glea Ramey, Rex Inman, and Jay Miller each testified at the March 7 hearing. The Court will briefly summarize the relevant parts of each witness's testimony.

Robert Ogle

Mr. Ogle was appointed Plan Agent of HDD in December, 2011. He has reviewed HDD's business records and gained familiarity with HDD's transaction history with Jay Miller and JT Miller, Inc. Mr. Ogle testified about three documents to support his theory that the $193,167.00 obligation payable to Mr. Miller was for the redemption of his equity interest in HDD. (Exhibits 2, 4, 5). Mr. Ogle prepared Exhibit 4, entitled “Jay Miller and JT Miller Inc. Transaction history and summary,” by reviewing HDD's Quickbooks accounts. Using Exhibit 4, Mr. Ogle described the parties' transaction history as follows: On August 28, 2008, Jay Miller loaned HDD $100,000.00 in exchange for a $100,000.00 note receivable. On December 31, 2008, Jay Miller was issued HDD stock with a par value of $333.00. When Karlins & Ramey audited HDD in December of 2010, they made adjusted entries to HDD's books as of December 31, 2009: the $333.00 worth of par value common stock was redeemed by HDD in exchange for a $193,500.00 note payable to Jay Miller. On March 31, 2010, Jay Miller's $100,000.00 note receivable was converted into equity. The converted equity interest was then redeemed for an additional $100,000.00 obligation payable to Mr. Miller. From June through December 2010, there were 8 transfers of inventory and equipment from HDD to JT Miller Inc. in satisfaction of the entire $293,500.00 debt owed to JT Miller Inc.

Next, Mr. Ogle testified that HDD's 2009 audit ² treats the $193,167.00 as a stock redemption. (Exhibit 2). Note 9 on page 13 of the audit characterizes the $193,167.00 amount as a note due to Mr. Miller for HDD's redemption of Mr. Miller's 133 shares.³ (Exhibit 2 at 13). Note 11 on page 13 records the entire amount owed to Jay Miller as a note due to JT Miller Inc. for $293,167.00. Id. He also noted that the $193,167.00 amount was not included in the $878,872.00 amount listed on page 3 under the “salaries and benefit expense.” (Exhibit 2 at 3).

Finally, Mr. Ogle testified that a representation letter signed by Gary Haub and Rex Inman treats the $193,167.00 amount as stock redemption. (Exhibit 5). On page 2, the letter states: “Jay Miller, former owner and employee is owed $293,167.00 of which $193,500.00 related to the purchase of Jay's 333 equity shares.” (Exhibit 5).

Mr. Ogle further testified that (i) there are no HDD documents evidencing any sales commissions or bonuses paid to Mr. Miller and (ii) to Mr. Ogle's knowledge, no other owner ever received a bonus or commission.

Mr. Ogle testified about HDD Rotary's 2009 and 2010 tax returns to support his position that the poor financial health of HDD Rotary demonstrates that Mr. Miller's sales efforts did not provide real benefit to the company. (Exhibits 14 and 15). HDD Rotary's 2009 tax return shows that HDD Rotary reported a loss of $3,523,014.00 for 2009. (Exhibit 14 at 5). It also shows that HDD earned (i) $16,741,057.00 in gross sales, (ii) $1,250,436.00 in gross profit, and (iii) a 7.5% gross margin for 2009. Id. In 2010, HDD reported (i) a $4,575,032.00 loss, (ii) $582,569.00 in gross profit, and (iii) a 5.3% gross margin. (Exhibit 15 at 7).

Matt Odom

Matt Odom, junior accountant for Karlins & Ramey, prepared HDD Rotary's 2009 audit. Exhibit 1, “Assignment of Membership Interest” (dated June 30, 2009), purports to be HDD's purchase of Jay Miller's interest in HDD Rotary for $100,000.00.

Mr. Odom testified that Karlins & Ramey did not have this document when they conducted HDD Rotary's 2009 audit. He explained that if Karlins & Ramey had this document at the time of the audit, then they would have (i) booked the redemption of Jay Miller's stock for $100,000.00 rather than at $293,500.00 and (ii) inquired as to the origin of the $193,500.00 ⁴ owed to Mr. Miller. Mr. Odom claims that Gary Haub represented that the entire $293,500.00 amount owed to Jay Miller was for the redemption of his shares. Mr. Odom explained that Mr. Haub's oral representation is inconsistent with Exhibit 1, which indicates that Mr. Miller's 25% interest in HDD (333 shares) was purchased for $100,000.00. Because of Mr. Haub's representation, Mr. Odom never inquired about the origin of the $193,500.00 debt to Mr. Miller.

Mr. Odom prepared tax returns for HDD Rotary, ...