United States District Court, S.D. New York
MEMORANDUM OPINION AND ORDER
LAURA TAYLOR SWAIN, District Judge.
Following entry of judgment in its favor in the above captioned-actions, Universitas Education, LLC ("Petitioner") seeks, pursuant to New York Civil Practice Law and Rules ("C.P.L.R.") section 5225(b) and Federal Rule of Civil Procedure 69, the turnover of assets by respondent Daniel E. Carpenter and his affiliated entities Grist Mill Capital, LLC, Grist Mill Holdings, LLC, the Grist Mill Trust Welfare Benefit Plan, Avon Capital, LLC, Hanover Trust Company, Carpenter Financial Group and Phoenix Capital Management, LLC (with Carpenter, the "Turnover Respondents"), as well as permanent injunctive relief barring the transfer by the Turnover Respondents of money and assets, including certain specified insurance policies, until Petitioner's judgment against Nova Group, Inc., has been satisfied. (Docket entry no. 308.)
The Court has jurisdiction of these proceedings pursuant to 28 U.S.C. §§ 1331, 1332(a)(1), 1441 and 1367.
Petitioner filed this motion for turnover against the Turnover Respondents on October 21, 2013. The Court held an evidentiary hearing on November 22, 2013. The Court heard oral argument regarding Petitioner's request for permanent injunctive relief on June 18, 2014. Post-hearing submissions were completed on July 11, 2014.
On January 13, 2014, the Court granted Petitioner's related motion for a preliminary injunction barring Mr. Carpenter, his controlled entities, his entities' officers, agents, servants, employees, and attorneys, and other persons who are in active concert or participation with them, pending resolution of Petitioner's turnover motion, from directly or indirectly causing, making, permitting or suffering any sale, assignment or transfer of, or any interference with, any asset or property of Mr. Carpenter, and any asset or property of any company, corporation or other entity (including any trusts) in which Mr. Carpenter has a direct or indirect interest or control; provided that Mr. Carpenter is permitted to expend or transfer up to an aggregate amount of $20, 000.00 per month solely for ordinary expenses of himself and all of the entities that are subject to the preliminary injunction. (Docket entry no. 366 (the "January Order").)
The Court has considered carefully all of the submissions and arguments of the parties, the documentary evidence, including transcripts of deposition testimony, and the courtroom testimony. In accordance with Federal Rule of Civil Procedure 52(a), this Memorandum Opinion constitutes the Court's findings of fact and conclusions of law. To the extent any finding of fact includes conclusions of law it is deemed a conclusion of law, and vice versa. For the following reasons, Petitioner's motion is granted in part.
FINDINGS OF FACT
This proceeding is the second turnover motion in the extensive litigation over the disposition of proceeds of two insurance policies on the life of the late Sash A. Spencer, who was the Chief Executive Officer of Holding Capital Group, Inc. The Court's Memorandum Opinion and Order resolving Petitioner's first turnover motion (docket entry no. 341, the "November Order") discusses the underlying facts in this case in detail, familiarity with which is presumed.
Mr. Spencer named Petitioner the sole, irrevocable beneficiary of a Charter Oak Trust death benefit comprising the proceeds payable under the two life insurance policies, whose face values totaled more than $30 million (the "Insurance Proceeds"). Under the confirmed arbitration award upon which judgment against Nova (in its capacity as trustee of the Charter Oak Trust) has been entered, all but $4.02 million of the Insurance Proceeds are owed to Petitioner. The Insurance Proceeds were paid to Charter Oak Trust and then removed from the Charter Oak Trust through a series of fourteen fraudulent transfers to other entities controlled, at all relevant times, by Mr. Carpenter. (See November Order at 6.)
Control of the Turnover Respondent Entities
In the November Order, the Court found that Mr. Carpenter controlled, during the periods relevant to the transactions discussed therein (May 2009 to October 2010), Nova Group, Inc. ("Nova"), Charter Oak Trust ("Charter Oak"), Grist Mill Capital, LLC ("Grist Mill"), Grist Mill Trust Welfare Benefit Plan ("GM Trust"), Grist Mill Holdings, LLC ("GM Holdings"), Phoenix Capital Management, LLC ("Phoenix"), and Caroline Financial Group, Inc. ("Caroline Financial"), as well as hundreds of other related entities. The Court found that Mr. Carpenter had used these shell entities to hide assets from Petitioner, Nova's judgment creditor. Among other things, the Court found that Wayne Bursey, who was President of Nova and Trustee of the Charter Oak Trust, was Mr. Carpenter's confederate in the fraudulent transfers found in the November Order. The Court noted that, "[d]espite the fact that Mr. Bursey had earlier acknowledged a fiduciary duty to pay Petitioner the trust funds, he proceeded to transfer the entire amount of the Insurance Proceeds to Grist Mill over a period of six months while wrongly denying Petitioner's claims." (November Order at 18.) The Court further found that this transfer was designed to fraudulently benefit Mr. Carpenter.
Mr. Bursey is also affiliated with GM Trust. In a submission in opposition to the instant motion practice, GM Trust asserts that it was not controlled by Mr. Carpenter during the relevant period, proffering testimony by one Kathy Kehoe. Ms. Kehoe, a member of the Trust Department of Benistar Admin Services, Inc., which was the third-party administrator of GM Trust, testified that Wayne H. Bursey is signatory trustee of Nova Benefit Plans, LLC, which is the trustee and plan sponsor of GM Trust. GM Trust argues that "the familial relationship between Wayne H. Bursey and Dan Carpenter, standing alone, is not itself determinative of fraud." (Docket entry no. 337, pg. 23.) The Court has reconsidered de novo the question of control of GM Trust in light of the augmented record and concludes that GM Trust was under Mr. Carpenter's control at all relevant times, notwithstanding Mr. Bursey's titular authority. The record as a whole, including but not limited to the nature and timing of Mr. Bursey's actions in his various capacities, Mr. Carpenter's failure to offer credible justifications for the transfers, and Mr. Bursey's failure to proffer any explanations at all, proves by a preponderance of the evidence that GM Trust was under Mr. Carpenter's control at the time of the challenged transfers of Insurance Proceeds. Ms. Kehoe's testimony, which presents no facts inconsistent with actual control by Mr. Carpenter, is insufficient to overcome Petitioner's proof.
The credible evidence of record also proves that the remaining Turnover Respondents, Avon Capital, LLC ("Avon") and Carpenter Financial Group ("CFG"), were also under Mr. Carpenter's control during the relevant transactions. Mr. Carpenter controlled CFG, serving as Chairman and Secretary during the relevant period. (Docket entry no. 338, pg. 9.) Avon was controlled by its managing member, Grist Mill, which is wholly owned by its members Grist Mill Holdings and Caroline Financial Group, Inc., both of which were wholly owned by Mr. Carpenter. (See May 9, 2013 Tr. at 25:2-4; Docket entry no. 223 at Ex. 22 at 47:15-18 ("[GM Holdings] is my alter ego for collecting commissions.").)
None of the entities controlled by Mr. Carpenter are New York entities. Each Turnover Respondent has waived the service requirements under Federal Rule of Civil Procedure 4 and accepted service of the motion for turnover via e-mail. (See docket entry no. 466.)
Fraudulent Conveyances to Mr. Carpenter's Entities
In May 2009, the insurer paid Charter Oak Trust $30.67 million in Insurance Proceeds, including interest, and Wayne H. Bursey signed for the deposit as trustee. (November Order at 3.) In its November Order, the Court further found that Mr. Carpenter had fraudulently transferred $8, 677, 276.75 and $2, 186, 566 (a total of $10.8 million) from Charter Oak Trust to Grist Mill in May 2009 for his own benefit. The Court found that, of these funds, $3.79 million was then transferred from Grist Mill to GM Trust, $2.7 million was transferred from GM Trust to Phoenix, $2.5 million was then transferred from GM Trust back to Grist Mill, $2.2 million was transferred to GM Holdings, and that GM Holdings then transferred $1.2 million to Hanover. The Court held that each of these transfers was fraudulent under New York law. The Court has reconsidered de novo its findings with respect to these fraudulent transfers in light of the record presented, and the additional arguments and evidence proffered by the Turnover Respondents, and finds that Petitioner has proven by clear and convincing evidence that each of these transfers was fraudulent.
Petitioner has also proven that the following additional transfers were fraudulent. On October 27, 2009, Mr. Carpenter caused $19.8 million to be transferred from the Charter Oak Trust to Grist Mill's account. (Nov. 22, 2013 Tr. at 27:8-24; Barnett Decl. Oct. 21, 2013 ¶ 56, Ex. 31.) Mr. Carpenter then caused $19 million to be transferred from Grist Mill to GM Holdings the next day, on October 28, 2009. (Barnett Decl. Oct. 21, 2013 ¶ 59, Ex. 35; Nov. 22, 2013 Tr. at 70:10-17.) Grist Mill also transferred $6, 710, 065.92 to Avon on November 11, 2009, at the direction of Mr. Carpenter. (Barnett Decl. Oct. 21, 2013 ¶ 59, Ex. 35.) On November 12, 2009, Mr. Carpenter caused GM Holdings to transfer $4, 140, 000 to CFG. (Barnett Decl. Oct. 21, 2013 ¶ 60, Ex. 37; Nov. 22 Tr. 70:10-17.) GM Holdings transferred an additional $7 million to CFG on December 3, 2009. (Barnett Decl. Oct. 21, 2013 ¶ 62, Ex. 40.) On December 3, 2009, CFG transferred $5 million to Phoenix at the direction of Mr. Carpenter. (Barnett Decl. Oct. 21, 2013 ¶ 62, Ex. 40.) That same day, Grist Mill made two transfers to GM Trust, in the amounts of $510, 000 and $178, 125. (Barnett Decl. ¶¶ 63 and 64, Ex. 43.) These transfers were without documentation or consideration, a clear sign of fraud. The haste and rapid succession of the transfers is also indicative of fraudulent intent by the Turnover Respondents. Furthermore, Nova and Mr. Carpenter resisted all discovery efforts to determine the whereabouts of the Insurance Proceeds after the transfers, and such secrecy further indicates a fraudulent intent. The Court finds that Petitioner has demonstrated by clear and convincing evidence that these transfers among Mr. Carpenter's entities were fraudulent.
No credible explanation for these transfers has been offered by the Turnover Respondents. The Turnover Respondents offered Mr. Carpenter's testimony to explain the purpose of the series of transfers. Mr. Carpenter's testimony largely mirrored the testimony that the Court had rejected as incredible in the November Order. At the November 22, 2013, hearing in connection with the preliminary injunction and turnover motion practice, Mr. Carpenter again testified that certain pre-existing debts and security interests allowed Grist Mill to retain the benefit of the Spencer life insurance policies. Mr. Carpenter testified, among other things, that Charter Oak Trust owed Grist Mill $60 million before the transfers of money it received in May and October 2009. Carpenter's testimony in this regard was neither consistent with the documents of record nor credible. Mr. Carpenter also testified incredibly that the transfer of $19.8 million from Charter Oak to Grist Mill was legal because of a "confidential settlement indemnity agreement" that, he alleged, allowed Grist Mill to retain the remaining proceeds of the Spencer policies. (Nov. 22 Tr. 23:20-24.) In the underlying arbitration proceeding in which Nova's liability to Petitioner for the Insurance Proceeds was initially determined, the arbitrator had rejected similar contentions advanced by Nova, and held, in the confirmed arbitration award, that the total amount payable to Grist Mill from the Insurance Proceeds was only $4.02 million, and that the remainder of the Insurance Proceeds, plus interest, were payable to Petitioner.
Mr. Carpenter asserted that the subsequent transfers, after Grist Mill received the Insurance Proceeds, among his other entities were made because the funds were required to pay life insurance premiums on policies held by Avon and GM Trust, and to ensure "tax-free receipt" of the Insurance Proceeds. While there is no doubt that some of the funds eventually were applied in this fashion, neither the "tax free receipt" of the funds, nor the need to pay life insurance premiums, provides a justification for Mr. Carpenter's usurpation of the Insurance Proceeds. These explanations, furthermore, do not demonstrate that the Insurance Proceeds were properly in possession of any of his entities other than the Charter Oak Trust, which was obligated to pay them to Petitioner.
Mr. Carpenter also asserted that the two transfers made from Grist Mill to GM Trust on December 3, 2009, totaling $688, 125, were repayments of an antecedent debt, specifically stating that GM Trust had made certain payments to the IRS for a client of Grist Mill. (Carpenter Aff. ¶ 39.) The Court found in the January Order that these assertions were not credible. GM Trust submitted the affidavit of Kathy Kehoe in support of the existence of these antecedent debts. Ms. Kehoe's affidavit does not attempt to explain all of the transfers of GM Trust, as it does not explain the $2.7 million loan allegedly made from GM Trust to Phoenix in June 2009. Nor does the affidavit demonstrate that Ms. Kehoe has personal knowledge of any facts regarding the transfers. The affidavit appears to be based on the assertions of Mr. Carpenter and his wife. At her deposition on January 7, 2014, Ms. Kehoe admitted that she was unaware of any loans made by Grist Mill Trust to anyone until six weeks prior to her deposition. (Docket entry no. 371, Ex. 65, at 109:5-7.) Ms. Kehoe further testified that she asked certain questions of Ms. Carpenter in preparation of her affidavit. (Docket entry no. 371, Ex. 65, at 23:1-22.) Wayne Bursey appointed Ms. Kehoe to sign the affidavit on behalf of GM Trust and to serve as its deposition designee. Ms. Kehoe's testimony lacks foundation, as she has not demonstrated personal knowledge of the transfers.
As the Court noted in the November Order, Grist Mill appointed Peter A. Goldman, Esq., as its agent to review documents and testify on its behalf in this case. Mr. Goldman testified in May 2013 that he had been retained in an attempt to "determine what happened to $30 million." (May 9 Tr. at 120:20-22.) Mr. Goldman further testified that he had reviewed certain records of Grist Mill, and that he had confirmed that there had been transfers totaling about $31 million from the Charter Oak Trust. (May 9, 2013 Tr. at 115:14-24.) He reported that he could not explain why the Charter Oak Trust had made any of the three transfers to Grist Mill. (May 9, 2013 Tr. at 114:5-25, 115:21-25, 116:1-17.) As to the $19.8 million that was transferred from Charter Oak Trust to Grist Mill in October 2009, Mr. Goldman reported that it was recorded in the Grist Mill's general ledger as an "unknown deposit." (May 9 Tr. at 118:19-20.)
Based upon its careful review of the entirety of the Record, the Court finds that Mr. Carpenter caused Nova, the Charter Oak Trust, and other affiliated entities, directly or indirectly, to transfer the Insurance Proceeds, to which Petitioner is entitled, to and through entities that he controlled, either directly or indirectly, all for the personal benefit of Mr. Carpenter and his affiliates and without consideration.
The testimony proffered by the Turnover Respondents fails to credibly refute Petitioner's demonstration of their fraudulent intent in engaging in the ...