Smith v. American Founders Financial, Corp.
| Decision Date | 10 March 2007 |
| Docket Number | Civ.A. No. H-05-1779. |
| Citation | 365 B.R. 647 |
| Parties | W. Steve SMITH, Trustee, Plaintiff, v. AMERICAN FOUNDERS FINANCIAL, CORP., et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Keavin David McDonald, Law Office of Keavin D. McDonald, P.C., Patrick J. Dyer, Wilshire Scott, Houston, TX, for Plaintiff.
Shari L. Heyen, Jana K. Terry, Greenberg Traurig LLP, Paul S. Francis, Baker & Hostetler, Houston, TX, for Defendant.
This case involves a bankruptcy trustee's attempt to avoid allegedly fraudulent transfers. The plaintiff, W. Steve Smith, the Chapter 7 bankruptcy trustee of the estates of IFS Financial Corporation ("IFS"), Circle Investors, Inc. ("Circle"), IFS Insurance Holdings, Inc. ("Insurance Holdings"), and Comstar Mortgage Corporation ("Comstar"), sued American Founders Financial Corporation ("AFFC") and Vesta Fire Insurance Corporation ("Vesta") under the Texas Uniform Fraudulent Transfer Act, TEX. BUS. & COM.CODE § 24.001, et seq., ("TUFTA").1 Smith challenges transactions that occurred after AFFC's 1999 merger with Securus Financial Corporation ("Securus"), one of a number of IFS's indirect subsidiaries. Smith also challenges transactions involving AFFC, IFS, and other entities related to IFS.
Both sides have filed numerous motions. This memorandum and opinion addresses the following motions:
• Smith's motion seeking summary judgment that AFFC is estopped from asserting that certain property is worthless, on the issue of alter ego, and as to whether Comstar was insolvent as of May 23, 2000 and whether IFS and its other wholly owned subsidiaries were insolvent as of June 30, 2000. (Docket Entry No. 67).
• Smith's motion to exclude the expert testimony of Ed Hirs, III and Ronald Vollmar. (Docket Entry No. 68).
• AFFC's motion seeking partial summary judgment that the statutes of repose apply. (Docket Entry No. 70).
• AFFC's motion to exclude the expert testimony of William E. Avera. (Docket Entry No. 71).
• AFFC's motion to exclude the expert testimony of James 0. Kelly III. (Docket Entry No. 74).
• AFFC's motion seeking summary judgment as to whether certain transfers by nondebtors were fraudulent. (Docket Entry No. 75).
• AFFC's motion to dismiss, to strike Smith's pleadings, or for an adverse inference instruction and motion to preclude documents as a sanction for spoliation of evidence. (Docket Entry No. 76).
• AFFC's motion seeking summary judgment as to certain affirmative defenses. (Docket Entry No. 78).
• AFFC's motion seeking summary judgment as to whether Smith has standing to bring this suit. (Docket Entry No. 79).2
Based on the motions; the responses, replies, and surreplies; the parties' submissions; the record; and the applicable law, this court makes the following rulings: AFFC's motion for partial summary judgment that Smith lacks standing to bring this suit is granted; AFFC's motion for partial summary judgment on the statutes of repose is denied; AFFC's motion for summary judgment on certain affirmative defenses is moot; AFFC's motion for partial summary judgment as to certain transfers by nondebtors is moot; the motions to exclude expert testimony are moot; Smith's second motion for partial summary judgment is moot; and AFFC's motion for sanctions is denied. A conference to set a schedule to resolve the remaining claims is set for April 6, 2007, at 1:00 p.m. The reasons for these rulings are explained below.
The facts of this case were set out in detail in this court's earlier Memorandum and Opinion. Briefly, Smith is the trustee for the bankruptcy estates of IFS, Insurance Holdings, Circle, and Comstar. Smith sued AFFC and Vesta, complaining of transfers that occurred before and after the AFFC management buyout of Securus, negotiated as a merger. Smith later dismissed with prejudice all claims against Vesta. (Docket Entry No. 121).
The corporate relationships that form the context for this case are neither simple nor straightforward. Interamericas Financial Holdings Corp. ("Interamericas") is the corporate parent and 59% owner of IFS. (Docket Entry No. 11, ¶ 12). IFS was a holding company controlled by Hugo Pimienta. Through subsidiaries, IFS engaged in the mortgage banking and insurance businesses. In mid-1999, Bradford National Life Insurance Company ("Bradford"), a Louisiana insurance company owned by one of those IFS subsidiaries, Insurance Holdings, merged into American Founders Life Insurance Company ("AFL"). (Docket Entry No. 78, Ex. A at 2). Kenneth Wayne Phillips, the former chairman of the board and chief executive officer of Bradford and a former director of Insurance Holdings, described in his affidavit the corporate structure of IFS and the insurance-related entities before the merger of Bradford and AFL: Bradford and AFL were indirect, wholly owned subsidiaries of Securus, which was a wholly owned subsidiary of Circle, which was a wholly owned subsidiary of Insurance Holdings, which was a wholly owned subsidiary of IFS. Securus, Circle, Insurance Holdings, and other related companies (the "IFS Group") were all ultimately owned by IFS. Hugo Pimienta served as chairman of the board and chief executive officer of IFS. (Docket Entry No. 78, Ex. A at 1-3). Interamericas Financial Holdings Corp. ("IFHC") was a major shareholder of IFS. (Id. at 2).
After the 1999 Bradford/AFL merger, AFL remained a wholly owned subsidiary of Laurel Life Insurance Company, which was in turn a wholly owned subsidiary of Securus, which was in turn a wholly owned subsidiary of Circle. (Docket Entry No. 78, Ex. A at 2). Circle was a wholly owned subsidiary of Insurance Holdings, which was a wholly owned subsidiary of IFS.. (Id.). The only aspect of the Corporate relationships that changed was that Bradford had merged into AFL.
In 1998 and 1999, Bradford and AFL made a series of loans totaling $41,750,000 to various individuals and corporations ("the Select Asset Loans"). (Docket Entry No. 78, Ex. A at 3). Five of the loans were made to companies that pledged stock in corporations owning real estate in Mexico. Three loans were made to Mexican nationals who pledged stock they owned in IFS. (Docket Entry No. 78, Ex. A at 4). AFFC alleges, and Phillips testified in his affidavit, that BNL and AFL made these loans at Hugo Pimienta's recommendation. (Docket Entry No. 78 at 7; Docket Entry No. 78, Ex. A at 3). Phillips and Wayne Allen Schreck, the former president and chief executive officer of Laurel and former senior vice-president of AFL, stated in their affidavits that they did not know of claims that the Select Asset Loans were of dubious value until late 2001. (Docket Entry No. 78, Exs., A, B). On April 12, 1999, Schreck and Phillips formed AFFC as a vehicle for purchasing the operating companies of Insurance Holdings. (Docket Entry No. 78, Ex. A at 6). AFFC concedes that "[i]t now appears that the Select Asset Loan proceeds were diverted for use by IFS and the borrowers were given investment credit in IFS or one of IFS's parent companies in exchange for their cooperation." (Docket Entry No. 78 at 8). Smith contends that Schreck and Phillips were aware that IFS — rather than the borrowers — was making the payments on the Select Asset Loans and receiving the loan proceeds during the relevant period. (Docket Entry No. 1, ¶ 23).
AFL was merged into AFFC on January 31, 2000, under an agreement that AFFC entered with Circle and IFS on September 17, 1999. . Schreck and Phillips stated that the merger occurred after "several months of intense arms' length negotiations with Mr. Pimienta." (Docket Entry No. 78, Ex. A at 6; Docket Entry No. 78, Ex. B at 4). Schreck and Phillips stated that before AFL's merger into AFFC, they first met with several potential buyers, none of whom was interested in including the Select Asset Loans in the AFL assets to be acquired. (Docket Entry No. 78, Ex. A at 6; Docket Entry No. 78, Ex. B at 3). AFFC argues that because it "did not have the relationship with the borrowers or the various Mexican contacts that would be related to collection and enforcement, AFFC was not willing to assume the sole risk of the Select Asset Loans." (Docket Entry No. 78 at 11). AFFC created a preferred stock structure as part of the merger to give IFS and Circle incentives to continue to facilitate repayment of the Select Asset Loans. This structure would also protect AFL and AFFC by allowing them to offset the Select Asset Loans against the preferred stock. Phillips explained the preferred stock structure in his affidavit:
The structure established in the Merger Agreement provided for the issuance by AFFC of Series A Preferred Stock to Circle, w[ith] preferential dividend, distribution and redemption features, which, however, could be paid either in cash or at AFFC's election, by assignments of interests in the Select Asset Loans, valued at the face amount of principal and accrued interest.
(Docket Entry No. 78, Ex. A at 8).
On the date of the AFL/AFFC merger, AFL paid dividends and distributions totaling $49.5 million to Securus, which in turn paid the dividends and distributions to Circle, less agreed adjustments. (Docket Entry No. 78, Ex. B at 6). AFFC issued Circle 50,000 shares of Series A Preferred Stock with a stated value of $1,000 per share and 50,000 Warrants that allowed Circle under certain conditions to convert the Series A Stock into AFFC common stock. (Id.). In exchange, AFFC received all of the issued stock of Securus and its subsidiaries, including AFL. (Id. at 7). AFL retained out of the $49.5 million it paid Securus $2,245,136.60 that was owing on the Select Asset Loans and $2,388,976.33' that was required to reduce the balance on one of those loans, the ...
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