Veluchamy et al v. BANK OF AMERICA, N.A not individually but derivatively on behalf of The Estate of Pethinaidu and Parameswari Veluchamy
Filing
32
OPINION and Order Signed by the Honorable Charles R. Norgle, Sr on 8/19/2015. Mailed notice (jc, )
IN THE UNITED STATES DISTRICT COURT FOR
THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BANK OF AMERICA, N.A., not individually )
of
but derivatively on behalf
THE ESTATE OF PETHINAIDU
and
)
)
Civil Action No. 15 CV 882
PARAMESWARI VELUCHAMY,
Bankruptcy Case No. 11-33413
Adversary Case No. 12-1715
Plaintiff-Appellee/
Cross-Appellant,
Hon. Charles R. Norgle
v.
ARLIN VELUCHAMY and
ANU VELUCHAMY,
Defendants -Appe I lants/
Cross-Appellee.
OPINION AND ORDER
CHARLES R. NORGLE, United States District Court Judge
After
a
long period of successfully developing a series of vertically-integrated companies
in the direct marketing industry in Illinois and various companies in India, Pethinaidu
Veluchamy ("Mr. Veluchamy")-aided by his wife, Parameswari ("Mrs. Veluchamy") and his
children Arun and Anu-set his acquisitional sights on a bank. Then his financial troubles began.
When state and federal banking regulators investigated the solvency of his bank, Mr. and Mrs.
Veluchamy (collectively, "the senior Veluchamys") personally guaranteed two loans that
eventually totaled approximately $43 million. They subsequently defaulted on both loans. After
the creditor-bank was awarded a judgment for the deficiency and began citation proceedings, the
senior Veluchamys petitioned for bankruptcy. It was later revealed that the senior Veluchamys
had transferred virtually all of their assets to their children via a series of fabricated transfer
forms and indemnity agreements, and the bank (now acting as estate representative) brought an
adversary complaint against Arun, Anu, and the senior Veluchamys. After the bankruptcy court
found that the Veluchamys conspired to defraud their creditors and awarded
a
judgment to the
bank for over $64 million plus stock and jewelry, Arun and Anu, and the bank filed crossappeals. For the following reasons, the decision of the bankruptcy court is affirmed in part,
reversed in part, and remanded to the bankruptcy court to enter an amended judgment consistent
with this
T. BACKGROUND
A. The General Timeline
l.
of Events
An overview
After coming to the United States from India in the 1970s, the senior Veluchamys
amassed a small fortune in the direct marketing industry via the operations of fourteen
interconnected entities: Fulfillment Xcellence,Inc; Creative Automation Company; Versatile
Card Technology, Inc.; Qualtec, Inc.; Global Card Services, Inc.; Unique Data Services, Inc.;
Unique Embossing Services, Inc.; Automated Presort, Inc. VMark, Inc. ("VMark," a holding
company that owned the first seven companies); Unique Mailing Services, Inc.; Jayavilas
Logistics; Veluchamy DISCT, Inc.; Veluchamy Children's DISC, Inc.; and University
Subscription Service, Inc. Seeking to diversify their holdings, the senior Veluchamys purchased
Security Bank of DuPage ("Security Bank"), located in Downers Grove,Illinois, in 1995.
After the Security Bank acquisition, in 1998 the senior Veluchamys purchased First
Mutual Bancorp of Illinois, Inc. ("First Mutual"). In2004, the Veluchamys merged Security
Bank into First Mutual. Shortly after that, however, the Veluchamys began to run into trouble.
First Mutual began investing heavily in commercial real estate and acquisition, development, and
construction loans. To fuel this growth, the bank "depended upon increasingly volatile funding
' A DISC is a domestic international sales corporation. 26 U.S.C. $ 992(a). Qualifoing corporations
electing DISC status are not required to pay federal income tax. Id. $ 991.
sources, including an extensive reliance on brokered and large time deposits, which became
restricted as economic conditions deteriorated." Office of Inspector Gen., Fed. Deposit Ins.
Corp., Report No. MLR-I0-021, Material Loss Review of Mutual Bank, Harvey, Illinois 2 (Feb.
2010) fhereinafter '.OIG Report"], available at http://www.fdicig.gov/reportsl0/10-021.pdf.2
Specifically, in 2005 the Veluchamys secured a $10 million revolving line of credit with LaSalle
Bank (now Bank of America or "BoA"), as well as a $10 million term loan that matured in 2010.
In 2006, First Mutual (acting through the Veluchamys) received an expansion of their revolving
line of credit, expanding the limit to $20 million.
Beginning in2007, First Mutual engaged in several bad loan transactions, writing off tens
of millions of dollars in uncollectible debt that had been used to secure commercial construction
loans and other real estate transactions. Nevertheless, First Mutual continued to leverage itself
for its lending activities, taking out another $10 million loan from BoA in February 2008. By
June 2008, First Mutual's edifice-papered over with easy
credit-showed signs of crumbling,
indicated by the increasing percentage of its non-current loans.
At this point, the Federal Deposit Insurance Corporation (ooFDIC") and the Illinois
Department of Financial and Professional Regulation ("IDFPR"), which had been observing First
Mutual since shortly after it had acquired Security Bank, placed First Mutual under a cease and
desist order "because its overall condition wananted a corrective program to stabilize the
institution and effect necessary improvements." OIG Report 14. In other words, the bank had
become undercapitalized. When the BoA loans became due on November 30, 2008, First Mutual
defaulted. After entering into forbearance agreements, First Mutual defaulted again on June 30,
2009. When the Veluchamys could not adequately capitalize First Mutual, IDFPR closed First
2
Although not discussed by either parfy, the Court takes judicial notice of governmental investigations
into the Veluchamys' financial activities to aid in the development of the facts surrounding this matter.
See Fed. R. Evid.20l(bX2).
Mutual and named the FDIC as receiver.
2. The Bank o-f America litigation
On August 19,2009, BoA filed separate lawsuits against First Mutual and the
Veluchamys, which were later consolidated. See Bank of Am.. N.A. v. First Mut. Bansorp of Ill..
Inc., No. 09-cv-5108; Bank of Am.. N.A. v. Veluchamy, No. 09-cv-5109. On December29,
20l0,the Court entered summary judgment in favor of BoA in the total amount of $39 million
plus interest. Bank of Am. v. Veluchamy, Nos. 09-cv-5108,09-cv-5109,2010 WL 5479687,*4
(N.D. Ill. Dec. 29,2010). BoA then began proceedings to collect on its judgment, serving
citations to discover assets on the Veluchamys, First Mutual, as well as a variety of financial
institutions. Initially, the senior Veluchamys claimed they had no money with which to pay the
judgments, were slow to return the citation documents, and broadly attempted to claim
protections offered by the Fifth Amendment in an effort to dodge answering the citation.
Documents produced by the financial institutions, however, revealed that the Veluchamys
transferred over $29 million out of their U.S. bank accounts, and had diluted or otherwise
transferred their interest in non-cash assets to friends and family. BoA then filed an emergency
motion to compel production of the senior Veluchamys' global bank account statements or
transfer of cash sufficient to satisfy the judgment.
3.
The adversarial banltruotcy proceeding
On August 16,2011, approximately one day before the hearing on the status of the
Veluchamys' asset disposition took place, the Veluchamys petitioned for bankruptcy. While the
senior Veluchamys listed assets on their financial statement of over $500 million as of December
37,2007, their bankruptcy petition listed a negative net worth of over $50 million. BoA filed an
adversary complaint against the senior Veluchamys, Arun, Anu, and various other Veluchamy
4
family members and friends. After
a weeklong bench
trial, the bankruptcy court found that Arun
and Anu had engaged in a pervasive conspiracy with their parents, who had fraudulently
transferred over $64 million in cash, plus stock, property, and jewelry to their children and other
entities. Arun and Anu, and BoA have cross-appealed certain aspects of the bankruptcy court's
decision; the facts specific to the appeal are described below.
B. Specific Events Relevant to the Cross-Appeals From the Bankruptcy Court
Arun and Anu contend that the bankruptcy court erred in its findings and conclusions
relating to the disposition of the VMark stock (Count III); the real estate located in Downers
Grove, Illinois and Chennai, India (Counts VII and XII, respectively); and the disposition
of
stock in Appu Hotels Ltd. ("Appu") (Count XXIII). BoA, on the other hand, challenges only the
court's finding relating to the amount of money ascribed to the Veluchamys in their purchase of
Appu stock.
1. The VMark stock transfers - Count III
As of July 30,2009, VMark had issued one million voting shares to its stockholders.
7OO,OO2
of those shares were held by Mrs. Veluchamy;3 Arun and Anu each held l4g,g9g shares.
On July 37,2009, VMark's board of directors authorized (1) the creation of a new, non-voting
class of shares and (2) a stock split, by way of a dividend, which would issue nineteen non-
voting shares for every one share of voting stock. Post-stock-dividend, VMark's shares were
allocated according to this table:
3
On January 1,2009, Mr. Veluchamy transferred "his entire 5l percent interest in VMark, or 510,004
voting shares, to Mrs. Veluchamy 'for and in consideration of the love and affection that [Mr.
Veluchamyl bears to his wife [Mrs. Veluchamy] . . . ."'App. Appellants Arun Veluchamy and Anu
Veluchamy's Opening Br. 561 [hereinafter'oA&A App."].
Shareholder
Non-Voting
Voting Shares
Shares
Total
Mrs. Veluchamy
Arun
700,002
149,999
13,300,038
14,000,040
2,849,981
2,999,980
Anu
149.999
2.849.981
2.999.980
19,000,000
20,000,000
Total
1,000,000
On August 19,2009-1he same day that BoA filed its litigation-VMark's board
authorized the issuance of three million new shares of voting stock and thirty-eight million new
shares of non-voting stock. The next day,
shares to
VMark sold one million of these newly-created voting
Arun and Anu, 500,000 each, for
a
total of $630,000.00 ($315,000.00 each). After this
transfer, Mrs. Veluchamy owned 66%% (a loss of 3%oh), Arun and Anu each owned 16%% (a
gain of l2/rYo), with the shares allocated according to this table:
Shareholder
Voting Shares
Non-Voting
Shares
Total
Mrs. Veluchamy
Arun
700,002
649,999
13,300,038
14,000,040
2,849,981
Anu
649.999
2.849.981
3,499,980
3.499.980
Total
2,000,000
19,000,000
21,000,000
Less than two weeks later, on September 8, 2009, VMark sold an additional 1,540,000
voting shares to Arun and Anu (770,000 each) for $939,400.00 ($469,700.00 each), and
6,384,610 non-voting shares to Arun and Anu (3,192,300 each) for $3,830,760.00
($1,915,380.00 each). After this sale, Mrs. Veluchamy owned 48.4% of VMark (a cumulative
loss of 21.60/0), and Arun and Anu each owned 27.8% of VMark (a cumulative gain
of 10.8%
each), with the shares allocated according to this table:
Shareholder
Mrs. Veluchamy
Arun
Voting Shares
Anu
700,002
r,419,999
1.419.999
Total
3,540,000
Non-Voting Shares
13,300,038
6,042,281
6.042^281
25,384,600
Total
14,000,040
7,462,280
7.462-280
28,924,600
In its decision, the bankruptcy court found that VMark was worth $57,767,275.00, and
that the "VMark stock was sold to Arun and Anu with the intent to hinder, delay, or defraud
creditors." In re Veluchamy, 524 B.R. 277,29I (Bankr. N.D. Ill. 2014). The bankruptcy court
looked at the transactions' characteristics, and the function of the three transactions together, and
found that VMark's valuation was appropriate for several reasons. First, the bankruptcy court
considered the transference of control of the corporation (treating Arun and Anu as sharing a
unity of ownership) and increased VMark's value because the senior Veluchamys transferred
enough shares to transfer control of the company to Arun and Anu. Second, the bankruptcy court
correctly increased the present value of future cash flows by removing the Veluchamys' salaries
as an
outflow, reducing the amount of estimated future capital expenditures, and decreased the
present value of the cash flow by including the theoretical income tax a prospective purchaser
would have to pay. Third, the valuation was discounted because VMark's status as a closely-held
corporation rendered it less liquid than a publiclytraded company, which reduced its overall
value.
After finding that $57 ,7 67 ,27 5.00 was a fair value, the court evaluated the August 20 and
September 8 transactions separately. For the August transaction, the court found that each
500,000 share issuance represented23Sl% of the total outstanding shares (500,000 /
21,000,000), and accordingly found that each transfer was worth $1,375,438 (2,381%
of
$57,767,275). For the September transaction, the court combined the voting and non-voting
slrares, and found that each 3,962,300 share issuance represented I3.699% of the total
outstanding shares (3,192,300 I 28,924,600), and accordingly found that each transfer was worth
$7,913,539 (13.699% of $57,767,275).In sum, the bankruptcy court found Arun and Anu jointly
and severally liable for $18,577,954 ($9,288,977 each).
2.
The-fraudulent real estate transfers
a.
Count
The Downers Grove, Illinois properties (Couryt VII)
VII of BoA's complaint
concerns the disposition of three properties located in
Downers Grove, Illinois: 5300 Katrine, 1400 Centre Circle, and 5200-5220 Thatcher (the
"Downers Grove Properties"). Prior to October 2009, all three properties were held in various
land trusts; the senior Veluchamys were each 50Yo beneficiaries of the trusts.
On October 7,2009, the senior Veluchamys transferred approximately $2.8 million from
their account at the State Bank of India in Chicago, Illinois, to Mrs. Veluchamy's account held at
Canara Bank in India. On the same day, Arun and Anu formed "5300 Katrine
LLC."
On October 8, 2009, Mrs. Veluchamy transferred $1.36 million from her Canara bank
account into both Arun's and Anu's accounts at Canara, for a total of $2,72 million transferred
out of her account. Also on this day, Mr. Veluchamy transfened $3,999,890 into an account at
E*Trade Financial Corporation ("E*Trade") that was jointly owned by Arun and Anu.
On October 9,2009, Arun and Anu transfened $2.8 million ($1.4 million each) from
their accounts at Canara Bank to their joint account at E*Trade, adding to the $4 million that Mr.
Veluchamy had transfened the previous day. Subsequently, on or around October 20,2009,
Arun and Anu, acting through 5300 Katrine LLC, bought the property located at 5300 Katrine
Avenue, Downers Grove, Illinois for approximately $4.1 million. To fund the transaction, Arun
and Anu transferred $986,000 ($493,000 each) in cash out of their E*Trade account and into
their respective checking accounts. They also obtained a loan for $3.1 million secured by a
mortgage on the property from Burr Ridge Bank and Trust. The senior Veluchamys used the sale
proceeds to release the mortgage that had been encumbering the property; the payoff amount was
$3,070,762.89. They used the remainder (the leftover equity) to pay off assorted debt incurred by
their other enterprises.
On October 23,2009, Arun and Anu went on to form two additional real estate LLCs:
1400 Centre Circle
LLC and 5200 Thatcher LLC. On December 29,2009, Arun and Anu, acting
through 1400 Centre Circle LLC, bought the property located at 1400 Centre Circle, Downers
Grove, Illinois from the senior Veluchamys for $3,350,000. Similar to the Katrine transaction
described above, Arun and Anu contributed $875,000 of the purchase price, and obtained a
n-rortgage loan
from Inland Bank & Trust for $2,500,000 to finance the balance of the purchase
price. The senior Veluchamys paid off the $1,088,394.57 loan that had been encumbering the
property and used the remaining equity to pay off debts incurred by their other businesses.
On or about March 3,2010, Arun and Anu, acting through 5200 Thatcher LLC, bought
the property located at 5200-5220 Thatcher Road from the senior Veluchamys for $3,830,000.
Arun and Anu jointly contributed $1,052,000 of the purchase price, and obtained a loan from the
Northern Trust Company for $2,681,000. As with the other two transactions, the senior
Veluchamys paid off the debt that had been encumbering the property in the amount
$2,085,941 .77 and used the remaining equity to pay
of
off other incurred debts in connection with
the Veluchamys' business activities.
Across the three properties, Arun and Anu contributed approximately $2.9 million toward
the purchase of the properties. Ultimately, the bankruptcy court determined that Arun and Anu
had paid more than the fair market value of the properties.
It found that 5300 Katrine was worth
$3,300,000; 1400 Centre Circle was worth $3,200,000; and 5200-5220 Thatcher was worth
$2,800,000, for a total of $9,300,000. To determine the amount subject to avoidance by the
trustee (i.e. the amount the trustee could recover from Arun and Anu), the bankruptcy judge
subtracted the paid off mortgages (totaling$,6,245,099.17) from the value of the property, and
entered judgment against Arun and Anu,
jointly
and severally
the amount of $3,054,900.83, or
$1,527,450.42 each.
b.
The Chennai, India property (Count
XII)
One of the items on the senior Veluchamys' personal financial statement as of December
31,2007 reflected aI00Yo ownership of 'oTwo Houses, Madras [now Chennai]," which were
valued at $15 million.a A&A App. 906 atl762. On December 30,
2}l},the
senior Veluchamys
transferred their interest in property located in Chennai, India to Arun and Anu ("the Chennai
Properties") for no consideration. When BoA asked Arun if he and his sister "are the absolute
owners of [the Chennai] property," Arun asserted his privilege under the Fifth Amendment.
Separate App. of Appellee
& Cross-Appellant
387 at
l02l:16-20 [hereinafter "Pl. App."]. Anu
asserted her Fifth Amendment privilege when she was asked
if "[t]he deed shows that [she was]
the owner of the Chennai property." Pl. App. 770 at 55:7-9. At that time, the Chennai Properties
consisted of two adjoining parcels. The bankruptcy court found this transaction to be a fraudulent
transfer intended to defraud their creditors, and ordered Arun and Anu to pay the fair market
value of the transfer. In finding the proper valuation for the Chennai Properties, the bankruptcy
court relied on the valuation opinion of BoA's expert, Berkeley Research Group ("Berkeley").
Berkeley, in turn, relied almost exclusively on a third-party valuation performed by Colliers
International ("Colliers"). Using the properties' deeds as a foundation, Colliers assumed that the
properties were wholly-owned by the Veluchamys, were otherwise free of encumbrances, and
were in a condition suitable for redevelopment.
Colliers used two fundamental methods to calculate the properties' value: the comparable
o
In 7gg6,the government of Tamil Nadu, India changed the city's name from Madras to Chennai.
Chennai, Encyclopedia Britannica Online, http://www.britannica.com/place/Chennai (last visited Aug.
20 l s).
10
10,
sales approach and the income approach.s Colliers reviewed the surrounding land and zoning
requirements, and determined that the highest and best use of the properties was as a high-rise
condominium. Colliers examined the Chennai Properties and determined that the properties were
worth 381 million rupees (o'Rs.") under the comparable sales approach and Rs. 344 million under
the income approach. After assigning greater weight to the comparable-sales approach to value,
Colliers concluded that the Chennai Properties were worth Rs. 365 million ($8,097,890 using the
December 2010 exchange rate), which was adopted by Berkeley and the bankruptcy court as the
final valuation of the properties. The bankruptcy court ultimately awarded
a money
judgment
regarding the Chennai Properties against Arun and Anu, jointly and severally, in the amount
of
the full value of the properties, $8,097,890.
3.
The
.fraudulent trans.fer
As of December
3
o-f
shares of stock in Appu Hotels (Count
XXIIII
1,2007 , the senior Veluchamys owned a large quantity of stock
(approximately 10,569,473 shares) in Appu Hotels. On or about February 28,2070, the senior
Veluchamys transferred a total of 4,275,777 shares in Appu to Arun and Anu (the "February
2010 Transfers"). The bankruptcy court eventually found that these transfers were fraudulent and
awarded
a
joint and several money judgment in the amount of $3,499,593.
Less than six months later, on August 2,2010, the senior Veluchamys deposited Rs. 17
million and Rs. 14.6 million in Arun's and Anu's accounts, respectively, which were held at
Canara Bank in India. That same day, both Arun and Anu transferred nearly the entire amounts
(Rs. 16,880,130 and Rs. 14,529,330) to Appu. Also on August 2,2010, Mrs. Veluchamy
transferred Rs. 14,491,180 (approximately $310,000) to Appu.
5
In the comparable sales approach, the appraiser determines the fair market value by researching the
price of similarly-situated properties that had recently sold. In the income approach, the appraiser
calculates the fair market value by deriving a present value of the property from estimating the property's
potential future profit.
11
Subsequently, on November 24,2010, Appu released the results of a stock issuance it had
conducted. Appu issued the shares for 30 rupees each. Arun received 1,787,524 shares with a
total value of Rs. 53,625,720. Anu received 1,709,164 shares with a total value of Rs.
51,274,920. Mrs. Veluchamy was not listed as a subscriber. Noting an imbalance in the amount
of shares issued to Arun and Anu when compared to the amount of money they deposited with
Appu, the bankruptcy court found that Mrs. Veluchamy had transferred cash to Appu in order for
Appu to issue an equivalent amount in shares to Arun and Appu. Accordingly, Arun and Anu
were found jointly and severally liable to the estate in the amount of $310,000. While the
bankruptcy court noted an imbalance, it did not trace the origin of an extra Rs. 59 million
(approximately $1,262,147) used to purchase Appu shares on behalf of Arun and Anu.6
II.
DISCUSSION
Standard of Revierv
This Court has jurisdiction to review the decision of the bankruptcy court under 28
U.S.C. $ 158(aXl). When reviewing the bankruptcy court's decision, the Court reviews all
conclusions of law de novo, and reviews all findings of fact for clear error. In re Bulk Petroleum
Corp., No. 13-1810,2015 WL 4591743,*4 (7th Cir. July 31,2015); see alsg Fed. R. Bankr. P.
7052 (incorporating Fed. R. Civ. P. 52(a)(6) when reviewing findings of fact). As aptly put by
the Seventh Circuit, the Courl can only reverse a finding of the bankruptcy court for clear error
if
the wrong strikes the court "'with the force of a 5-week-old, unrefrigerated dead fish."' See Cent.
Mfg.. Inc. v. Brett, 492 F.3d 876, 883 (7th Cir. 2007) (quoting Parts & Elec. Motors. Inc. v.
Sterling Elec.. Inc. ,866 F.2d228,233 (7th Cir. 1988)).
u
The totalvalue of stock issued to Arun and Anu was Rs. 104,900,640. ArLrn, Anu, and Mrs. Veluchamy,
however, only contributed Rs. 45,900,640,Ieaving a Rs. 59 million imbalance.
t2
A. VMark (Count III)
Arun and Anu's first five issues on appeal (they raise eleven total) concem the
bankruptcy court's findings and conclusions regarding the disposition of VMark stock. Their
first set of issues argues that VMark's internal dilution of its own corporate stock cannot, as a
matter of law, be an indirect transfer of stock from the senior Veluchamys to their children. Their
second set of issues argues that the bankruptcy court incorrectly valued VMark. Their third set
of
issues argues that the judgment entered against Arun and Anu was too high because (1) the
bankruptcy court did not consider the amounts Arun and Anu paid in consideration for the stock
issuance and (2) did not consider the equity ownership that Arun and Anu already possessed.
I.
VMark's internal stock dilution was an indirect -fraudulerlt transfer
o.f
ownership
Arun and Anu first argue that the stock that VMark issued to them is not subject to
avoidance because VMark, not the senior Veluchamys, transferred the shares. Arun's and Anu's
argument is essentially that because the shares did not exist until VMark (not the Veluchamys)
created them, they could not be apart of the senior Veluchamys' estate and thus were not subject
to avoidance.
The Bankruptcy Code allows trustees to "avoid any transfer . . . of an interest of the
debtor in property . . . if the debtor voluntarily or involuntarily made such transfer . . . with actual
intent to hinder, delay, or defraud any entity to which the debtor was or became . . . indebted."
11
U.S.C. $ 5a8(aX1)(A) (emphasis added). The Code defines "transfer" as, inter alia,"each mode,
direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting
with property or an interest in property." Id. $ 101(54XD). "The word [transfer] is used in its
most comprehensive sense, and is intended to include every means and manner by which
property can pass from the ownership and possession of another, and by which the result
13
forbidden by the statute may be accomplished." Pirie v. Chi. Title & Trust Co., 182 U.S. 438,
444 (te01).
From reviewing the parties' briefs and the Court's own research, it appears that the
Seventh Circuit has not spoken directly on whether stock dilution by the majority shareholder
of
a closely-held corporation constitutes a fraudulent transfer. But a district court in Texas and a
bankruptcy court in Colorado have found fraudulent transfer liability in such situations. See In re
Powers, Adv. No. 87-0388-H3, 1990 WL290210 (S.D. Tex. Oct. 18, 1990), aff d, 979 F.2d
1533 (5th Cir.1992); In re Dreiling, 233 B.R. 848 (Bankr. D. Colo. 1999).
In Powers, the court found a fraudulent transferee liable when he received 1,000 shares in
his debtor-brother's corporation, "which watered the Debtor's stock by 22.5Yo." Powers, 1990
WL 290210, *12. Similarly, the Bankruptcy Court for the District of Colorado held that there
was no substantive difference between a debtor causing his corporation to issue new shares to a
transferee and the debtor transferring already-issued shares:
It is axiomatic that the value of the stock held by the Trustee before the issuance
of the Treasury stock was considerably higher than the value immediately
thereafter. This diminution of value was no less real than if Dreiling [the Debtor]
had conveyed ownership of the Trustee's stock in Kearns [the corporation issuing
the new shares]. Not only that, the issuance of the Treasury stock effectively
transferred majority control of Kearns from the Trustee. Ownership of a majority
interest in the stock of a corporation carries with it many rights and powers
unavailable to minority interests. Those rights and powers are but additional sticks
in the bundle of rights enjoyed by the owner of the majority interest. These
ownership rights and powers were taken from the Trustee and transferred to the
individual Plaintiffs.
Dreiling,233 B.R. at876. The Court is unaware of any bankruptcy case that holds that intemal
stock dilutions of closely held corporation are a legitimate method to transfer assets away from
an estate.
In addition to fraudulent conveyances in a bankruptcy context, and although not an
explicit component of bankruptcy jurisprudence, cases interpreting the Uniform Fraudulent
14
Transfer Act ("UFTA") are nonetheless instructive in interpreting the analogous provisions
of
the bankruptcy code because the "UFTA was an effort to harmonize state law with the
Bankruptcy Code." See In re Image Worldwide. Ltd., 139 F.3d 574,577 (7th Cir. 1998) (citing
Philip I. Blumberg, Intragroup (Upstream. Cross-Stream. and Downstream) Guarantees Under
the Uniform Fraudulent Transfer Act,9 Cardozo L. Rev. 685, 695-96 (1987)).
From what the Court can discern, there is only one case discussing fraudulent transfer
liability under the UFTA when
a
majority shareholder dilutes the stock of a closely-held
corporation. In Reill), v. Antonello, 852 N.W.2d 694 (Minn. Ct. App. 2014), the judgment
debtor, originally the sole owner of the 10,000 shares that comprised his corporation, "amended
the corporation's articles of incorporation to authorize the issuance of 490,000 new shares
of
stock" to his wife. Id. at 700-01. The court found that the debtor 'omanipulate[d] the corporation
to dilute the value of his levied 10,000 shares of stock from one-hundred-percent ownership to
two-percent ownership before the sherifls sale." Id. The court deemed this activity-using the
corporation as a conduit for the transfer of his ownership-a fraudulent transfer under the UFTA.
Synthesizing the dearth of cases that interpret fraudulent conveyances in this context, the
courts have consistently ignored the mere number of transferred shares (i.e. the form) in favor
of
determining the actual percentage of the company that the debtor caused to transfer to a thirdparty (the substance). These courts have also ignored the fiction that the corporation issued the
shares, and have consistently viewed the corporation as the mere alter-ego of the
majority
shareholder in these types of fraudulent transfers. SeS. e.g., Reilly, 852 N.W.2d at701(holding
that the corporation-is-a-separate-person argument'oignores the reality that [the debtor] was
exclusively responsible for the actions of the corporation and that he fraudulently transferred
assets to the detriment
of his creditors").
15
Moreover, the cases cited by Arun and Anu are irrelevant at best, and actually appear to
cut against their argument. Arun and Anu's discussion of Freeland v. Engdis Corp., 540 F.3d
721,740 (7th Cir. 2008) is inapplicable. In Freeland, the parent corporation (Enodis) directed its
subsidiary (Consolidated) to issue a cash dividend and a dividend note to an intermediate
subsidiary (Welbilt, Consolidated's parent). Id. at 727.Rather than issue the dividend as a
discrete cash (or interest) payment, Enodis simply transferred the money from Consolidated's
account to its own. Id. Consolidated's dividends therefore never rested with Welbilt. Due to
product defects, Consolidated later filed for bankruptcy and the trustee subsequently sought to
avoid the dividend payments to Enodis and Welbilt. Id. at 728. While the court in that case
awarded judgment against Enodis,
it did not attach liability to Welbilt
because the dividend
payments had already been recovered from Enodis-Welbilt's parent corporation.Id. at740
("Because Welbilt Holding did not derive a benefit from the transfers, we affirm the district
court's refusal to enter judgment against Welbilt Holding."). Here, the senior Veluchamys
caused
VMark-of which
they controlT)Yo-to issue stock to VMark's minority shareholders-
Arun and Anu. This stock issuance effectively transferred the majority interest in VMark from
the senior Veluchamys to Arun and Anu. In Freeland, however, the entity receiving the transfer
(Welbilt) was simply a conduit; it derived no independent benefit from the transfers.
Arun's and Anu's reliance on In re McCook Metals. LLC, 319 B.R. 570 (Bankr. N.D. Ill.
2005) is similarly misplaced: MsCook focused on a transfer beneficiary, not a transferee (as is
the case with Arun and Anu). In McCook, the debtor, a closely-held corporation, fraudulently
transferred its right to purchase a competitor's aluminum smelter to a different entity (Longview
LLC). Both entities, however, were principally owned by the same shareholder, Lynch. Id. at
577
.In holding Lynch liable for the value of the fraudulent transfer, the court rejected Lynch's
t6
argument that Longview LLC was the only recipient of the benefit because Lynch received an
actual, quantifiable benefit in the form of his share of the asset value, and actually controlled
Longview LLC. Id. at 592. As in Freeland, Longview was simply a conduit for its principal
shareholder, Lynch. In this case, Arun and Anu are the principal shareholders, the two
individuals that received the benefit and control that accompanies the transfer of the controlling
interest in a closely-held corporation.
In this case, the undisputed facts show that the senior Veluchamys owned the majority of
VMark. The senior Veluchamys used this position of control to cause VMark to issue enough
new stock to Arun and Anu (who happened to be the only minority shareholders of the
corporation) to make them the new majority shareholders, effectively removing the bulk of the
corporation from the Estate's assets. The bankruptcy court correctly concluded that this was a
fraudulent transfer transaction.
2.
The banlcruptc:t court coruectl:t valued VMark
Arun and Anu next argue that the bankruptcy court incorrectly valued VMark.
Specifically, they argue that the senior Veluchamys did not transfer a majority position because
the two transactions each separately transferred a minority interest. Because, they argue, the
transfers were of a minority interest, a35Yo marketability discount should apply, instead of the
15% discount that the court ordered. This higher discount would then result in a lower effective
valuation of VMark. Arun and Anu cite no case law in support of their argument.
"[C]ourts generally do not elevate form over substance[, and w]here an allegedly
frar-rclulent transfer is merely one step in a general plan, the plan must be viewed as a whole
with
all its composite parts taken into consideration." In re Jumer's Caqtle Lodgg. Inc., 338 B.R. 344,
356 (Bankr. C.D. Ill. 2006) (citations omitted); seg also In re J,oy Recovery Tech. Com., 286
t7
B.R. 54, 74 (Bankr, N.D. Ill. 2002). This rule makes sense because to hold otherwise would
reward a fraudulent transferor's careful planning of transferring a majority interest via a series
of
smaller structured transfers.
Arun's and Anu's argument would require the Court to reward scheming and deceptive
behavior. The undisputed facts show that the senior Veluchamys conducted two transfers
approximately nineteen days apart. The bankruptcy court found, and Arun and Anu do not
challenge the fact, that the senior Veluchamys transferred their shares in an effort to remove
VMark's ownership from the Estate, and therefore, its creditors. The apparent lack of
case
support by Arun and Anu only further dissuades the Court of the merits of their argument. The
senior Veluchamys fraudulently transferred a controlling stake in VMark, and the valuation
of
the company correctly encompassed the transfer of control. The Court does not find any error, let
alone clear el'l'or, in the bankruptcy court's findings on this issue.
3.
The bankruotc:t court coruectbt ignored the consideration Arun qnd Anu
issued shares qf VMark, and the cgurt properlv vqlued the trans-fers
paidfor their
The final argument that Arun and Anu make concerns the value of the stock transfers
themselves. They argue (1) that the bankruptcy court improperly ignored the consideration they
paid for their VMark shares, and (2) incorrectly valued the shares issued to Arun and Anu.
a.
Arun and Anu do not receive a seto-ffagainst the awardf.or the consideration
they paid.for their shares
Notwithstanding the rule permitting trustees to avoid fraudulent conveyances, a
transferee is entitled to a setoff for the consideration paid in connection with the conveyance,
where the transferee took the interest "for value and in good faith." See 11 U.S.C. $ 548(c). The
"for value" requirement of the setoff allowance does not require the value to be reasonably
equivalent to the transferred interest, See In re Comm. Loan Corp., 396 B.R. 730,743-44 (Bankr.
N.D. Ill. 2008) (noting that the Code "contains no equivalence standard"). ooGood faith" requires
18
the transferee to have engaged in the transaction without knowledge of its voidability or
fraudulent nature (i.e. that the tlansfer was intended to defraud the transferor's creditors). See.
e.g., Comm. Loan Corp., 396 B.R. at745; Bonded Fin. Servs.. Inc. v. European Am. Bank, 838
F.2d 890, 897-98 (7th Cir. 1988) ("Venerable authority has it that the recipient of a voidable
transfer may lack good faith if he possessed enough knowledge of the events to induce a
reasonable person to investigate.").
Without discussing
tl"re presence
of good faith, Arun and Anu argue that denying the
setoff is tantamount to allowing BoA a double recovery, in violation of the single satisfaction
rule. But Arun and Anu appear to misunderstand the interplay between the single satisfaction
rule under $ 550(d) and the inability to receive an offset from a knowing participation in a
fraudulent transfer scheme under $ 5a8(c). Section 550(d) of the Code provides that "[t]he
trustee is entitled to only a single satisfaction" when recovering an avoided transfer under
$ 550(a). 11 U.S.C. $ 550(d). This rule means that for every source of funds, the trustee may
only recover the entire amount once. Section 548(c), on the other hand, does not allow funds
used in a fraudulent transfer to offset the fair market value of the transfer unless the transferee
made the transfer for value and in good faith. Id. $ 5a8(c); see Boyer v. Crown Slock Distrib..
Inc., 587 F.3d787,796-97 (7th Cir. 2009) (analyzing the analogous provision under $ 550(b),
which uses the same standard-value and good
faith-to
prevent the trustee from avoiding the
transler altogether),
An illustration is helpful to understand the difference. Debtor D fraudulently transfers
$
1
00 to transferee T; T is aware of the transfer's fraudulent nature and gives no consideration for
the $100. Zproceeds to distribute $80 to his four friends ($20 each); each one knows of the
transfers' fraudulent nature and provides no consideration for the exchange. A week later, D
19
petitions for bankruptcy protection. Pursuant to $ 550(d), the eventual trustee is only entitled to
recover
$
$
100, but may recover that
$
100 from 7 and his four friends. The trustee cannot recover
180 from the five.
But D also o'sold" his priceless Picasso to
I
for $20. Under $$ 5a8(c) and 550(b)(1), the
trustee would be entitled to avoid and recover the full value of the Picasso; Tcould not deduct
the $20 he paid for the painting because he did not engage in the transaction "in good faith." See
11 U.S.C. $ 5a8(c). The $20 Tpays
in exchange for the painting is not counted twice, the trustee
(and the court) merely disregard any consideration used in connection with a knowing fraudulent
transfer. The Code disallows payment offsetting to guard against rewarding a knowing
participant in a fraudulent scheme. See Nostalgia Network. Inc. v. Lockwood, 315 F.3d 717,720
(7th Cir. 2002). As the Seventh Circuit points out, disallowing such an offset will not create a
creditor windfall because the debtor-not the creditors-will be the recipient of any surplus
funds after all of the creditors have been paid from the estate. Boyer, 587 F.3d at797 (citing 1l
U.S.C. $ 726(aX6) and interpretive cases).
Arun and Anu have shown that they did indeed give value for the issued shares. But that
is not rvhy their contention fails. They cannot receive a setoff because they did not enter into the
transactions "in good faith." See l1 U.S.C. $ 5a8(c). While Arun and Anu appear to agree with
the Code and its interpretive cases, they nevertheless argue that they should be entitled to a setoff
because they made the payments to
VMark, not to their parents. They again cite no case law to
support their position,T and in any event, this contention is pure sophistry. Settled case law holds
that the corporation is disregarded when it is used as a conduit for the controlling shareholder to
7
It is not the Court's function to make the parties' arguments for them. Roger Whitmore's Auto. Servs..
Inc. v. Lake Cnty., Ill. , 424 F .3d 659, 664 n.2 (1th Cir. 2005) ("lD)e novo review does not mean that fthe
Court] must make and support the parties' arguments for them."). "As we have repeated time and again,
'Judges are not like pigs, hunting fortruffles buried in [the record]."'Gross v. Town of Cicero.lll., 619
F.3d697,702(7thCir.20l0)(quotingUnitedStatesv.Dunkel,927F.2d955,956
20
(7thCir. 1991)).
erlgage in fraurd. See. e.q., Wachovia Secs.. LLC v. Banco Panamericano. Inc. , 674
F
.3d 743,751
(7th Cir. 2012); Reilly, 852 N.W.2d at70l. This principle still holds when a transfereeshareholder who knows about the fraudulent nature of the transaction accesses the same
corporation to perpetuate the fraud. The bankruptcy court correctly disregarded Arun's and
Anu's payments for the VMark shares, and the Court afflrrms the result on that issue.
b.
The banlo'uptcy_court appropriatebt-found the value of the trans-ferued
VMark shares
Last, Arun and Anu claim that the bankruptcy judge improperly calculated the value
of
the transferred shares from VMark. While their argument is mathematically sound, it ignores the
good faith required ofa fraudulent transferee that seeks to reduce an avoided transfer by the
amount of an in-kind exchange. See l1 U.S.C. $ 5a8(c). The bankruptcy court determined
daniages fi'om evaluating each transaction separately. The Court agrees with the prudence of that
approach, and
will
also discuss the two transactions separately.
Before the August 2009 transfer, Arun and Anu owned 30% of VMark, while the senior
Veluchamys owned 70Yo. On August 19,2009, VMark issued 500,000 new shares to both Arun
and Anu (1,000,000 total). The effect of this transfer reduced the senior Veluchamys' interest
in
VMark by 3%oh, and correspondingly raised Arun's and Anu's interests by the same amount.
The bankruptcy court, however, found the value of that transfer was 4.762Yo of the total value, or
$2,750,876. The bankruptcy court calculated this amount from dividing the number of issued
shares (1,000,000) into the total number
of issued shares (21,000,000). Arun and Anu argue that
the bankruptcy court should have only awarded the bank the lower 3%Yo of the value because
that was the effective interest that actually transferred from the senior Veluchamys to Arun and
Amr.
While they are correct that the effect of the transfer moved 3tAoh from the parents to the
21
children, it glosses over the series of transactions that, when collapsed, yielded the 3tA0h figure.
Had the senior Veluchamys simply transferred 3%%o of their interest to Arun and Anu, they
would be correct. But the corporation itself (acting on behalf of the senior Veluchamys) issued
the new shares, which diluted the outstanding shares.
All of VMark's shareholders passively paid
for this dilution, including Arun and Anu. By accepting the newly-issued shares, Arun and Anu
paid value in the form of the dilution of their stock in the amount of the difference between the
ofthe total outstanding shares, and the actual increase in ownership
issued shares as a percentage
tlrey exp.rlenced (in this case, L429%).
So another way of looking at this transaction reveals that not only did Arun and Anu pay
cash for the newly-issued shares, but that they paid in stock as well. Because their knowing
participation in their parents' fraudulent scheme disentitles them to receive a setoff for the value
they paid for the shares, see
1
I U.S.C. $ 5a8(c); Bonded Fin., 838 F.2d at 897-98, the bankruptcy
court correctly awarded the Estate 4.762% of VMark's value for this transaction.
The September 8, 2009 transaction is different only in numbers. On that day, VMark
issued 7,924,600 shares to Arun and Anu (3,962,300 each). This transaction effectively
transferred 18.265% of the interest in VMark from the senior Veluchamys to Arun and Anu. The
bankruptcy court again looked only at the shares issued as a percentage ofthe total, ignoring the
net interest transfer. The bankmptcy court found that Arun and Anu received 27.398% of VMark
(7,924.600 128,924,600), and entered judgment against them in the amount of $15,827,078
($7,913,539 each). Here too, in consideration for the newly-issued shares Arun and Anu not only
paid cash, but diluted their own shares as consideration for the transfer. Because they knowingly
participated in the scheme, they are not entitled to setoff. The bankruptcy court correctly
determined that the value of VMark stock issued to Arun and Anu was $18,577,954.
22
B. The Fraudulent Real Estate Transactions
Arun and Anu next challenge the bankruptcy court's findings and conclusions regarding
the transfer of certain real estate held by the Veluchamys that is situated in Downers Grove,
Illinois and Chennai, India.
l.
The Downers Grove transfers (Count VII)
Arun and Anu argue that, because they paid more than the fair market value for the
Downers Grove Properties, they could not receive a benefit as a matter of law,
claiming-
without support-that overpayments "in the normal course laref primafacie evidence that no
benefit was received by the purchaser." Appellants' Opening Br. 34. But this argument does not
address why the transfer of the Downers Grove Properties to Arun and Anu was not fraudulent.
If anything, their argument
appears to suggest that the properties were undervalued and that
therefore the bankruptcy court's damages finding on this count was too low. See Appellants'
Opening Br. 35 (ooFurther, Arun and Anu paid an additional $4,000,000 of money from their
E*Trade account for the purchase of the Downers Grove Properties
exceeds tlre money judgment amount entered on Count
-
an amount that actually
VII.").
Section 550 of the Code allows the trustee to avoid any transfer intended to defraud the
transferors' creditors. 11 U.S.C. $ 550(a). A subsequent transferee can dodge the avoidance
the transfer if he can show that he took the property for value with good faith and lack
of
of
knowledge of the fraudulent nature. Id. $ 550(b)(l). If he is an intermediate transferee, he could
also escape liability if he can demonstrate that he never controlled the money, but was acting as a
nrere conduit for the transferor and the true transferee. See McCook, 319 B.R. at 590.
Neither of these defenses is applicable here. The undisputed facts show that the senior
Veluchamys transferred the Downers Grove Properties to Arun and Anu. While Arun and Anu
paid value for the properties, the fact remains that they had full knowledge of what their parents
were seeking to accomplish by transferring the properties. These facts, alone, are enough to
defeat their proffered defense. See Bonded Fin., 838 F.2d at 897-98. Whether
transferees of the property who took
title-received
they-as the actual
some tangible benefit is irrelevant to the
analysis. The bankruptcy court correctly found Arun and Anu liable to the Estate in the amount
of the fair market value of the properties less the cash used to pay off the mortgages then
attached to the Downers Grove Properties.
Arun and Anu also raise the issue that the bankruptcy court erred in "refus[ing] to
consider all of the mortgage indebtedness that encumbered the Downers Grove Real Estate at the
time of purchase by Arun and Anu." Appellants' Opening Br. 6. But Arun and Anu did not
develop the argument any further in their brief. Consequently, the Court finds that Arun and Anu
have w,aived whatever arguntent they may have made regarding this issue. See Dunkel ,927 F.2d
at 956; Roger Whitmore's Auto. Servs. ,424 F.3d at 664 n.2. The Court is unable to find any
clear error committed by the bankruptcy court regarding the valuation of the Downers Grove
Properties or Arun's and Anu's liability for accepting their transfer, and the Court affirms the
bankruptcy court on this issue.
2.
The Chennai trans.fers (Count
XII)
Arun and Anu next contend that the bankruptcy court (1) erred in ordering the payment
of the Chennai Properties' fair market value instead of title to the properties and (2) incorrectly
valued the Chennai Properties by finding Arun and Anu liable for the entire value of the
property.
a.
The banlq'uptcy court properb) awarded a monq) judgment-for the Chennai
Propertie,s instead o-f awardins title
If the trustee is able to successfully avoid a fraudulent transfer of property, "the trustee
24
may recover, for the benefit of the estate, the property transferred, or. if the court so orders. the
valr.re
of such propelty, from the initial transferee of such transfer, . . .'o S.gg 11 U.S.C. $ 55O(aX1)
(emphasis added). The Court reviews the bankruptcy court's decision to award money in place
the transferred property for an abuse of discretion. See In re Keeley
of
& Grabanski Land P'ship,
531 B.R. 771,776 (B.A.P. 8th Cir.2015).
Here, Arun and Anu claim that the bankruptcy coufi incorrectly awarded a money
judgment instead of ordering a turnover of the property because they did not receive a benefit
fi'orn the transl'er. Arun and Anr"r do not explain why they did not receive a benefit, and do not
explain how the bankruptcy court abused its discretion in awarding a money judgment instead of
a
tumover of property. Accordingly, the Court finds that the bankruptcy court did not abuse its
discretion in awarding money, instead of the properties themselves, to the Estate.
b.
The banl{ruotcy court properb) vakted the Chennai Properties
Arun and Anu next argue that BoA's valuation expert impermissibly relied on the
Colliels Report when determining the value of the Chennai Properties. They argue that the
Colliers Report is unreliable because it "makes several assumptions critical to their valuation
which are not substantiated in fact, and result in overwhelming uncertainty as to the actual value
of the Chennai [Properties]." Appellants' Opening Br. 36. Arun and Anu chose not to delve into
the substance of the Colliers Report's apparent assumptions, other than to say that the Report
assrured that ownership (i) "was held undisputed with clear and marketable title and without any
encumbrances; and (ii) that, without any verification, the Chennai Property was in a condition
suitable for redevelopment." Appellants' Opening Br. 16 (intemal citations omitted). Aside from
challenging the assumptions, Arun and Anu broadly claim deficiencies in the report's
methodology, claiming that the appraisers "failed to: (i) ascertain the actual ownership of the
Chennai Property; (ii) perform a physical inspection of the Chennai Property; or (iii) have an
25
environmental survey or analysis performed on the Chennai Property." Id. (citations omitted).
Fatal to their argument is Arun's and Anu's failure to rebut the Colliers Report's
assumptions. For example, Arun and Anu claim that they only own (or were transferred) 67%
of
the Chennai Properties. But their claim stops there; they do not explain who the mystery third-
party owner is or provide the Court (or the bankruptcy court below) with any proof that the thirdparty actually owned the land. Moreover, as the bankruptcy court noted:
Beyond the failures of these challenges on their face, many issues relating to the
value of the Chennai property would be known to Arun and Anu, who owned the
property since the time of the 2010 transfers. Arun, in parlicular, moftgaged his
portion of the property. PX 234; PX 235. Yet when questioned about valuation
issues, Arun and Anu both asserted their privilege against self-incrimination. Mr.
Veluchamy, who might have had even more relevant information, gave
noncredible testimony-contrary to all of the documentary evidence and without
corroboration from any source-that he and his wife did not hold title to the
property but only rented it. . . . None of the defendants provided any credible
information bearing on the property's value.
Veluchamy, 524 B.R. at322-23. The attacks on the appraisers'methodology is deficient as well.
The appraisers could not ascertain the actual owners of the Chennai Properties because they
could not access the documents-only the Veluchamys had those, and they refused to release
thern to the appraisers, raising their privilege against self-incrimination when compelled. In
addition, the appraisers did not conduct a physical inspection of the property because they felt
the highest and best use would be to redevelopment the properties into a condominium. Third,
there were no environmental issues that would have warranted the appraisers' consideration. The
inability of Arun and Anu to provide any evidence that would support their claim for a lower
vahntion, combined with the negative inference drawn from their blanket assertion of their
privilege under the Fifth Amendment, see Lightspeed Medi4 Corp. v, Smith, 761 F.3d 699,705
(7th Cir. 2014), defeats their claim. Accordingly, the Court can find no clear error with the
bankruptcy court's findings regarding the valuation or ownership of the Chennai Properties, and
26
the Cor"rrt affirrns on that issue.
C. The Fraudulent Appu Hotels Stock Issuance (Count XXID
Both Bank of America and Arun and Anu cross-appeal the bankruptcy court's decision
regarding the fraudulent transfer to Appu that led to its issuance of shares to Arun and Anu. Arun
and Anu first claim that there could be no frauduler-rt transfer because Mrs. Veluchamy
transferred the $310,000 to Appu, not themselves, while Appu (not Mrs. Veluchamy) issued the
shares. According to
Arun and Anu, this defeats BoA's claim for a fraudulent transfer of that
$310,000.
Bank of America, on the other hand, believes that the $310,000 awarded by the
bankruptcy court for Mrs. Veluchamy's role in the Appu transfers was too low. Specifically,
BoA points to evidence (namely Appu's subscription report) showing that Arun and Anu
actually received Rs. 104,900,640 worth of stock, Rs. 59 million (approximately $1.3 million)
more than what Arun, Anu, and Mrs. Veluchamy transferred to Appu. BoA seeks a higher
judgment amount consistent with the full value of the issued Appu stock. Each of the parties'
arguments will be discussed in tum.
l.
Mrs. Velucham)trt'audulentbt transferued $310,000 to Arun and Anu
Arun and Anu argue that the bankruptcy court improperly held that Mrs. Veluchamy's
$310,000 transfer to Appu was a fraudulent transfer to them because, while Mrs. Veluchamy
transferred the money directly to Appu, the number of shares linked to that $310,000 went
undetermined. But when asked if their parents gave them funds to purchase Appu stock, Arun
and Anu asserted their privilege against self-incrimination. Because of the negative inference
drawn from such an assertion, see Lightspeed, 761 F.3d at705, they cannot now claim that Mrs.
Veluchamy's transfer did not go toward purchasing additional shares. Additionally, there is no
27
evidence that Mrs. Veluchamy ever received any benefit or stock issuance from her funds that
she transferred to Appu.
"The trustee may recover, for the benefit of the estate, the property transferred, or if the
court so orders, the value ofsuch property, from the initial transferee ofsuch transfer . . . ; or any
immediate or mediate transferee." 11 U.S.C. $ 550(aX2). While Mrs. Veluchamy originally
made her transfer to Appu, Appu then transferred the
value-in the form of Appu stock-to
Arun and Anu. Appu is not properly chalacterized as a transferee because it never exercised
control over the funcis. See Bonded Fin.,838 F.2d at893-94.Instead, Mrs. Veluchamy directed
Appu to issue stock to Arun and Anu, presumably in an amount equivalent to the transferred
funds. Id. Accordingly, Arun and Anu are properly considered immediate transferees. Arun and
Anu concede that they knew the transfers were fraudulent, and, in any event, did not pay value
for the shares issued as a result of Mrs. Veluchamy's transfer. So the affirmative defense in
$ 550(b) cannot apply. Accordingly, the bankruptcy court properly avoided the transfer, and
found Arun and Anu liable for Mrs. Veluchamy's transfer amount, $310,000.
2.
The banlcruptqt court did not accgunt for the -full va.lu.e qf
th.e
fraudulerlt trans-fer
Next, Bank of America argues that the bankruptcy court did not account for the full value
of the Appu stock that was issued to Arun and Anu. BoA contends that Rs. 59 million
(approximately
$ 1.3
million) was not addressed by the bankruptcy court. Further, it
says, the
\/eluclramys \\/ere the source of the unaccounted-for Rs. 59 million; accordingly, BoA seeks an
amended judgment that awards BoA the
full value of the Appu stock issued to Arun and Anu.
The record shows that on August 2,2010, Arun, Anu, and Mrs. Veluchamy each made
separate transfers to Appu. Specifically, Arun transferred Rs. 16,880,130, Anu transferred Rs.
14,529,330, and Mrs. Veluchamy transferred Rs. 14,491,180. In total, the three transferred
28
(.
Rs. 45,900,640. But on November 24,2010, when Appu released its subscriber list,
it stated that
Arun received 1,787,524 shares and Anu received 1,709,164 shares. See Pl. App. 642. Mrs.
Veluchamy was not listed as a subscriber. Id. Appu offered each share at Rs. 30. Id. at 641.
Tlrerefore, Anrn's issuance was worth Rs. 53,625,720 (1,787,524 multiplied by Rs. 30) and
Anu's stock was worth Pts.51,274,920 (1,709,164 multiplied by Rs. 30); in total, their stock was
worth Rs. 104,900,640, or Rs. 59 million more than the combined total of Rs. 45,900,640 that
Arun, Anu, and Mrs. Veluchamy transferred to Appu.
None of the Veluchamys provided an answer as to the source of the extra Rs. 59 million,
For their part, Arun and Anu invoked the Fifth Amendment when they were asked about the
source of the extra money. In their post-trial brief, Arun and Anu did not contest BoA's assertion
that the entire subscription was purchased with fraudulently-transferred money. Despite her role
in transferring the Estate's money to purchase Appu stock, Mrs. Veluchamy claimed that she did
not know if her and her husband "provided all the money for Arun and Anu to get [the] shares."
Pl. App. 360 at40l:2-5.
On appeal, Arun and Anu do not contend that the Appu subscription list is wrong, and
they also cannot trace the source of the extra money used to purchase the shares. While not their
burden to prove the money was not fraudulently transferred, their assertion of the privilege
against self-incrimination, combined with the subscription list, permits the Court to draw the
negative inference that the balance of shares that Arun and Anu did not pay for was paid for with
fraudulently-transfered property. See Lishtspeed, 761 F.3d at705; Brenner v. CFTC, 338 F.3d
713, 720 (7th Cir. 2003) ("[W]e believe that the evidence offered by the [CFTC], combined with
the petitioners' failure to respond to that evidence by invoking various privileges, is sufficient to
support the findings of liability.").
29
Although the bankruptcy court found that "the amounts for which [Arun and Anu] were
credited substantially exceeded the amounts that can be traced to their own deposits," the court
only awarded the Estate Mrs. Veluchamy's transfer to Appu, and never made a finding regarding
the disposition of the full value of the issued stock. See Veluchamy, 524 B.R. at298. This was
incorrect. Given the record and without an explanation as to the source of an extra Rs. 59 million
used to buy stock for Arun and Anu,
it was clear error for the bankruptcy court not to award the
full amount of the transfer. Accordingly, the bankruptcy court is reversed as to the judgment
awarded in Count
XXI[,
and is amended to award judgment to the Estate, and against Arun and
Anu, jointly and severally in the amount of $1,572,747.8
III. CONCLUSION
The judgment entered in Count
XXIII is amended to $ 1,572,1 47 jointly
against Arun and Anu, and the judgment in Counts
reflect the increase in Count
XXI[.
and severally
XX and XXI is amended to $59,119,383 to
For the foregoing reasons, the judgment of the bankruptcy
court is affirmed in part, reversed in part, and remanded for the bankruptcy court to enter
judgment consistent with this opinion.
IT IS
SO ORDERED.
CHARLES RONALD NO
United States District Court
DATE: August 19,2015
8
The Court adopts the exchange rate used by the bankruptcy court in deriving its judgment in Count
XXIII, approximately Rs. 46.746/USD. See Veluchamy, 524 B.R. at323 n.25.
30
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