Gordon v. Hackenberry (In re Alpha Protective Services, Inc.)

Citations: 570 B.R. 914; 77 Collier Bankr. Cas. 2d 1171; 2017 Bankr. LEXIS 1110Docket: Case Number: 12-70482-JTL; Adversary Proceeding Number: 14-07032

Court: United States Bankruptcy Court, M.D. Georgia; April 24, 2017; Us Bankruptcy; United States Bankruptcy Court

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A Motion for Full or Partial Summary Judgment was filed by the Trustee in an Adversary Proceeding related to the bankruptcy case of Alpha Protective Services, Inc., which initially filed for Chapter 11 bankruptcy on April 12, 2012, and was converted to Chapter 7 on December 20, 2012. The Trustee initiated the adversary proceeding against Paul Hackenberry on April 1, 2014, seeking to avoid and recover a $110,000 payment to Hackenberry under 11 U.S.C. § 544. Hackenberry opposed the Trustee's Motion filed on October 10, 2016, and the parties presented oral arguments on January 13, 2017.

The Court emphasized that under Federal Rule of Civil Procedure 56, it must grant summary judgment if there is no genuine dispute regarding any material fact and the movant is entitled to judgment as a matter of law. The evidence must be viewed favorably for the non-moving party, and the movant must demonstrate the absence of genuine issues of material fact by referencing specific parts of the record. A material fact affects the case's outcome, and a genuine dispute exists if a reasonable fact finder could favor the non-moving party based on the evidence presented. The Court will focus its analysis on relevant factual contentions necessary for the case's outcome.

Hackenberry is the president and owner of Security Essentials, Inc., a security consulting firm, with a 35-year background in government security roles, including positions with the U.S. Secret Service and the TSA. After retiring in 2005, he established Security Essentials and began contracting with the Debtor for security services, starting with the 2004 G-8 Summit. Hackenberry maintained various roles with the Debtor, including independent contractor, employee, and Board of Directors member until the Debtor's bankruptcy filing on April 12, 2012. Security Essentials provided consulting services from 2009 to 2012 and continued post-bankruptcy. The Debtor faced financial difficulties, including a garnishment from Omniplex due to a substantial judgment and significant tax debts to the IRS. In 2011, Bank of America froze the Debtor’s operating account, and the Debtor received an $8 million line of credit. Hackenberry and another individual, Sigmund Rogich, provided cash advances to assist with payroll, both of which were repaid shortly after. Under § 544(b)(1) of the Bankruptcy Code, the trustee can avoid transfers that are voidable by creditors holding unsecured claims, with the burden on the trustee to demonstrate the existence of such a creditor.

The trustee must identify a creditor with standing to sue the debtor to avoid a transfer as of the bankruptcy petition date (5 Collier on Bankruptcy § 544.06 [1], citing In re Petters Co., 495 B.R. 887, 896-901). The term “applicable law” in § 544(b)(1) permits the trustee to apply federal and state non-bankruptcy laws for pursuing fraudulent or preferential-transfer actions. In this case, the trustee has identified the IRS as a creditor with an unsecured claim against the debtor. The trustee's claim is based on 28 U.S.C. § 3304(a)(2) of the Fair Debt Collections Procedures Act (FDCPA), asserting that the IRS could have pursued a claim against Hackenberry for a $110,000 transfer because the transfer was made to an insider while the debtor was insolvent and the insider had reasonable cause to believe in the debtor's insolvency.

The court in Gordon v. Harrison (In re Alpha Protective Services, Inc.) affirmed that the FDCPA qualifies as applicable law for avoiding insider-preferential transfers under § 544. It clarified that any law an unsecured creditor could use to avoid a transfer outside of bankruptcy falls within the ordinary meaning of “applicable law” in § 544 and that the trustee may select any unsecured creditor for such actions. The FDCPA stipulates a two-year reach back period for insider preference claims, with actions needing to be filed within this timeframe post-transfer. The court concluded that the trustee can act on behalf of the IRS, as it holds an unsecured claim against the debtor, and noted that the transfer occurred within the allowed two-year period.

To proceed with the FDCPA claim, the trustee must demonstrate: 1) the transfer was made to an insider for an antecedent debt; 2) the debtor was insolvent at the time; and 3) the insider had reasonable cause to believe in the debtor's insolvency. The FDCPA defines an “insider” to a corporate debtor, which includes directors, officers, partnerships where the debtor is a general partner, general partners, or relatives of those in control of the debtor. These definitions align with those established in the Bankruptcy Code.

The February 11, 2011 transfer of $110,000 from the Debtor to Hackenberry was established as a repayment of a cash advance made by Hackenberry on January 25, 2011, qualifying as payment for an antecedent debt. Hackenberry was confirmed as an insider of the Debtor, holding the position of director at the time of the transfer, which the Trustee successfully argued entitled him to summary judgment on this matter.

Regarding insolvency, the FDCPA defines a debtor as insolvent when its debts exceed its assets. A presumption of insolvency arises when a debtor is not paying debts as they come due. The Court referenced the case Kelley v. Specials (In re Gregg), applying a flexible-totality-of-the-circumstances test to evaluate whether the Debtor was generally paying its debts. The Trustee submitted an affidavit from Christopher Edwards, a CPA, who reviewed multiple financial documents, including both audited and unaudited financial statements, IRS claims, and testimony from various individuals.

Edwards concluded that the Debtor was generally not paying its debts at the end of 2010 and throughout 2011, supporting the presumption of insolvency. He criticized the 2010 financial statement for inaccurately representing the Debtor’s financial condition, as it failed to account for significant debts, such as the Omniplex judgment and IRS liabilities. Edwards identified various debts owed by the Debtor, including a judgment to Omniplex, substantial FICA tax obligations, overdraft fees, and loans from Hackenberry and Rogich used to cover payroll, as well as lease payments owed to Fred Taylor Company.

Hackenberry contends that Edwards failed to apply a comprehensive "flexible-totality-of-the-circumstances test" in assessing the Debtor's financial status, as he focused only on six specific debts without considering the broader context, including the number of unpaid claims, their amounts, the significance of nonpayment, and the overall financial conduct of the Debtor. The Trustee presented evidence of unpaid claims totaling between $100,000 and $2,867,753.62 due at the start of 2011, but the Court emphasizes that without knowing the total debts owed, it cannot definitively evaluate whether the Debtor was generally paying debts as they became due, a prerequisite for presuming insolvency under the FDCPA.

The Court notes that a reasonable fact finder might conclude that the Debtor was solvent according to the definition in 28 U.S.C. § 3302(a). No insolvency analysis was provided based on the balance sheet test, and Edwards's opinion neglected the Debtor's financial status at the time of the alleged transfer, relying instead on outdated financial statements from 2009 and 2010. The absence of evidence showing that the Debtor's debts exceeded its assets at fair value at the time of the transfer led the Court to find that the Trustee failed to demonstrate entitlement to summary judgment regarding the Debtor's insolvency.

Regarding the reasonable cause to believe the Debtor was insolvent, this is a subjective determination that varies by case. The Trustee argued that Hackenberry had sufficient knowledge of the Debtor's financial struggles, including the absence of a credit line, reliance on overdrafts, a significant judgment against the Debtor, and the need for cash advances for payroll. The Trustee asserted that Hackenberry, through his access to accounts and communication with the Debtor's CEO, should have recognized the Debtor's financial issues. In contrast, Hackenberry's affidavit claims he was unaware of certain financial difficulties, including the judgment against Omniplex and outstanding taxes, at the time of the transfer.

Hackenberry asserts that neither Hunter, the Debtor’s CPA, nor Brinson, the CEO, informed him of the Debtor's insolvency. He claims he had no reason to question the Debtor's financial status during the transfer, as Bank of America (BOA) was performing due diligence to issue credit to the Debtor and he lacked access to any financial information indicating insolvency. Hackenberry states that by early 2010, the Board had ceased functioning, and he does not recall any board meetings in 2010 or 2011. He asserts he never received financial data from the Debtor’s accountants and believed cash flow issues would be resolved by BOA's credit line. Hackenberry argues the Debtor was not legally insolvent but operating with low capital, contending that the Debtor's overdrafts did not imply insolvency. He references Hunter's testimony about the Debtor's government contracts being reliable receivables, despite frequent late payments. Supporting his argument, Hackenberry cites the Fifth Circuit case of Lang v. First National Bank, which found a bank did not have reasonable cause to believe a debtor was insolvent when the debtor had lucrative contracts in progress. The court highlights that legal insolvency differs from financial distress and that the Fair Debt Collection Practices Act (FDCPA) requires reasonable cause rather than knowledge. A genuine issue of material fact exists regarding whether Hackenberry had reasonable cause to believe in the Debtor's insolvency, necessitating a subjective inquiry into his beliefs and their reasonableness. The Trustee challenges Hackenberry's business judgment in advancing $110,000 without inquiring about the Debtor's financial status, invoking the "business judgment rule," which presumes directors act with knowledge and good faith.

The Trustee indicates that the business judgment rule may not protect a director involved in a transaction where they benefit financially or are on both sides of the deal, referencing relevant case law. Hackenberry asserts compliance with Georgia's business judgment rule, supported by testimonies from the Debtor's CEO and CPA, suggesting he reasonably relied on their statements. The Court is not convinced that the presumption of a director being informed equates with the presumption that an insider creditor had reasonable cause to believe the debtor was insolvent. The record supports that Hackenberry acted within the business judgment rule by trusting the representations of Brinson and Hunter. However, the Court clarifies that failure to investigate the debtor's financial state does not automatically imply that Hackenberry had reasonable cause to suspect insolvency. Consequently, the Court grants the Trustee partial summary judgment recognizing Hackenberry as an insider under § 101(31)(B)(ii) due to his director status during the disputed transfer. Summary judgment is denied on the issues of the Debtor's insolvency and Hackenberry's reasonable belief regarding the Debtor's insolvency on February 11, 2011.

To establish insolvency under the FDCPA, the Trustee must demonstrate that the Debtor failed to pay debts as they became due. The Court found that the Trustee did not meet this burden for a judgment as a matter of law regarding insolvency. Additionally, there is a genuine issue of material fact concerning reasonable cause to believe insolvency existed. An order will be issued reflecting this finding. The Trustee initially sought to recover a $110,000 payment made to Hackenberry within two years of the Debtor's bankruptcy petition, alleging it was a fraudulent transfer under 11 U.S.C. § 544 and § 548, but later withdrew these counts. The IRS has a total claim of $2,967,733.62, which includes a secured claim of $1,943,422.83, an unsecured priority claim of $851,226.29, and a general unsecured claim of $73,084.50. The Trustee contended that the Debtor's attempt to solicit a $110,000 cash advance for payroll should have alerted Hackenberry to the Debtor's potential insolvency. Under the business judgment rule, a director can rely on information from reliable corporate officers, legal counsel, accountants, or committees if they reasonably believe in their competence, as stipulated in O.C.G.A. 14—2—830(b, 2017).