Free Reply to Response to Motion - District Court of Arizona - Arizona

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STEVE BROWN & ASSOCIATES, LLC
1414 EAST INDIAN SCHOOL ROAD, SUITE 200 PHOENIX, A RIZONA 85014 (602) 264-9224

Steven J. Brown (#010792) [email protected] Attorneys for Trustee

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA DIANE MANN, Trustee; et al., CIV-02-2099-PHX-RCB Plaintiffs, v. GCTR GOLDER RAUNER, L.L.C., a Delaware limited liability company; et al., Defendants. In re: LEAPSOURCE, INC., Debtor. DIANE MANN, Trustee, Plaintiff, v. ICG GROUP, INC., an Arizona corporation; MICHAEL MAKINGS and MARCIA MAKINGS, husband and wife, Defendants. consolidated with CIV-02-2325-PHX-RCB BK-01-9020-PHX-JMM Adv. No. 02-1202

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REPLY IN SUPPORT OF MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COUNT III)

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I.

MAKINGS WAS AN INSIDER . Defendants' first argument is that Mr. Makings was not an insider. (Defendants do not

contest anywhere in their Response that ICG Group, Inc. was an insider). Makings in essence is arguing that the CEO of a company, armed with inside information that

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the company is failing and on its way to bankruptcy, can negotiate for payment of his own debt, then resign, then days later receive the transfer, and thereby avoid insider status. Such a position turns t he policies of §547(b)(4)(B) on their head, and has been rejected many times. (See, generally,

Determining Insider Status Under Bankruptcy Code Section 547(B)(4)(B): When "I Resign" May
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Not Be Enough To Terminate Insider Status, 41 UCLA L. Rev. Aug. 1 994)("If the instigation of the transaction at issue resulted from opportunities available because of insider status, a simple resignation from the insider position cannot insulate that party from future attack." At P. 1576). In In re EECO, Inc., 138 B.R. 260 (Bankr. C.D. Cal. 1992), the bankruptcy court looked at analogous 9 th Circuit law and aptly stated the logic belying Mr. Makings' argument: For example, if an insider put together a transfer for himself, formally resigned, and then a minute later received the monetary benefits from the deal he had made while an insider, it would be clear that the transfer would be avoidable, even without a showing of fraud or intent to delay or hinder required by 11 U.S.C. § 548. The insider's formal resignation did not change the nature of the transfer in any way. Further, to hold that one could gain non-insider status in such a manner would thwart § 547's goal of recovering assets from insiders. [FN2] FN2. Congress established the one-year reach-back provision in order to "ameliorate the insider's potential leverage in dealing with the debtor shortly before bankruptcy." Jahn v. Economy Car Leasing (In re Henderson ) 96 B.R. 820, 825 (Bankr.E.D.Pa.1989) citing Nimmer, Security Interests in Bankruptcy: An Overview of Section 547 of the Code, 17 House L.Rev. 289, 293 n. 10 (1980).
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138 B.R. at 264 (emphasis added). Accord, In re Imperial Corp. of America, 1992 WL 427752 at p. 13, (S. D. Cal. 1992) ("[I]f the transferee is an insider on the date the transfer is arranged, the one-year reachback period applies); In re F&S Cent. Mfg. Corp., 53 B.R. 842, 849 (Bankr. N.Y. 1985) ("Section 547(b)(4) was not intended to allow those who are insiders to escape the insider provisions by delaying instead the date the debtor transfers its property. A creditor who is an insider at the time the transfer of the debtor's property is arranged is an insider at the time of the transfer. In re Vaniman International, Inc., 22 B.R. at 189; Hostellerie d'Argentevil, Inc., 42 B.R. 292, 293 (S.D.Fla.1984).") There is no genuine issue of disputed fact regarding Making's tenure with the company: He

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admits he was the CEO and a director right up until just a few days before the document was signed that effectuated the transfer of ICG's assets t o him. It is those undisputed facts on which the Trustee relies for this motion and for Makings' insider status per se under §101(31) and §547 of the Code. In her Motion, the Trustee also cited the following precedent of the Ninth Circuit Bankruptcy

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Appellate Panel: "An insider is one who has a sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arm's length with the debtor," including an individual or entity that "commands preferential treatment by the debtor" because of affinity or consanguinity. In re Friedman, 126 B.R. 63, 69-70 (9th Cir. B.A.P. 1991). Defendants do not address this precedent, and instead cite one inapposite case from Mississippi, Coors of N. Miss., Inc. v. Bank of Longview (In re Coors of N. Miss., Inc.), 66 B.R. 845 (Bankr. N.D. Miss. 1986). The inapplicability of this case could not be more obvious. The debtor, Coors of North Mississippi, Inc., was formed by Charles Moak as a Coors beer franchise. Id. at 850-3Document 374

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51. In April 1982, Moak sold his stock in the company to the owners of a neighboring franchise. Id. at 851. After the sale, Moak was no longer a shareholder, director, or officer. Id. at 863-64. The company later went bankrupt and brought a preference action against Moak. The bankruptcy court held that Moak was not an insider when he received payments in September and October of 1982 totaling $350,000. Id. Moak's receipt of money half a year after selling his company is hardly like the case at bar, where Makings' negotiated for this transfer while he was still the CEO of Leapsource, then resigned his job, and then received a $2.51 million business a few days after resigning as Debtor's CEO and

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director, while all other creditors were left high and dry. He admits he created ICG on March 16, while CEO, just two weeks before the transfer, for the sole purpose of receiving the transfer. See PSOF ¶ 6. He admits he went to a board meeting on March 20, still the CEO and a director of Leapsource, to finish negotiating the transfer knowing the company was heading into bankruptcy

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"Obviously that's when everyone knew it was over" and then resigned after that board meeting (PSOF ¶ 7 at Exhibit 2, Makings Deposition p. 272). Makings was an officer and director at the

time the transfer was arranged, and had a "sufficiently close relationship" with Debtor to make his conduct "subject to closer scrutiny than those dealing at arm's length with the debtor" and

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"commanded preferential treatment" from Debtor. He was an insider. II. ANY "NEW VALUE" WAS WORTH FAR LESS THAN THE TRANSFERRED ASSETS. Defendants probably do state a genuine issue of fact for trial as to the specific amount of "new value" they contemporaneously exchanged, if any, when they received the preferential payment.

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However, two things are clear as a matter of law, thus allowing at least a partial summary judgment:

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First, even if everything Defendants say is taken as true, the new value paid was at most $1,290,474. Since Making's own expert concludes that the assets he and ICG received were worth $2.51 million, there is still a preferential payment of $1,219,526 under the best case scenario for Makings and ICG. Partial summary judgment should be entered for at least that amount. Second, at least one portion of the "new value" claimed cannot constitute new value as a matter of statutory bankruptcy law. Defendants correctly state the law (page 9 of their Response) that payment of a debtor's debts to a third party can qualify as "new value" because it benefits the bankruptcy estate by reducing its debt accordingly. But that new value must benefit the estate. Thus Defendants cannot as a matter of law receive credit for new value of $636,262 in assumed building lease payments, when the debtor would never have to pay that amount. Debtor's liability on the building lease is actually capped at one third of that amount by the Bankruptcy Code. Defendants come up with that amount from their expert's report (CSOF ¶8), who included 36 months of building lease payments as part of the alleged new value paid by Defendants for the ICG assets. The Bankruptcy Code, however, caps the bankruptcy estate's liability on rejected leases at one year's worth of payments. See, 11 U.S.C. §502(b)(6). Thus as a matter of law, only one third of that amount, $212,087, can qualify as new value, because the bankruptcy estate would have been obligated for only one third of that amount. The Estate received no benefit from Defendants' payments of the rest of the lease. When that legal reduction is made, the maximum amount of new value paid by Defendants is $866,299. When subtracted from the $2.51 million value of assets actually received by the

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Defendants, this Court can still enter partial summary judgment for $1,643,701, with the trial to be limited to the amount of actual new value paid by Defendants. III. THE VALUE OF ICG WAS $2.51 MILLION. Defendants dispute the value of the ICG assets they received, even though that is exactly the value conclusion of their own expert witness. To get there, Defendants interchange two distinct legal issues and thus misstate the law. Defendants argue that the value of the ICG business must be determined according to its liquidation value because Leapsource was in such dire straits at the time of the transfer. But they cite several cases concerning a completely different element of the preference action; the insolvency element at § 547(b)(3). That element is not disputed by Defendants: Leapsource, as opposed to the ICG division, was indisputably insolvent at the time of the transfer. Defendants' caselaw only concerns a debtor's value for purposes of determining insolvency of the debtor under § 547(b)(3). It does not concern valuation of transferred assets under § 550(a)(1). Under § 550(a), the trustee may recover the value of the property transferred. Defendants have cited no cases regarding the method of valuation under this section. The value of assets under § 550(a) is the fair market value. Moglia v. Universal Automotive, Inc. (In re First Nat'l Parts Exchange, Inc.), 2000 WL 988177, *9 (N.D. Ill. 2000) ("While the statute does not define `value,' `[c]ourts generally agree that the market value of the property at the time of transfer, less the consideration received, is the proper measure of recovery under § 550.'"). Defendants attempt to create a factual dispute by trying to run away from their own expert's fair market valuation of the ICG business. The expert, however, considers all four of the standard

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valuation methods, like every business valuation expert does, gives each one the proper weight under the particular circumstances, and then comes up with an overall fair market value for the ICG assets on the date they were transferred. See, FTI Report (section entitled "FAIR MARKET VALUE OF ICG"). Plaintiff's Exhibit 3, pages 29-40.1 Their own expert considers the "liquidation value" that Defendants try to argue here (also known as the "Asset Accumulation Method") and says: "I accorded minor weight to the Asset Accumulation (or Liquidation) Method in my concluded value estimate for ICG...." Defendants cannot cherry pick this reliance on the liquidation value

determined by their own Expert and then, in the same breath, ignore that Expert's conclusion that liquidation value is NOT the proper valuation of these assets and was only a small factor in the Expert's overall fair market value assessment. This is one of those creative, moot-court arguments that lawyers come up with in an academic discussion over drinks. But the Court just needs to step back and overlay the argument with some basic common sense: Why would the defendants have paid $1.2 million+ in actual, out of pocket new value as they claim they did, plus forgive a $2.7mm promissory note debt, if all they were really buying was $250,000 in desks and chairs and computers and name branding? How can Defendants claim they only bought liquidated hard assets, not a going concern, when Makings admits he has continued to operate that same business eve r since March 2001 (5 years)? Defendants' arguments about their expert's liquidation valuation are irrelevant as a matter of law, because the proper value under § 550(a) is fair market value. According to Defendants' own expert, the fair market value of the ICG business transferred to the Defendants was $2,510,000
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Because the Defendants have quoted from parts of the expert report not included in Plaintiff's original Statement of Facts, that Exhibit 3 has been refiled to

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(PSOF ¶ 9). This valuation is not a disputed fact. Since the Trustee is willing to accept that valuation for purposes of this claim, there is no genuine issue of material fact to be tried on t he value of the assets transferred. IV. CONCLUSION. The Court should enter an order avoiding Debtor's transfer of the ICG business to ICG Group, Inc. and ordering ICG Group, Inc. and Mr. and Mrs. Makings, jointly and severally, to pay the Estate $2.51 million. Alternatively, the Court can enter partial summary judgment in the amount of

$1,643,701, and limit the trial to whether Defendants are entitled to any portion of the "new value" defense they claim, or whether the preferential transfer should be deemed the entire $2.51 million. DATED April 20, 2006 STEVE BROWN & ASSOCIATES, LLC

By /s/ Steven J. Brown #010792 Steven J. Brown 1414 East Indian School Road, Suite 200 Phoenix, Arizona 85014 Attorneys for Trustee

ORIGINAL of the foregoing filed Via ECF this 20th day of April, 2006. ONE COPY of the foregoing will be hand-delivered the 21st day of April, 2006, to: The Honorable Robert C. Broomfield U.S. District Court, District of Arizona 401 W. Washington Phoenix, Arizona 85003

include the entire excerpt.

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COPIES of the foregoing mailed the 20th day of April, 2006 to: Merrick B. Firestone Veronica L. Manolio RONAN & FIRESTONE, PLC 9300 East Raintree Drive, Suite 120 Scottsdale, AZ 85260 Attorney for Defendants ICG Group, Inc, Michael Makings, and Marcia Makings Kevin A. Russell David S. Foster Patrick E. Gibbs LATHAM & WATKINS, LLP Sears Tower, Suite 5800 Chicago, IL 60606 Attorneys for GCTR Golder Rauner, L.L.C. et al Don P. Martin Edward A. Salanga QUARLES & BRADY STREICH LANG, LLP One Renaissance Square Two North Central Phoenix, AZ 85004-2391 Attorneys for GCTR Golder Rauner, L.L.C. et al Richard A. Halloran Jon Weiss LEWIS & ROCA, LLP 40 North Central Phoenix, AZ 85004-4429 Attorneys for Defendants David Eaton and AEG Partners LLC

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John Bouma James R. Condo Patricia Lee Refo SNELL & WILMER LLP One Arizona Center 400 East Van Buren Phoenix, AZ 85004 Attorneys for Defendant Kirkland & Ellis Leo L. Beus Scot C. Stirling Steven E. Weinberger Kevin Breger BEUS GILBERT PLLC 4800 North Scottsdale Road Suite 6000 Scottsdale, AZ 85251 Attorneys for Individual Plaintiffs and Trustee

/s/ Ann Schultz

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