David Crumpton v. A. McGarrity

Filing

Opinion issued by court as to Appellant David H. Crumpton. Decision: Affirmed. Opinion type: Non-Published. Opinion method: Per Curiam.

Case: 12-15604

Date Filed: 04/16/2013

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 12-15604
Non-Argument Calendar
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D.C. Docket Nos. 8:11-cv-02649-EAK; 8:08-bk-14131-CED
In Re: NORTHLAKE FOODS, INC.,
a.k.a. North Lake Foods, Inc.,
Debtor.
_______________________________________
DAVID H. CRUMPTON,
Plaintiff - Appellant,
versus
A. DOUGLAS MCGARRITY,
Defendant - Appellee.
________________________
Appeal from the United States District Court
for the Middle District of Florida
________________________
(April 16, 2013)

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Before TJOFLAT, MARCUS, and WILSON, Circuit Judges.
PER CURIAM:
Northlake Foods, Inc. (“Northlake”) is a Georgia corporation that owned
approximately 150 Waffle House restaurants in Georgia, Florida, and Virginia. On
March 1, 1991, A. Douglas McGarrity, a shareholder of Northlake, executed a
Shareholders Agreement. Section 5.01 of the agreement contained the following
provision:
If the Corporation’s income ever becomes taxable to the Shareholders,
rather than to the Corporation, the Corporation shall pay a dividend at
least annually in an amount and at a time sufficient for each
Shareholder to pay out of the dividend all income tax, state and
federal, attributable to that portion of the Corporation’s income
included in such Shareholder’s income in the year preceding the year
of payment of the dividend.
Record, No. 1-5, at 16. 1
In 2005, Northlake designated itself an S corporation. Accordingly, its
shareholders were responsible for paying the taxes owed on Northlake’s income.
The amount of McGarrity’s personal income tax attributable to his share of
Northlake’s 2005 taxable income was $94,429.00. In 2006, citing § 5.01 of the
Shareholders Agreement, the board of directors authorized a dividend for
McGarrity and made a cash payment to him for $94,429.00 (“2006 Transfer”).

1

The Shareholders Agreement was attached as an exhibit to the complaint.
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On September 15, 2008, Northlake filed for bankruptcy under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Middle District
of Florida. On January 28, 2009, the Bankruptcy Court appointed David Crumpton
as bankruptcy trustee for Northlake. On August 3, 2010, Crumpton filed a
complaint in the Bankruptcy Court, claiming (1) that the 2006 Transfer was a
fraudulent transfer subject to avoidance and recovery by Crumpton under 11
U.S.C. §§ 544, 548, 550, and 551 and the Georgia Uniform Fraudulent Transfer
Act, § 18-2-70 et seq. and (2) seeking disallowance and equitable subordination of
McGarrity’s claims brought in Northlake’s bankruptcy under 11 U.S.C. §§ 502(d)
and 510(c). McGarrity moved for judgment on the pleadings.
The Bankruptcy Court granted the motion, ruling that the complaint
reflected that Northlake received reasonably equivalent value for the 2006
Transfer. The court reached this conclusion on two grounds: first, it determined
that the 2006 Transfer satisfied an antecedent debt created by the Shareholders
Agreement, see 11 U.S.C. § 548(d)(2)(A); second, the court determined that
Northlake received reasonably equivalent value for the 2006 Transfer “by virtue of
the Debtor’s Subchapter S election for federal income tax purposes.” Record, No.
1-12, at 3. In an order issued on February 9, 2011, the court dismissed the
complaint without prejudice. Crumpton filed an amended complaint; it alleged
that the 2006 Transfer constituted an illegal dividend under Georgia law, O.C.G.A.
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§ 14-2-640(c) and again sought disallowance and equitable subordination of
McGarrity’s claims under 11 U.S.C. §§ 502(d) and 510(c). McGarrity moved the
court to dismiss. In an order issued on September 9, 2011, the court granted the
motion, ruling that O.C.G.A. § 14-2-640 only applies to directors, and McGarrity
was not a Northlake director.
Crumpton appealed the Bankruptcy Court’s February 9, 2011, order and
September 9, 2011, order to the United States District Court for the Middle District
of Florida. The District Court affirmed the February 9, 2011, order, holding that
the 2006 Transfer satisfied an antecedent debt created by the Shareholders
Agreement. The District Court also affirmed the September 9, 2011, order, holding
that Georgia’s illegal dividend statute could not be applied to Stephens because he
was not a Northlake director.2
Crumpton now appeals the District Court’s judgment.
II.
We review legal determinations made by either the bankruptcy court or the
district court de novo. In re JLJ Inc., 988 F.2d 1112, 1116 (11th Cir. 1993). We
review the bankruptcy court’s findings of fact for clear error. Id. When reviewing
a ruling on a motion for judgment on the pleadings under Federal Rule of Civil
Procedure 12(c), we accept as true all allegations in the complaint and construe

2

Crumpton does not contest this ruling in the instant appeal.
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them in the light most favorable to the nonmoving party. Hawthorne v. Mac
Adjustment, Inc., 140 F.3d 1367, 1370 (11th Cir. 1998). Because there are no
findings of fact to be made from a judgment on the pleadings, we review the legal
significance accorded to the facts de novo. Elston v. Talladega Cnty. Bd. of Educ.,
997 F.2d 1394, 1405 (11th Cir. 1993).
A fraudulent transfer occurs when (1) a debtor was insolvent on the date that
the transfer was made or became insolvent as a result of the transfer; (2) the debtor
received less than a reasonably equivalent value in exchange for the transfer; and
(3) the transfer was made on or within two years before the date the debtor filed
the petition for bankruptcy. See 11 U.S.C. § 548(a)(1). The only question before
us is whether the District Court erred when it ruled that the 2006 Transfer was
made in exchange for reasonably equivalent value.
A debtor has not made a fraudulent transfer if the transfer confers an
economic benefit on the debtor. In re Rodriguez, 895 F.2d 725, 727 (11th Cir.
1990). The complaint shows that the Shareholders Agreement provides Northlake
with valuable benefits by virtue of its S-corporation election. We hold that these
benefits constitute a reasonably equivalent exchange for the 2006 Transfer and
affirm on that basis.3
3

We therefore do not address whether the 2006 Transfer satisfied an antecedent debt.
Krutzig v. Pulte Home Corp., 602 F.3d 1231, 1234 (11th Cir.2010) (“This court may affirm a
decision of the district court on any ground supported by the record.”).
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Taking the allegations in the complaint as true, it is clear that Northlake
received valuable benefits under the Shareholders Agreement in exchange for the
2006 Transfer. The exchange contemplated by the agreement is simple enough:
McGarrity agreed to pay his share of Northlake’s taxes if it ever decided to be
treated as an S corporation. In exchange, Northlake would reimburse McGarrity
the following year for the tax liability he incurred that was attributable to
Northlake’s income. This agreement benefitted Northlake because it enabled the
company to shift to S-corporation status whenever it determined it was
advantageous to do so. When Northlake elected this status, it enjoyed the added
benefit of freeing up cash that otherwise would have been dedicated to paying its
tax liability—though it would have to reimburse its shareholders the following year
for taking on this liability. Thus, the agreement provided Northlake with two
valuable benefits: flexibility and time.
The facts in the complaint and its exhibits are sufficient to conclude that this
was an exchange of reasonably equivalent value. Though the complaint alleges
that no consideration was given for the 2006 Transfer, no additional facts are
alleged describing the lack or inadequacy of the consideration. Moreover, this bald
allegation is plainly contradicted by the Shareholders Agreement attached to the
complaint. We therefore afford it no weight. See Griffin Indus., Inc. v. Irvin, 496
F.3d 1189, 1205–06 (11th Cir. 2007) (“Our duty to accept the facts in the
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complaint as true does not require us to ignore specific factual details of the
pleading in favor of general or conclusory allegations. Indeed, when the exhibits
contradict the general and conclusory allegations of the pleading, the exhibits
govern.”).
The concept of reasonably equivalent value does not require a dollar-fordollar transaction. In re Advanced Telecomm. Network, Inc., 490 F.3d 1325, 1336
(11th Cir. 2007). Because the complaint contains no allegations indicating why
these benefits do not constitute a reasonably equivalent exchange for the 2006
Transfer, we have no grounds to conclude they do not. Accordingly, the District
Court’s judgment is
AFFIRMED.

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