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Factual Issues Precluded Judgment in Favor of the Defendant

In re Empire Land, Nos. 6:08-bk-14592-MH, 6:10-ap-01329-MH, 2016 Bankr. LEXIS 1087 (U.S. Bankr. C.D. Cal. Apr. 4, 2016)

California, April 4, 2016 – The Trustee for the Debtors Empire Land LLC and its affiliates brought a lawsuit against Defendant Empire Partners, Inc. and others, alleging the avoidance and recovery of transfers under a preference theory, intentional fraudulent transfer theory, and/or constructive fraudulent transfer theory. The Defendant served as the general partner or managing member for the Debtors.

The Defendant first alleged that the Trustee failed to establish evidence of fraud and that each transfer was made with the actual intent to hinder, delay, or defraud under Sec. 548 (a)(1)(A) and Cal Civ. Code §3439.04(a)(1). The Court rejected the Defendant’s argument and concluded that the Trustee produced sufficient evidence, in form of emails and reports, as to the badges of fraud to raise a disputed fact with regard to intent to hinder, delay and defraud creditors as to the transfers. The Court also opined that the expert report submitted by the Debtor was sufficient to create a disputed fact as to the Debtors’ insolvency on the date of alleged transfers.

The Defendant next alleged that it was only a conduit with respect to certain transfers as the funds received from one of the Debtors were used to pay credit card expenses on its behalf, because it did not had its own bank credit card. However, the Court found that the evidence indicated that the Defendant may have been the entity behind the transfers and there was a possible inference that the Defendant had the ability to use the funds as it saw fit. Thus, a material issue of fact existed as to whether Defendant could use the funds as it saw fit, and hence, under the dominion test, whether it was an initial transferee with respect to the alleged transfers.

Next, although the Defendant alleged that certain transfers were reimbursements for business expenses incurred by the Debtor in the ordinary course of business, the Court found that the Defendant did not submit any evidence that such transfers were made in the ordinary course of business, and hence failed to meet its burden. The Court denied the Defendant’s Motion and concluded that the Trustee presented sufficient evidence to pursue the alleged transfers under both a preference and constructive fraud theory.