Caruso v. Keeneland Association, Inc. et al
Filing
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MEMORANDUM OPINION & ORDER: 1. Clemmens' motion for summary judgment, 1 , is DENIED; 2. Caruso's motion for summary judgment, 2 , is GRANTED; and 3. Clemmens' objections, 14 , are OVERRULED. 4. Caruso is AWARDED $109,026.21 for the Keeneland Transfer, which may be collected from Clemmens. Signed by Judge Karen K. Caldwell on 11/5/2018.(STC)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
AT LEXINGTON
FRED C. CARUSO,
CIVIL ACTION
NO. 5:17-CV-325-KKC
Plaintiff,
MEMORANDUM OPINION AND
ORDER
V.
NELSON E. CLEMMENS,
Defendant.
*** *** ***
This matter is before the Court on Clemmens’ objections to the Bankruptcy Judge’s
proposed findings of fact and conclusions of law in this case.1 (DE 3; DE 14). For the reasons
stated below, Clemmens’ objections are overruled. Likewise, Caruso’s motion for summary
judgment is granted, (DE 2), and Clemmens’ motion for summary judgment, (DE 1), is denied.
I. FACTUAL BACKGROUND
The parties stipulate the following facts. (DE 3 at 2–5).
Revstone Industries, LLC, an automobile business and Delaware LLC, was founded in
2008 by and among three Children’s Trusts, which were established for the benefit of the
children of Revstone’s chairman and sole board member: George S. Hofmeister. In 2011, the
Children’s Trusts assigned their membership interests in Revstone to Ascalon Enterprises,
LLC, for which Hofmeister was also the chairman and sole member the board. Id. at 3.
Revstone—founded by Hofmeister’s Childrens’ Trusts, and owned by Hofmeister’s Ascalon
This matter is best considered in light of Caruso v. Clemmens, 5:17-CV-326-KKC, which involves the
same parties in a slightly different factual scenario.
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Enterprises—operated its business through the direct or indirect ownership and
management of approximately thirty-two (32) subsidiary entities. Id. at 2.
Clemmens met Hofmeister in 1986. In 2007, Hofmeister later selected Clemmens to serve
as the trustee of Hofmeister’s family trusts. Id. at 3.
In 2009, Clemmens had a personal account with Keeneland, which allowed him to bid on
and purchase horses at Keeneland’s auctions. Clemmens authorized Hofmeister to use the
account. In 2009, Hofmeister used the account to purchase $268,765.00 in thoroughbreds.
The thoroughbreds were shipped to Hofmeister’s farm, but Clemmens was liable for the debt,
for which Clemmens received the bills in November and December 2009. Clemmens sent the
bills to Hofmeister requesting payment for the debt. Id. at 3–4.
In January 2010, Revstone issued a check to Keeneland in the amount of $269,026.21. Id.
For purposes of this proceeding, this transaction is known as the “Keeneland Transfer.”
In December 2012, Revstone filed for Chapter 11 relief in the United States Bankruptcy
Court for the District of Delaware. In 2014, Revstone filed a complaint in that Delaware court
seeking to avoid and recover its payment to Keeneland for the personal benefit of Clemmens
as a fraudulent transfer. In 2015, after resolving some procedural issues, the matter was
transferred to the Eastern District of Kentucky. In 2017, Keeneland agreed to pay Caruso
$160,000.00, in exchange for being dismissed as a defendant, reducing Clemmens’ potential
aggregate liability to $109,026.21. Id. at 4–5.
Clemmens and Caruso then filed cross motions for summary judgment. (DE 1; DE 2).
Caruso, the Bankruptcy Trustee for the Revstone/Spara Litigation Trust, seeks summary
judgment against Clemmens to recover $109,026.21 in funds plus interest based on a theory
of constructively fraudulent transfer pursuant to 11 U.S.C. § 544 and 550, and Del. Cod. Ann.
6 §§ 1301–12. (DE 2). Clemmens seeks summary judgment asserting Caruso cannot show
Clemmens is the initial transferee or received a benefit from the transfer pursuant to 11
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U.S.C. § 550(a)(1). The Bankruptcy Court held that Caruso’s motion should be granted and
Clemmens’ motion should be denied. (DE 3). Clemmens presents nine (9) objections to the
Bankruptcy Court’s determinations. (DE 14).
II. STANDARDS OF REVIEW
The Court reviews de novo the portions of the Bankruptcy Court’s decision to which
Clemmens objects. Fed. R. Bankr. P. 9033(d). The Court may accept, reject, or modify the
Bankruptcy Court’s proposed findings of fact and conclusions of law as required. In re
Sahuaro Petroleum & Asphalt Co., 170 B.R. 689 (C.D. Cal. 1994), aff’d 89 F.3d 846 (9th Cir.
1996), cert. denied 519 U.S. 992 (1996). The Bankruptcy Court opinion is to be reviewed with
no deference, presumption of validity or correctness. Waldman v. Stone, 599 F. App’x 569,
572 (6th Cir. 2015) (citing Perry v. Simplicity Eng’g, 900 F.2d 963, 966 (6th Cir.1990)).
Nonetheless, the Court is under no obligation to expand the Record beyond that presented.
Fed. R. Bankr. P. 9033(d); Waldman, 599 F. App’x at 572 (citing Deutsche Bank Nat’l Trust
Co. v. Tucker, 621 F.3d 460, 464 (6th Cir.2010)).
On a motion for summary judgment, the movant has the burden of showing that there
are no genuine issues of material fact in dispute. The evidence, together with all permissible
inferences, is construed in the light most favorable to the opposing party. Fed. R. Bank. P.
7056 (incorporating Fed. R. Civ. P. 56); see Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio
Corp., 475 U.S. 574, 585–87 (1986). Once the moving party has made this initial showing, the
opposing party must come forward with affirmative evidence sufficient “to permit a
reasonable jury to find in that party’s favor.” Van Gorder v. Grand Trunk W. R.R., Inc., 509
F.3d 265, 268 (6th Cir. 2007) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986)).
Summary judgment must be entered if, “after adequate opportunity for discovery,” a party
“fails to make a showing sufficient to establish the existence of an element essential to that
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party’s case, and on which that party will bear the burden of proof at trial.” Tolton v.
American Biodyne, Inc., 48 F.3d 937, 940 (6th Cir. 1995) (quoting Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986) (internal quotation marks omitted)).
III. ANALYSIS
Caruso seeks to recover pursuant to 11 U.S.C. § 544 and Del. Code. Ann. 6 § 1305, which
is substantially the same as 11 U.S.C. § 548. To prevail, Caruso must show by a
preponderance of the evidence that (1) Revstone made a transfer for less than reasonably
equivalent value; and (2) Revstone was insolvent or became insolvent due to the transfer,
engaged or about to engage in a business or transaction for which the remaining assets were
unreasonably small in relation to the business or transaction, or intended to incur, or believed
or reasonably should have believed that it would incur, debts beyond its ability to pay. See
Miller v. Greenwich Capital Fin. Prods., Inc. (In re Am. Bus. Fin. Servs., Inc.), 471 B.R. 354,
378 n.17 (Bankr. D. Del. 2012); In re Plassein Int’l Corp., 428 B.R. 64, 67 (D. Del. 2010).
Caruso must also prove Clemmens is the person “for whose benefit such transfer was made”
to recover from him under 11 U.S.C. § 550(a).
The parties’ stipulated facts show that there is no genuine dispute that Revstone was in
the automobile industry and had no interests in thoroughbreds or racing. (DE 3 at 2–5).
Specifically, the stipulated facts show that Revstone paid Keeneland $269,026.21 for horses
that Hofmeister purchased with Clemmens’ account and retained for himself. (See generally
id.; DE 2 at 2–3 (the Lukenda report, nothing that Hofmeister pulled these funds from
Revstone’s healthcare account); DE 2 at 54 (noting that Hofmeister, using Revstone’s
healthcare funds, made the transfer to pay Clemmens’ debt on Clemmens’ Keeneland
Account No. 124692-329901)). There is no indication anywhere in these facts that Revstone
received any benefit whatsoever for paying for Hofmeister’s horses and paying off Clemmens’
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debt. As such, the first prong of Del. Code. Ann. 6 § 1305 is satisfied. Revstone did not receive
reasonably equivalent value for the transfer.
There is also no genuine issue as to Revstone’s insolvency at the time of the transfer.
Caruso’s arguments rely on the expert report and opinion of James Lukenda, who concludes
that Revstone was balance sheet insolvent and without adequate capital to pay its debts from
its formation in 2008. (DE 2 at 41–42). The Lukenda report shows by a preponderance that
Revstone was insolvent at the time the Keeneland transfer was made, and Clemmens’ has
not met his burden to indicate specific facts that show otherwise, (DE 1; DE 14 (and
attachments)), because Clemmens has failed to introduce affirmative evidence that
contradicts or overcomes the Lukenda report. See Cox v. Ky. Dep’t of Transp., 53 F.3d 146,
149 (6th Cir. 1995) (citing Street v. J.C. Bradford & Co., 886 F.2sd 1472, 1477 (6th Cir. 1986)
(“Essentially, a motion for summary judgment is a means by which to challenge the opposing
party to ‘put up or shut up’ on a critical issue.”).
Nonetheless, Clemmens takes specific issue with the method Lukenda employed to
determine the fair value of Revstone. In general, there are two methods to determine a
corporation’s value: going concern value and liquidation value. EBC I, Inc. v. Am. Online, Inc.
(In re EBC I, Inc.), 380 B.R. 348, 355 (Bankr. D. Del. 2008). If a company is on its way out of
business, going concern valuation is inappropriate—the company is no longer a going
concern. Fryman v. Century Factors (In re Art Shirt, Ltd, Inc.), 93 B.R. 333, 341 (E.D. Pa.
1988). For that reason, Lukenda determined the liquidation value of Revstone, relying on
GAAP financial statements and the fair market prices paid for the assets of Revstone. (DE 3
at 33–42). This methodology is reasonable and is adequately explained. Id. The mere fact
that Clemmens disagrees with the result or methodology is not enough to defeat Caruso’s
motion for summary judgment, especially in light of the fact that Clemmens produces no
alternate methodology that Lukenda should have considered or used to reach a conclusion.
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(DE 3 at 10–13). Thus, the second prong of Del. Code. Ann. 6 § 1305 is satisfied. Revstone
was insolvent at the time the Keeneland transfer was made.
Caruso has also proved that Clemmens is the person “for whose benefit such transfer was
made” to recover from him under 11 U.S.C. § 550(a). This explanation is axiomatic.
Clemmens’ owed a $269,026.21 debt to Keeneland for horses bought by Hofmeister using
Clemmens’ account. (DE 2 at 54). Revstone paid Clemmens’ debt, relieving Clemmens of the
liability. Id. Clemmens does not deny that this is the case. (DE 1 at 4). Clemmens’ argument
that he personally never received horses or funds is of no consequence. See generally id.
Similarly, Clemmens’ citations to cases involving actual fraud are distinguishable. This case
involves constructive fraud. As correctly noted by the Bankruptcy Court, payment of a debt
of a third party is a classic example of a constructively fraudulent transaction that fits under
11 U.S.C. § 548(a)(1)(B) and 11 U.S.C. § 550(a)(1). See 5 Collier on Bankr. § 550.2[04] (Resnick
& Sommer eds., 16th ed. 2017). This factual scenario fits perfectly under 11 U.S.C. § 550(a),
and Caruso may collect from Clemmens, 11 U.S.C. § 544.
IV. OBJECTIONS
Clemmens’ presents nine (9) objections to the Bankruptcy’s Court’s proposed findings of
fact and conclusions of law. (DE 14 (objecting to DE 3)). Although the objections now include
proper citations and exhibits, they remain meritless.
1. Clemmens objects to the consideration of the Lukenda report under Fed. R. Evid. 702,
and the Bankruptcy Court’s conclusion of law based on that report that Revstone
made the Keeneland transfer while insolvent. (DE 14 at 3–4). For the same reasons
as discussed above this objection overruled. Revstone was insolvent when the
Keeneland transfer was made.
2. Clemmens objects to the conclusion that he failed to support his opposition to the
Lukenda report, which found Revstone to be insolvent, with specific evidence. (DE 14
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at 4). Clemmens has filed financial audits by AlixPartners as exhibits that indicate
Revstone’s solvency. These reports do claim that Revstone was solvent. But these
reports also appear to calculate Revstone’s value as a going concern, (See, e.g., DE 144 at 357 (“Net Enterprise Value”)), and id. at 378–79). As the Bankruptcy Court
correctly noted, this is inappropriate when a company is going out of business, which
is why the Lukenda report used liquidation/balance sheet value. Fryman v. Century
Factors (In re Art Shirt, Ltd, Inc.), 93 B.R. 333, 341 (E.D. Pa. 1988). This objection is
overruled.
3. Clemmens objected to the use of liquidation value to determine Revstone’s solvency.
(DE 14 at 4–5). Clemmens would prefer to use going concern value. In general, there
are two methods to determine value: going concern or liquidation. EBC I, Inc. v. Am.
Online, Inc. (In re EBC I, Inc.), 380 B.R. 348, 355 (Bankr. D. Del. 2008). The Court
should consider the totality of the circumstances and be flexible in determining which
approach to use. Iridium Roaming, LLC v. Statutory Committee of Unsecured
Creditors on behalf of Iridium Operating, LLC (In re Iridium Operating, LLC), 373
B.R. 283, 344 (Bankr. S.D.N.Y. 2007). Here, given that Revstone did in fact file for
bankruptcy within the two years following this fraudulent transaction, liquidation
value is the most appropriate method to determine whether Revstone was solvent. See
Fryman, 93 B.R. 333, 341. This objection is overruled. Revstone was insolvent.
4. Clemmens objects to the Bankruptcy Court’s conclusion Clemmens should have
provided a published valuation standard for the Lukenda Report to use. As correctly
stated by the Bankruptcy Court, however, on a motion for summary judgment, once
the movant has shown there is no dispute of material fact, with inferences are drawn
in favor of the nonmovant, the nonmoving party must come forward with specific facts
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that show there is a genuine issue for trial. Van Gorder v. Grand Trunk W. R.R., Inc.,
509 F.3d 265, 268 (6th Cir. 2007) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
252 (1986)). The Bankruptcy Court thus correctly stated that Clemmens had a burden
to overcome the Lukenda report, which established by a preponderance that Revstone
was insolvent. Clemmens failed to meet that burden. One of the ways Clemmens
might have attempted to meet that burden, however, is by providing a published
valuation standard that would call the Lukenda report into doubt. Instead, Clemmens
generally relied on argument unsupported by evidence. This is insufficient.
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585–87 (1986)
(metaphysical doubt is not enough to defeat a motion for summary judgment). For
that reason, this objection is overruled.
5. Clemmens objects to the Bankruptcy Court’s conclusion that the Lukenda report’s
methodology is sound. (DE 14 at 5). The Bankruptcy Court was within its powers to
rely on the report, although this Court reviews that decision de novo. Fed. R. Bankr.
P. 9033(d). In his objection, Clemmens does not indicate how precisely the
methodology should have been different, or what exactly is flawed. This Court has
also already found that the Lukenda report, (DE 2 at 18–22, 23–72), adequately
describes and applies its own methods. See Fryman v. Century Factors (In re Art Shirt,
Ltd, Inc.), 93 B.R. 333, 341 (E.D. Pa. 1988). For that reason, this objection is overruled.
6. Clemmens objects to the Bankruptcy Court’s conclusion that he had the burden of
showing the pension obligations should not have been included in the Lukenda
Report. (DE 14 at 5). This objection should be overruled. Again, Clemmens does not
make any argument as to why his objection should be considered. The Lukenda report
was considered by the Bankruptcy Court as evidence of insolvency. Clemmens had the
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opportunity to depose Lukenda or submit an alternate expert report, but he did
neither. The method employed by Lukenda—balance sheet/liquidation value—is the
appropriate analysis when a company is on its death bed. Fryman, 93 B.R. at 341
(E.D. Pa. 1988). The source or this litigation is the bankruptcy of Revstone, so there
can be no legitimate argument that Revstone is a going concern at this time for which
some other valuation method would be appropriate. There is nothing in the Record to
specifically explain why or how the pension obligations of Revstone should not have
been considered as liabilities for purposes of determining solvency in a balance
sheet/insolvency analysis. Clemmens’ general argument will not suffice. Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585–87 (1986).
7. Clemmens objects to the Bankruptcy Court’s conclusion that there is no basis to find
fault with Lukenda’s Methodology. (DE 14 at 6). Clemmens believes the Lukenda
report was unreliable, but does not explain how, other than stating that Lukenda does
not explain his methodology. Lukenda, however, does explain his methodology, and
his methodology is well-founded. (DE 2 at 18–22, 23–72). This argument fails, and
this objection is overruled.
8. Clemmens objects to the Bankruptcy Court’s conclusion that the transfer was made
with the intent to benefit Clemmens. (DE 14 at 6). This objection is overruled. Intent
may be inferred for purposes of Del. Code. Ann. 6 § 1305. Sahley v. Tipton, Co., 264 F.
Supp. 653, 658 (D. Del. 1967) (noting that intent is a “fair inference” from
circumstantial evidence); see also 5 Collier on Bankr. § 550.2[04] (Resnick & Sommer
eds., 16th ed. 2017).
9. Clemmens objects to the Bankruptcy Court’s conclusion that showing actual intent to
benefit is not a requirement. This objection is overruled. Actual fraud is not an issue
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here. Constructive fraud is, and intent may be inferred for purposes of constructive
fraud under Del. Code. Ann. 6 § 1305. Sahley, 264 F. Supp. at 658 (noting that intent
is a “fair inference” from circumstantial evidence). In addition, as correctly noted by
the Bankruptcy Court, payment of a debt of a third party is a classic example of a
constructively fraudulent transaction that fits under 11 U.S.C. § 548(a)(1)(B) and 11
U.S.C. § 550(a)(1). See 5 Collier on Bankr. § 550.2[04] (Resnick & Sommer eds., 16th
ed. 2017). Given the number of fraudulent transactions involving Revstone,
Hofmeister, and Clemmens outlined in the Lukeda report and other matters before
this Court, see, e.g., Caruso v. Clemmens, 5:17-cv-325-KKC, fraudulent intent is
properly inferred for purposes of this Keeneland transfer.
V. CONCLUSION
Consistent with the above Opinion, the Court ORDERS as follows:
1. Clemmens’ motion for summary judgment, (DE 1), is DENIED;
2. Caruso’s motion for summary judgment, (DE 2), is GRANTED; and
3. Clemmens’ objections, (DE 14), are OVERRULED.
4. Caruso is AWARDED $109,026.21 for the Keeneland Transfer, which may be
collected from Clemmens.
Signed November 5, 2018.
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