Tucker
Filing
7
MEMORANDUM OPINION AFFIRMING ORDER AND MEMORANDUM OPINION OF THE BANKRUPTCY COURT. The Memorandum Opinion granting the petitioner's relief under Chapter 7 of the Bankruptcy Code is AFFIRMED. This appeal is DISMISSED and STRICKEN from the active docket of this Court. Clerk directed to enter Judgment. Signed by Senior Judge Frederick P. Stamp, Jr on 10/31/11. (c to counsel, U.S. Bankruptcy Court)(cc)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
FRANCIS CLIFFORD TUCKER,
Bankruptcy No. 09-914
Debtor.
_______________________________
FRANCIS CLIFFORD TUCKER,
Debtor - Appellant,
v.
Civil Action No. 5:11CV38
(STAMP)
OHIO VALLEY AMUSEMENT COMPANY,
ALLAN HART and
ALEXAS INTERTAINMENT LLC,
Creditors - Appellees.
MEMORANDUM OPINION AFFIRMING
ORDER AND MEMORANDUM OPINION
OF THE BANKRUPTCY COURT
I.
Procedural History
The appellees, Ohio Valley Amusement Company (“OVA”), Alexas
Intertainment, LLC (“Alexas”), and Al Hart (collectively, the
“petitioning creditors”), filed an involuntary Chapter 7 petition
against the appellant/debtor, Francis C. Tucker (“Tucker”). Tucker
filed an answer contesting the petition and two motions to dismiss.
The United States Bankruptcy Court for the Northern District of
West Virginia denied the motions to dismiss and held a trial on the
contested
petition.
Based
upon
the
evidence
and
arguments
presented by the parties at trial, the bankruptcy court found that
the petitioning creditors established grounds for relief under 11
U.S.C. § 303.
Tucker appealed to this Court.
Pursuant to the
briefing schedule ordered by this Court, the appellant filed a
memorandum of law in support of his appeal.
The appellees filed
their brief, to which the appellant filed a reply brief.
This
matter is now ripe for review and pending before this Court.
II.
Background
From 1980 through 2006, Tucker operated a video lottery
business.
Tucker organized OVA to hold the necessary licenses,
equipment, and real estate leases, and he served as OVA’s president
and sole shareholder.
In February 2003, Tucker authorized OVA’s
Chapter 11 bankruptcy petition.
In 2007, a group of investors
doing
(“HEB”)
business
as
H.E.B.,
bankruptcy proceeding.
LLC
intervened
in
OVA’s
HEB formed Alexas as a special purpose
entity to enable OVA to emerge from bankruptcy.
Alexas purchased
third-party claims against the OVA bankruptcy estate in order to
promote a plan of reorganization.
capital
by
Alexas,
the
With a substantial infusion of
reorganization
plan
was
confirmed
on
December 14, 2007. When outstanding stock in OVA was cancelled and
new stock was issued, Tucker was left with no interest in OVA.
Upon
accordance
confirmation
with
its
of
OVA’s
terms,
Brad
reorganization
Singleton
Operations Officer and Vice President of OVA.
plan,
became
and
the
in
Chief
Later, HEB sold its
membership interests in Alexas to Singleton, giving him a 49%
ownership
interest
in
OVA.
Al
Hart,
a
contractor
for
OVA
originally hired by Tucker, continued to work for OVA even after
2
Tucker lost control of the company.
Hart remained on call each
night to respond to calls from OVA’s customers.
OVA’s claim against Tucker arises from a March 27, 2002
promissory note (the “Northern Note”) executed by Tucker on behalf
of Mound City, Inc. (“MCI”) and OVA to Northern Hancock Bank
(“Northern”). MCI and OVA both signed as borrowers on the Northern
Note, while Tucker signed a personal guaranty for the borrowers’
obligations to Northern.
OVA’s Chapter 11 plan provided that it would be bound by its
guarantee of the debts of MCI owed to Northern, but that Northern
would receive no distribution under the plan.
After confirmation,
Northern filed a complaint in the Circuit Court of Hancock County,
West Virginia, seeking a judgment against MCI, OVA, and Tucker for
the amount due on the Northern Note.
Northern later assigned all
of its rights in the Northern Note to OVA.
The petition alleges
that OVA holds a $258,034.84 claim against Tucker based on his
personal guaranty.
Additionally, Tucker owes $5,021.11 to OVA
based upon an award of sanctions issued by the bankruptcy court for
his failure to attend a scheduled deposition.
Alexas acquired its claims against Tucker in conjunction with
its acquisition of claims in the OVA bankruptcy case.
Tucker’s
personal obligations on OVA’s corporate debts resulted in three
judgments against him totaling $1,432,623.23. Hart’s claim against
Tucker
is
based
upon
an
oral
agreement
3
by
which
he
loaned
$10,000.00 to Tucker to buy stock in Virtual Health Technologies,
Inc. (“VHGI”).
III.
This
Court
Jurisdiction and Standard of Review
has
jurisdiction
over
this
bankruptcy
appeal
pursuant to 28 U.S.C. § 158(a) and Federal Rule of Bankruptcy
Procedure
8002.
This
Court
reviews
the
bankruptcy
court’s
conclusions of law under a de novo standard of review and reviews
findings of fact by the bankruptcy court for clear error.
See
Federal Rule of Bankruptcy Procedure 8013; In re NVR, LP, 189 F.3d
442, 448 (4th Cir. 1999); Educ. Credit Mgmt. Corp. v. Kirkland, 600
F.3d 310, 314 (4th Cir. 2010).
IV.
Discussion
In his memorandum of law in support of appeal, Tucker focuses
on two arguments previously raised before the bankruptcy court: (1)
the petitioning creditors acted in bad faith; and (2) the petition
is not valid because it does not include a valid number of
petitioning creditors due to the interrelatedness of OVA, Alexas,
and Hart.
Tucker also presents a new argument: he cannot be held
liable for alleged debts incurred by him while acting in his
official capacity as president of OVA.
Notably, Tucker does not
contest the bankruptcy court’s conclusion that all three of the
petitioning creditors hold qualified claims pursuant to 11 U.S.C.
§ 303(b).
Mem. Op., BK No. 09-914 at 13, Nov. 24, 2010.
Court addresses each of the appellant’s arguments in turn.
4
This
A.
Petitioning Creditors’ Good Faith
In analyzing Tucker’s claim that the involuntary petition
against him was filed in bad faith, the bankruptcy court utilized
the United States Court of Appeals for the Fourth Circuit’s test
that combines both an objective standard that focuses on whether a
reasonable person in the position of the creditor would have filed,
and
a
subjective
motivation.
standard
that
examines
the
petitioner’s
See In re U.S. Optical, Inc., No. 92-1396, 1993 WL
93931, at *4 (4th Cir. Apr. 1, 1993) (“Most courts . . . apply both
a subjective and objective test.”).
Considering the totality of
the circumstances, the bankruptcy court found that Tucker had
failed to show that the involuntary petition was filed in bad
faith.
See id. (“No one single factor will show bad faith.
Rather, the totality of the circumstances must be evaluated to
determine whether the petition has been filed in bad faith.”).
On appeal, Tucker again asserts that the petitioning creditors
acted in bad faith because they filed the involuntary petition
purely for collection purposes.
Tucker relies heavily on Atlas
Mach. & Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709,
716 (4th Cir. 1993), in which the Fourth Circuit affirmed the
bankruptcy court’s conclusion that the involuntary petition was
filed for an improper purpose -- the collection of a debt.
In
Atlas, the court dismissed the involuntary petition against Atlas
Machine & Iron Works, Inc. because the petitioning creditor,
Bethlehem Steel Corp., acted in bad faith by filing the petition
5
solely to collect the debt owed to them by Atlas.
Id.
Citing to
the testimony of Al Hart, Brad Singleton, and Tom Tucker, the
appellant argues that all of the petitioning creditors conceded
that they filed the involuntary petition solely to collect on a
debt.
Further, Tucker argues that the appellees failed to contact
other possible creditors, thus proving that they did not bring the
petition for the good of the creditor body, but instead used the
petition in a self-serving manner as a debt collection device.
The
appellees
misplaced.
argue
that
Tucker’s
reliance
on
Atlas
is
According to the appellees, the bankruptcy court in
Atlas deemed the petition defective because Bethlehem filed as a
single petitioner even though it knew that Atlas had more than
twelve creditors.
The appellees highlight that in this case, in
contrast to Atlas, the involuntary petition was commenced by three
creditors, each of which holds a non-contingent, undisputed claim
against Tucker, which collectively constitute 97% of all the claims
at issue in this case.
The appellant also argues that the bankruptcy court erred in
failing to address whether Al Hart acted in bad faith.
Tucker
claims that “the bankruptcy court’s view that the petitioning
creditors have brought a good faith involuntary petition simply
because they hold a bigger piece of the overall pie in comparison
to other potential creditors is simply erroneous.” Appellant’s Br.
at 10. Moreover, Tucker contends that Hart never made a demand for
payment and that there are no terms associated with his loan.
6
The appellees respond by stating that as of the date of the
petition, Hart knew that Alexas held a judgment against Tucker in
an amount exceeding $2,350,000.00.
The appellees claim that Hart
was also aware that Tucker had fraudulently transferred his assets
in order to block Alexas’ efforts to enforce its judgment claim.
Based on these facts, the appellees contend that Hart acted in good
faith by filing the petition.
As the bankruptcy court correctly noted, “[a] filing is
presumed to be in good faith, and the existence of bad faith must
be proven by the debtor by a preponderance of the evidence.”
U.S. Optical, Inc., 1993 WL 93931, at *3.
In re
This Court agrees that
the appellant cannot rely on Atlas to meet this burden.
In Atlas,
Bethlehem filed as a single petitioner even though Atlas had twelve
or more creditors, and the bankruptcy court determined that the
administration of the case in bankruptcy would be of no benefit to
other creditors who were being paid.
Atlas, 986 F.2d at 714.
An
involuntary petition “must be exercised for the good of the entire
creditor body and for legitimate bankruptcy purposes.
It is not
intended to be used in an exclusively self-serving manner as a
collection device.”
In re Tichy Elec. Co., 332 B.R. 364, 376-77
(Bankr. N.D. Iowa 2005) (“Improperly exercised, a creditor [filing
an involuntary petition] can hold a business hostage unless its
claim
is
satisfied.”).
While
a
creditor
may
not
file
an
involuntary petition solely to protect his own interest, he may
file an involuntary petition to ensure payment according to the
7
bankruptcy priority scheme. In re Ex-L Tube, Inc., No. 06-42967-7,
2007 WL 541670, at *3 (Bankr. W. D. Mo. Feb. 16, 2007).
In this case, Tucker admitted to transferring assets out of
the reach of his creditors.
This conduct rendered state court
collection remedies difficult and impractical for his creditors.
Considering the objective standard, this Court agrees that Tucker
has failed to show how invoking the bankruptcy court’s jurisdiction
to recover and liquidate property for his bankruptcy estate is not
something
that
petitioning
a
reasonable
creditors
would
person
in
the
attempt.
With
position
of
the
regard
to
the
petitioning creditors’ subjective motivations, Tucker has not shown
that their motives include anything but a desire to recover
fraudulent transfers and to initiate a liquidation of Tucker’s
property.
these
The bankruptcy process can be used to achieve both of
goals.
Additionally,
Tucker
has
offered
nothing
but
speculation in support of his argument that OVA and Alexas filed
the petition in order to eliminate him as competition.
The fact that the bankruptcy court did not directly address
whether Al Hart acted in bad faith does not change this result.
Like the other creditors, Hart was aware of Tucker’s fraudulent
transfers and his debts owed to Alexas.
reasonable
person
in
Hart’s
position
Given this knowledge, a
would
have
filed
an
involuntary petition, motivated by a desire to recover fraudulent
transfers and to ensure his repayment priority.
Tucker has failed
to prove any other motivation on the part of Hart.
8
Thus, this
Court agrees that the involuntary petition was filed in good faith
by all of the petitioning creditors.
B.
Number of Petitioning Creditors
Previously, Tucker argued before the bankruptcy court that OVA
and Alexas should be counted as a single creditor, which would
require the petitioning creditors to prove that Tucker has fewer
than twelve creditors under 11 U.S.C. § 303(b)(2).
The bankruptcy
court concluded that because Tucker could not pierce the corporate
veil, he could not prove that Alexas and OVA should be counted as
one entity for purposes of standing to file the involuntary
petition.
On appeal, Tucker again emphasizes the interrelatedness of
OVA, Alexas, and Hart. Specifically, he argues that OVA and Alexas
“speak though one voice” -- Brad Singleton, the Director of OVA and
managing member of Alexas.1
According to Tucker, Alexas is not a
qualified petitioner because its interest is the same as that of
OVA.
Tucker also argues that because Hart is an employee of OVA
and listed as an “insider” in the Chapter 11 Reorganization Plan of
OVA, he does not qualify as a separate petitioning creditor.
As the appellees note in their brief, the appellant’s argument
regarding the interrelatedness of the creditors ignores the proper
analysis
creditors.
for
determining
The
appellees
whether
they
qualify
submit
that
the
1
as
separate
bankruptcy
court
Singleton is the sole shareholder of Alexas and Alexas owns
49% of the shares of OVA.
9
correctly found that Tucker bears the burden of proving that the
corporate veil of OVA and Alexas should be pierced under state law
in order for them to be counted as a single creditor.
Pointing to
the record, the appellees argue that Tucker has not met this burden
because: (1) there is no evidence that any of the petitioning
creditors have been operated for a fraudulent purpose; (2) OVA and
Alexas have maintained their separate corporate identities; and (3)
Hart’s business relationship with OVA does not disqualify him as a
petitioning creditor.
This Court finds that the bankruptcy court correctly applied
West
Virginia
law
on
veil
piercing
creditors should not be consolidated.
in
determining
that
the
See S. Elec. Supply Co. v.
Raleigh County Nat’l Bank, 320 S.E.2d 515, 523 (W. Va. 1984)
(setting forth the considerations involved in the decision to
pierce the corporate veil).2
2
As the bankruptcy court stated, the
Decisions to “pierce” involve multifarious
considerations,
including
inadequacy
of
capital structures, whether personal and
corporate funds have been commingled without
regard
to
corporate
form
by
a
sole
shareholder, whether two corporations have
commingled their funds so that their accounts
are interchangeable; whether they have failed
to follow corporate formalities, siphoning
funds from one corporation to another without
regard to harm caused either entity, or failed
to keep separate records.
Other reasons to
disregard the structure are: total control and
dominance of one corporation by another or a
shareholder; existence of a dummy corporation
with
no
business
activity
or
purpose;
violation of law or public policy; a unity of
interest and ownership that causes one party
or entity to be indistinguishable from
10
factors set forth in S. Elec. Supply Co. must be coupled with
“evidence
that
a
corporation
attempted
to
use
its
corporate
structure to perpetrate a fraud or do a grave injustice on an
innocent third party seeking to ‘pierce the veil.’”
Id.
After reviewing the pleadings and the record in this case,
this Court agrees that Tucker has done nothing more than show that
Alexas and OVA share an officer, Brad Singleton.
This connection
alone is insufficient proof that the corporate structures were used
to perpetrate fraud or do grave injustice.
This Court agrees that
nothing prohibits Singleton from owning interests in two separate
corporations with common purposes.
evidence
shows
that
while
Id. at 788-89.
Singleton
exercises
Further, the
considerable
discretion in managing the financial affairs of OVA, Tom Tucker,
CEO of OVA, manages the daily business affairs of OVA.
Similarly, Hart’s employment with OVA does not disqualify him
as a petitioning creditor.
Again, the appellant has failed to
pierce the corporate veil in order to justify consolidating Hart’s
claim with OVA’s.
The fact that Hart is “available on call at all
times by OVA” does not mean that OVA has attempted to use its
corporate structure to perpetrate a fraud.
In
this
case,
the
creditors
have
Appellant’s Br. at 12.
maintained
their
another; common shareholders, common officers
and employees, and common facilities.
S. Elec. Supply Co., 320 S.E.2d at 788.
11
separate
identities, thus, consolidation should not be permitted.
The
appellant has failed to prove otherwise.
C.
Tucker’s Personal Liability for Debts
As the bankruptcy court’s opinion sets forth, an order for
relief under 11 U.S.C. § 303 can only be entered if it is
determined that the “debtor is generally not paying such debtor’s
debts as such debts become due unless such debts are the subject of
a
bona
fide
§ 303(h)(1).
dispute
as
to
liability
or
amount.”
11
U.S.C.
The burden is on the creditors to establish that as
of the petition date, the debtor was generally not paying his debts
when due.
See In re Caucus Distributors, Inc., 83 B.R. 921, 931
(Bankr. E.D. Va. 1988). Applying the five-factor test set forth in
In
re
Knoth,
168
B.R.
311,
316
(Bankr.
D.
S.C.
1994),
the
bankruptcy court determined that the creditors have shown by a
preponderance of the evidence that Tucker was not paying his debts
as those debts fell due.3
Tucker, however, argues for the first time on appeal that the
bankruptcy court improperly found, in effect, that he could be held
personally liable for actions taken by him while acting in his
3
“The ‘generally not paying’ test is determined as of the date
of the filing of the involuntary petition.” In re Knoth, 168 B.R.
at *317. The five factors used as a starting point are as follows:
[1] the timeliness of payments on past due obligations;
[2] the amount of debts long overdue;
[3] the length of time during which the debtor has been
unable to meet large debts;
[4] any reduction in the debtor’s assets; and
[5] the debtor’s deficit situation.
Id.
12
official capacity as president of OVA.
Citing to Boston Beverage
Corp. v. Turner, 81 B.R. 738 (D. Mass. 1987), Tucker asserts that
the claims brought by OVA and Alexas arise out of his relationships
with the petitioning creditors and that his debts accrued while he
was serving in his corporate capacity.
Therefore, Tucker argues
that cannot be held personally liable for these debts.
The
appellees counter that the bankruptcy court correctly found that
Tucker is generally not paying his debts as they become due.
As noted above, the bankruptcy court determined, and the
appellant does not dispute, that the petitioning creditors’ claims
against him are not the subject of a bona fide dispute as to
liability or amount.4
See 11 U.S.C. § 303(b)(1).
The claim held
by OVA against Tucker is the result of an absolute guaranty of
payment by Tucker, and Alexas’ claims are the result of judgment
liens against Tucker based upon personal obligations on purchase
money loans for OVA’s equipment. Thus, Tucker’s personal liability
for these debts has already been established and the only remaining
inquiry is whether he is generally not paying these debts.
As the
bankruptcy court stated, Tucker has never made a payment on the
debts owed to the three petitioning creditors, and the majority of
this approximately $2.6 million debt has been due for over five
years.
Moreover, Tucker acknowledged at trial that he was not
4
In the appellant’s reply to the brief of the appellees, he
states that certain state court actions filed by the appellees are
clear evidence that a bona fide dispute still exists between the
parties.
Appellant’s Reply Br. at 3.
The appellant, however,
presents no other facts in support of this argument.
13
making payments to any of the other fourteen creditors in his
Debtor’s Rule 1003(b) Creditor list, ten of which are individuals
who made personal loans to Tucker.
Although these creditors may
not be actively seeking collection, that does not excuse Tucker
from a debt that is due.
See In re West Side Cmty. Hosp., 112 B.R.
243, 256 (Bankr. N.D. Ill. 1990) (“Mere failure of a creditor to
demand payment of a debt does not excuse failure to pay it.”).
In addition to the debts not being paid as due to the
petitioning creditors and Tucker’s family and friends, Tucker also
testified to a debt owed to an attorney and another debt owed to an
equipment supplier.
Tucker acknowledged that these debts were not
being paid either.
Despite the fact that Tucker has not paid the
amounts due to the petitioning creditors and other creditors, his
assets have been reduced.
Tucker transferred stock to his mother
and to Tucker & Tucker Enterprises.5
Tucker also conveyed real
estate to his mother for no consideration. This Court concurs with
the bankruptcy court’s finding that there is no evidence to suggest
that Tucker was fulfilling his financial obligations.
Instead,
Tucker managed his finances in a manner that was evasive and
detrimental
to
his
creditors.
This
Court
finds
that
the
petitioning creditors have shown by a preponderance of evidence
that Tucker was not paying his debts as those debts fell due.
5
Tucker & Tucker Enterprises is a business set up by Tucker in
which his mother is the sole shareholder.
14
V.
Conclusion
For the reasons set forth above, the bankruptcy court’s order
and
memorandum
opinion
granting
the
petitioners
Chapter 7 of the Bankruptcy Code is AFFIRMED.
relief
under
It is further
ORDERED that this appeal should be and hereby is DISMISSED and
STRICKEN from the active docket of this Court.
The Clerk is directed to transmit copies of this memorandum
opinion to counsel of record herein.
Pursuant to Federal Rule of
Civil Procedure 58, the Clerk is directed to enter judgment on this
matter.
DATED:
October 31, 2011
/s/ Frederick P. Stamp, Jr.
FREDERICK P. STAMP, JR.
UNITED STATES DISTRICT JUDGE
15
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?