Greaves v. Office of the Delaware Attorney General (In Re Two Springs Membership Club)

Citations: 408 B.R. 475; 2009 Bankr. LEXIS 1968; 2009 WL 2192291Docket: 19-30001

Court: United States Bankruptcy Court, N.D. Ohio; May 5, 2009; Us Bankruptcy; United States Bankruptcy Court

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In the case of In re Two Springs Membership Club, Elaine B. Greaves, the Plaintiff, filed against the Office of the Delaware Attorney General and others in the United States Bankruptcy Court, N.D. Ohio. The excerpt details the United States' Motion to Alter or Amend a prior court decision under Bankruptcy Rule 9023, which aligns with Federal Rule of Civil Procedure 59 regarding new trials and amending judgments. 

The Government's motion, filed on April 17, 2009, requests amendments to the court's Memorandum Opinion and Order issued on April 9, 2009, following a trial on February 23, 2009. The Government claims the motion addresses perceived legal errors in the previous decision but does not waive its right to appeal on other grounds. 

During the May 1, 2009 hearing, the court found that the Government's arguments were not based on the trial record and introduced new legal arguments not previously raised. The court rejected the Government's rationale for filing a Rule 59 Motion, stating that they had ample opportunity to present their claims prior to trial but failed to do so in a timely manner. This included a late motion for summary judgment based on judicial estoppel, which the court granted in part but ultimately addressed in a separate order. The Government's arguments regarding judicial estoppel were contested by Coast, which pointed out differences in the underlying facts and legal issues of the prior ruling. The court declined to amend its previous decision based on these considerations.

Coast contended that the Orange County Action, initiated by certain Novelli Group entities, constituted a breach of contract. The court ruled in favor of Coast and awarded attorney fees to Coast, citing the plaintiffs' unclean hands. Consequently, Coast argued that the facts from this action did not support the IRS's alter ego claim. The Judicial Estoppel Order clarified that the court's focus was not on the applicability of the Orange County Court's alter ego finding but rather on whether Coast was judicially estopped from asserting that Travel America and Revcon [Nevada] were not alter egos. The court emphasized that while Coast was estopped from presenting alternative interpretations of the alter ego factors, the Government still bore the burden of proof on those factors. The court rejected the Government's argument that its failure to establish all elements of alter ego was justified by a misunderstanding of the ruling. Additionally, the court found that the Government did not demonstrate any injustice or inequity necessitating a finding of alter ego. Despite the Government's disagreement with the court's decision, it failed to provide valid grounds for altering or amending the judgment, such as clear legal error or newly discovered evidence. The court noted that the Government confused judicial estoppel with res judicata and collateral estoppel, which were not raised during the trial. The court maintained that it should not be subjected to new theories after an unfavorable ruling.

The Government contends that the Court incorrectly determined that Revcon Nevada and Travel America are not alter egos, arguing that Coast is judicially estopped from making contrary claims. Key points include: 

1. Coast holds a general unsecured claim against the Debtor amounting to $3,880,039, representing approximately 99% of the total unsecured claims against the Debtor's estate.
2. The Court’s ruling allowing Coast to receive a distribution from the Debtor violates the policies underlying judicial estoppel, which aims to prevent parties from taking inconsistent positions in court.
3. The Government misunderstands judicial estoppel, asserting that it should prevent parties from benefiting from previous court positions, while the doctrine actually focuses on preventing inconsistent positions.
4. The Government misinterprets case law, notably In re Coleman, which does not support its broad application of judicial estoppel. The doctrine prohibits inconsistent claims but does not prevent a party from benefiting from a ruling when no inconsistent position has been taken.
5. The Court found the Government's evidence insufficient to establish the alter ego relationship, despite the application of judicial estoppel. 
6. The Government's claim that its lien for assessments against Travel America should be deemed uncontested due to Coast's judicial estoppel is rejected, as the argument lacks substantive support.

Overall, the Government failed to demonstrate a prima facie case for alter ego status between Revcon Nevada and Travel America.

The Government lacks a direct lien on the Sale Proceeds because it has no direct lien on the Campground, which belongs to the Debtor. The Court ruled that the Debtor and Revcon Nevada are alter egos, thus the Government's lien for tax assessments against Revcon Nevada applies to the Sale Proceeds. The Government does not dispute this ruling but contests the finding that Travel America and Revcon Nevada are not alter egos; the Government's lien on the Sale Proceeds for Travel America taxes exists only if this alter ego relationship is proven. The Government failed to meet this burden, which is outlined in the Court's Decision. 

The Government's first argument misapplies the doctrine of judicial estoppel, which is intended to prevent parties from manipulating judicial proceedings, rather than allowing one party to evade its burden of proof. Coast did not take a position on the alter ego issue, and its potential benefit from Debtor's estate does not invoke judicial estoppel. 

In its second argument, the Government speculates about a hypothetical scenario where it could have brought a fraudulent transfer action, claiming Coast would be judicially estopped from denying the alter ego status. However, this argument is flawed as it is based on possibilities rather than actual facts presented in court. The Government contends that the fraudulent transfer remedy is still viable despite the Revcon Trustee not pursuing an action under section 544(b) of the Bankruptcy Code. The Court disagrees, noting that the Revcon Trustee had fully settled claims related to the alleged fraudulent transfer of the Campground to the Debtor, including holding $33,000 in escrow to resolve related objections, but did not file an action to avoid the transfer or seek to include the Campground or Sale Proceeds in the Revcon Nevada bankruptcy estate.

On August 23, 2005, the Revcon Trustee submitted a proof of claim in the Debtor's case, asserting an unsecured claim related to the transfer of assets to the debtor. The Revcon Trustee subsequently settled all claims regarding an allegedly fraudulent transfer for $33,000. The Court determined that the Revcon Trustee administered, rather than abandoned, these claims, despite Coast's assertions to the contrary. The Sixth Circuit's decision in *Hatchett* supports that an individual creditor may pursue fraudulent conveyance claims only after the trustee has abandoned such claims. The Government was notified of the Trustee's motion to sell the Campground and did not object to the settlement amount. Consequently, the Government is bound by the Court's order approving the Revcon Trustee's settlement. 

The Government's argument regarding tax assessments and liens in relation to the fraudulent conveyance claim is flawed. If the transfer was deemed fraudulent and avoided, it would retroactively nullify the transfer, making Revcon Nevada the owner of the Campground when Coast filed its Judgment Lien. Thus, Coast's Judgment Lien would have priority over the Government's later filed tax lien. The Government's additional arguments concerning res judicata and collateral estoppel are inapplicable, as they do not meet the necessary criteria, particularly since the prior action did not involve the Government.

The Orange County Action was a contract lawsuit unrelated to tax collection or liability. The facts in this case differ from those in the Orange County Court, undermining the Government's claim that this Court would be compelled by res judicata to find an alter ego relationship. While the Government asserts that this Court must grant preclusive effect to the Orange County judgment, which awarded Coast $3,880,039 in attorney's fees, this Court has already done so. The judgment has not been challenged here, and the principles of res judicata and collateral estoppel do not apply to the current case.

For collateral estoppel to apply, certain elements must be met: a final judgment on the merits, direct litigation of the issue in the prior suit, identical issues in both cases, and the party to be estopped must have been involved in the prior action. The alter ego issue was not directly litigated in the Orange County Action, and despite both cases involving the label "alter ego," their circumstances are significantly different, preventing a finding of collateral estoppel regarding the relationship between Revcon Nevada and Travel America.

Additionally, this Court has emphasized that all defendants must meet their prima facie burden for claims to be considered. The cases cited by the Government relate to res judicata or collateral estoppel and are not relevant to judicial estoppel, which is a distinct doctrine. The Government's third argument, which introduces alleged facts not present in the trial record, claims this Court should have applied California law regarding the alter ego determination. However, the Government previously maintained that federal common law was applicable and only suggested California law through Coast, which later favored Delaware law. The Court found no significant differences between the required elements of proof under either law, both necessitating some form of fraud or injustice for an alter ego finding.

The Government contends that California has a more lenient standard for establishing alter ego and claims to have met this standard. However, it is established that California law requires evidence of some injustice to support an alter ego finding, which the Government's cited cases do not challenge. The Court noted that there was no evidence of fraud or injustice related to the operations of Travel America and Revcon Nevada. The Government's post-trial findings did not specify any injustice connected to the relationship between the two corporations, failing to demonstrate how their separation resulted in injustice. The Government's argument that the inability of creditors to access assets due to the separate corporate structure constituted injustice is unsupported by evidence. Additionally, the Government's assertion that most of Travel America's tax liabilities arose from employees who worked for Revcon Nevada is not substantiated in the record, as it lacks evidence linking the tax liability specifically to the services provided across the Novelli Group entities. The Court found that the Government did not sufficiently prove the required element of injustice necessary for an alter ego finding between Travel America and Revcon Nevada.

The Court would find it grossly inequitable to exempt individual campground properties from liability for employment taxes incurred by headquarters employees whose services benefitted all campgrounds, especially since income from all campgrounds was pooled to cover payroll. The deposition of Raymond Novelli lacks details on employee wages or numbers at either the campground or headquarters, while Marlies Novelli indicated that each campground maintained a separate payroll account with low-salaried hourly workers, but did not provide information regarding headquarters salaries or payroll practices. The Government's assertion of inequity is unsupported by evidence, particularly regarding the allocation of taxes or payroll sources. Although the Government claims that Revcon Nevada's payroll was handled from the All Seasons Resorts main office, evidence shows only that headquarters paid campground employees without clarifying the funding source or allocation of those payments. Marlies Novelli's testimony suggests that a central payroll account was used for both resorts and headquarters, but this was unclear and insufficient to support the Government's argument regarding alter ego liability based on headquarters employees providing services to Revcon Nevada.

Raymond Novelli's testimony indicates that the on-site employees of Revcon and Two Springs were primarily managed by separate corporate entities, with some individual corporations, contradicting the Government's claims. He confirmed that financial records were meticulously maintained, allowing for precise tracking of each corporation's financial status despite the use of a sweep account to manage payroll. The Government's assertion of gross inequity due to payroll sourced from the sweep account is unsupported by the evidence, which shows that debits and credits for each corporation were kept distinct. 

Novelli explained that the establishment of multiple corporations was partly due to bankruptcy requirements, as lenders preferred individual corporations to manage risk. He denied any intention to defraud creditors through this structure, asserting that it was a legitimate means of protecting company assets. The Government's failure to explore Novelli's motivations resulted in an insufficient factual record to support its claims of creditor injustice linked to the separate corporations.

Furthermore, the Government introduced new legal arguments and factual assertions regarding employee wages, tax allocations, and the characterization of the sweep account as a creditor avoidance mechanism, none of which were presented during the trial. The Court found these arguments unmeritorious and declined to amend its previous decision. An order will follow accordingly.

The Court has denied the United States' motion to alter or amend its prior decision from April 9, 2009, as detailed in the accompanying Memorandum Opinion. The Court has not considered documents filed by Coast and the Government in response to the motion, as per its established policies which discourage responses to motions for reconsideration absent direction. It notes that the Government's lien against the Debtor has been satisfied from sale proceeds. The Government's argument that Revcon Nevada and Travel America are alter egos, based on judicial estoppel, was rejected; the Court clarified that this is not a traditional two-party case and found no basis for the Government's claims, particularly since the relevant issues were not previously adjudicated. Additionally, it confirmed that all necessary parties, including the IRS and the U.S. Attorney's Office, received proper notice of the proceedings. Testimony indicated that employees at the Campground likely did not recognize the change in ownership due to payroll practices. The summary also references a discussion on injustice, indicating further analysis is available in the document.