Zazzali v. Goldsmith (In re DBSI Inc.)

• Decision Date: 17 October 2018
• Docket Number: Adv. No. 12-06056-TLM,Case No. 08-12687-CSS
• Parties: IN RE DBSI INC., et al., Debtor. James R. Zazzali, as Litigation Trustee for the DBSI Estate Litigation Trust, Plaintiff, v. Marty Goldsmith and John Doe 1-10, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho

593 B.R. 795

IN RE DBSI INC., et al., Debtor.

James R. Zazzali, as Litigation Trustee for the DBSI Estate Litigation Trust, Plaintiff,

v.Marty Goldsmith and John Doe 1-10, Defendant.

Case No. 08-12687-CSS

Adv. No. 12-06056-TLM

United States Bankruptcy Court, D. Idaho.

Signed October 17, 2018

Dale Barney, Mark Barry Conlan, Jennifer A. Hradil, Brett S. Theisen, Gibbons, P.C., Newark, NJ, Keely E. Duke, Kevin Alan Griffiths, Duke Scanland and Hall, PLLC, Boise, ID, for Plaintiff

L. Jason Cornell, Carl D. Neff, Fox Rothschild LLP, Wilmington, DE, Kimbell D. Gourley, Brian F. McColl, Boise, ID, for Defendant

John Doe 1-10, pro se

MEMORANDUM OF DECISION

TERRY L. MYERS, CHIEF U. S. BANKRUPTCY JUDGE

INTRODUCTION

James R. Zazzali ("Plaintiff") is the trustee for the jointly-administered estates of DBSI, Inc., an Idaho corporation ("DBSI"), and certain DBSI affiliated debtors and consolidated non-debtors. Plaintiff is also the litigation trustee for the DBSI Estate Litigation Trust formed under a confirmed chapter 11 plan, and charged inter alia with pursuing transfer avoidance actions.

In November 2010, Plaintiff filed the complaint commencing this action against Marty Goldsmith ("Defendant").¹ Plaintiff seeks to avoid certain transfers under § 548(a)(1) and (2), and under Idaho state law made applicable under § 544(b), and to obtain recovery under § 550.² This adversary proceeding was filed in the District of Delaware and venue was subsequently transferred to this Court in October 2012.

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (2)(H) and (O) in which this Court enters final orders and judgment.³

This Decision constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052.⁴

FACTS

A. Overview

The Delaware Bankruptcy Court substantively consolidated numerous DBSI debtor and non-debtor entities after finding, among other things, that they operated as a single economic enterprise with largely overlapping officers, directors, members, and general partners.⁵ The primary and parent entity at bankruptcy was DBSI, Inc., the successor as of 2008 to DBSI Housing Inc. Doug Swenson was the majority owner and principal executive of DBSI and its predecessor.

As the Delaware court also found, "DBSI and its related entities were involved in three main spheres of business activity: the syndication and sale to investors of tenant-in-common interests in real estate, the purchase of real estate, and investments in technology companies." Zazzali v. Mott (In re DBSI, Inc.) , 447 B.R. 243, 245 (Bankr. D. Del. 2011).⁶ That court also rendered, in connection with confirmation, findings and conclusions including "that ‘DBSI ran its business and entities as a unified enterprise under common ownership and control’ with a ‘small group of insiders [who] employed that control to raise cash, commingle it, and then distribute it as needs presented.’ " Id. (quoting confirmation order); see also Ex. 315 at 14.

The parties are in general agreement with the Delaware court, and others, that DBSI and its many related entities, under the control of Doug Swenson, his sons Jeremy and David Swenson, Gary Bringhurst and Mark Ellison, were engaged in a massive Ponzi scheme. As Defendant's closing brief concedes:

In this case, there is substantial evidence, which Goldsmith does not dispute, that beginning in 2005, certain entities within the DBSI group were operating with the characteristics of a Ponzi scheme .... [T]he operation of the Ponzi centered on three investment units sold by DBSI as either securities through security markets or as interests in real estate through real estate markets: (1) promissory notes, both secured and unsecured; (b) [sic ] bonds, usually secured; and (3) TICs or tenant in common units. The largest of the three was the TIC investment unit, with DBSI entities selling a whopping $1.2 billion in TIC units in one year. The problem was not in the sale of the TIC units, it was what was done with the proceeds of later TIC sales that created the Ponzi.

The Ponzi scheme on the notes, bonds and TICs of DBSI occurred when later investment units were created and sold to new investors ostensibly to raising [sic ] new funds to investment [sic ] in legitimate real estate investments. Instead, the new funds raised would be used to repay or redeem earlier investors at what had become unsupported rates of return that had been promised.

Doc. No. 353 at 13.⁷

B. The adversary proceeding

The transaction underlying this litigation was the purchase of certain Idaho real estate from Defendant. As this Court noted in a prior decision, Plaintiff asserts that Defendant received around $29 million in exchange for selling approximately 180 acres of real property located in Ada County, Idaho (the "Property" or, at times, the "Tanana Valley Property") that was worth substantially less. Zazzali v. Goldsmith (In re DBSI Inc.) , 2013 WL 1498365, *1 (Bankr. D. Idaho Apr. 11, 2013).⁸ Plaintiff contends DBSI was in desperate need of additional real property to "TIC out" to investors in order to keep the Ponzi alive, and was willing to pay more than fair market value for this property in order to obtain it for such purpose. Id. at *6–7.

The Court strongly encouraged a mediation process in this litigation, which ultimately was unsuccessful.⁹ Thereafter, the Court, with the concurrence of the parties, scheduled the trial in two phases. Phase I, tried on September 11–14, 2017, dealt with the value of the Tanana Valley Property. That phase was resolved through entry of oral findings of fact and conclusions of law on November 8, 2017, which are incorporated fully by reference, and here generally summarized.

1. Phase I and the valuation ruling

The Property was mostly undeveloped ground located at the southeast corner of Meridian Road and Victory Road in Meridian, Ada County, Idaho. On October 21, 2005, the owners of the Property (the Caven L.O.M. Trust and the Caven Foundation) sold the Property to Justin Martin or his assigns for $19,200,000. Martin, who is Defendant's half-brother, conveyed the Property to Defendant by deed executed that same day, though the deed was later recorded in June 2006. Between the execution and the recording of this deed, Defendant entered into a Purchase and Sale Agreement ("PSA") on April 17, 2006 with Kastera, LLC ("Kastera") as the purchaser. Ex. 101.¹⁰ Under the PSA, Defendant contracted to sell the Property—which he had acquired just six months earlier for $19,200,000—for a total price of $35,804,500. This amount was to be paid through earnest money of $3,400,000 in the form of a note from Kastera, guaranteed by Kastera's owners, Doug Swenson and Thomas Var Reeve, with a due date of September 10, 2006, and the balance of $32,404,500 was to be paid at closing, scheduled in October 2006. Id. ; see also Ex. 103 (note), Exs. 108, 109 (guarantees).

The Property was in a "rural urban transition" zone, and Defendant—a local real estate developer—had already applied for annexation into the city of Meridian and for preliminary plat approval for a residential subdivision. The PSA required Defendant to obtain, before closing and at his cost, "acceptable entitlements" (i.e. , actual annexation and preliminary plat approval). In August of 2006, Defendant achieved annexation. However, that same month, Reeve had discussions with Defendant about Kastera's inability to meet the earnest money deadline, or to close as scheduled. See , e.g. , Ex. 204.¹¹

By an agreement reached in September 2006, and based on a payment of $500,000 to Defendant, the maturity date of the earnest money note was extended one month to October 10, 2006. Ex. 105. On that new due date, a check in the amount of $2,980,258.54 was paid by Kastera, LLC to Defendant. Ex. 110. As addressed in the Phase I decision, this amount represented the balance owed on the earnest money note after adjusting for the prior partial payment and accrued interest.

A September 13, 2006 "second amendment" to the PSA set a January 27, 2007 closing date. Ex. 106 at 2.¹² But as that date approached, a January 22, 2007 letter from Reeve advised Defendant that Kastera would not close at the $35,804,500 figure but, instead, offered to purchase the Property for a total of $24,000,000 inclusive of the earnest money. Ex. 133.¹³ Following negotiations, a February 19, 2007 "third amendment" to the PSA established that the balance of the purchase price to be paid at closing (i.e. , in addition to the earnest money paid in October 2006) would be $25,400,000. It also provided that the January 2007 closing would be extended to February 26, 2007. Ex. 140.

The transaction closed on that day, and the final price paid for the Tanana Valley Property under the terms of the third amended PSA, comprised of earnest money of $3,400,000 and a final payment of $25,400,000, was $28,800,000.¹⁴

The Court, in its November 17, 2017 Phase I decision, found that the value of the Property, as of February 26, 2007, was $25,480,000.¹⁵

2. Phase II

All other issues were reserved for Phase II. Trial was held on February 26–28 and March 1–2, 2018. The matter was taken under advisement upon the submission of closing briefs on March 16, 2018.

C. DBSI's TIC business and operations

The testimony of multiple witnesses and hundreds of documents established how DBSI and its numerous subsidiaries, closely-owned and other related entities, operated.

In confirming the Second Amended Joint Chapter 11 Plan for the DBSI entities, the Delaware court in October 2010 summarized:

25. Prior to the Petition Date, the DBSI enterprise was separated into three main spheres of activity:

(a) the syndication and sale to investors of TIC interests in real estate ("TIC Investment"). Offering documentation reflects that the marketability of those interests rested on (i) their qualification under Internal Revenue Code § 1031 as a tax-minimization device for sheltering capital

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