Free Motion for Partial Summary Judgment - 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] Steven D. Nemecek (#015219) [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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MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COUNT III)

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Plaintiff/Trustee Diane Mann moves for partial summary judgment on Count III of her Amended Complaint. Debtor transferred its most valuable, multi-million-dollar division to Defendant Michael Makings' company in exchange for the release of Debtor's $2.5 million promissory note to Makings. Makings was Debtor's CEO and a director, yet he was also the sole owner of the transferee, ICG Group, Inc., which he created for the sole purpose of the transfer. Makings was in the process of resigning as CEO and director of Debtor at the time. In other words, on his way out the door, Makings arranged to receive payment in full of his $2.5 million note while all other unsecured creditors were left with virtually nothing when Debtor filed its bankruptcy petition slightly more than three months later. The Trustee is entitled to recover this preferential transfer for the Estate. I. F ACTUAL SUMMARY. This Motion concerns the transfer of a valuable business known as ICG. ICG provides consulting services to large corporations to help them integrate their financial and accounting systems. (Pl's Stmnt. of Facts ("PSOF") ¶ 1.) The ICG business was founded in approximately 1990. Defendant Michael Makings ("Makings") was one of the two co-founders. ICG was owned by Image Consulting Group, Inc., later changed to ICG Consulting, Inc. At all times prior to the year 2000, Makings was ICG Consulting, Inc.'s 50% shareholder, one of its two directors, and its president. (PSOF ¶ 2.) On January 1, 2000, Debtor purchased the ICG business from ICG Consulting, Inc. for $10 million. Debtor paid $5 million in cash (including $2.5 million to Makings and $2.5 million to his partner) and delivered $5 million worth of promissory notes, including the $2.5 million Promissory

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Note to ICG Consulting, Inc. that is the subject of this claim ("the Note"), which it assigned to Makings. (PSOF ¶ 3.) After that purchase, Debtor hired Makings as an employee with a starting annual salary of $360,000. Makings also became a shareholder of Debtor. Makings continued to operate the ICG business, integrated the business into a division of Debtor, and did sales and marketing for Debtor on other accounts unrelated to ICG. In October 2000, Debtor made Makings its chief operating officer, and Makings became heavily involved in Debtor's operations. On or before February 27, 2001, Debtor officially made Makings its CEO and a director. (Though as early as February 15, 2001, Makings executed documents indicating he was the CEO and a director of Debtor.) (PSOF ¶ 4.) In January 2001, Makings accelerated the entire balance owed on the Note, $2.5 million plus interest, due to Debtor's default (PSOF ¶ 5). In early March 2001, Makings began planning a re-acquisition of ICG and began negotiating with Debtor for the re-acquisition of ICG. On March 16, 2001, Makings incorporated a new entity: Defendant ICG Group, Inc. Makings created ICG Group, Inc. for the sole purpose of re-acquiring and operating the ICG business. At all times Makings has been ICG Group Inc.'s sole shareholder and sole director. (PSOF ¶ 6.) On March 20, 2001, Makings formally resigned as the chief executive officer and a director of Debtor. On March 29, 2001, Debtor's board of directors accepted Makings' resignation as a director, which it characterized as effective on March 22, 2001. (PSOF ¶ 7.) By Asset Purchase Agreement dated and signed on March 23, 2001--a week before Debtor's board accepted Makings' resignation--Debtor "sold" its ICG division to ICG Group, Inc. According

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to the Agreement, the "purchase price" for that transfer consisted almost entirely of ICG Group, Inc.'s forgiveness of the $2.5 million unsecured Note that Debtor owed to Makings, which he had allegedly assigned to ICG Group, Inc. just for this purpose. According to Makings' expert, Debtor owed Makings $2,748,526 on the Note when the Agreement was executed. Makings admits that he "traded" the Note, in part, for his former business, ICG. (PSOF ¶ 8.) According to Makings' expert, the fair market value of the ICG business at the time of the transfer was $2,510,000 (PSOF ¶ 9). Pursuant to the Asset Purchase Agreement, the ICG assets were transferred to ICG Group, Inc. on March 30, 2001 (PSOF ¶ 10). ICG Group, Inc. still owns and operates the ICG business, under the name ICG Consulting (PSOF ¶ 11). II. P ROCEDURAL B ACKGROUND. On July 11, 2001, Debtor filed a Chapter 7 Petition in the Bankruptcy Court, 01-9020-PHXJMM. Diane Mann was appointed as Trustee. In 2002, the Trustee initiated this adversary proceeding against Defendants, Adv. No. 021202. In Count III of her Complaint, the Trustee sought recovery of the value of the transferred ICG assets as a preferential transfer under 11 U.S.C. § 547(b) and § 550(a). In 2002, the case was withdrawn to this Court, CIV-02-2325-PHX-RCB. In 2003, the Court consolidated this case into a related case, CIV-02-2099-PHX-RCB.

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III.

SUMMARY JUDGMENT STANDARDS. Summary judgment is warranted when there is no genuine issue as to any material fact and the

party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). [T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. The requirement is that there be no genuine issue of material fact. A "material fact" is any factual dispute that might affect the outcome of the case under the governing substantive law. A factual dispute is "genuine" if the evidence is such that a reasonable jury could resolve the dispute in favor of the nonmoving party. Valdiviezo v. Phelps Dodge Hidalgo Smelter, Inc., 995 F. Supp. 1060, 1063 (D. Ariz. 1997) (Broomfield, J.), citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). Summary judgment "shall be entered" if the nonmoving party fails to "set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). The nonmoving party does not

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meet this burden through "mere allegations o r denials in the pleadings or papers" or "evidence [that] is merely colorable or is not significantly probative." Valdiviezo, 995 F. Supp. at 1063, citing Anderson, 477 U.S. at 249-50 (1986). IV. DEBTOR'S "SALE" OF ICG WAS A P REFERENTIAL TRANSFER. Under § 547(b) of the Bankruptcy Code, a trustee may avoid certain transfers made by the debtor within one year before the bankruptcy petition was filed. A transfer by the debtor constitutes an avoidable preference if six elements are shown: (1) a transfer of an interest of the debtor in property; (2) to or for the benefit of a creditor; (3) for or on account of an antecedent debt; (4) made

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while the debtor was insolvent; (5) made to an insider between 90 days and one year before the debtor filed its petition; and (6) that enables the creditor to receive more than such creditor would

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receive in a Chapter 7 liquidation of the estate. 11 U.S.C. § 547(b); In re Kemp Pac. Fisheries, Inc., 16 F.3d 313, 315 & n.1 (9th Cir. 1994). 1. Transfer of interest of debtor in property.

The ICG business assets transferred pursuant to the Asset Purchase Agreement were owned by Debtor (PSOF, Ex. 2, Ex. 372 (3/23/01 APA) § 1.1). This element will not be in dispute. 2. Transfer to or for benefit of creditor.

Makings was a creditor of Debtor, and the transfer of the ICG business was "for the benefit of" Makings. Debtor owed Makings over $2.7 million on the Note (PSOF ¶ 8). Makings assigned the Note to ICG Group, Inc. (PSOF ¶ 8), which was and is solely owned by Makings (PSOF ¶ 6). "Asset transfers made to third parties in exchange for payment of a debtor's antecedent debts are transfers `to or for the benefit of a creditor.'" In re Food Catering & Housing, Inc., 971 F.2d 396, 398 (9th Cir. 1992). When a transfer is made to a creditor's assignee, the transfer is made "for the benefit of" the creditor. In re Cardon Realty Corp., 146 B.R. 72, 78 (Bankr. W.D.N.Y. 1992). Makings was the Note payee at all times, and had recently accelerated the debt in full and threatened legal action against Debtor for non-payment (PSOF ¶ 5). The transfer thus benefited Makings both directly and indirectly. 3. Transfer for or on account of antecedent debt.

A "debt" is defined as "liability on a claim," and a "claim" is defined as the "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. §§ 101(5)(A), (12).

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"The Bankruptcy Code defines the term `claim,' and coextensively the term `debt,' in the broadest possible manner to include all legal obligations of the debtor, no matter how remote or contingent." In re Powerline Oil Co., 126 B.R. 790, 792 (Bankr. 9th Cir. 1991); accord In re Bullion Reserve of N. Am., 836 F.2d 1214, 1218-19 (9th Cir. 1988); In re United Energy Corp., 944 F.2d 589, 595 (9th Cir. 1991); see also 11 U.S.C.A. § 101, 1978 note ( coextensive terms "debt" and "claim" have the "broadest possible definition", include "all legal obligations of the debtor, no matter how remote or contingent", and permit "the broadest possible relief in the bankruptcy court"). The broad definition of "claim" includes the "contingent" or "unmatured" right to payment. 11 U.S.C. § 101(5)(A). A creditor obtains a right to payment at the moment the underlying instrument is executed, not when demand for payment is later made. In re Bullion Reserve of N. Am., 836 F.2d 1214, 1218 (9th Cir. 1988). The determining factor on whether an obligation is an antecedent debt is the date of the contract, not when the debtor becomes bound to pay. In re Southmark Corp., 88 F.3d 311, 318 (5th Cir. 1996). This element cannot be in dispute. The transfer of the ICG business was "for or on account of an antecedent debt." The antecedent debt was the $2.5 million Note owed by Debtor to Makings. The Note was dated January 1, 2000 (PSOF, Ex. 1, Ex. 359) and was clearly a pre-existing, antecedent debt relative to the transfer on March 30, 2001 (PSOF ¶ 10). The Note was in default; Debtor owed Makings over $2.7 million (PSOF ¶¶ 5, 8). Makings assigned the Note to ICG Group, Inc., and ICG Group, Inc.'s release of the Note was almost the entirety of the ICG "purchase price" (PSOF ¶ 8). 4. Transfer while debtor insolvent.

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Under the Bankruptcy Code, a debtor is insolvent when its "financial condition [is] such that the sum of [the debtor's] debts is greater than all of [the debtor's] property, at a fair valuation." 11 U.S.C. §101(32)(A). Courts use a "balance sheet test" to determine whether a debtor's debts exceed its assets. In re Koubourlis, 869 F.2d 1319, 1321 (9th Cir. 1989). A debtor is insolvent if its debts exceed the fair value of its assets at the time of the transaction. In re Sierra Steel, Inc., 96 B.R. 275, 277 (9th Cir. B.A.P. 1989); In re Food & Fibre Protection, Ltd., 168 B.R. 408, 417 (Bankr. D. Ariz. 1994). According to Makings' own expert, Debtor's liabilities exceeded its assets by $2,237,000 at the time of the transfer (PSOF ¶ 12). The Trustee will accept, for purposes of this Motion only, that Making's expert's valuation is correct. Debtor was therefore insolvent by Makings' own admissions. 5. Transfer to insider between 90 days and one year before petition.

The Asset Purchase Agreement states that the ICG assets were to transfer on March 30, 2001 (PSOF ¶ 10), which was far less than one year--and just barely more than 90 days--before Debtor filed its bankruptcy petition on July 11, 2001. "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). In addition, the Bankruptcy Code provides a non-exhaustive list of per se insiders. Id.; 11 U.S.C. § 101(31). Makings was the CEO, a director, and a shareholder of Debtor (until just one day before the execution of the Asset Purchase Agreement pursuant to which the ICG assets were transferred)

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(PSOF ¶¶ 4, 7). Makings was thus an insider because he 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 "commanded preferential treatment" from Debtor. Makings himself was also a per se insider, as an officer and director of Debtor. 11 U.S.C. § 101(31)(b)(i), (ii). ICG Group, Inc. was also an insider (though not a per se insider). Just two weeks before the Asset Purchase Agreement was executed, Makings formed ICG Group, Inc. for the sole purpose of re-acquiring the ICG business (PSOF ¶ 6). At all times, Makings has been the sole shareholder and sole director of ICG Group, Inc. (id.). Makings was the person who negotiated the Asset Purchase Agreement on behalf of ICG Group, Inc. ( id.). As the CEO, a director, and a shareholder of Debtor, Makings was certainly not negotiating with Debtor at arm's length. The fact that Makings was negotiating not on his own personal behalf, but on behalf of his solely-owned corporation, does not change the fact that the negotiations were not at arm's length. There can be no dispute that both Makings and ICG Group, Inc. were insiders. 6. Transfer enables creditor to receive more than in Chapter 7 liquidation.

In a Chapter 7 liquidation, the Estate would have a maximum of $9,634,123 million to distribute ($134,123 in current assets (PSOF ¶ 13) plus $9.5 million, the maximum future recovery in GTCR litigation1). However, there would be $12,189,088 in claims ($9,440,562 in filed claims 2 plus $2,748,526 on the Note (PSOF ¶ 8)) and hundreds of thousands of dollars in administrative expenses. Thus, the unsecured creditors would receive a maximum of 79 cents on the dollar.

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See Trustee's Motion for Order Authorizing Trustee to Employ Beus Gilbert PLLC As Special Co-Counsel and Approving Legal Representation Agreement, Ex. A (Legal Representation Agreement) ¶ 2(e) (filed August 15, 2002) (copy attached as Exhibit 1 to Judge's copy of Motion, pursuant to Local Rule 7.1(d)(4)). 2 See Claims Register (copy attached as Exhibit 2 to Judge's copy of Motion, pursuant to Local Rule 7.1(d)(4)).

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Makings would therefore receive a maximum of $2,171,336, far less than the $2,510,000 his expert says he received through the ICG transfer (PSOF ¶ 9). He would most likely receive far less--these computations reflect his maximum recovery, assuming full victory in the GTCR litigation and no administrative expenses. Makings has repeatedly stated in his own pleadings that the Trustee and other plaintiffs in the related GTCR litigation are pursuing meritless claims. Thus, Makings himself seems to think his recovery in a Chapter 7 proceeding would be considerably less than 100% or even 79%, and Makings' own opinion should be considered for purposes of this Motion as well. V. THE TRUSTEE IS ENTITLED TO RECOVER $2.51 MILLION FROM MAKINGS AND ICG G ROUP, INC., J OINTLY AND SEVERALLY. Under § 550(a)(1) of the Bankruptcy Code, when a transfer is avoided under section 547, the trustee may recover, for the benefit of the estate, the value of the property transferred, from the

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initial transferee of such transfer or the entity for whose benefit such transfer was made. A. The Value of ICG Was $2.51 Million.

Under § 550(a)(1), the trustee may recover the value of the property transferred. According to Makings' own expert, the fair market value of the ICG business at the time of the transfer was

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$2,510,000 (PSOF ¶ 9). B. ICG Group, Inc. and Makings Are Jointly and Severally Liable.

Under § 550(a)(1), the trustee may recover from any of several parties, including "the initial transferee" or "the entity for whose benefit such transfer was made." Liability under § 550(a)(1) is

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joint and several. In re Carolyn's Kitchen, Inc., 209 B.R. 204, 209-10 (Bankr. N.D. Tex. 1997). The transfer of ICG was made to ICG Group, Inc. (PSOF ¶ 8). ICG Group, Inc. is thus clearly the initial transferee and liable under § 550(a)(1).
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Makings is also liable as the person "for whose benefit such transfer was made." The transfer was made for Makings' benefit: it was a payoff of the Note owed by Debtor to Makings since early 2000 (PSOF ¶ 8), and Makings is the sole shareholder of ICG Group, Inc. (PSOF ¶ 6). The sole shareholder of a transferee corporation is liable under § 550(a)(1) as a person "for whose benefit such transfer was made." In re National Safe Northeast, Inc., 76 B.R. 896, 904 (Bankr. D. Conn. 1987). VI. CONCLUSION. The Trustee moves for partial summary judgment on Count III of her Amended Complaint, avoiding Debtor's transfer of the ICG business to ICG Group, Inc. and ordering ICG Group, Inc. and Makings, jointly and severally, to pay the Estate $2.51 million. DATED February 2, 2006 STEVE BROWN & ASSOCIATES, LLC

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

ORIGINAL of the foregoing filed Via ECF this 2 nd day of February, 2006.

ONE COPY *hand-delivered this 2 nd day of February, 2006.

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Clerk of the Court *The Honorable Robert C. Broomfield U.S. District Court, District of Arizona 401 W. Washington Phoenix, Arizona 85003 Copies mailed this 2 nd day of February, 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/ Gina Ortega Gina Ortega

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