Logan v. McLean (In re McLean)
Logan v. McLean (In re McLean)
Opinion of the Court
OPINION
Defendant Michael E. McLean (hereinafter “Debtor”) filed a voluntary Petition commencing a Chapter 7 bankruptcy case on September 9, 2010 (the “Petition Date”). On January 18, 2011, Creditor Airpack, Inc. (“Airpack”) commenced Adversary Proceeding No. 11-039 by the filing of a “Complaint Objecting To Discharge Of Certain Debt.” That complaint asserted that Airpack held a judgment
On March 23, 2011, the Chapter 7 Trustee commenced this adversary proceeding against Debtor and the non-debtor defendants
Defendants subsequently filed a Motion for Partial Summary Judgment which was granted in part and denied in part by the court by an order entered September 26, 2012.
Trial of the adversary proceeding was conducted on March 5 and 7, 2013. The parties subsequently submitted proposed findings and conclusions and a hearing for final argument was held on June 12, 2013, after which the court held the matter under advisement.
I. Factual Findings
Debtor was hired by Airpack in 2002
Airpack brought a suit in the Circuit Court for Wicomico County, Maryland, Case no. 02-C-04-098423 against Debtor and MacPack, LLC for damages from violation of the non-compete clause (hereinafter referred to as the “Judgment Case”). Attorney Martin represented the defendants in that case.
At the time MacPack, LLC was created, Debtor was the principal person involved in the business with the contacts, knowledge and experience to run the operation of MacPack, LLC. At times Debtor held himself out as the General Manager of MacPack, LLC.
In lieu of salary paid to Debtor, Mac-Pack, LLC paid a salary to Linda McLean. Joanne Zenobia testified that compensation was paid to Linda McLean for the work performed by Debtor.
The evidence as to the degree of involvement and work contribution provided by Linda McLean is in conflict and at different times inconsistent. For example, witness Zenobia testified at trial in this Adversary Proceeding that Debtor was her supervisor when she worked for MacPack, LLC
The evidence also demonstrates that the business of MacPack, LLC was conducted with very significant work done by Debtor for which the company paid a salary and some profit distributions in the form of checks to Linda McLean.
The Initial Transfers from Debtor to MacPack, LLC and to Linda McLean could form the basis for a judgment against MacPack, LLC and Linda McLean to avoid fraudulent conveyances. In addition, the MacPack Income Transfers could form the basis for a judgment against Linda McLean for the value of the Debtor’s services for which payment was made to Linda McLean. Such judgments can only be found if other elements of recoverable fraudulent conveyances are proven and no defense, such as statute of limitations, is successfully presented by the defendants.
On January 7, 2008, a new entity named MacPack of S.C., LLC (“S.C., LLC”) was formed.
II. Analysis
A. Counts I, II and IV — Fraudulent Conveyance and Recovery
Plaintiffs Count I is brought under Section 548(a)(1) and requests the court to avoid transfers (1) of the South Carolina property from Debtor to MacPack, LLC; (2) of ownership of MacPack and MacPack of SC from Debtor to Linda McLean; (3) of profit distributions from MacPack, LLC and S.C., LLC to Linda McLean; and (4) of wages paid to Linda McLean (specified only as the Debtor’s wages, but no amount provided) by MacPack, LLC and S.C., LLC. Plaintiff asks for reconveyance of property to Debtor or a judgment against MacPack, LLC, S.C., LLC and Linda McLean in the amount of $500,000. In Count II, Plaintiff seeks avoidance of the same transfers pursuant to state fraudulent conveyance law set forth in Md.Code Ann. Com. Law §§ 15-204 and 15-207.
The court finds from the evidence that Plaintiff has proven by the preponderance standard
Despite this finding of evidence of avoidable fraudulent conveyances, in its Order granting partial summary judgment entered September 26, 2012, the court was compelled to find in favor of defendants as to all avoidances under Section 548(a)(1) that occurred more than two years prior to petition.
The court, however, declined to make a finding on summary judgment as to Count II brought under Md.Code Ann. Com. Law §§ 15-204 and 15-207 for conveyances which occurred more than three years
What is known as the “fraud discovery exception” is codified at Md.Code Ann. Cts. & Jim PROC. § 5-203. That Section provides: “If the knowledge of a cause of action is kept from a party by the fraud of an adverse party, the cause of action shall be deemed to accrue at the time when the party discovered, or by the exercise of ordinary diligence should have discovered the fraud.” Although Plaintiff alleges that the underlying conveyances were done with fraudulent intent and constituted fraud as against Airpack, the record does not support a finding that defendants took fraudulent measures to conceal the transfers from Airpack. The creation of MacPack, LLC as solely owned by Linda was never concealed or denied. Even if this court were to find that the defendants fraudulently concealed the transfers to Linda McLean, for the same reasons discussed supra, the court finds that Airpack (in whose “shoes” Trustee now appears as Plaintiff) by exercise of ordinary diligence should have discovered the fraudulent conveyances. Therefore, the cause of action accrued at the time of the transfers.
The common law “discovery rule” is recognized in Maryland law and is different than the statutory “fraud discovery exception.” The operation of the common law discovery rule is to effectively toll a limitations period where a plaintiff does not or can not discover that the wrong has occurred until sometime after the wrong is committed. Stated conversely “a cause of action accrues when a plaintiff in fact knows or reasonably should know of the wrong.” Hecht v. Resolution Trust Co., 333 Md. 324, 336, 635 A.2d 394, 399 (1994) (citing Poffenberger v. Risser, 290 Md. 631, 636, 431 A.2d 677 (1981)). In the instant adversary proceeding, Plaintiff argues that the limitations period should be found to have been tolled from the period of the conveyances to 2010.
Accordingly, the court does not find that a statutory or common law “discovery rule” would operate to toll the statute of limitations thereby allowing the Plaintiff trustee to reach transfers beyond the applicable statutes of limitations. The court concludes that transfers occurring prior to August 2, 2007
As to the MacPack Income Transfers paid to Linda McLean by MacPack, LLC, the Court finds that such income payments were an intentional misdirection of payment for the services and expertise of Debtor and as such are a transfer by Debtor to Linda McLean of the Debtor’s right to receive the income and distributions. The evidence supports a finding that these transfers, as each income and distribution payment was made, were made to “hinder, delay, or defraud present or future creditors” and are thus avoidable pursuant to Md.Code Ann. Com. Law § 15-207 to the extent they occurred after the Limitations Date.
In addition, the above-discussed MacPack Income Transfers are avoidable pursuant to Section 544(b) and Md.Code AnN. Com. Law § 15-204.
Plaintiff asserts that the same fraudulent transfers occurred as a result of the formation of S.C., LLC and income paid by S.C., LLC to Linda McLean. S.C., LLC was formed after the Limitations Date and therefore avoidance under the causes of action prayed by Count II of the Amended Complaint are not barred by the Maryland statute of limitations.
S.C., LLC was formed to separate the hazardous materials packaging business retained by MacPack, LLC from other packing and freight forwarding to be done by S.C., LLC.
The Amended Complaint also sought avoidance of a March 17, 2009 transfer of real property located in South Carolina (the “S.C. Property”) from Debtor and Linda McLean to MacPack, LLC. This transfer occurred within both the two year and three year statutes of limitations and is not subject to the statute of limitations defense raised by Defendants. However in argument before the court, Plaintiffs counsel effectively abandoned any request to find the transfer avoidable. Plaintiffs counsel explained that discovery had revealed that the S.C. Property was heavily mortgaged and so no evidence was presented during trial as to the net value of the property. The court, therefore, concludes that there is insufficient evidence upon which the court could determine the transfer of the S.C. Property to be avoidable.
B. Counts III and VII — Turnover and Declaratory Judgment
The court also must deny the Plaintiffs alternative argument in Count VII of the Amended Complaint that the businesses were and remain owned by the Debtor and that the court should enter a declaratory judgment so stating. Although in closing argument, counsel for Plaintiff stated that this is the Plaintiffs primary position with the assertion that the businesses were fraudulently transferred being an alternative, the court notes that the count for declaratory judgment was added by the Amended Complaint filed after defendants raised the statute of limitations defenses to the fraudulent conveyance counts. Simply put, the evidence does not support that either business was owned by Debtor at the time of the Petition Date.
Having denied the declaratory judgment requested by Count VII, the action for turnover in Count III must similarly be denied. The ownership of the business and income paid to Linda McLean by the businesses were not property of the estate on the date of petition.
C. Counts V and VI — Civil Conspiracy and Aiding and Abetting
In Count V, Plaintiff alleges a civil conspiracy of a fraudulent transfer of property. To support such a claim, Plaintiff is required to demonstrate an agreement between the involved parties. A cause of action for civil conspiracy was defined in Maryland as “a combination of two or more persons by an agreement or understanding to accomplish an unlawful act or to use unlawful means to accomplish an act not in itself illegal, with the further requirement that the act or the means employed must result in damages to the plaintiff.” Hoffman v. Stamper, 385 Md. 1, 24, 867 A.2d 276, 290 (2005). In In re Rood, 459 B.R. 581, 603-04 (Bankr.D.Md. 2011), this court (P. Mannes), held that the tortious conduct of an underlying fraudulent transfer was sufficient to find a civil conspiracy where the court also found an agreement or meeting of the minds to accomplish such fraudulent conveyance. Id. Such a finding that civil conspiracy would lie was upheld by the District Court in 482 B.R. 132, 143 (D.Md. 2012)(D. Cha-sanow).
The Rood case, like the instant case, also involved an allegation of aider and abettor liability. 459 B.R. at 604. The court held that such liability is established if “(1) there is a violation of the law by the principal, (2) defendant knew about the violation, and (3) the defendant gave substantial assistance or encouragement to
In the Order Denying Motion of Defendants Melissa Greenwell, Attorney Martin and Allison Davis for Summary Judgment, entered on September 26, 2012, the court held that upon their motion for summary judgment, it was defendants who must prove by evidence the nonexistence of the claims brought against them and that the “Defendants’ evidence does not entirely refute their possible participation, knowledge and encouragement in one or all (depending on which Defendant of these alleged fraudulent transfers).”
As to Greenwell and Davis, the exhibits could lead the court to find that they were aware that the Debtor’s role in MacPack, LLC was greater than that which he now claims and similarly that Linda McLean’s role was smaller. However, evidencing a degree of awareness by Greenwell and Davis’ of their co-defendants’ business efforts does not satisfy the Plaintiffs burden to prove both an awareness that such acts were being done for a tortious purpose and that Greenwell and Davis participated in the scheme.
Plaintiff argues that as the Debt- or’s attorney, Attorney Martin was in the position of collaborating with Debtor to create the scheme and effectuate the fraudulent conveyances. The evidence that Plaintiff asserts supports such a finding is Attorney Martin’s role in preparing business documents with respect to the creation of MacPack, LLC, the sanction entered against him for a discovery violation during the Fraudulent Conveyance Case and statements made by Attorney Martin which at most demonstrate that he was aware of the fraudulent conveyance scheme. The evidence is not in dispute that Attorney Martin prepared and filed the paperwork to form MacPack, LLC, which creation is found to be a fraudulent conveyance though unavoidable for reasons of statute of limitations. However, Plaintiff has not demonstrated that Attorney Martin advised or participated with Debtor to adopt the ultimate scheme of creating the corporation in Linda McLean’s name and paying his salary to her in order to avoid Airpack’s collection efforts.
As explained in the decision of Fraidin, et al. v. Weitzman, et al., 93 Md.App. 168, 611 A.2d 1046 (Md.App. 1992), an attorney will not be found liable for a conspiracy where the conduct of the attorney was within the scope of employment. Id. at 234-35, 611 A.2d at 1079-80. Further, the Plaintiff has not demonstrated by any evidence that Attorney Martin’s services to Debtor were undertaken to either benefit himself or injure another. Id. at 235-236, 611 A.2d at 1079-80. As the Fraidin Court pointed out, there is a distinction between “committing] fraud or collusion, or a malicious or tortious act, even
The court cannot conclude that Plaintiff has proven by a preponderance of the evidence that Greenwell, Attorney Martin or Davis conspired with each other or with Michael and Linda McLean to commit tor-tious acts, or that any of the defendants aided and abetted Michael and Linda McLean with those acts. The court finds that Plaintiff presented insufficient evidence to prove liability against Greenwell, Attorney Martin or Davis under Counts V and VI of the Amended Complaint.
III. Judgment
Having found that the MacPack, LLC Income Transfers occurring after the Limitations Date are fraudulent conveyances that are avoidable as against Linda McLean, the court must determine the amount of the consequent judgment to be entered. Plaintiffs Exhibit 69 is a voluminous copy of paystubs demonstrating amounts paid to Linda McLean by Mac-Pack, LLC. Plaintiff did not provide a summary or computation as to the aggregate amounts stated in this evidence. Therefore in its order determining certain MacPack Income Transfers to be avoided, the court will require that Plaintiff file a detailed summary and computation of the MacPack Income Transfers occurring after the Limitations Date as evidenced by Exhibit 69. The court will enter a money judgment in favor of Plaintiff and against Linda McLean after receipt and review of the required summary and computation.
These are the findings and conclusions of the court. An order and judgment will be entered in accordance with this Opinion.
. The remaining defendants in the Fraudulent Conveyance Case are the non-debtor defendants in the instant adversary proceeding.
. Hereafter, all code sections refer to the United States Bankruptcy Code found at Title 11 of the United States Code unless otherwise noted.
. In the bankruptcy case, Airpack also filed a Motion for Relief from Stay asking that it be permitted to prosecute the Fraudulent Conveyance Case in the state court. The court denied that motion because upon the filing of a chapter 7 bankruptcy case, the right to pursue a fraudulent conveyance action belongs to the chapter 7 trustee. 11 U.S.C. §§ 323, 544(a), 548(a). See also PW Enterprises, Inc. v. State of North Dakota, et al. (In re Racing Services), 363 B.R. 911, 916 (8th Cir. BAP 2007) (citing, inter alia, In re Baltimore Emergency Services II Corp., 432 F.3d 557 (4th Cir. 2005) and finding that absent specific finding by bankruptcy court that creditor can proceed derivatively, the authority to pursue a fraudulent conveyance action rests with the trustee).
. The non-debtor defendants are MacPack, LLC, MacPack of SC, LLC, Linda McLean (the Debtor's wife), Melissa Greenwell (the Debtor’s daughter), Allison Davis (a former employee of MacPack, LLC), and J. Edward Martin (the Debtor's attorney).
. If upon any appellate review it shall be determined that the bankruptcy judge was not permitted to enter final orders and judgments, in the alternative the findings and conclusions stated in this opinion would be intended to constitute proposed findings and conclusions under Standing Order 2012-05 of the United States District Court for the District of Maryland.
. The Motion for Partial Summary Judgment was brought by all defendants. In addition to that motion, defendants Greenwell, Davis and Martin filed a Motion for Summary Judgment seeking to have the Amended Complaint dismissed in its entirety as against them. Although the court now finds that the Amended Complaint is properly denied as to those defendants, such finding was not appropriate prior to the trial on the merits and that motion was denied on September 26, 2012.
. Trial Transcript March 5, 2013, p. 28, line 5.
. Plaintiff's Exhibit 11.
. Plaintiff’s Exhibit 1.
. Plaintiff’s Exhibit 3 and Trial Transcript March 5, 2013, p. 29, line 8.
. Defendant’s Exhibit 21.
. Plaintiff's Exhibits 13 and 14.
. Plaintiff’s Exhibit 15.
. Defendant's Exhibit 25, Bates no. 3677
. Id.
. See Joint Exhibit A, Deposition of Linda McLean, November 9, 2011, at p. 49, lines 9-15 and p. 50, lines 1-9.
. See id. at Deposition of Linda McLean, August 23, 2010, at pp. 22-26, 38 and Deposition of Linda McLean, November 9, 2011, at pp. 57-59. See also Defendants' Exhibit 25, Bates no. 3677.
. See generally Joint Exhibit A, Excerpts of Deposition of Linda McLean August 23, 2010, including pp. 56-60.
. Plaintiff's Exhibit 7; Plaintiff’s Exhibit 13, at Bates no. 2334.
. See e.g., Joint Exhibit A, Deposition of Michael McLean, November 16, 2011, at p. 66, lines 8-14; Plaintiff's Exhibit 65, Defendants' Exhibit 32 and Defendants' Exhibit 24, Bates no. 1634, 1643.
. Plaintiff’s Exhibit 13, at Bates no. 2334.
. E.g., Plaintiff’s Exhibit 10, at Bates no. 6277.
. Trial Transcript March 5, 2013, p. 96, line 14.
. Plaintiff’s Exhibit 22 at Bates no. 1078.
. Id. at Bates no. 1164.
. Trial Transcript March 5, 2013, p. 74, line 13.
. Id. at p. 74, line 1 — p. 75, line 2.
. See id. at pp. 103-04.
. Id. at p. 112
. See id. at pp. 103-113.
. See id.
. See Plaintiff's Exhibit 22, Bates no. 1164.
. Defendant’s Exhibit 34.
. Plaintiff’s Exhibit 26.
. See e.g., Plaintiff's Exhibit 22, Bates no. 1078/1164.
. Plaintiff's Exhibit 28.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2010, atpp. 61-62.
. Trial Transcript March 5, 2013, at p. 121, lines 9-13.
. Id. atp. 83, line 15.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2010, at p. 63, line 12.
. Id. atpp. 178-81.
. Id. at p. 183, lines 2-13; p. 121, lines 9-10.
. Id. at p. 120, lines 2-12.
. Id. atp. 119, lines 18-23.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2010, at pp. 69-71; Plaintiff's Exhibit 70.
. Id. atp. 188, lines 3-6.
. Plaintiff’s Exhibits 69-71.
. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). See also In re Goldschein, 241 B.R. 370, 377-78 (Bankr.Md. 1999).
. Plaintiff's Exh. 22, at 560, 1163.
. See generally Cardiello v. Arbogast (In re Arbogast), 466 B.R. 287, 300-01 (Bankr.W.D.Pa. 2012) (court found fraudulent conveyance where debtor caused wages to be direct deposited into account maintained with wife as tenants by the entireties).
. Section 548 limits the avoidance of a fraudulent transfer to those transfers occurring within two years of the petition date.
. Where a trustee asserts claims under state law pursuant to Section 544(b), the state law statute of limitations will apply. E.g., In re Simpson, 334 B.R. 298, 304 (Bankr.D.Mass. 2005). In Maryland, the statute of limitations for fraudulent conveyance is set forth in Md. Code Ann., Cts. & Jud. Proc. § 5-101 which provides: "A civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.”
.The Petition Date is ordinarily the proper date for application of the state law statute of limitations. The trustee is required to file an action for avoidance within two years of appointment pursuant to Section 546(a), however, even if the trustee does not initiate the adversary proceeding seeking avoidance of transfers until a date between the petition date and the two year deadline applicable by Section 546(a), transfers made within three years of the petition date are within the statute of limitations. E.g., In re Dry Wall Supply, Inc., 111 B.R. 933, 936 (D.Colo. 1990).
However, see infra fn. 55, Airpack had initiated a fraudulent conveyance action against Debtor a month prior to the Petition Date and that earlier date is the starting point of the limitations period.
. As recognized in In re Bernard L. Madoff Investment Securities LLC, 445 B.R. 206 (Bankr.S.D.N.Y. 2011), applying a similar New York discovery rule, a trustee proceeding under Section 544 can take advantage of the discovery rule if the fraud was "(1) not discovered, and could not have been discovered with reasonable diligence, by at least one unsecured creditor; or (2) was only discovered, and could have only been discovered with reasonable diligence, by at least one unsecured creditor within two years of the Filing Date.” Id. at 232.
. A trustee gains only what right an unsecured creditor would have on the date of petition. Because the court finds that the statute of limitations had run as to any transfer which occurred more than three years prior to the filing of the state court action (August 2, 2010), Plaintiff acquires no greater right to maintain an avoidance for transfers beyond the period of time. Cardiello v. Arbogast (In re Arbogast), 466 B.R. 287, 300-01 (Bankr.W.D.Pa. 2012). See also Bergquist v. Vista Development, Inc. (In re Quality Pontiac Buick GMC Truck, Inc.), 222 B.R. 865, 869 (Bankr.D.Minn. 1998); Bay State Milling Co. v. Martin (In re Martin), 142 B.R. 260 (Bankr.N.D.Ill. 1992).
.The court infra has held that the transfer of property to S.C., LLC which occurred in 2008 and from S.C., LLC to Linda McLean did not constitute an avoidable transfer so it is not necessary to determine the applicable statute of limitations date.
.Plaintiff produced an exhibit which he has identified as MacPack LLC’s Supplemental Answers to Interrogatories from the Judgment Case. Plaintiffs Exhibit 14. That document provides that Linda McLean provided information relevant to the answers (Supplemental Answer No. 1), that Michael McLean became a consultant to MacPack, LLC at the request of Linda McLean (Supplemental Answer No. 7) and further, though unsigned for reasons unknown to the court, the prepared signature line identifies Linda McLean as the majority owner of MacPack, LLC.
On cross examination at trial, counsel for Debtor provided Ms. Zenobia with a copy of a deposition transcript from March 20, 2006 during which deposition she testified as the corporate designee for MacPack, LLC in the Judgment Case. Those excerpts revealed a pattern of questions and answers between Zenobia and Airpack's counsel wherein Zeno-bia referenced the ownership by Linda McLean and that Linda McLean had hired her. Trial Transcript March 5, 2013, at pp. 106-109.
. Trial Transcript March 7, 2013, at p. 142, line 23 — p. 143, line 4 ("[The allegation] was made during the Airpack case sometime in 2006, but it was not believed by Airpack at the time because obviously Michael McLean was running the company.”)
. The Fraudulent Conveyance Action was filed by Airpack in state court on August 2, 2010. Seefn. 55.
. Section 15-207 of the Commercial Law Article of the Maryland Annotated Code provides: “Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud present or future creditors, is fraudulent as to both present and future creditors.”
. This Section of the Maryland Code provides: "Every conveyance made and every obligation incurred by a person who is or will be rendered insolvent by it is fraudulent as to creditors without regard to his actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.” Md. Code Ann. Com. Law § 15-204.
. Lacey v. Van Royen, 259 Md. 80, 93-94, 267 A.2d 91, 98 (1970) (discussing Section 4 of Article 39B of the Annotated Code of Maryland, now codified in Md.Code Ann. Com. Law § 15-204).
. The court previously ruled in the Order granting partial summary judgment that as to Count I (Section 548), the statute of limitations would bar recovery of any avoidable transfers occurring prior to two years prior to the Petition Date. See supra fn. 51 and accompanying text.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2013, at pp. 61-62.
. See supra fn. 41-44 and accompanying text.
. Order entered September 26, 2012, at p. 4.
Reference
- Full Case Name
- In re Michael E. McLEAN, Debtor. Sean C. Logan, Trustee v. Michael E. McLean
- Cited By
- 1 case
- Status
- Published