ANDREW, et al v. UNITED STATES OF AMERICA

Filing 100

MEMORANDUM OPINION AND ORDER signed by JUDGE CATHERINE C. EAGLES on 2/12/2015, that the plaintiffs are entitled to judgment, which will be entered as time permits. (Butler, Carol)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
HERBERT ALLEN ANDREW, et al., )
)
)
Plaintiffs,
)
)
v.
)
)
UNITED STATES OF AMERICA,
)
)
Defendant.
)

1:10-CV-90

MEMORANDUM OPINION AND ORDER
Catherine C. Eagles, District Judge.
The plaintiffs filed this lawsuit against the United States seeking a refund of taxes
and penalties assessed against them as transferees of GNC Investors Club, Inc. (See Doc.
1.) The case came on for a bench trial on November 17, 2014. Having considered the
documentary evidence and testimony, the Court finds that the plaintiffs have proven that
there is no basis under North Carolina law for holding them liable as transferees for
GNC’s unpaid taxes.
The parties stipulated to many of the facts, (see Doc. 36-1), and these stipulations
are incorporated in the Court’s findings by reference. The Court’s remaining findings are
based either on undisputed evidence or on its evaluation of the admissible evidence and
its determination about the credibility of and appropriate weight to be given to the
testimony of the various witnesses and the various exhibits. The plaintiffs’ trial exhibits
will be referenced as “PTX” and the defendant’s trial exhibits as “DTX.” Because many

of the defendant’s exhibits have multiple pages and documents, the Court has often used
the number found on the bottom left of the page, i.e., DTX 15.0043, to specifically
identify the location of the referenced evidence. The Court has not attempted to cite all
of the evidence available to support its findings.
The Court makes the following findings of fact and conclusions of law pursuant to
Federal Rule of Civil Procedure 52(a).
BACKGROUND FACTS
GNC Investors Club, Inc., (“GNC”) was incorporated as a “C” corporation in
1957 and engaged in the business of (1) acquiring, holding, and selling securities and
holding cash and cash equivalents; and (2) conducting meetings and educating its
members about the stock market. (Doc. 36-1 at ¶ 1, 2; Testimony of H.A. Andrew.)
GNC’s shareholders met monthly to conduct the corporation’s business and for social
purposes. (DTX 15.0036-15.0069.) In 2000, the plaintiffs or their predecessors in
interest collectively owned 16 of the 24 outstanding GNC shares, and each share
represented one vote. (Doc. 36-1 at ¶¶ 4, 5.)
In the spring of 2000, GNC began to consider alternative business models. (Doc.
36 at ¶ 7.) The shareholders’ goal was to avoid the double taxation resulting from its Ccorporation status and to reduce the buy-in price for new members. (DTX 15.003615.0037; Testimony of P. Thompson, H.A. Andrew; Doc. 97-2 at 16-17.) After
considering and rejecting the possibility of converting to an LLC in March of 2000,
(DTX 15.0001-15.0035, 15.0051; Testimony of W.K. Fraser), the shareholders began

2

considering dissolution in the late summer and early fall of 2000. (Doc. 36-1 at ¶¶ 7-8;
DTX 15.0042-15.0048.)
Michael Haley, then-president of GNC and an astute businessman, formed a
Dissolution Task Force (“Dissolution Committee”) composed of himself, Clayton Lee,
W. Kenneth Fraser, and Porter Thompson. (Doc. 36-1 at ¶ 9; see also Testimony of
W.K. Fraser, P. Thompson, H.A. Andrew, J. Aplington.) GNC invited Lewis Ritchie, a
KPMG tax advisor, to several meetings to discuss the tax consequences of dissolution.
(DTX 15.0045-15.0047.) In September 2000, the shareholders voted to pursue
dissolution and reorganization as an LLC, and GNC hired local attorney Sharon Allen to
assist. (DTX 15.0051.) The shareholders expected the dissolution and reorganization to
be completed in December of 2000. (DTX 15.0053.) Each shareholder knew that if this
was done, the corporation would have to pay taxes on the gains from the sale of GNC’s
stock and that each shareholder would have to pay taxes on the cash proceeds distributed
to him after dissolution. (DTX 15.0053; DTX 22.0075; Testimony of S. Allen.)
In October 2000, Mr. Lee saw Thomas Watkins, a reputable local attorney with
over 30 years of experience in the purchase and sale of companies, at a social event.
(Doc. 36-1 at ¶ 10; see also Testimony of T. Watkins.) During their conversation, the
topic of investment clubs came up, and Mr. Watkins told Mr. Lee that he might know of
an alternative to dissolution. (Doc. 36-1 at ¶ 10; Testimony of T. Watkins.) Mr. Watkins
had received several solicitations from MidCoast Credit Corporation (“MidCoast”) that
communicated MidCoast’s interest in acquiring the stock of C corporations and paying its
shareholders a premium in excess of the amount they would otherwise receive from
3

liquidation. (DTX 24.0667-24.0668.) Mr. Watkins reached out to MidCoast, and
MidCoast expressed an interest to Mr. Watkins in purchasing an investment club’s stock.
(Testimony of T. Watkins.) Mr. Watkins then conveyed MidCoast’s interest to Mr. Lee,
and Mr. Lee authorized Mr. Watkins to share GNC’s information with MidCoast.
(Testimony of T. Watkins; DTX 16.0009.) MidCoast retained Mr. Watkins to represent
it in negotiations with GNC. (DTX 24.0693-24.0694; Testimony of T. Watkins.)
MidCoast sent a letter of intent to Mr. Watkins on October 17, 2000, stating terms
for a deal to buy 100% of GNC’s stock. (DTX 16.0009-16.0012; Testimony of T.
Watkins.) MidCoast proposed that it or its designee would acquire the GNC
shareholders’ stock as an alternative to the shareholders liquidating GNC. (Doc. 36-1 at ¶
11; DTX 16.0009-16.0012.) MidCoast required that GNC liquidate its stock portfolio
before the closing date. (DTX 16.0009-16.0010.) MidCoast provided a schedule
showing that the GNC shareholders would receive more money from selling GNC’s stock
to MidCoast than from liquidation, taking into account the tax consequences. (Doc. 36-1
at ¶ 12; DTX 16.0013; Testimony of T. Watkins.) Specifically, MidCoast represented
that the shareholders would collectively receive $401,325 more in proceeds from the
stock sale to MidCoast than if they liquidated GNC; this constituted a premium of
approximately 10%. (DTX 16.0013; Testimony of T. Watkins.)
The same day Mr. Watkins received the letter of intent from MidCoast, he met
with the Dissolution Committee members and communicated MidCoast’s proposal to
them. (Testimony of T. Watkins; see also DTX 16.0090.) At a shareholder meeting that
night, the shareholders considered and accepted MidCoast’s proposal. (DTX 15.0054.)
4

After accepting MidCoast’s proposal, the Dissolution Committee checked
MidCoast’s business references. (DTX 15.0064.) Jack Dixon, a GNC shareholder and
partner at KPMG, informed the Committee that his company had some dealings with
MidCoast in the past, and a Committee member checked with Dun & Bradstreet and
reported that MidCoast was a viable company. (Doc. 97-3 at 27-28; see also DTX
15.0064.) On October 20, 2000, the Committee reported to the other shareholders that
the MidCoast references were favorable and that GNC would move forward with
negotiating a stock purchase agreement with MidCoast. (DTX 15.0064.) On November
3, 6, and 7, 2000, GNC liquidated its publicly traded stock and received a total of
$4,955,000. (Doc. 36-1 at ¶ 13.) Ms. Allen represented GNC and its shareholders in
connection with the sale to MidCoast. (Testimony of S. Allen.)
Through November 2000, GNC and MidCoast finalized arrangements for the
transaction. MidCoast arranged for Battery Street, Inc., a newly formed corporation, to
acquire GNC’s stock. (Doc. 36-1 at ¶ 14.) Mr. Watkins continued to represent
MidCoast, (DTX 24.0693-24.0694; Testimony of T. Watkins), and also represented
Battery Street. (Testimony of T. Watkins.) The shareholders, through Ms. Allen,
reviewed Battery Street’s certificate of incorporation and confirmed that it was an
existing company. (Testimony of S. Allen.) The shareholders made no additional
inquiries about MidCoast or Battery Street because Battery Street planned to pay cash
and because they trusted Mr. Haley’s ability to review the arrangement with Battery
Street and Mr. Watkin’s business reputation. (Testimony of S. Allen, W.K. Fraser, P.
Thompson, H.A. Andrew.)
5

By letter dated November 22, 2000, Ms. Allen informed Mr. Watkins that GNC
had an estimated federal tax liability of $1,208,690, of which $30,000 had been paid,
from the sale of GNC’s publicly traded stock. (Doc. 36-1 at ¶ 15.) Also during this time,
several GNC shareholders donated their shares to various foundations. (Testimony of M.
Angulo, W. Sanders; Doc. 97-2 at 30-31.) Among these were gifts of three shares to a
plaintiff, the Community Foundation of Greater Greensboro, Inc. (DTX 21.000321.0009; Testimony of W. Sanders.)
On November 27, 2000, one day before the closing, Southeast Acquisition
Partners (“SEAP”) offered to lend Battery Street $3,818,000 to purchase GNC,
conditioned upon Battery Street’s repayment within 24 hours. (See Doc. 36-1 at ¶ 17
(referencing Doc. 36-1 at 9-10); see also DTX 23.0558-23.0560.) None of the
shareholders knew the terms of SEAP’s loan offer or of how Battery Street would come
up with the money to buy GNC’s stock. (Testimony of W.K. Fraser, P. Thompson, H.A.
Andrew, J. Aplington.)
On November 28, 2000, the GNC shareholders and Battery Street signed a Stock
Purchase Agreement (the “Agreement”),1 which required the shareholders to sell and

1

The Court finds that PTX 111, excluding the table of contents, is a copy of the Agreement
between GNC and Battery Street. The table of contents, according to Ms. Allen’s testimony
which the Court accepts, was not part of the Agreement executed by the parties. (Testimony of
S. Allen.) Similarly, the Court finds that the documents referenced in this “table of contents”
were not part of the Agreement executed by the parties. (See PTX 111.) While Ms. Allen had
seen some of these documents, many she had not. (Testimony of S. Allen.) To the extent
documents purporting to be the documents referenced in the “table of contents” can be found in
DTX 23 at 23.0359-23.0628, including purported transaction summaries, (DTX 23.036423.0365), purported consent documents and agreements between companies named “SCALP”
and “Cronulla,” (DTX 23.0525-23.0554; 23.0621-23.0622), purported loan documents between
6

Battery Street to buy all shares of GNC for $3,818,000. (Doc. 36-1 at ¶ 16.) At that
time, GNC’s sole assets were two bank accounts—a Wachovia account and a Paine
Webber account—that contained cash in the total amount of $4,932,676. (Doc. 36-1 at
¶¶ 18, 21.) The Agreement required Battery Street to cause GNC to pay its state and
federal taxes for the tax year ending on April 30, 2001, including GNC’s “Specified Tax
Liability” and all taxes, penalties, and interest GNC was required to pay after the closing
date. (PTX 111.) Schedule 3.2(h) of the Agreement outlined GNC’s Specified Tax
Liability as: “(1) federal taxes on 2000 taxable income of $1,210,811.00, and (2) state
and local taxes on 2000 taxable income of $267,790.00.” (PTX 111.)
Ms. Allen made copies of the Agreement and Battery Street’s corporate
documents available for the shareholders to review at closing. (Testimony of S. Allen, P.
Thompson, H.A. Andrew.) Mr. Haley reviewed Battery Street’s certificate of existence,
but no other shareholder asked to review the documents. (Testimony of S. Allen.) At
closing, each shareholder executed a signature page to the Agreement after “scanning”
the document or without reading it. (Testimony of P. Thompson, H.A. Andrew.)
Battery Street and SEAP, (DTX 23.0558-23.0570), purported merger documents and certificates
between Battery Street and post-transaction GNC, (DTX 23.0571-23.0574; 23.0595-23.0614),
and purported contribution documents relating to SCALP and SEAP, (DTX 23.0626-23.0628),
the Court finds them to be hearsay. According to the testimony of IRS agent Maria Angulo,
DTX 23 is comprised of a multitude of documents, all produced by Larry Austin, the posttransaction president of GNC. (See Testimony of M. Angulo.) However, no witness testified as
to how these documents came into existence, whether they are real agreements, or when the
documents were signed. The Court finds that these SCALP/Cronulla/SEAP/Battery Street
documents were not part of the closing documents and were not available to the GNC
shareholders at the closing, nor were they made available to Ms. Allen. (See Testimony of S.
Allen.) The Court further finds that the purported copy of the Agreement with these documents
attached at DTX 23.0359-23.0628 is not a copy of the Agreement between GNC and Battery
Street and is inadmissible hearsay. The Court discusses the admissibility of DTX 23 in full infra.
7

Also on November 28, 2000, Battery Street wired the purchase price of
$3,818,000 to Ms. Allen’s trust account. (Doc. 36-1 at ¶ 20.) Once Ms. Allen received
this money from Battery Street, GNC wired $4,928,752 from its Wachovia account to a
new Golden Gate Bank account set up by Battery Street in GNC’s name. (Doc. 36-1 at
¶ 21.) GNC also wrote a $3,924 check to Battery Street from its Paine Webber account.
(Doc. 36-1 at ¶ 21.) These amounts represented the total assets of GNC. (Doc. 36-1 at
¶ 21.) GNC also transferred all outstanding stock certificates to Battery Street. (Doc. 361 at ¶ 21.)
On November 30, 2000, Ms. Allen distributed the sale proceeds to the
former shareholders in amounts ranging from $31,775 to $478,500. (See Doc. 361 at ¶ 22.) After the closing, the GNC shareholders had no contact with MidCoast
or Battery Street. (See Testimony of W.K. Fraser, P. Thompson, H.A. Andrew.)
GNC filed a tax return for the year 2000 that showed it did not owe any tax.
(DTX 17.0011.) On December 28, 2004, the IRS issued a statutory Notice of Deficiency
to GNC for the tax year ending April 30, 2001. (Doc. 36-1 at ¶ 23; DTX 17.0004.) The
deficiency found GNC liable for $1,286,686 in unpaid taxes and an accuracy-related
penalty of $514,573.20. (Doc. 36-1 at ¶ 23; DTX 17.0004.) On September 2, 2005,
GNC and the IRS entered into a stipulation providing that GNC owed $1,158,132 in
unpaid taxes and a $231,626 penalty. (Doc. 36-1 at ¶ 24; DTX 17.0041-17.0042.) The
IRS was unable to collect the tax or the penalty from GNC. (See Testimony of M.
Thompson, C. Ferebee.)

8

On or about September 30, 2008, the IRS proposed assessments against the
plaintiffs as transferees of GNC.2 (Doc. 36-1 at ¶ 25.) On or about July 29, 2009, the
plaintiffs collectively paid the IRS in full for the alleged deficiency ($1,158,132 in unpaid
taxes and $231,626 in penalties, for a total of $1,389,758). (Doc. 36-1 at ¶ 26.)
OVERVIEW OF ISSUES
Section 6901 of the Internal Revenue Code “authorizes the assessment of liability
against both (a) transferees of a taxpayer who owes income tax and (b) transferees of
transferees.” Diebold Found., Inc. v. Comm’r, 736 F.3d 172, 181 (2nd Cir. 2013) (citing
26 U.S.C. § 6901(a)(1)(A)(i), (c)(2)). Liability against both “shall . . . be assessed, paid,
and collected in the same manner and subject to the same provisions and limitations as in
the case of the taxes with respect to which the liabilities were incurred.” 26 U.S.C.
§ 6901(a); see also Comm’r v. Stern, 357 U.S. 39, 43 (1958) (explaining that § 6901
requires the Government to follow the same procedures in transferee cases and ordinary
income tax cases, “that is, notice by the [C]ommissioner to the transferee and opportunity
either to pay and sue for refund or else to proceed before the [Tax Court], with review by
the [federal district] courts”). Section 6901 provides only a procedural remedy against
alleged transferees; “substantive state law controls whether a transferee is liable for a
transferor’s tax liabilities.” Frank Sawyer Trust of May 1992 v. Comm’r, 712 F.3d 597,
602-03 (1st Cir. 2013); accord Starnes v. Comm’r, 680 F.3d 417, 427 (4th Cir. 2012).

2

The IRS did not propose assessments against all of the former GNC shareholders. (See
Testimony of M. Angulo.) For example, the IRS did not seek to collect from non-plaintiff
shareholder Mr. Haley. (See Testimony of M. Angulo.)
9

The Government may collect a corporation’s unpaid taxes from former
shareholders as transferees “if an independent basis exists under applicable [s]tate law”
for holding the former shareholders liable for the corporation’s debts. See Starnes, 680
F.3d at 427. The substantive law of North Carolina applies in this case.3 See Julia R.
Swords Trust v. Comm’r, 142 T.C. No. 19, at *11 (May 29, 2014) (“The applicable [s]tate
law is the law of the [s]tate where the transfer occurred.”); see also Frank Sawyer Trust,
712 F.3d at 602-03; Starnes, 680 F.3d at 427.
The Court assumes without deciding that the plaintiffs have the burden of proof.4
To carry their burden and show overpayment in the transferee liability context, the
plaintiffs must prove two independent things: (1) that they are not “transferees” of GNC
within the meaning of Section 6901, a procedural question governed by federal law; and
3

The Government also contends that the plaintiffs are liable for GNC’s unpaid taxes under
the Federal Debt Collection Procedure Act (“FDCPA”). See 28 U.S.C. §§ 3301-08. The
Government cited no case that applies FDCPA provisions in the context of a tax assessed under
Section 6901. It is undisputed that FDCPA provisions do not apply to proceedings brought in
Tax Court, see 28 U.S.C. § 3002(2); e.g., Starnes, 680 F.3d at 425, 427, and nothing suggests
that FDCPA principles would apply where a party challenges a transferee assessment in a refund
suit before a district court, particularly where the plain language of the FDCPA suggests
otherwise. See 28 U.S.C. § 3001(b).
4

Most transferee liability cases originate in Tax Court, where 26 U.S.C. § 6902(a) places the
burden of proof on the Government to show liability. E.g., Starnes, 680 F.3d at 425, 427. By
contrast, it is well-established that in a general refund suit, the plaintiff-taxpayer bears the burden
of proving overpayment. See 26 U.S.C. § 7422; see also Bull v. United States, 295 U.S. 247, 260
(1935); Higginbotham v. United States, 556 F.2d 1173, 1175 (4th Cir. 1977); Timken Roller
Bearing Co. v. United States, 38 F.R.D. 57, 61-62 (N.D. Ohio 1964); Wehby v. Patterson, 6
A.F.T.R.2d 5122 (N.D. Ala. 1960); Van Benschoten v. United States, 4 A.F.T.R.2d 5707 (S.D.
Cal. 1959). Under North Carolina law, the burden of proof in a fraudulent conveyance case is on
the creditor to prove that the transfer was fraudulent. E.g., N.C. Nat’l Bank v. Johnson Furniture
Co. of Mount Airy, Inc., 34 N.C. App. 134, 137, 237 S.E.2d 313, 315 (1977). Thus, there is a
plausible argument that the Section 6901 framework, which looks to state law to determine
substantive liability, alters the general rule as to the burden of proof in refund suits. The Court
need not decide the issue.
10

(2) that there is no basis for holding them liable for GNC’s unpaid taxes, a substantive
question governed by state law. See Starnes, 680 F.3d at 429 (holding that the second
prong of this analysis is “purely a question of state law, without an antecedent federallaw recasting of the disputed transactions”).
At trial, the plaintiffs did not dispute that they are transferees of GNC. At issue,
then, is whether the plaintiffs have proven that there is no basis for holding them liable
for GNC’s unpaid taxes under North Carolina law, specifically the North Carolina
Uniform Fraudulent Transfer Act (“NCUFTA”).
FINDINGS, CONCLUSIONS, AND ANALYSIS OF DISPUTED QUESTIONS
1. Transferee Liability
a. The November 28 Transfers
The November 28 transfers resulted in the sale of GNC to Battery Street and
consist of Battery Street’s transfer of $3,818,000 to the plaintiffs to buy their GNC shares
and, in exchange, GNC’s transfer of $4,932,676 from its pre-closing accounts to the new
GNC account set up by Battery Street at Golden Gate Bank, which gave Battery Street
control over GNC and its assets. The Government contends that these transfers were
fraudulent under three NCUFTA provisions: § 39-23.5(a), § 39-23.4(a)(2), and § 3923.4(a)(1). The Court finds and concludes that the November 28 transfers were not
fraudulent under any of these provisions.
Under § 39-23.5(a), a transfer made by GNC would be fraudulent if, inter alia,
GNC did not receive “a reasonably equivalent value in exchange for the transfer” and
GNC “was insolvent at that time or . . . became insolvent as a result of the transfer.”
11

N.C. Gen. Stat. § 39-23.5(a). As a result of the November 28 transfers, GNC transferred
$4,932,676 from its existing accounts, and $4,932,676 was deposited into the new GNC
account. A “separate and distinct” $3,818,000 was transferred from Battery Street to the
plaintiffs. See Starnes, 680 F.3d at 432. Because GNC had the same $4,932,676 before
and after the November 28 transfers, the Court finds and concludes that GNC received a
reasonably equivalent value in exchange for the transfer of its cash from one bank
account to another account. See Starnes v. Comm’r, T.C.M. 2011-63, at *8 (Mar. 15,
2011) (collecting cases that define “reasonably equivalent value” under North Carolina
law), aff’d, 680 F.3d 417 (4th Cir. 2012).
Moreover, GNC was not rendered insolvent. At the time of the November 28
transfers, GNC’s only debts were federal and state tax liabilities totaling $1,478,601.
Because the $4,932,676 in GNC’s new account on November 28 was sufficient to pay
these liabilities, the Court finds that GNC was not rendered insolvent by the November
28 transfers. Thus, the November 28 transfers were not fraudulent under § 39-23.5(a).
Section 39-23.4(a)(2) also provides that a transfer made by GNC would be
fraudulent if, inter alia, GNC did not receive “a reasonably equivalent value in exchange
for the transfer.” N.C. Gen. Stat. § 39-23.4(a)(2). As found supra, GNC received a
reasonably equivalent value in exchange for the November 28 transfer of its money from
one bank account to another. Thus, the November 28 transfers were not fraudulent under
§ 39-23.4(a)(2).
Under § 39-23.4(a)(1), a transfer made by GNC is fraudulent if, inter alia, GNC
made the transfer “[w]ith [the] intent to hinder, delay, or defraud” the Government. Id.
12

§ 39-23.4(a)(1). The statute identifies thirteen non-exclusive factors for determining
GNC’s intent. See id. § 39-23.4(b)(1)-(13). Proof of the existence of any of these factors
is relevant evidence of GNC’s intent “but does not create a presumption that [GNC] made
a fraudulent transfer.” Id. § 39-23.4 cmt. 5; see also Starnes, T.C.M. 2011-63, at *11.
While several of these factors exist in this case, others do not. As to the
November 28 transfers, GNC did not transfer “substantially all [of its] assets” to another
party but rather transferred its assets from one bank account to another, see N.C. Gen.
Stat. § 39-23.4(b)(5), “[t]he value of the consideration” GNC received “was reasonably
equivalent to the value of the asset[s] [it] transferred,” see id. § 39-23.4(b)(8), and, as
discussed supra, GNC received a reasonably equivalent value in exchange and was not
rendered insolvent. See id. § 39-23.4(b)(9), (12).
While the November 28 transfers occurred shortly after GNC incurred a
“substantial debt,” see id. § 39-23.4(b)(10), namely the tax liabilities from the liquidation
of its publicly traded stock, the funds in GNC’s account after these transfers were
sufficient to satisfy these tax liabilities. And, while the plaintiffs were “insiders” of GNC
before the sale of GNC’s stock to Battery Street, see id. §§ 39-23.1(7)(a)(4), 3923.4(b)(1), the November 28 transfer to the plaintiff-insiders was from Battery Street, not
GNC. Further, there is nothing credible to indicate illegitimate tax planning on the part
of GNC when it was owned by the plaintiffs. See id. § 39-23.4(b)(13). Finally, most of
the plaintiffs were only tangentially involved in the details of the sale, and no plaintiff
had knowledge of MidCoast or Battery Street’s tax strategies. Several of the plaintiffs
credibly testified that they were familiar with legitimate business reasons for selling a
13

company at a premium, and the plaintiffs received favorable business references
concerning MidCoast.
After weighing the factors and other evidence, the Court finds that when GNC,
then controlled by the plaintiffs and other shareholders, transferred money from its
existing accounts to a new GNC account controlled by Battery Street, it did not make a
transfer with the intent to hinder, delay, or defraud the Government. Thus, the November
28 transfers were not fraudulent under § 39-23.4(a)(1).
b. The November 29 – December 1 Transfers
The Government contends that the Court should also consider certain transfers that
allegedly occurred from November 29 through December 1, 2000, after the plaintiffs no
longer controlled GNC. Specifically, the Government contends that:
 On November 29, GNC transferred $3,846,818 from its new account at Golden
Gate Bank to SEAP in repayment of a November 27 loan from SEAP to
Battery Street;5

5

The evidence the Government offered in support of this contention can be found at Doc. 361, DTX 23.0561-23.0570 (Battery Street-SEAP promissory note and security agreement), DTX
23.0013-23.0015 (correspondence between Mr. Austin and Fortrend International employees
regarding the GNC-Battery Street-SEAP transactions), DTX 16.0079-16.0081 and DTX
26.0001-26.0003 (SEAP’s account records), DTX 16.0082-16.0084 and DTX 26.0004-26.0006
(Battery Street’s account records), and DTX 16.0085-16.0089 and DTX 26.0007-26.0011
(GNC’s account records). (See Testimony of M. Angulo.) While various IRS witnesses
testified about what these documents said, none of those witnesses had any personal knowledge
beyond the information conveyed in the documents themselves and none had any personal
knowledge as to whether the transactions reflected in those documents actually occurred.

14

 On December 1, GNC transferred a $100,000 fee to Fortrend International, a
company that assisted Battery Street with purchasing GNC’s stock, and
transferred a $460,000 fee to MidCoast;6 and
 After these three transfers, the balance of GNC’s account was $192,758.34, an
insufficient amount to satisfy GNC’s tax liabilities.7
Essentially, the Government contends that these three transfers and the November
28 transfers discussed supra should be treated as one “transfer” for NCUFTA purposes.
See Starnes, 680 F.3d at 432. The effect of considering all of these transfers together is
to “collapse” the transfers and treat them as if GNC liquidated all of its assets into cash
and made one transfer of that cash to the plaintiff-shareholders. See Diebold, 736 F.3d
at 187; see also Starnes, 680 F.3d at 432; Cullifer v. Comm’r, T.C.M. 2014-208, at *23
(Oct. 7, 2014). Under this theory, the plaintiffs would then be liable as transferees of
GNC because GNC transferred all of its cash to the plaintiffs, received nothing in return,
and went “from being fully able to meet its tax obligations to being entirely unable to do
so.” Starnes, 680 F.3d at 433; see also Diebold, 736 F.3d at 186-87.
The Government’s theory fails for two reasons. First, this theory depends on
findings of fact that the November 29 through December 1 transfers occurred as
6

The evidence the Government offered in support of this contention can be found at DTX
16.0089 and DTX 26.0011 (GNC’s account record). (See Testimony of M. Angulo.) While
various IRS agents testified about what these documents said, none of those witnesses had any
personal knowledge beyond the information conveyed in the documents themselves and none
had any personal knowledge as to whether the events reflected in those documents actually
occurred.
7

The evidence the Government offered in support of this contention is the same evidence set
forth in note 6 supra.
15

described by the Government, and the Court is not satisfied by the preponderance of the
evidence that those facts exist. Second, the transfers can be collapsed for NCUFTA
purposes only if the plaintiffs had actual or constructive knowledge of Battery Street’s
post-closing plans, that is, if the plaintiffs “knew or should have known before the deal
closed that [Battery Street] would cause [GNC] to fail to pay its . . . taxes.” See Starnes,
680 F.3d at 433. The Court finds that the plaintiffs had no such actual or constructive
knowledge of Battery Street’s plans for GNC.
i. Evidence of the Transfers
As proof that the November 29 through December 1 transfers occurred, the
Government proffers several pieces of evidence, as set forth in detail in notes 5-7 supra.
The parties stipulated to the authenticity of a “Loan Facility Letter” dated November 27,
2000, which indicates that SEAP offered to lend Battery Street $3,818,000 to buy GNC,
conditioned upon Battery Street repaying the loan within 24 hours. (See Doc. 36-1 at
¶ 17 (referencing Doc. 36-1 at 9-10 (Battery Street and SEAP “Loan Facility Letter”));
see also DTX 23.0558-23.0560.) The Court will consider the Loan Facility Letter.8
The Government also proffers various documents within DTX 16, DTX 23, and
DTX 26. These documents fall into two categories: (1) bank records in DTX 16 and 26
that reflect the various alleged transfers of funds between GNC, SEAP, Fortrend, and
Battery Street; and (2) documents in DTX 23, including a promissory note and a security
agreement, that tend to indicate that SEAP loaned Battery Street the money to buy GNC.
8

In the stipulation and at trial, the plaintiffs objected to the relevance of this document. (See
Doc. 36-1 at ¶ 17; Testimony of M. Angulo, V. Rex.) The Court overrules that objection.
16

The plaintiffs contend that these documents contain hearsay within hearsay. At
trial, the plaintiffs agreed that the documents were maintained as business records of the
Government, but contended they are hearsay to the extent they are offered for the truth of
the matter asserted because no custodian or other qualified witness identified the
documents as business records of Golden Gate Bank, SEAP, Battery Street, or GNC.
(See, e.g., Testimony of V. Rex, M. Angulo, C. Ferebee.)
Business records may be admitted under the hearsay exception in Federal Rule of
Evidence 803(6) if a “custodian or another qualified witness” testifies that the record
was: (1) made at or near the time by someone with knowledge; (2) kept in the course of a
regularly conducted business activity; and (3) made as a regular practice of that business
activity. Fed. R. Evid. 803(6). Even then, the evidence may be excluded if the opponent
presents circumstances that “indicate a lack of trustworthiness” in the record. Id. The
person who actually prepared the record need not testify as long as the proponent
provides evidence “sufficient to support the trustworthiness of the document, and to
prove that it was prepared in the usual course of business.” United States v. Hawkins,
905 F.2d 1489, 1494 (11th Cir. 1990) (internal citation and quotation marks omitted),
cert. denied, 498 U.S. 1038 (1991).
Federal Rule of Evidence 805 “requires that hearsay within hearsay is admissible
only if it also comes within an exception to the hearsay rule.” United States v. Filippi,
172 F.3d 864 (table), 1999 WL 89297, at *7 (4th Cir. Feb. 23, 1999), cert. denied, 528
U.S. 846 (1999); see also Fed. R. Evid. 805. “Double hearsay in the context of a
business record exists when the record is prepared by an employee with information
17

supplied by another person. Any information provided by another person, if an outsider
to the business preparing the record, must itself fall within a hearsay exception to be
admissible.” United States v. Gwathney, 465 F.3d 1133, 1141 (10th Cir. 2006) (internal
citation and quotation marks omitted), cert. denied, 550 U.S. 927 (2007). It is thus clear
that a document written by a third person does not automatically become admissible for
the truth of the matter stated in the document merely because the Government obtains the
document from the third person and thereafter maintains possession of the document in
the regular course of its business.
1. DTX 23
DTX 23 was identified at trial by IRS agent Maria Angulo as documents produced
by Larry Austin, post-transaction president of GNC, in response to an IRS summons.9
(Testimony of M. Angulo.) From this exhibit, the Government relies on what appear to
be a promissory note and a security agreement between SEAP and Battery Street, (see
DTX 23.0561-23.0570), and purported correspondence between Fortrend employees and
Mr. Austin regarding the GNC-Battery Street-SEAP transactions, (DTX 23.001323.0015), to prove that SEAP loaned Battery Street the money to purchase GNC.10 The
plaintiffs objected to the admission of these documents for the truth of the matter
asserted. (See Testimony of M. Angulo.)

9

The Austin documents in DTX 23 were produced by Randall Dick, Mr. Austin’s power of
attorney. (See Testimony of M. Angulo.)
10

The Government also relies on the Loan Facility Letter between SEAP and Battery Street
found at DTX 23.0558-23.0560. There are no evidentiary issues with these pages of DTX 23
because they are identical to Doc. 36-1 at 9-10, which the Court admitted into evidence.
18

No representative from SEAP or Battery Street testified at trial, and there was no
testimony from any witness with personal knowledge about when the documents at issue
were created or signed. While various IRS agents read and drew conclusions from some
of these documents, no Government witness did, nor would have been able to, testify to
the business-record factors in Rule 803(6)(A)-(C), since no witness was familiar with
either of these companies’ record-keeping systems.
Even if the promissory note and security agreement, (DTX 23.0561-23.0570),
qualify as “commercial paper” under Rule 902(9), the Court is not satisfied that there is
substantial evidence from which the Court should infer that the documents are authentic.
See United States v. Carriger, 592 F.2d 312, 316 (6th Cir. 1979). As the plaintiffs
pointed out at trial, the dates in the documents’ headings and footers do not match; the
headings say the documents were created/executed on November 27, 2000, but the
footers show a date of January 18, 2001. (See DTX 23.0561-23.0570.) Moreover, the
documents were purportedly signed by Mr. Austin, one of several people the Government
contends acted fraudulently in this entire scheme, (see DTX 23.0561-23.0570; Gov’t
Closing Argument), and anything that hinges on his credibility is immediately suspect.
None of the other documents at issue in DTX 23 appear to qualify for self-authentication
under Rule 902. The Court will not consider these documents in DTX 23 for the truth of
the matter asserted.
Even if the Court admitted these parts of DTX 23, they are insufficient to create
liability. The Government’s argument is premised on and requires that the plaintiffs have
knowledge of the loan in late November. The mismatched dates in the headings and
19

footers create significant doubt as to whether a loan even occurred, much less that the
plaintiffs were aware of it. A more reasonable interpretation is that SEAP and Battery
Street created the documents at a later date as part of an effort to create a paper trail. And
there is no evidence the plaintiffs were aware of these transactions.
2. DTX 16 and 26
DTX 16 was identified at trial by IRS agent Carolyn Ferebee as a collection of
some of the documents the Government received in response to IRS summonses issued to
a number of different persons and entities.11 (Testimony of C. Ferebee.) DTX 26 was
identified at trial by IRS agent Victoria Rex as documents received from Golden Gate
Bank in response to an IRS summons seeking account records for SEAP, Battery Street,
and GNC. (Testimony of V. Rex.)
The pages at issue in DTX 16 and the pages at issue in DTX 26 are identical. The
pages at issue in DTX 16 are pages 16.0079-16.0081 (SEAP’s account records), 16.008216.0084 (Battery Street’s account records), and 16.0085-16.0089 (GNC’s account
records). The pages at issue in DTX 26 are pages 26.0001-26.0003 (SEAP’s account
records), 26.0004-26.0006 (Battery Street’s account records), and 26.0007-26.0011

11

The Government’s submission of various unrelated documents received from various
sources as one trial exhibit caused substantial confusion at trial. (See Testimony of C. Ferebee.)
Some pages in DTX 16 are admissible, such as, for example, certain pages identified by Mr.
Watkins. (See, e.g., DTX 16.0001-16.0006, 16.0009-16.0013, 16.0063-16.0064, 16.009016.0091, 16.0097; Testimony of T. Watkins.) The Court has parsed this exhibit to determine
which pages are and are not admissible for the truth of the information documented.

20

(GNC’s account records).12 Because these purported bank records in DTX 16 and DTX
26 are duplicative, and because the witness who identified DTX 16 had no personal
knowledge about the information in the purported bank records beyond what the records
themselves disclose, the Court need not consider these pages from DTX 16. (See
Testimony of C. Ferebee.)
At trial, the plaintiffs did not dispute that the documents in DTX 26 were produced
by Golden Gate Bank and agreed that the Government thereafter maintained the
documents in the course of its regular business. The plaintiffs contend that DTX 26 is
still hearsay to the extent the Government is offering the account records for the truth of
what the records say because no witness from the Bank identified the documents as the
Bank’s business records and because no one associated with the entity that owned the
bank accounts at issue identified the documents or testified about the transactions
reflected in the documents. (See Testimony of V. Rex (objecting to DTX 26), C. Ferebee
(objecting to DTX 16.0079-16.0089).)
A Government witness properly authenticated the Golden Gate Bank records as
records the Government obtained and kept in the course of its regular business. Yet, just
as with DTX 23, the issue of what documents the Government maintained as business
records is not relevant. No Bank representative testified; no one testified that the bank
records were made at or near the time by someone with knowledge, that the records were
kept by the Bank in the course of a regularly conducted business activity, or that the
12

DTX 26.0012-26.0043 appear to be GNC’s account records after December of 2000. The
Government did not rely on these pages at trial, and they appear to be irrelevant.
21

records were made as a regular practice of that business activity. See Fed. R. Evid.
803(6)(A)-(D). There was no certification from the Bank under Rule 902(11). Nor did
the owner of any of the accounts provide any testimony to identify the documents or the
transactions reflected therein. Thus, the Court finds that the bank records in DTX
26.0001-26.0011 are hearsay and are not admissible to prove that the transactions
reflected in these records occurred as the Government describes them.
ii. Collapsing the Transfers
Even if the Court considered the loan documents in DTX 23.0561-23.0570 and the
bank records in DTX 26.0001-26.0011, there is no evidence that any plaintiff had actual
knowledge of Battery Street’s post-closing plans. No plaintiff knew at the time GNC’s
stock was sold to Battery Street that Battery Street would cause GNC not to pay its taxes.
No plaintiff was privy to Battery Street’s financial arrangements, and no plaintiff knew
that Battery Street had borrowed money to finance the deal, how Battery Street intended
to manage GNC after the sale, or what Battery Street’s tax strategies were.
That leaves the question of whether the plaintiffs should have known that Battery
Street would cause GNC not to pay its taxes. Under North Carolina law, evaluating
whether the plaintiffs had constructive knowledge is a two-part inquiry:
First, did the [plaintiffs] have actual knowledge of facts that would have led
a reasonable person concerned about [GNC’s] solvency to inquire further
into [Battery Street’s] post-closing plans? Second, if the [plaintiffs] were
thereby on “inquiry notice,” whether the inquiry a reasonably diligent,
similarly-situated person would have undertaken [would have] revealed
[Battery Street’s] plan to leave [GNC] unable to pay its [2000] taxes?

22

Starnes, 680 F.3d at 434 (collecting cases that discuss the test for constructive
knowledge under North Carolina law).
The Court finds that no plaintiff should have known at the time GNC’s stock was
sold to Battery Street that Battery Street would cause GNC not to pay its taxes.
MidCoast and Battery Street were brought to the plaintiffs by an experienced and
reputable attorney, and the plaintiffs were represented by their own attorney, neither of
whom questioned the propriety of the transaction. The plaintiffs, through their
representatives on the Dissolution Committee, conducted a basic background check into
MidCoast’s business references, which raised no red flags. The shareholder primarily
responsible for managing the deal, non-plaintiff Mr. Haley, was an experienced
businessman who had no questions about the propriety of the transaction. The plaintiffs
did not have actual knowledge of facts that would have led a reasonable person
concerned about GNC’s solvency to inquire further into Battery Street’s post-closing
plans, and thus they were not on inquiry notice.
The Government contends that the mere fact that MidCoast offered to pay a
“premium” was enough to put the plaintiffs on inquiry notice that MidCoast would cause
GNC not to pay its taxes, since MidCoast offered to pay more for the company than its
balance sheet showed that it was worth. The Court is not persuaded. Several plaintiffs
credibly testified that they were familiar in their business careers with the purchase of
companies for a premium, i.e., at a price above a company’s “book value” measured by
the difference between its assets and liabilities. The premium at issue here was relatively
small, and each plaintiff received only a small increase in proceeds from the sale to
23

Battery Street as opposed to from a liquidation. Many non-plaintiff shareholders were
clearly not motivated by receiving this larger amount, as they gave their shares away.
And, as noted supra, Battery Street came to the plaintiffs by way of a reputable and
experienced attorney and with favorable business references for its parent entity from
KPMG and Dun & Bradstreet, two national accounting firms.
Even if the plaintiffs were on inquiry notice, there is no evidence that further
inquiry would have revealed Battery Street’s plan to leave GNC unable to pay its taxes.
The Government contends that had the plaintiffs obtained independent tax advice to
confirm that there was a legitimate tax strategy available that would allow Battery Street
to pay for both GNC’s stock and GNC’s tax debts, they would have learned that there
was no such legitimate tax strategy. Yet, the Government offered no testimony
suggesting that a person offering “independent tax advice” to the plaintiffs in 2000 would
have advised them that there was no legitimate tax strategy, and IRS Notice 2001-16,
which was intended to put taxpayers on notice that transactions with companies like
MidCoast and Battery Street were fraudulent, was not issued until 2001, after the
plaintiffs’ involvement with MidCoast and Battery Street ended. The plaintiffs are not
required to offer evidence to disprove speculation.
The Government relies on Diebold,13 but that case has very different facts. In
Diebold, the shareholders specifically sought out potential buyers “that could help them
13

See also Salus Mundi Found. v. Comm’r, No. 12-72527, ___ F.3d ___, ___ 2014 WL
7240010, at *9 (9th Cir. Dec. 22, 2014) (“The Second Circuit’s decision in Diebold Foundation
addressed the same facts, issues, and applicable law at issue in this appeal. While the question of
the shareholders’ constructive knowledge is a difficult issue, we conclude that the Second
24

avoid the[ir] tax liability.” Diebold, 736 F.3d at 188. Here, the plaintiffs did not seek out
MidCoast with the goal of avoiding GNC’s tax liability and instead responded to an offer
brought to them by a reputable attorney. In Diebold, the plaintiffs were “extremely
sophisticated actors” who deployed a “stable of tax attorneys” to structure the deal. Id.
While the plaintiffs here are sophisticated, the deal was simple, and the plaintiffs had one
attorney. In Diebold, the deal involved a “huge amount of money,” see id., whereas here
the amount involved, in total and as to each plaintiff, was not huge.14 Finally, in Diebold,
the shareholders and their attorneys had a “sophisticated understanding of the . . . entire
transaction,” and they knew that the buyer was a new entity with plans to sell the stock
immediately upon closing and with no “legitimate offsetting losses or deductions to
Circuit’s decision is not demonstrably erroneous.”). In the Salus Mundi and Diebold line of
cases, the Tax Court held that three foundations, the Salus Mundi Foundation, the Diebold
Foundation, and the Ceres Foundation were not liable as transferees under Section 6901. See
Salus Mundi Found. v. Comm’r, T.C.M. 2012-61, *1 & n.1, *14 (Mar. 6, 2012), vacated sub
nom. Diebold, 736 F.3d 172. Because the Diebold Foundation was organized in Connecticut, see
id. at *1, the Government appealed to the Second Circuit. See Diebold, 736 F.3d at 172.
Because the Salus Mundi Foundation was organized in Arizona, see Salus Mundi, T.C.M. 201261, at *1, the Government appealed to the Ninth Circuit. See Salus Mundi, ___ F.3d at ___, 2014
WL 7240010, at *9. The Ceres Foundation was organized in South Carolina, see Salus Mundi,
T.C.M. 2012-61, at *1, but the Government did not appeal to the Fourth Circuit. See Salus
Mundi, ___ F.3d at ___, 2014 WL 7240010, at *9.
14

By comparison, the shareholders in Diebold received $309 million in exchange for a
corporation with $319 million in assets and approximately $81 million in tax liabilities. See
Diebold, 736 F.3d at 176, 188. In other words, the shareholders collectively received a premium
of $71 million over the amount they would have received if they had liquidated the corporation
and paid income taxes. See id. at 180. This figure is significantly higher than the approximately
$400,000 premium the plaintiffs received in this case, a fact that must be considered in
determining whether the plaintiffs knew or should have known that Battery Street would cause
GNC to fail to pay its taxes. See id. at 188; see also Cullifer, T.C.M. 2014-208, at *23 (“In
Diebold Found., the cumulative effect of the transactions resulted in the shareholders’ receiving
nearly 97% of the value of Double D’s assets. In such circumstances, collapsing the multiple
business deals and recharacterizing sale proceeds as a liquidating distribution fairly reflects the
true substance of the transactions.”).
25

cancel out the huge built-in gain it would incur upon the sale” of the corporation’s assets.
Id. at 188-89. Here, the plaintiffs, their attorney, and Battery Street’s attorney had no
knowledge of Battery Street’s financial plans and had no information indicating Battery
Street had no legitimate losses to offset GNC’s tax liabilities.
In sum, the Court concludes that no plaintiff knew or should have known that
Battery Street would cause GNC to fail to pay its taxes. The Court declines to collapse
the transfers and finds that, even considering the loan agreements in DTX 23.056123.0570 and the bank records in DTX 26.0001-26.0011, the November 29 through
December 1 transfers described by the Government provide no basis for holding the
plaintiffs liable for GNC’s unpaid taxes.
2. Transferee of a Transferee Liability
In its trial brief and closing argument, the Government made a complex and
unclear argument that the plaintiffs are liable as “transferees of a transferee.” (See Doc.
74 at 25-27; Gov’t Closing Argument.) While the Government never cited Frank Sawyer
Trust, as best the Court can tell this argument is based on the same theory explained by
the First Circuit in that case. See Frank Sawyer Trust, 712 F.3d at 606-12 (upholding the
Tax Court’s finding that a trust was not liable as a “transferee” under the Massachusetts
Uniform Fraudulent Transfer Act, but remanding the case for the Tax Court to determine
if the trust could be liable as a “transferee of a transferee”).
This theory depends on the same November 29 through December 1 transfers set
forth supra. The evidence to support these factual contentions is largely inadmissible,

26

and the Court is not satisfied that those transfers took place. Therefore, the plaintiffs
have proven that they are not liable under this theory.
Moreover, the Court has concerns about whether the Government should even be
allowed to raise this theory. It was not raised in the Government’s Answer, (see Doc. 8),
it was not raised when the Government successfully sought several stays while Starnes
was pending before the Fourth Circuit, (see Docs. 17, 20, 22, 24, 25), and it was not
raised when the plaintiffs moved for summary judgment. (See Docs. 33, 36.) Indeed, in
one of its motions to stay pending Starnes, the Government represented to the Court that
“Starnes will likely control the outcome of the present matter and, at a minimum, will
likely narrow the issues for the district court.” (Doc. 20 at 2.)
Instead of narrowing the issues, Starnes caused the Government to search for new
theories of liability. (See generally Gov’t Closing Argument.) Just a few weeks before
trial, after Starnes was decided against the Government and when it became clear that the
case would not settle, the Government inserted this new transferee of a transferee theory
into the case when it filed its trial brief and proposed findings of fact. (See Doc. 74 at 2527; Doc. 75 at 15-18.)
While the Government used words that can be read to raise this theory, those
words did not clearly explain the theory; as the Court noted before trial, it was “difficult
to discern” what transfers were at issue and what proof the Government’s transferee of a
transferee theory would entail. (See Doc. 87.) This remained true even after the
Government filed a supplemental trial brief at the Court’s direction, (Doc. 93), and during
trial. While the Government did better at explaining this theory during closing argument,
27

and finally cited a case that lays out the transferee of a transferee analysis, (see Gov’t
Closing Argument (citing Cullifer, T.C.M. 2014-208, at *23-25)), the Government’s
explanation was still muddy and obviously came after the close of evidence. The
Government never cited Frank Sawyer Trust to this Court in connection with its
transferee of a transferee theory, even though the First Circuit in that case articulated a
clear, step-by-step analysis for determining whether transferee of a transferee liability
exists. See Frank Sawyer Trust, 712 F.3d at 606-12.
As noted supra, the Court has assumed that the plaintiffs have the burden of
disproving liability in this case. 15 That does not and cannot mean that the plaintiffs bear
the burden of explaining with clarity every conceivable theory of liability and then
disproving that theory. Nor does it mean that the Government can wait until the eve of
trial to surprise the plaintiffs and the Court with a totally new theory of liability. Even if
the evidence was sufficient to support this theory, the Court would be inclined to
disregard it because of the lateness and lack of clarity with which it was raised.
CONCLUSION
For the foregoing reasons, the Court concludes that the plaintiffs have met their
burden to prove that there is no basis under North Carolina law for holding them liable as
transferees for GNC’s unpaid taxes.

15

If the Government has the burden of proof in this case, see supra n. 4, the Court finds that
the Government has failed to produce convincing evidence that establishes the plaintiffs’ liability
as transferees of a transferee.

28

The Court perceives that this opinion resolves all pending motions or renders them
moot. The Court also perceives that it has ruled on all evidentiary objections made at
trial on which the Court reserved ruling. If any party believes otherwise, it shall consult
with opposing counsel and then so advise the Court in a Joint Status Report, filed no later
than February 27, 2015, that identifies the remaining motion or issue.
It is ORDERED that the plaintiffs are entitled to judgment, which will be entered
as time permits.
This the 12th day of February, 2015.

__________________________________
UNITED STATES DISTRICT JUDGE

29