Shults & Tamm v. Ruley et al

Filing 55

ORDER DENYING SUMMARY JUDGMENT re 11 , 14 , 32 - Signed by CHIEF JUDGE SUSAN OKI MOLLWAY on 5/31/13. (emt, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
SHULTS & TAMM (Litigation
Trustee),

)
)
)
)
Plaintiff,
)
vs.
)
)
MICHAEL S. RULEY,
)
)
Defendant.
)
_____________________________ )

CIVIL NO. 12-702 SOM/BMK
ORDER DENYING SUMMARY
JUDGMENT

ORDER DENYING SUMMARY JUDGMENT
I.

INTRODUCTION.
Plaintiff is a Litigation Trustee suing Michael Ruley,

a former Chief Executive Officer and a Director of Hawaiian
Telecom Communications, Inc., (“Hawaiian Telecom”), to recover
allegedly preferential and fraudulent transfers pursuant to the
Bankruptcy Code.

Ruley moves for summary judgment on all counts,

and the Trustee moves for summary judgment with respect to Counts
III and IV.
II.

The court denies the motions.

STATEMENT OF FACTS.
Michael Ruley was the CEO of Hawaiian Telecom from

October 1, 2004, until he resigned in February 2008.

Second Am.

Compl. ¶¶ 13, 21.
When Ruley began working for Hawaiian Telecom, he
entered into an employment agreement (the “Employment
Agreement”), which provided for various severance benefits if his

employment ended under certain conditions.

Id. ¶¶ 18-20.

For

example, Ruley was eligible for “a lump-sum severance payment of
$900,000.”

Id.

¶ 19.

In addition, Ruley was eligible for

reimbursement for all expenses relating to moving from Hawaii
(the “Moving Payments”), payment of up to a 6% real estate broker
commission fee to facilitate the sale of Ruley’s Hawaii residence
(the “Relocation Payment”), and an additional payment to
reimburse Ruley for moving away from Hawaii (the “Relocation
Gross Up Payment”).

Id. ¶ 20.

See also Ex. A, Employment

Agreement, ECF No. 14-3.
On February 3, 2008, members of the Hawaiian Telecom
Board informed Ruley that his employment would end effective the
next day.

Ex. G, Ruley Dep. at 25, ECF No. 14-9.

Ruley says the

Hawaiian Telecom Board gave him two options: “We can terminate
you, [or] you can resign for good cause, the cause being they
eliminated my position.”

Id. at 28.

At this meeting, Hawaiian

Telecom Board members allegedly assured Ruley that, either way,
“his severance obligations under his employment contract would be
honored.”

Id. at 93.

According to Ruley, Hawaiian Telecom Board

members handed him a severance agreement that reflected the terms
outlined in his Employment Agreement, id. at 100, and encouraged
his attorney to look it over.
effective the next day.

Id. at 26.

Ruley resigned

Ex. 6, Resignation Email, ECF No. 14-17.

2

The particulars of Ruley’s severance payments were
finalized on February 22, 2008.

Ex. B, Mutual Release and

Severance Agreement, ECF No. 14-4.

Ruley’s severance payments

included:
(1)
(2)

Any bonus which has been declared or
earned but not yet paid for fiscal year
2007;

(3)

$71,340 (with respect to Executive’s
annual COLA payment for 2007) [the “COLA
Payment”];

(4)

Any business expenses incurred by the
Executive in accordance with the
Employer’s policies not yet paid to the
Executive;

(5)

The value of all accrued, unused
vacation days based on Executive’s
service to the Employer which the
parties agree is 320.33 hours [the
“Vacation Payment”];

(6)

Any other amounts due to the Executive
arising from the Executive’s
participation in, or benefits under, any
employee benefit plans, programs or
arrangements; plus

(7)

Id.

$1,117,272 [the “Severance Payment”];

$20,000 (with respect to accrued but
unused airfare between Honolulu and the
United States mainland)[the “Airfare
Payment”].

In addition, Ruley received the Moving Payment, the

Relocation Payment, and the Relocation Gross Up Payment outlined
in his Employment Agreement, as well as $4,500 in attorneys’ fees
(the “Attorneys’ Fee Payment”).

Second Am. Compl. ¶ 25.

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That same day, Ruley and Hawaiian Telecom also entered
into a consulting agreement.
ECF No. 14-5.

See Ex. C, Consulting Agreement,

Under the consulting agreement, Ruley was to serve

as a “Special Advisor to the Chairman” for six months and to
receive a monthly consulting fee of $23,780 (the “Consulting
Payments”).

Id.

On or about March 10, 2008, Ruley also received a
payment of $95,840 to reimburse him for his cost of living
adjustment, airfare, and attorneys’ fees (collectively, the
“Special Payment”).

Second Am. Compl. ¶ 32.

On December 1, 2008, Hawaiian Telecom filed a voluntary
petition for relief under chapter 11 of the Bankruptcy Code.
Second Am. Compl. ¶ 7.

Hawaiian Telecom’s payments to Ruley were

made between February 5, 2008, and June 16, 2009.

Id. ¶¶ 31-38.

Many of these payments were made by Cartus, a company retained by
Hawaiian Telecom.

Cartus then invoiced Hawaiian Telecom for

advances paid to Ruley.

Id. ¶ 35.

The Trustee’s Complaint asserts four claims against
Ruley.

First, the Trustee seeks to avoid the Relocation Payment,

the Severance Payment, the Vacation Payment, and the Special
Payment pursuant to 11 U.S.C. § 547 (Count II).

Second, the

Trustee alleges that the Moving Payments, the Relocation Payment,
the Relocation Gross Up Payment, the Severance Payment, the
Vacation Payment, the Consulting Payments, and the Special

4

Payment are fraudulent transfers in violation of 11 U.S.C.
§§ 548(a)(1)(B)(i) and (ii)(IV) (Count III).

Third, the Trustee

seeks to avoid these payments as fraudulent transfers in
violation of 11 U.S.C. §§ 548(a)(1)(B)(i) and (ii)(I) (Count IV).
Finally, the Trustee makes a “catchall” argument that it is
entitled to recover the transfers it seeks to avoid (Count VII).
Ruley moves for summary judgment on all counts against
him.1

The Trustee moves for summary judgment on Counts III and

IV.
III.

SUMMARY JUDGMENT STANDARD.
Summary judgment shall be granted when “the pleadings,

the discovery and disclosure materials on file, and any
affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of
law.”

Fed. R. Civ. P. 56(c).

One of the principal purposes of

summary judgment is to identify and dispose of factually
Celotex Corp. v. Catrett, 477

unsupported claims and defenses.
U.S. 317, 323-24 (1986).

Accordingly, “[o]nly admissible

evidence may be considered in deciding a motion for summary
judgment.”

Miller v. Glenn Miller Prods., Inc., 454 F.3d 975,

988 (9th Cir. 2006).

Summary judgment must be granted against a

party that fails to demonstrate facts to establish what will be

1

Counts I, V, and VI are asserted against parties
other than Ruley.
5

an essential element at trial.

See Celotex, 477 U.S. at 323.

A

moving party has both the initial burden of production and the
ultimate burden of persuasion on a motion for summary judgment.
Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102
(9th Cir. 2000).

The burden initially falls on the moving party

to identify for the court “those portions of the materials on
file that it believes demonstrate the absence of any genuine
issue of material fact.”

T.W. Elec. Serv., Inc. v. Pac. Elec.

Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987) (citing
Celotex Corp., 477 U.S. at 323); accord Miller, 454 F.3d at 987.
“A fact is material if it could affect the outcome of the suit
under the governing substantive law.”

Miller, 454 F.3d at 987.

When the moving party fails to carry its initial burden
of production, “the nonmoving party has no obligation to produce
anything.”

In such a case, the nonmoving party may defeat the

motion for summary judgment without producing anything.
Fire, 210 F.3d at 1102-03.

Nissan

On the other hand, when the moving

party meets its initial burden on a summary judgment motion, the
“burden then shifts to the nonmoving party to establish, beyond
the pleadings, that there is a genuine issue for trial.”
454 F.3d at 987.

Miller,

This means that the nonmoving party “must do

more than simply show that there is some metaphysical doubt as to
the material facts.”

Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 586 (1986) (footnote omitted).

6

The

nonmoving party may not rely on the mere allegations in the
pleadings and instead “must set forth specific facts showing that
there is a genuine issue for trial.”

Porter v. Cal. Dep’t of

Corr., 419 F.3d 885, 891 (9th Cir. 2005) (quoting Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 256 (1986)).

“A genuine

dispute arises if the evidence is such that a reasonable jury
could return a verdict for the nonmoving party.”

California v.

Campbell, 319 F.3d 1161, 1166 (9th Cir. 2003); Addisu v. Fred
Meyer, Inc., 198 F.3d 1130, 1134 (9th Cir. 2000) (“There must be
enough doubt for a ‘reasonable trier of fact’ to find for
plaintiffs in order to defeat the summary judgment motion.”).
On a summary judgment motion, “the nonmoving party’s
evidence is to be believed, and all justifiable inferences are to
be drawn in that party’s favor.”

Miller, 454 F.3d at 988

(quotations and brackets omitted).
IV.

ANALYSIS.
A.

Count II

Count II seeks to avoid the Relocation Payment, the
Severance Payment, the Vacation Payment, and the Special Payment
(collectively, the “Alleged Preferential Payments”) pursuant to
11 U.S.C. § 547(b).

Second Am. Compl. ¶¶ 62-70.

Under § 547(b), the Trustee may avoid “any transfer of
an interest of the debtor in property” made
(1) to or for the benefit of a creditor;
7

(2) for or on account of an antecedent debt
owed by the debtor before such transfer was
made;
(3) made while the debtor was insolvent;
[and]
(4) made –
. . .
(B) between ninety days and one year
before the date of the filing of the
petition, if such creditor at the time of
such transfer was an insider; . . . .
There are at least two genuine issues of material fact
that preclude summary judgment as to Count II.
First, the parties dispute whether Hawaiian Telecom was
insolvent at the relevant time of the Alleged Preferential
Payments.

The Trustee argues that Hawaiian Telecom was insolvent

as of December 31, 2007, and continued to be insolvent through
the petition date.

See Ex. 30, Ueno Expert Report.

By contrast,

Ruley argues that Hawaiian Telecom’s Form 10-Qs demonstrate that
Hawaiian Telecom’s assets were greater than its liabilities
during the relevant time period.

See Hawaiian Telecom’s Form 10-

Q ending March 31, 2008 (showing assets of $1,414,974,000 and
liabilities of $1,264,644,000), ECF No. 14-19; Hawaiian Telecom’s
Form 10-Q ending June 30, 2008 (showing assets of $1,376,294,000
and liabilities of $1,247,140,000), ECF No. 14-20; Hawaiian
Telecom’s Form 10-Q ending September 30, 2008 (showing assets of
$1,352,591,000 and liabilities of $1,269,296,000), ECF No. 14-21.
Second, the parties dispute whether Ruley was an
insider.

There are two types of “insiders” in the bankruptcy

8

context.

As the B.A.P. explained in Miller v. Brady (In re

Enterprise Acquisition Partners, Inc.), 319 B.R. 626, 631 (B.A.P.
9th Cir. 2004): “There are two distinct types of insiders, those
entities specifically mentioned in the statute . . ., i.e., per
se insiders, or those not listed in the statutory definition, but
who have a sufficiently close relationship with the debtor that
conduct is made subject to closer scrutiny than those dealing at
arm’s length with the debtor.”
A per se insider under the Bankruptcy Code includes
individuals such as a director or officer of the debtor.
U.S.C. §§ 101(31)(B)(i)-(ii).

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“When the transferee is a per se

insider, the court does not need to examine the actual nature of
the relationship.

The per se insider is considered to be close

enough to the debtor to demand preferential treatment as a matter
of law, regardless of whether the insider has any actual control
over the actions of the debtor.”

Id.

But while the Bankruptcy Code provides a list of
statutorily defined per se insiders, § 101(31)’s use of the term
“includes” indicates that the list is nonexclusive.

See 11

U.S.C. § 102(3) (indicating that the term “includes” is not
exhaustive).

Thus, one who is not a per se insider may still

qualify as an insider “based on a professional or business
relationship with the debtor . . . where such relationship
compels the conclusion that the individual or entity has a

9

relationship with the debtor close enough to gain an advantage
attributable simply to affinity rather than to the course of
business dealings between the parties.”

Friedman v. Sheila

Plotsky Brokers, Inc. (In re Friedman), 126 B.R. 63, 69-70 (9th
Cir. B.A.P. 1991).

“The determination of insider status is a

question of fact.”

Id. at 67.

Ruley argues that he was not a per se insider as of
February 4, 2008.

Motion at 9, ECF No. 14-1.

By contrast, the

Trustee argues that Ruley was a per se insider through February
7, 2008, because Ruley’s resignation letter was not submitted to
Hawaiian Telecom until February 8, 2008.

Opp’n at 5, ECF No. 37.

Although Ruley’s resignation letter stated that his resignation
was retroactive to February 4, 2008, ECF No. 14-6, the Trustee
says:
the evidence is clear that on February 4,
2008, Ruley had not yet resigned, nor had he
been fired. On February 4th and until
February 8th, Ruley remained the CEO of
Debtors and was a member of their Boards.
During that period, Ruley and Debtors were
negotiating the terms of Ruley’s Severance
and Consulting Agreements, and upon the
agreement on the terms, Ruley submitted his
resignation. Thus, until his delivery of his
resignation on February 8, 2008, Ruley
remained a per se insider.
Opp’n at 20, ECF No. 37.

Ruley does not dispute that the Debtors

paid him the Vacation Payment on February 5, 2008.
Am. Compl. ¶ 31.

See Second

Viewing the evidence in the light most

favorable to the Trustee as the nonmoving party with respect to
10

Count II, the court concludes that, on the present record, Ruley
does not establish that he is entitled to summary judgment as to
when he ceased to be a per se insider.

With regard to the

Vacation Payment, a question of fact precludes summary judgment
as to whether Ruley was a per se insider who received
preferential treatment.
The remainder of the Alleged Preferential Payments were
paid on either March 10, 2008 (the Severance Payment and the
Special Payment), or May 30, 2008 (the Relocation Payment).
¶¶ 32, 36.

Id.

Ruley again asserts that he was not an insider during

the relevant time period because he was neither an officer nor a
director of Hawaiian Telecom at the time the transfers were made.
Ruley Motion for Summary Judgment at 8, ECF No. 14-1.

But

Ruley’s arguments presume that the only relevant inquiry is
whether he was a per se insider.

The Trustee raises questions of

fact as to whether Ruley had a sufficiently close relationship
with Hawaiian Telecom after he resigned as CEO to qualify as a
nonstatutory insider.

Most significantly, Ruley acted as a

consultant to Hawaiian Telecom for six months after he resigned,
from March 1, 2008, through August 1, 2008.

The Trustee also

suggests that Ruley was a limited partner in Hawaiian Telecom at
least through February 22, 2008.

See Mutual Release and

Severance Agreement, ECF No. 12-19 (describing Ruley as being in
a Hawaiian Telecom “limited partnership”).

11

Given questions of

fact concerning the remainder of the Alleged Preferential
Payments, the court denies Ruley’s motion for summary judgment as
to Count II.
B.

Count III

Count III seeks to avoid the Moving Payments, the
Relocation Payment, the Relocation Gross Up Payment, the
Severance Payment, the Vacation Payment, the Consulting Payments,
and the Special Payment (collectively, the “Alleged Fraudulent
Transfers”) pursuant to 11 U.S.C. §§ 548(a)(1)(B)(i) and
(ii)(IV).

Both Ruley and the Trustee move for summary judgment

as to Count III.
Section 548(a)(1)(B) provides for the avoidance of
constructively fraudulent transfers and obligations.

The

Bankruptcy Code states:
(a)(1)

The trustee may avoid any transfer
(including any transfer to or for
the benefit of an insider under an
employment contract) of an interest
of the debtor in property, or any
obligation (including any
obligation to or for the benefit of
an insider under an employment
contract) incurred by the debtor,
that was made or incurred on or
within 2 years before the date of
the filing of the petition, if the
debtor voluntarily or involuntarily
-

. . .
(B)(i)

received less than a
reasonably equivalent value in
exchange for such transfer or
obligation; and

. . .
12

(ii)
. . .
(IV) made such transfer to or for the
benefit of an insider, or incurred
such obligation to or for the
benefit of an insider, under an
employment contract and not in the
ordinary course of business.
11 U.S.C. § 548(a)(1)(B).
There are several questions of fact that preclude
summary judgment as to Count III.

First, there is a genuine

issue of material fact as to whether Hawaiian Telecom received
less than a reasonably equivalent value for the Alleged
Preferential Payments.

While the parties present competing

arguments on this point, the court is unable to resolve the
matter based on the record.

Second, as discussed in connection

with Count II, there is a genuine issue of material fact as to
whether Ruley is an insider.

Third, there is a genuine issue of

material fact as to whether the Alleged Fraudulent Transfers were
made in the ordinary course of business.

The Trustee

characterizes the Alleged Fraudulent Transfers as exceptional in
the context of Hawaiian Telecom, whereas Ruley urges the court to
view the Alleged Fraudulent Transfers as part of Hawaiian
Telecom’s normal business practices.

The determination of

whether a payment is made in the ordinary course of business “is
a question of fact that depends on the nature of industry
practice.” In re Peck/Jones Const. Corp., 2010 WL 6245626, at * 6
(B.A.P. 9th Cir. Aug. 26, 2010).

13

Neither party has provided this

court with evidence as to the industry practice.

The court

denies summary judgment as to Count III.

C.

Count IV

Count IV seeks to avoid the Alleged Fraudulent
Transfers pursuant to §§ 548(a)(1)(B)(i) and (ii)(I).
Compl. ¶¶ 84-92.

Second Am.

Both Ruley and the Trustee move for summary

judgment as to Count IV.
Section 548 provides:
(a)(1)

The trustee may avoid any transfer
(including any transfer to or for
the benefit of an insider under an
employment contract) of an interest
of the debtor in property, or any
obligation (including any
obligation to or for the benefit of
an insider under an employment
contract) incurred by the debtor,
that was made or incurred on or
within 2 years before the date of
the filing of the petition, if the
debtor voluntarily or involuntarily
–

. . .
(B)(i)

received less than a reasonably
equivalent value in exchange for such
transfer or obligation; and

. . .
(ii)
. . .
(I)

was insolvent on the date that such
transfer was made or such obligation was
incurred, or became insolvent as a
result of such transfer or obligation; .
. . .

11 U.S.C. § 548(a)(1).
14

As discussed in connection with Count III, there is a
genuine issue of material fact as to whether Hawaiian Telecom
received less than a reasonably equivalent value for the Alleged
Preferential Payments.

Also, as discussed in connection with

Count II, there is a question of fact as to whether Hawaiian
Telecom was insolvent at the relevant time of the Alleged
Preferential Payments.

Because the court cannot resolve these

issues from the record, summary judgment is precluded as to Count
IV.
D.

Count VII

Count VII is a “catchall” claim seeking recovery of all
Alleged Preferential Payments and all Alleged Fraudulent
Transfers.

Given the foregoing genuine issues of material fact,

summary judgment on Count VII is denied.
V.

CONCLUSION.
For the foregoing reasons, the court denies the summary

judgment motions filed by both Ruley and the Trustee.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, May 31, 2013.

/s/ Susan Oki Mollway
Susan Oki Mollway
United States District Judge

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Shultz & Tam (Litigation Trustee) v. Michael S. Ruley, CIV. NO. 12-00702 SOM/BMK;
ORDER DENYING SUMMARY JUDGMENT

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