Thursday, June 14, 2012

Trustees Not Personally Liable for Fraudulent Conveyance of Assets into Trust

Court Rejects Herculean Effort to Hold Trustees Personally Liable
For Trust Settlor’s Alleged Fraudulent Conveyances

      A recent effort by a creditor to hold the trustees personally liable for certain alleged fraudulent conveyances accomplished by the trust settlor has been rejected.  GATX Corp. v. Addington, 2012 WL 1621363 (E.D. Ky. May 9, 2012).
      GATX Corporation leased coal-mining equipment from Appalachian Fuels pursuant to a master lease agreement.  Larry Addington, a 30% shareholder in Energy Coal Resources, Inc., it being a member of Appalachian Fuels, signed a joint and several guaranty of Appalachian’s fuel obligations under the master lease agreement to GATX, that liability capped at $5 million.  On May 15, 2009, GATX sued Larry for his obligations under that guaranty agreement, which suit was ultimately resolved pursuant to an Agreed Judgment against Larry in the amount of $2,900,000.  GATX agreed to forbear collecting until November 16, 2011.  The Agreed Judgment was not, however, resolved by that day, and suit was filed by GATX against Larry on November 17, 2011.
      In December 2008, Larry converted a previously existing revocable trust into an irrevocable trust for the benefit of his brother Maxwell.  Stephen and Robert Addington, both brothers of Larry, served as co-trustees of the irrevocable trust.  Larry conveyed into it three pieces of real property located in Boyd County, those transfers taking place on the same day the trust was reorganized into its irrevocable form.  Shortly thereafter, on January 2, 2009, he contributed $1 million in cash to the irrevocable trust.  Almost two years later, November 18, 2012, the irrevocable trust acquired title to the three vehicles, but the opinion does not specify whether they were purchased with the cash conveyed to the trust or were separately transferred to the trust from Larry’s name.
      On January 26, 2012, Larry Addington filed for personal bankruptcy protection under Chapter 11, thereby effecting a stay of the suit brought against him by GATX under the original Agreed Judgment.
      GATX, in the suit filed November 17, 2011, in addition to suing Larry for breach of the Agreed Judgment, filed suit as well against Stephen and Robert, co-trustees of the trust, alleging a variety of claims based upon participation in alleged fraudulent conveyances by Larry.  These claims were, ultimately, unavailing and were dismissed on Rule 12(b)(6) motion:

GATX has presented numerous legal theories in pursuit of a viable legal theory by which it might hold Stephen and Robert liable in their individual capacities.  In GATX’s Complaint, it alleged that Stephen and Robert are directly liable, and for aiding and abetting Larry Addington in fraudulently conveying property in violation of KRS §§ 378.010 and 378.020….  GATX asserted that the Complaint also pled a sufficient factual basis to support additional legal theories, naming conspiracy to effectuate fraudulent transfers and simple fraud.  Continuing its quest for a viable legal theory, GATX filed a Motion for Leave to Amend Its Complaint (and subsequently filed a proposed Amended Complaint) with yet another legal theory – negligence per se under KRS § 446.070.  However, despite these continued efforts, GATX has failed to assert a viable legal theory against Stephen or Robert in their individual capacities for which relief may be granted.  2012 WL 1631363, *4.

As for breach of the Kentucky statute of fraudulent conveyances, the Court noted that it is applicable to only a transferor or a transferee.  Neither Stephen nor Robert was, in their individual capacity, either a transferor or transferee of the property.  Rather, Larry was the transferor and the trust was the transferee.  “Thus, Stephen and Robert were not ‘transferees’ and therefore cannot be directly liable for violating the fraudulent conveyance statutes.”  2012 WL 1621363, *7.
      Acknowledging that Kentucky courts have not directly addressed the issue, it was stated that Kentucky would likely follow the “overwhelming majority of states” that have held that there exists no claim for aiding and abetting a fraudulent conveyance.

Therefore, to the extent that GATX has pled that Stephen and Robert aided and abetted a fraudulent conveyance, that claim is dismissed.  Furthermore, GATX has requested leave to amend its complaint so that it may assert this claim if it was not property pled in the original complaint.  Having concluded that such a claim is not viable as a matter of law, it would be futile to grant GATX’s motion to the extent it wishes to assert a claim for aiding and abetting a fraudulent transfer.  2012 WL 1621363, *9.

      The Court as well disposed of arguments that GATX should be allowed to amend its Complaint, there asserting claims based upon either fraud by misrepresentation or fraud by omission, detailing the elements of those causes of actions and finding the necessary factual predicates to be missing.  The Court as well rejected the suggestion that Kentucky would recognize a cause of action for conspiring to effect a fraudulent conveyance.

No Kentucky Court has been asked to determine whether a claim for conspiring to effect a fraudulent conveyance is recognized as a matter of Kentucky law.   However, the majority approach appears to be in line with the goals of Kentucky’s fraudulent conveyance statutes; therefore, Kentucky would likely adopt the majority approach.  Like the fraudulent conveyance statutes at issue in Efessiou and S. Prawer & Co., the purpose of Kentucky’s fraudulent conveyance statutes is to “put the creditors back in the same position they would have enjoyed immediately prior to the voidable conveyance.”  Mattingly v. Gentry, 419 S.W.2d 745, 747 (Ky. 1967).  To fulfill this purpose, the plain language of both statutes allows the creditor to void the fraudulent conveyance.  However, neither the plain language of the statutes or Kentucky case law suggests that a defendant can be personally liable for fraudulently conveying property.  Therefore, as the court held in Efessiou, a plaintiff may not circumvent the limitations of the fraudulent conveyance action by bringing a civil conspiracy claim seeking an in personam judgment.  2012 WL 1621363, *14.

The Court went on to explain how the notion of conspiracy is itself analytically impossible and as well rejected a claim that there can be negligence per se in a claim for fraudulent conveyance.

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