Peterson v. Capital One N.A. (In re Mack Indus., Ltd.)
| Decision Date | 16 November 2020 |
| Docket Number | No. 17 B 09308,No. 19 A 00372,17 B 09308,19 A 00372 |
| Parties | In re: Mack Industries, Ltd., et al., Debtor. Ronald R. Peterson, as Chapter 7 Trustee, Plaintiff, v. Capital One N.A. et al, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Memorandum Opinion
Chapter 7 trustee Ronald Peterson filed this adversary proceeding against Capital One, N.A., Capital One Financial Corp. (collectively "Capital One"), and Menard Inc. He seeks to recover as fraudulent transfers payments made by debtor Mack Industries Ltd. ("Mack") to Capital One for purchases Mack made at Menards using a Capital One credit card. The trustee contends that Mack used the goods it purchased from Menards to improve real property that it did not own as part of a fraudulent scheme to deplete Mack's assets. He also seeks to recover some of the payments as preferences.
Capital One moved to dismiss most of the amended complaint. It argues that the trustee has not alleged a plausible claim for fraudulent transfer based on either constructive fraud or actual fraud. It also argues that the trustee has not alleged any claims against Menards so the complaint against it should be dismissed in its entirety. Capital One is correct regarding the fraudulent transfer claim against it based on constructive fraud and all the claims against Menards. Those claims will be dismissed. Capital One's motion to dismiss the fraudulent transfer claim against it based on actual fraud will be denied.
The trustee filed a complaint against Capital One and Menards alleging two claims to avoid fraudulent transfers and a claim to avoid preferential transfers. The court granted a motion to dismiss a similar adversary proceeding in Peterson v. McClean (In re Mack Industries, Ltd.), No. 19-ap-00433, 2019 Bankr LEXIS 3603 (Bankr. N.D. Ill. Nov. 20, 2019). The fraudulent transfer claims in this case were similar to those alleged in McClean. The trustee consented to the dismissal of his complaint against Capital One and Menards. He was granted leave to amend and he filed an amended complaint.
In the amended complaint, the trustee again alleges two claims to avoid fraudulent transfers and a claim to avoid preferential transfers. He seeks to recover payments of approximately $3.3 million that Mack made to Capital One to pay down its credit card balances. Exhibit A to the amended complaint shows payments made by Mack to Capital One between January 2, 2013 and March 22, 2017. Exhibit B is a 275 page document entitled "Bills and Charges." It contains approximately 12,000 lines stating a date, amount, address and PINnumber, and owner of the property, presumably where Mack used supplies purchased at Menards with the Capital One credit card. The trustee acknowledged in response to the motion to dismiss that Exhibit B shows that approximately $700,000 of the "bills and charges" were for supplies allegedly used in property owned by American Residential Leasing Company LLC, an unsecured creditor of Mack. He is not seeking to recover those transfers. He seeks to recover the remaining $2.6 million in payments to Capital One, which he claims were for charges Mack made to purchase building supplies that were used in properties owned by parties other than Mack or American Residential.
In Count 1, the trustee alleges that the payments were constructively fraudulent under the Illinois Uniform Fraudulent Transfer Act and § 548(a)(1)(B) of the Bankruptcy Code. He contends that Mack did not receive reasonably equivalent value for the payments to Capital One because Mack used the building supplies it purchased to improve properties owned by third parties. In Count 2, the trustee alleges that Mack incurred the charges and made the payments to Capital One with actual intent to defraud. He bases this claim primarily on a statement allegedly made by a vice president of Mack in June 2014 threatening American Residential that if it did not renegotiate a significant contract, Mack would dissipate its assets to prevent American Residential from collecting from Mack. In Count 3, the trustee seeks to recover approximately $38,000 in payments to Capital One as preferences under § 547 of the Bankruptcy Code. Capital One is not seeking dismissal of the preference claim against it.
Regarding the actual fraud claim in Count 2, the amended complaint alleges as follows. Mack's primary business was "flipping houses" - buying properties, improving them, and selling or renting them. Amended Complaint ¶ 8. American Residential purchased hundreds ofproperties from Mack, which then leased the properties back from American Residential under a Master Lease Agreement ("Agreement") and sublet them to tenants. In the summer of 2014, Mack began to claim that it could not meet its obligations under the Agreement and sought to renegotiate it. When American Residential resisted, Erik Workman, Mack's Vice President of Sales and Marketing, told Christopher Byce, formerly Senior Vice President of Investments of American Residential's prior parent company, that "the Debtor would transfer its assets to related entities for nothing in return to hinder American Residential's ability to exercise its legal remedies as a creditor." Amended Complaint, ¶ 32. By September 2014, Mack had stopped making payments under the Agreement. Amended Complaint ¶ 36. In December 2014, Mack sent American Residential a proposed revised contract that Mack said was, essentially, not negotiable. Amended Complaint ¶ 30. American Residential refused to change the Agreement.
Even before Workman made his threat about dissipating assets, Mack began to "prepare for a possible breakdown in the business relationship." Amended Complaint ¶ 41. "In the months leading up to and during the negotiations with American Residential, the debtor had already begun dissipating its assets." ¶ 42. Before 2013, the McClellands, who own Mack and many related entities, ran almost the entire real estate business in Mack's name. Amended Complaint ¶ 43. In 2013, the McClellands began to "create new entities and to divert business opportunities and assets from the Debtor to those entities." Amended Complaint ¶ 44. They created at least 15 new entities in 2013, at least four new entities in 2014, at least six new entities in 2015, and at least two new entities in 2016. Amended Complaint ¶ 45. Mack owned five of these entities: Mack Industries II LLC, Mack Industries III LLC, Mack Industries IV LLC, Mack Industries V LLC, and Mack Industries VI LLC. Amended Complaint ¶ 46. All the othernew entities were owned by James K McClelland, James H. McClelland (James K. McClelland's son), or both. Amended Complaint ¶ 47.
Although Mack owned some real estate after 2013, "the vast majority of real estate acquired for flipping was acquired by the new entities." Amended Complaint ¶ 49. Mack also transferred real estate from itself to the new entities. Amended Complaint ¶¶ 49, 50. The McClellands thereby reduced the assets "that the debtor had that could be collected by American Residential." Amended Complaint ¶ 50. Mack also "drew down" on its own assets to benefit the other entities. Amended Complaint ¶ 51. It paid contractors to work on and improve real property owned by the other entities, and paid bank loans incurred by the other entities. Complaint ¶52. The McClellands also "extracted" at least $10.7 million in cash from Mack and other entities. Amended Complaint ¶ 54. Mack concealed its dissipation from American Residential. After June 2014, it failed to provide American Residential with Quarterly Statements required under the Agreement detailing its income. Amended Complaint ¶¶ 56, 57. American Residential tried to take over its own properties in 2016 but Mack refused to provide information about the subtenants. Amended Complaint ¶ 60. In March 2016, American Residential sued Mack and related entities in state court. Amended Complaint ¶ 39.
Capital One argues that the fraudulent transfer claim based on constructive fraud in Count 1 must be dismissed because the trustee has failed to allege an essential element of his claim: that Mack did not receive reasonably equivalent value for the payments to Capital One. It asserts, and the trustee does not contest, that the complaint and attachments show that CapitalOne provided credit to Mack and Mack's payments were on account of that antecedent debt. Capital One therefore contends that Mack received reasonably equivalent value as a matter of law for the debt repayments. It argues that what Mack chose to do with the goods it purchased from Menards with the credit provided by Capital One does not matter. The trustee responds that Mack did not receive any value because Mack used the goods it purchased with the credit provided by Capital One to increase the value of properties that Mack did not own. Capital One is correct. Mack received reasonably equivalent value for each payment to Capital One.
The trustee brings his constructive fraud claim under the Illinois Uniform Fraudulent Transfer Act, 740 ILCS 160/5(a)(2), 6(a), and 8(a), via § 544(b)(1) of the Bankruptcy Code, as well as under § 548(a)(1)(B) of the Bankruptcy Code. A plaintiff seeking to avoid a fraudulent transfer based on constructive fraud under § 548(a)(1)(B) must plead and prove the following: (1) a transfer of the debtor's property or interest; (2) made within two years before the date the bankruptcy petition was filed; (3) for which the debtor received less than a reasonably equivalent value in return; and (4) that the debtor (a) was insolvent on the date of the transfer or became insolvent as a result, (b) engaged in business or a transaction as a result of which the debtor's remaining capital was unreasonably small, or (c) intended to incur, or should have known he would incur, debts he would be unable to pay. KHI Liquidation Trust v. C. Goshy Enterprises, Inc. (In re Kimball Hill, Inc.)...
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