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HomeMy WebLinkAbout2002-5660 Equity TAM SYSTEMS, INC., Plaintiff, : IN THE COURT OF COMMON PLEAS OF : CUMBERLAND COUNTY, PENNSYLVANIA v. FIGLIO MIO VISAGGIO, INC., a Pennsylvania Corporation, : ACTION IN EQUITY WILLIAM 1. LUMADUE, SR., and ROSEMARY V. LUMADUE, Husband and Wife, WILLIAM 1. LUMADUE, JR., and JOHN E. LUMADUE, Defendants. : 02-5660 EQUITY OPINION and ORDER OF COURT EBERT, 1., November 15,2006. In this civil action for equity, Plaintiff alleges that the Defendant corporation fraudulently conveyed property to its shareholders, also named as Defendants, in violation of the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. C.S.A. 95101 et seq. Following a non-jury trial, this Court finds that Plaintiff failed to meet its burden of proof. For the reasons stated herein, judgment is entered in favor of Defendants. FINDINGS OF FACT This matter has its origin in a previous suit initiated by Plaintiff Tam Systems, Inc., against Defendant Figlio Mio Visaggio, Inc., ("Figlio Mio") in September, 1997. In the fall of 1996, Figlio Mio hired Plaintiff to perform construction work on a building owned by Figlio Mio, at 6481 Carlisle Pike, Mechanicsburg, Pennsylvania ("the property"). Plaintiff initiated suit on September 26, 1997, alleging that Figlio Mio had failed to pay Plaintiff in full for the performance of the construction contract. At the time of the Complaint, the subject property and the agreement for its lease (payment of monthly rent) were the primary assets of Figlio Mio. In January, 1999, in response to a set of interrogatories, Figlio Mio stated through its officers and legal counsel that it owned the real estate at 6481 Carlisle Pike where the work was performed. In November, 2001, judgment was entered for Plaintiff in the amount of $124,523.55. One week later, Figlio Mio filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Middle District of Pennsylvania. Plaintiff was the sole creditor of Figlio Mio. Figlio Mio is a Pennsylvania business corporation that was formed for purposes of opening a restaurant. Its shareholders, officers and directors consist of William J. Lumadue, Sr., his wife, Rosemary V. Lumadue, and their sons, William 1. Lumadue, Jr., and John E. Lumadue ("Individual Defendants"). In 1992, Figlio Mio began operating a restaurant at the subject property, and became the owner of the property in August 1993. By 1995, Figlio Mio was losing money, despite personal loans made by the Lumadues to the corporation in excess of $270,000 through 1996, due largely to competition from other new restaurants in the area. The decision was made to renovate the property for use as office space for lease. Tam Systems, Inc. was employed as the general contractor under a contract to perform the renovation, and this relationship led to the civil action commenced in September 1997. In September, 1999, on the advice of both the accountant and attorney to both parties, Figlio Mio transferred the property to the Individual Defendants for a price of $830,000.00. The Lumadues personally borrowed $830,000.00 from Mid Penn Bank, which was in turn paid by Figlio Mio to Mid Penn Bank to satisfy Figlio Mio' s portion of the $1,315,000 mortgage on the property.l The Lumadues concurrently signed a note and mortgage in the amount of $830,000.00, becoming liable for this debt on property that had a fair market value of $625,000.00 on September 30, 1999. Figlio Mio did not supplement the answers it provided to Plaintiff's interrogatories in January 1999 and Plaintiff asserts that it was only formally notified of the property transfer at the January 13,2000, deposition of William 1. Lumadue, Sr? Plaintiff initiated the current action against Figlio Mio and the Individual Defendants through a Complaint filed on November 25,2002, alleging that the 1 This mortgage resulted in July 1997, after a series of refinancings. 2 Notes of Transcript of Proceedings held June 26, 2006, page 24 (hereinafter "NT _"). 2 September, 1999, transfer of the property was a violation of the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa.C.S.A. 95101 et seq, specifically that Figlio Mio did not receive a "reasonably equivalent" value in exchange for the transfer and was either (1) engaged in a business for which the remaining assets of the debtor were umeasonably small; or (2) intended to incur, or reasonably should have believed that it would incur, debts beyond the ability to pay as they became due. 12 Pa.C.S.A. 95104(a)(2). Trial was held before this Court on June 26 and 27,2006. Following the filing of the trial transcript, closing arguments were heard on October 5, 2006. Defendants assert that the idea to transfer the property from Figlio Mio to the Individual Defendants originated from James E. Lyons, a certified public accountant who had worked as the Lumadues' accountant for over 20 years and who also served as the accountant for Figlio Mio.3 Mr. Lyons testified that he made this recommendation based on the benefit from an income tax standpoint of "getting out of the corporate structure" and that at no time did Mr. Lumadue, or any of the Individual Defendants, suggest that they wanted to put the property into the family's individual names.4 The reasons that Mr. Lyons presented to Mr. Lumadue in support of transferring the property did not include any consideration of the ongoing litigation with Tam Systems, Inc.5 Mr. Lyons testified that while he was not aware of the existence of such litigation, it would not have changed his opinion with regard to the income tax consequences to the transfer, as he does not try to determine from a legal standpoint the effects of items such as litigation. 6 On May 26, 1999, Mr. Lyons wrote to Richard C. Snelbaker, Esquire, and stated his reasons for recommending a transfer of the property.7 In that letter Mr. Lyons stated that he had told Mr. Lumadue not to do anything with the property until he had received Mr. Snelbaker's input. 8 The letter described the tax concerns that prompted Mr. Lyons' recommendation and was written a full year after Mr. Lyons made the initial 3 NT 132. 4 NT 108-09, 132. 5 NT 123. 6 NT 124. 7 See Letter, dated May 26, 1999, Defendants' Exhibit 3. 8 Id., NT 133. 3 recommendation to Mr. Lumadue.9 Mr. Lumadue testified that the sale of the property from Figlio Mio to the Lumadues individually was made on the advice of Mr. Lyons and Mr. Snelbaker and would not have been made without their advice.Io Mr. Lumadue further testified the property transfer was made over two years after the initiation of the previous suit against Figlio Mio, and that he believed that "nothing was happening" in that lawsuit or that it had gone away. I I A belief which is clearly supported by the record of the initial lawsuit filed by Tam Systems against Figlio Mio. DISCUSSION The Pennsylvania Uniform Fraudulent Transfer Act provides two methods by which a transfer may be found fraudulent. 12 Pa.C.S.A. 95101 et seq. Section 5104(a)(1) provides, in relevant part, that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with actual intent to hinder, delay or defraud any creditor of the debtor. (emphasis added). Section 51 04( a )(2) provides for the determination of a fraudulent transfer where the debtor did not receive a "reasonably equivalent value" in exchange for the transfer. Plaintiff does not raise the issue of "reasonably equivalent value," except to note that "Figlio Mio did not receive any proceeds from the property.,,12 This statement is misleading in that the Individual Defendants actually took out a personal loan in order to satisfy Figlio Mio' s portion of the mortgage on the property, and in doing so paid $205,000.00 in excess of the fair market value of the property. The relevant determination then is whether the transfer was made with the actual intent to "hinder, delay or defraud any creditor," and this Court finds that Plaintiff has failed to satisfy its burden of proof in this regard. Although "actual intent" may be established by circumstantial evidence, the plaintiff bears the burden of showing intent to defraud through clear and convincing evidence. Moody v. Security Pacific Business Credit, Inc., 127 B.R. 958 (W.D. Pa. 9 NT 133, 142. 10 NT 171 -72,174. 11 NT 57,171. 12 Plaintiff's Post-Trial Brief, dated October 4,2006, p. 7. 4 1991). Clear and convincing evidence is the highest burden in civil law and requires that the fact-finder be able to "come to clear conviction, without hesitancy, of the truth of the precise fact in issue." Suber v. Pennsylvania Com'n on Crime and Delinquency, 885 A.2d 678, 682 (Pa. Cmwlth. 2005), citing Lessner v. Rubinson, 592 A.2d 678, 681 (Pa. 1991). In determining "actual intent," 9 51 04(b ) provides the following list of factors: (b) Certain factors.-In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was disclosed or concealed; (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) the transfer was of substantially all of the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (II) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. 5 The list of factors in 951 04(b) is a "nonexclusive catalog of factors," and proof of the existence of anyone or more of the factors may be relevant as to actual intent "but does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation." Committee Comment (5) to 95104. Furthermore, in considering the factors listed in subsection (b), the court should evaluate all the relevant circumstances involved in the transfer and may appropriately take into account "all indicia negativing as well as those suggesting fraud." Committee Comment (6) to 95104. This Court agrees with the Plaintiff that the fact that property that was the sole asset of a corporation involved in a lawsuit was transferred to the corporation's four shareholders before the resolution of the lawsuit warrants a critical examination of the surrounding circumstances. It does not, however, create a presumption of a fraudulent transfer, and the examination of those circumstances reveals not only a transfer motivated by a failing business and the desire to obtain more favorable tax consequences, but one recommended and initiated by the accountant and attorney on whom Defendants' reliance was justified. The transaction was not concealed from the public, and although Defendants failed to supplement their answers to Plaintiff s interrogatory, this Court finds this oversight to fall short of the clear and convincing evidence needed to show actual intent to defraud. That this failure was an oversight is further indicated by Mr. Lumadue's forthrightness about the transfer at his next scheduled deposition. Accordingly, this Court finds that Plaintiff has failed to meet its burden of showing Defendants' actual intent to defraud by clear and convincing evidence. 6 ORDER OF COURT AND NOW, this 15th day of November, 2006, following a bench trial and for the reasons stated in the accompanying opinion, judgment is entered in favor of the Defendants and against Plaintiff. BY THE COURT, M.L. Ebert, Jr., 1. Douglas G. Miller, Esq. West Pomfret Professional Building 60 West Pomfret Street Carlisle, P A 17013-3222 Attorney for Plaintiff Keith O. Brenneman, Esq. Snelbaker & Brenneman, P.C. 44 West Main Street Mechanicsburg, P A 17055 Attorney for Defendant 7