ANDREW, et al v. UNITED STATES OF AMERICA

Filing 40

MEMORANDUM OPINION AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE signed by MAG/JUDGE L. PATRICK AULD on 11/27/2013. Plaintiffs have failed to show the lack of a genuine dispute as to any material fact. RECOMMENDED that Plaintiffs' Motion for Summary Judgment (Docket Entry 33 ) be denied. ORDERED that Plaintiff's Motion for Leave to File a Suggestion of Subsequently Decided Authority (Docket Entry 39 ) is DENIED AS MOOT.(Taylor, Abby)

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.

1:10CV90

MEMORANDUM OPINION AND RECOMMENDATION
OF UNITED STATES MAGISTRATE JUDGE
The instant matter comes before the undersigned Magistrate
Judge for a recommended ruling on Plaintiffs’ Motion for Summary
Judgment (Docket Entry 33) and a ruling on the United States’
Motion for Leave to File a Suggestion of Subsequently Decided
Authority (Docket Entry 39).

(See Docket Entry dated Jan. 25,

2013; see also Docket Entry dated Oct. 31, 2011 (assigning case to
undersigned Magistrate Judge).)

For the reasons that follow,

Plaintiffs’ instant Motion should be denied and the United States’
instant Motion will be denied as moot.
I.

Factual Background

Plaintiffs “are former shareholders or successors in interest
to former shareholders of GNC Investors Club, Inc, a North Carolina
corporation (‘GNC’).” (Docket Entry 1, ¶ 22; see also Docket Entry
34-2, ¶ 3.)

GNC’s sole activities were “(a) acquiring[,] holding

and selling securities and holding cash and cash equivalents; and
(b) conducting meetings, educating its members with regard to the

stock market, and carrying on other corporate activities of its
directors and shareholders.”

(Docket Entry 34-2, ¶ 2.)

In 2000,

“GNC’s assets consisted solely of ownership of publicly traded
stock and nominal amounts of cash.”

(Id., ¶ 6.)

That year, the

shareholders of GNC “began to consider alternative strategies for
GNC, including liquidation.”

(Id., ¶ 8.)

In October of 2000, Thomas Watkins (a member of a similar
investment group through which he had learned of a company,
MidCoast Credit Corporation (“MidCoast”), interested in acquiring
corporations

like

GNC)

approached

the

GNC

shareholders

selling their GNC stock instead of liquidating.
also Docket Entry 34-5 at 4-5.)1

about

(Id., ¶ 10; see

Via a Letter of Intent and Share

Agreement, MidCoast proposed that “it or its designee would acquire
the GNC shareholders’ stock as an alternative to the liquidation of
GNC”

(Docket

Entry

34-2,

¶

11)

and

provided

a

schedule

“demonstrating that the proceeds to the shareholders from a stock
sale would be greater if the GNC shareholders sold their shares to
MidCoast or its designee instead of GNC liquidating the company and
distributing the remaining cash after payment of corporate income
tax to its shareholders” (id., ¶ 12; see also Docket Entry 36-14).
“MidCoast represented that the GNC shareholders would collectively

1

All pin citations (other than to paragraph numbers) refer
to the pagination in the footer appended to each document by the
CM/ECF system.
2

receive $391,887 more in proceeds from a stock sale than if they
were to liquidate GNC.”

(Docket Entry 34-2, ¶ 12.)

In early November of 2000, GNC liquidated its publicly traded
stock for $4,955,000.

(Id., ¶ 13.)

As a result of this sale, “GNC

had an estimated federal tax liability of $1,208,690 (of which
$30,000 had been paid [as of November 22, 2000]) . . . .”

(Id.,

¶ 15.) “MidCoast arranged for Battery Street, Inc., a newly-formed
Delaware corporation, to acquire the GNC stock.”

(Id., ¶ 14.)

On

November 28, 2000, the GNC shareholders sold their stock in GNC to
Battery Street for $3,818,000.

(Id., ¶ 16.)

At this time, GNC’s

only assets consisted of $4,932,676 in cash (id., ¶ 18) and it had
a federal tax liability of approximately $1,210,811, as well as a
North Carolina state tax liability of approximately $267,790 (id.,
¶ 19). As part of the purchase agreement, Battery Street agreed to
pay GNC’s outstanding tax liability.

(Docket Entry 34-6 at 19.)

On November 27, 2000, Battery Street took out a $3.8 million loan,
subject to repayment within 24 hours.

(Docket Entry 34-2, ¶ 17;

see also id. at 10.)
“On December 28, 2004, the IRS issued a statutory Notice of
Deficiency to GNC for the tax year ending April 30, 2001.”
¶ 23.)

(Id.,

“The deficiency was in the amount of $1,286,686 and an

accuracy related penalty in the amount of $514,573.20.” (Id.) The
IRS and GNC entered into a stipulation on September 2, 2005,
whereby they agreed that GNC had a deficiency of $1,158,132 and a

3

related penalty of $231,626.

(Id., ¶ 24.)

The IRS “proposed

assessments against [] [P]laintiffs as transferees of GNC” on
September 20, 2008.

(Id., ¶ 25.)

and related penalty in full.

Plaintiffs paid the deficiency

(Id., ¶ 26.)

They thereafter filed

the instant Complaint against the United States “for the refund of
taxes (assessable penalties) erroneously and illegally assessed
against and collected from Plaintiffs.”
II.

(Docket Entry 1, ¶ 17.)

Procedural Background

During the pendency of this case, the United States sought
(Docket Entry 20) and this Court granted a stay pending resolution
by the Fourth Circuit of a case raising similar issues (Docket
Entry 22).

The Fourth Circuit, thereafter, issued its opinion in

that case (see Docket Entry 23 at 2 (citing Starnes v. Commissioner
of Internal Revenue, 680 F.3d 417 (4th Cir. 2012))), and this Court
granted a further stay pending a ruling on a petition for rehearing
en banc by the United States (see Docket Entry 25).

The Parties

subsequently submitted a Joint Notice indicating that the Fourth
Circuit had denied that petition and that the Parties had not
settled the instant matter.

(Docket Entry 27 at 2.)

Plaintiffs

then filed the instant Motion for Summary Judgment (Docket Entry
33), to which the United States responded (Docket Entry 36) and
Plaintiffs

replied

(Docket

Entry

37).

The

United

States

subsequently filed its first Motion for Leave to File a Suggestion
of Subsequent Authority (Docket Entry 38), which the Court granted

4

(see Docket Entry dated Apr. 27, 2013), followed by the instant
Motion for Leave to File a Suggestion of Subsequent Authority
(Docket Entry 39).
III.

Motion for Summary Judgment

A. Summary Judgment Standard
“The [C]ourt shall grant summary judgment if the movant shows
that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
P. 56(a).

Fed. R. Civ.

Such a genuine dispute exists if the evidence presented

could lead a reasonable factfinder to return a verdict in favor of
the non-moving party.

Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 255 (1986). In making this determination, the Court must view
the evidence and any reasonable inferences therefrom in a light
most favorable to the non-moving party.

Matsushita Elec. Indus.

Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); but see
Francis v. Booz, Allen & Hamilton, Inc., 452 F.3d 299, 308 (4th
Cir. 2006) (“Mere unsupported speculation is not sufficient to
defeat a

summary judgment motion if the undisputed evidence

indicates that the other party should win as a matter of law.”).
“[N]or is [summary judgment] appropriate ‘even where there is no
dispute as to the evidentiary facts but only as to the conclusions
to be drawn therefrom.’”

Gordon v. Kidd, 971 F.2d 1087, 1093 (4th

Cir. 1992) (quoting Charbonnages de France v. Smith, 597 F.2d 406,
414 (4th Cir. 1979)).

Furthermore, “[w]here states of mind are

5

decisive as elements of a claim or defense, summary judgment
ordinarily will not lie.”
B.

Id. at 1094.

Starnes v. Commissioner of Internal Revenue

In the case that led to the stay of this action, the Fourth
Circuit affirmed the finding of the United States Tax Court in
favor of individuals challenging their assessed federal income tax
liability

as

transferees

Starnes, 680 F.3d at 420.

for

a

corporation’s

unpaid

taxes.

The plaintiffs in that case were former

shareholders of Tarcon, a freight consolidation company.

Id.

The

former shareholders, upon deciding to retire, considered various
options for disposing of the company in the spring of 2003.
420-21.

Id. at

They sold Tarcon’s only remaining non-cash asset (a

warehouse) and entered into an agreement with MidCoast whereby
MidCoast would buy all of the stock in Tarcon.

Id. at 421.

MidCoast’s offer was contingent upon the conversion of Tarcon’s
assets to cash and MidCoast was aware, during the negotiations with
Tarcon, that Tarcon was arranging for the sale of its warehouse;
“[t]hus it was understood . . . that when MidCoast purchased the
stock, Tarcon’s only asset would be cash.”
MidCoast

agreed

to

pay

Tarcon’s

Id.

2003

tax

liability

and

“[e]very witness who knew the details of the stock sale, including
the attorney for MidCoast, testified that they had no reason to
believe MidCoast would not honor th[at] commitment.”
22.

Id. at 421-

In its offer letter, MidCoast explained that it pursued

6

acquisitions of companies such as Tarcon “as an effective way to
grow [its] parent company’s core asset recovery operations.”
at 421.

Id.

Tarcon’s former shareholders testified that “they did not

understand what was meant by the ‘asset recovery business’ or what
MidCoast planned to do with Tarcon, but they made no inquiries.”
Id. at 422.
On October 30, 2003, Tarcon sold its warehouse for $3.18
million.

Id. at 423.

That sale resulted in a corporate income tax

liability of $880,000, giving Tarcon a net worth of approximately
$2.2 million.

Id.

MidCoast agreed to buy all of Tarcon’s stock

“for an amount equal to Tarcon’s cash less 56.25 percent of
Tarcon’s local, state, and federal corporate income taxes for
2003,” or approximately $2.6 million.
November 13, 2003.
After

Id.

The sale closed on

Id.

executing

the

agreement,

the

former

shareholders

transferred the $3.1 million in cash assets to their attorneys’
escrow account, and MidCoast transferred the $2.6 million to a
similar account held by its attorneys.

Id. at 424.

The former

shareholders’ attorneys transferred the asset money to MidCoast’s
attorneys’ account, and from that account the former shareholders
individually received their portion of the sale price.

Id.

The

$3.1 million was transferred into Tarcon’s “post-closing” bank
account on November 14, 2003.

Id.

7

“[O]n November 24, 2003, eleven days after the November 13
closing, MidCoast sold its Tarcon stock to Sequoia Capital, L.L.C.,
a Bermuda company, for $2,861,465.96.”

Id.

Two days later, the

funds in Tarcon’s post-closing account were transferred into a
Deutsche Bank account under Tarcon’s name.

Id.

“[O]n December 1,

2003, $2,960,000 was transferred from the Deutsche Bank account to
an account in the Cook Islands in the name of ‘Delta Trading
Partners,’ and $126,822 was transferred to a MidCoast bank account.
After December 1, 2003, Tarcon never had more than $132,320 in any
account.”

Id.

Tarcon filed its 2003 tax return, reporting capital gains and
ordinary income offset by two large losses, purportedly from
December 2003. Id.

“Thus, the return reported an overall loss and

no tax due.”

Upon review, the IRS “disallowed the claimed

Id.

deductions” for the two losses, id. at 424-25, and determined
“Tarcon owed an income tax deficiency for 2003 of $855,237,” id. at
425. When the IRS was unable to recover the liability from Tarcon,
it sent notices of transferee liability to the Plaintiffs.

Id.

The notices indicated the amount due from each Plaintiff and
explained that the combined sale of the warehouse and the stock
sale was “substantially similar to an Intermediary transaction
shelter

described

in

Notice

2001-16,

2001-1

C.B.

730,

or,

alternatively, the transaction [was] in substance a sale of Tarcon
assets [] followed by a redemption of Tarcon stock owed by the

8

Tarcon shareholders.” Id. (internal quotation marks omitted). The
former shareholders contested the notices before the United States
Tax Court.

Id.

The Tax Court found in favor of the former

shareholders after a bench trial, id. at 428, and the Fourth
Circuit affirmed its holding, id. at 440.
The Fourth Circuit upheld the Tax Court’s use of North
Carolina law to determine whether a basis existed for holding the
former shareholders liable for the transferor’s debts. Id. at 430;
see also id. at 427 (“As the tax court in this case properly
articulated, § 6901 provides a procedure through which the IRS may
collect unpaid taxes owed by the transferor of the assets from a
transferee if an independent basis exists under applicable State
law or State equity principles for holding the transferee liable
for the transferor’s debt.” (internal quotation marks omitted)).
Under North Carolina law, “a ‘transfer’ made by a debtor ‘is
fraudulent as to a creditor whose claim arose before the transfer
was made,’ if the debtor (1) made the transfer ‘without receiving
a reasonably equivalent value in exchange,’ and (2) ‘was insolvent
at that time’ or ‘became insolvent as a result of the transfer.’”
Id. at 430 (quoting N.C. Gen. Stat. § 39-23.5).

In the case of the

Tarcon sale, the Fourth Circuit (and the Tax Court) identified the
central question as involving the determination of what transfer or
combination of transfers counted in assessing “whether Tarcon
received

reasonably

equivalent

9

value

and/or

was

rendered

insolvent,” id. at 432; the Fourth Circuit further explained that
the options consisted of the November 13-14, 2003 transfers (of
$3.1 million from the former shareholders to MidCoast and $2.6
million

from

MidCoast

to

the

former

shareholders)

or

those

transactions as well as the December 1, 2003 transfer of Tarcon’s
cash to the Cook Island account, id.

In the former, Tarcon

received reasonably equivalent value and remained solvent; in the
latter, it did not.

Id. at 432-33.

In selecting the proper time frame, the Tax Court looked to
North Carolina law concerning when multiple transactions qualify as
“collapsed.”

Id. at 433.

It determined that such a collapse

occurs only if the former shareholders “had actual or constructive
knowledge of the entire scheme . . . .”
marks omitted).

Id. (internal quotation

The Fourth Circuit affirmed this basic conclusion

and analyzed the standard in greater detail, indicating that the
former shareholders would have liability if the Commissioner had
proven they “knew or should have known before the deal closed that
MidCoast would cause Tarcon to fail to pay its 2003 taxes.”

Id.

Under North Carolina law, the Fourth Circuit explained, the latter
constructive knowledge consists of two prongs:
[1] did the [f]ormer [s]hareholders have
actual knowledge of facts that would have led
a reasonable person concerned about Tarcon’s
solvency to inquire further into MidCoast’s
post-closing plans[; and 2] if the [f]ormer
[s]hareholders were thereby on “inquiry
notice,” whether the inquiry a reasonably
diligent, similarly-situated person would have
10

undertaken revealed MidCoast’s plan to leave
Tarcon unable to pay its 2003 taxes?
Id. at 434 (citing Vail v. Vail, 233 N.C. 109, 116, 63 S.E.2d 202,
207 (1951), and Nash v. Motorola Commc’ns & Elecs., Inc., 96 N.C.
App. 329, 331-32, 385 S.E.2d 537, 538 (1989)).

Finding that the

Tax Court applied this standard, the Fourth Circuit upheld the
determination that the Commissioner failed to prove that the former
shareholders knew, actually or constructively, that MidCoast would
cause Tarcon to fail to pay its 2003 taxes.

Id.

In analyzing the

Tax Court’s findings, the Fourth Circuit acknowledged evidence in
favor of a finding of constructive knowledge, but noted that it
“do[es] not persuade us that the Tax Court was clearly erroneous in
finding that, under the circumstances shown by the evidence, the
[f]ormer [s]hareholders lacked constructive knowledge that Tarcon
was unlikely to pay its 2003 taxes.”

Id. at 435.

Thus, the Fourth Circuit upheld the Tax Court’s conclusion
that “the Commissioner failed to prove that the December 1[, 2003]
transfer - which rendered Tarcon essentially insolvent and unable
to satisfy its 2003 tax liability - should be collapsed with the
earlier
received

transfers

for

‘reasonably

purposes

equivalent

of

determining

value’

required by N.C. Gen. Stat. § 39-23.5.”

in

the

whether

Tarcon

‘transfer,’

Id. at 437.

as

As a result,

the former shareholders did not have liability under Section 3923.5.

Id.

11

For similar reasons, the Fourth Circuit also upheld the Tax
Court’s finding that the transfer did not qualify as fraudulent
pursuant to two other state law provisions, id. at 437-38, which
deem a transfer as fraudulent
if the debtor made the transfer or incurred
the obligation:
(1) With intent to hinder, delay, or
defraud any creditor of the debtor; or
(2) Without receiving a reasonably
equivalent value in exchange for the transfer
or obligation, and the debtor:
a. Was engaged or was about to
engage in a business or a transaction for
which the remaining assets of the debtor were
unreasonably small in relation to the business
or transaction; or
b. Intended to incur, or believed
that the debtor would incur, debts beyond the
debtor’s ability to pay as they became due.
N.C. Gen. Stat. § 39-23.4(a).

In upholding the Tax Court’s

rejection of liability under those provisions, the Fourth Circuit
found dispositive the Tax Court’s adverse factual determinations
that foreclosed collapsing the November 13-14 and December 1
transfers, as explained in the discussion of liability under N.C.
Gen Stat. § 39-23.5.

Starnes, 680 F.3d at 437-38.
C.

GNC Sale

For the purposes of summary judgment, Plaintiffs in this case
“concede that this Court may assume that Plaintiffs are transferees
pursuant

to

§

6901.”

(Docket

12

Entry

34

at

14.)

Moreover,

Plaintiffs

apparently

do

not

contest

that,

should

the

Court

determine that the sale of GNC and Battery Street’s repayment of
its

$3.8

million

loan

“collapse,”

Plaintiffs

would

not

have

received “reasonably equivalent value” and/or GNC would have become
insolvent under North Carolina law.

(Docket Entry 34 at 6-20.)

The only remaining question for liability under N.C. Gen. Stat.
§ 39-23.5 thus concerns whether Plaintiffs knew or should have
known of the likelihood that Battery Street would cause GNC to fail
to pay its 2000 taxes.

(Id.; see also Docket Entry 36 at 9-16.)

Plaintiffs argue that they did not have actual or constructive
knowledge before the deal closed that Battery Street would cause
GNC to fail to pay its 2000 taxes and, therefore, that the Court
should consider only the transfer of $3.8 million from Battery
Street to Plaintiffs in exchange for GNC’s $4.9 million in cash
assets.

(Docket Entry 34 at 15-20.)

Plaintiffs further contend

that the facts of the instant case parallel those in Starnes (id.
at 16-18) and, in fact, even more compellingly support Plaintiffs’
position (id. at 18-20).

The United States, on the other hand,

distinguishes Starnes in a number of respects (Docket Entry 36 at
9) and asserts that, for summary judgment purposes, sufficient
evidence shows that Plaintiffs should have discovered that GNC
would not pay its 2000 taxes (id. at 10-16).
As an initial matter, the procedural posture of the instant
case significantly differs from that of Starnes.

13

As the United

States

has

pointed

out

(see

id.

at

8),

the

Fourth

Circuit

considered Starnes only after a bench trial before the Tax Court.
The Fourth Circuit affirmed that the Tax Court employed the correct
legal standard and that its factual findings survived clear error
review.

See Starnes, 680 F.3d at 425, 435, 437.

At the summary

judgment stage, however, the United States only needs to show that
a dispute as to a material fact exists and this Court must draw any
inferences in favor of the United States, see Matsushita, 475 U.S.
at 587.
1.

Inquiry Notice

The first question in the constructive knowledge analysis
concerns whether or not Plaintiffs had actual knowledge of facts
that would lead a reasonable person to inquire further into Battery
Street’s post-closing plans. Starnes, 680 F.3d at 434. Plaintiffs
contend that they investigated MidCoast and found that it was
legitimate; “[t]herefore, Plaintiff’s made a reasonable inquiry in
an attempt to ascertain the truth and should not be subjected to
the second prong of the constructive knowledge test under North
Carolina law.”

(Docket Entry 34 at 16.)

The United States points to a number of facts in support of
its argument that Plaintiffs in fact had notice of facts that
should have led them to inquire further.

First, the transfers in

this case that resulted in GNC becoming insolvent took place over
a period of only two days, as compared with 16 days in Starnes.

14

(Docket

Entry

36

at

12-13.)

The

United

States

argues

that

“Plaintiffs were participants for at least this two day period, and
the actions which occurred over those two days were enough to put
Plaintiffs on notice that they needed to inquire further.” (Id. at
13.) The United States also points to the fact that Battery Street
“agreed to pay [] Plaintiffs $3.8 million for the stock of a
corporation which was only worth $3.4 million, and whose sole asset
was cash . . . .”

(Id.)

According to the United States, “[t]here

was no legitimate business reason for Battery Street to pay a
premium to GNC for cash, let alone a $400,000 premium.

The so-

called premium made business sense only if the parties understood
that GNC’s $1.5 million tax liability would not be paid.

The

premium represented Plaintiffs’ cut of the taxes not paid to the
United States.”

(Id. at 14.)

Furthermore, “Plaintiffs claim they

did not know to whom they were selling their stock, and took no
steps to find out.”

(Id. (citing Docket Entry 36-5 at 6, 7).)

Drawing all reasonable inferences in favor of the United
States, see Matsushita, 475 U.S. at 587, a material dispute exists
as to whether Plaintiffs had actual knowledge of facts that would
have led a reasonable person to inquire further, see Starnes, 680
F.3d at 434. Consistent with the Tax Court’s reasoning in Starnes,
a reasonable fact finder could determine that Plaintiffs, knowing
that the proposal would allow them to sell their corporation for
more than its worth, should have inquired further about the

15

acquiring company. See Starnes v. C.I.R., T.C. Memo. 2011-63, 2011
WL 894608, at *10 (U.S. Tax Ct. 2011) (“Further inquiry by the
Tarcon shareholders, who were also officers and directors of
Tarcon, was likely warranted considering that they ultimately
received proceeds from the sale of their Tarcon stock that exceeded
the Tarcon cash on hand, less the calculated tax liabilities as of
October 31, 2003.

The Tarcon shareholders failed to do so.”),

aff’d, 680 F.3d at 434 (“The [Tax C]ourt found the Commissioner
satisfied his burden on prong one because it found that although
the circumstances did oblige the Former Shareholders to conduct
‘[f]urther inquiry,’ they ‘failed to do so.’” (some alterations in
original)).
2.

Findings of Reasonable Inquiry

The United States contends that “[a] reasonably diligent
inquiry would have revealed that when Battery Street acquired GNC,
it had no assets other than the shares of GNC, which itself held
only cash from the pre-closing mandated sale of GNC’s assets and a
large tax liability from the same pre-closing mandated sale of
GNC’s assets.”

(Docket Entry 36 at 14.)

Furthermore, the United

States points out that Plaintiffs made no inquiry into Battery
Street at all.
16).)

(Id. at 14-15 & n.7 (citing Docket Entry 34 at

Had they investigated Battery Street, the United States

alleges Plaintiffs would have discovered the following facts:

16

(1) Battery Street incorporated only two months before the
scheduled closing (id. at 15 (citing Docket Entry 36-11));
(2) Battery Street borrowed approximately $3.8 million to buy
Plaintiffs’ GNC stock (id. (citing Docket Entry 36-1 at 9));
(3) Battery Street had to repay said loan within 24 hours (id.
(citing Docket Entry 36-1 at 9)); and
(4) in a letter dated the day of the purchase agreement,
Battery Street’s special counsel “disclaimed any opinion as to the
‘truth, accuracy and completeness of any of the representations,
warranties or statements as to factual matters given by Battery
Street or required of Battery Street under the Agreement’” (id.
(quoting Docket Entry 36-12 at 3)).
These facts materially differentiate this case from Starnes.
Under

these

circumstances,

particularly

given

the

absence

of

evidence indicating that Battery Street had any assets prior to its
acquisition of GNC, a reasonable fact finder could infer that a
reasonably diligent individual in Plaintiffs’ position would have
discovered that Battery Street could only execute the purchase of
GNC’s stock after taking out a $3.8 million loan, subject to
repayment the next day with the GNC cash Battery Street would
acquire from the sale, thus leaving insufficient funds to repay
GNC’s tax liability. Further, to the extent that the United States
relies on additional facts similar to the ones at issue in Starnes,
the Fourth Circuit only ruled that such evidence “d[id] not

17

persuade [it] that the Tax Court was clearly erroneous in finding
that, under the circumstances shown by the evidence, the Former
Shareholders lacked constructive knowledge that Tarcon was unlikely
to pay its 2003 taxes.” Starnes, 680 F.3d at 435 (emphasis added).
In other words, in Starnes, the Fourth Circuit reviewed the Tax
Court’s decision in favor of the plaintiffs only for clear error;
in the instant case, the United States (as the non-moving party)
receives the benefit of all reasonable inferences.
Plaintiffs also contend that the Court should disregard the
arguments by the United States that an investigation into Battery
Street would have revealed its recent incorporation, its borrowing
of the money for the sale, and its obligation to repay said funds
within 24 hours.

(Docket Entry 37 at 9-10.)

However, Plaintiffs

justify this position by stating that “the acts of Battery Street
after the closing transaction should not be collapsed into the
closing transaction and are therefore irrelevant.”

(Id. at 10.)

The loan and related immediate repayment obligation, however, came
about on November 27, 2000, one day before the closing, making
Plaintiffs’ argument unavailing as to these particular facts.
Moreover, Plaintiffs offer no argument as to why the Court should
disregard the fact of Battery Street’s recent incorporation, which
clearly occurred prior to closing.

(Id.)

In sum, in Starnes, the Fourth Circuit deferentially reviewed
the Tax Court’s findings of fact and verdict after a bench trial,

18

Starnes, 680 F.3d at 425, 428, whereas, in the instant case, still
at the summary judgment stage, the United States receives the
benefit of all reasonable inferences.

This distinction makes a

difference, given the record of this case.

See Runvee, Inc. v.

United States, No. 2:10-CV-2260-KJD-GWF, 2013 WL 1249602, at *13
(D. Nev. Mar. 26, 2013) (unpublished) (distinguishing summary
judgment issue from Starnes “on the basis that [it was] established
on facts developed at trial” and “decided after [a] factually
intensive presentation[] of evidence”); see also Starnes, 680 F.3d
at 440 n.14 (recognizing that each transferee liability case must
turn on its particular facts and citing “primacy of the [trial
court’s] role as fact finder”). Viewing the record in a light most
favorable to the United States, a reasonable fact finder could
determine that a reasonable inquiry into Battery Street, prior to
the sale, would have revealed facts indicating that, as a result of
the sale, GNC would fail to pay its 2000 taxes.

For this reason,

the Court should deny Plaintiffs’ instant Motion.2
D.

Other Theories of Liability

Plaintiffs next argue that no genuine issue of fact exists as
to whether the transfer(s) violated N.C. Gen. Stat. § 39-23.4(a)(1)
& (2).

(See Docket Entry 34 at 20-21; Docket Entry 37 at 11.)

2

As

The subsequently decided authority proffered by the
United States in its instant Motion (Docket Entry 39) does not
significantly add to or alter the analysis of Plaintiffs’ instant
Motion. The Court therefore will deny the instant Motion of the
United States as moot.
19

Plaintiffs acknowledge, these other potential theories of liability
also turn on the question of whether the post-sale transfer(s)
collapse into the sale (see id.) and the Court therefore should not
grant summary judgment in favor of Plaintiffs on these issues for
the reasons discussed in the prior subsection.

See Starnes, 680

F.3d at 437-38 (recognizing that analysis under N.C. Gen. Stat.
§ 39-23.4(a)(1) & (2) rests largely on whether relevant transfers
“collapse”).
IV.

Conclusion

Plaintiffs have failed to show the lack of a genuine dispute
as to any material fact.
IT

IS

THEREFORE

RECOMMENDED

that

Plaintiffs’

Motion

for

Summary Judgment (Docket Entry 33) be denied.
IT IS ORDERED that Plaintiff’s Motion for Leave to File a
Suggestion of Subsequently Decided Authority (Docket Entry 39) is
DENIED AS MOOT.
/s/ L. Patrick Auld
L. Patrick Auld
United States Magistrate Judge
November 27, 2013

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