FT - Triple S Restaurants & Heavrin v. Schilling (2/23/2004)

[Riser Adkisson LLP]

Triple S Restaurants Inc., Donald M. Heavrin v. J. Baxter Schilling
Nos. 3:03CV-217-H; 3:03CV-396-H; 3:03CV-546-H (W.D. Ky. 02/23/2004)

Synopsis

Debtor was the owner of an insurance policy. The first two issues concerned whether the
bankruptcy court erred in ordering the attorney and the individual to reimburse the bankruptcy
estate for insurance proceeds they received from the trust. The instant court found that the
policy did constitute an interest in property of debtor. The transfer created value for the
attorney and caused a determent to debtor. In return, debtor received no consideration.
Plaintiff trustee satisfied all the requirements of constructive fraud.

Opinion

IN RE: TRIPLE S RESTAURANTS, INC.; DONALD M. HEAVRIN, PLAINTIFF v. J. BAXTER
SCHILLING, DEFENDANT; J. BAXTER SCHILLING, PLAINTIFF v. ROBERT E. HARROD,
DEFENDANT; J. BAXTER SCHILLING, PLAINTIFF v. ROBERT E. HARROD, et al., DEFENDANTS

CIVIL ACTION NO. 3:03CV-217-H, CIVIL ACTION NO. 3:03CV-396-H, CIVIL ACTION NO. 3:03CV-546-H

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF KENTUCKY

February 23, 2004, Decided
February 25, 2004, Entered

DISPOSITION: Bankruptcy Court's order determining that payment of insurance proceeds was void,
order requiring Donald Heavrin and Bobbie Bridges to reimburse Trustee for proceeds of insurance
policy, and order denying motion to recuse affirmed. Bankruptcy Court's order requiring
attorney's fees be disgorged reversed.

COUNSEL: For Donald M. Heavrin (3:03-cv-00217-JGH, 3:03-cv-00396-JGH): Donald M. Heavrin, LEAD
ATTORNEY, Heavrin & Associates, Louisville, KY.

For Donald M. Heavrin (3:03-cv-00217-JGH): James A. Earhart, LOUISVILLE, KY.

For J. Baxter Schilling (3:03-cv-00217-JGH): J. Baxter Schilling, LEAD ATTORNEY, Louisville, KY.

For Donald M. Heavrin (3:03-cv-00396-JGH): James A. Earhart, LEAD ATTORNEY, LOUISVILLE, KY.

For J. Baxter Schilling, Trustee (3:03-cv-00396-JGH): J. Baxter Schilling, LEAD ATTORNEY,
Louisville, KY.

For Triple S Restaurants, Inc., ICMS converted party type (3:03-cv-00396-JGH): Donald M. Heavrin,
LEAD ATTORNEY, Heavrin & Associates, Louisville, KY.

For Triple S Restaurants, Inc., ICMS converted party type (3:03-cv-00396-JGH): James A. Earhart,
LEAD ATTORNEY, LOUISVILLE, KY.

For J. Baxter Schilling, Plaintiff (3:03-cv-00546-JGH): J. Baxter Schilling, LEAD ATTORNEY,
Louisville, KY.

For Robert E. Harrod, Defendant (3:03-cv-00546-JGH): David Marcus Cantor, LEAD ATTORNEY, Seiller
& Handmaker, Louisville, KY.

For Robert E. Harrod, Donald M. Heavrin, Bobby H. Bridges, Defendants (3:03-cv-00546-JGH): Donald
M. Heavrin, LEAD ATTORNEY, Heavrin & Associates, Louisville, KY.

For Robert E. Harrod, Defendant (3:03-cv-00546-JGH): James A. Earhart, LEAD ATTORNEY, Joseph S.
Elder, II, Rob Eggert, Scott C. Cox, LOUISVILLE, KY.

For Donald M. Heavrin, Defendant (3:03-cv-00546-JGH): James A. Earhart, LEAD ATTORNEY, Joseph S.
Elder, II, LEAD ATTORNEY, Rob Eggert, LEAD ATTORNEY, Scott C. Cox, LEAD ATTORNEY,
LOUISVILLE, KY.

For Bobby H. Bridges, Defendant (3:03-cv-00546-JGH): James A. Earhart, LEAD ATTORNEY, Rob Eggert,
LEAD ATTORNEY, Scott C. Cox, LEAD ATTORNEY, Joseph S. Elder, II, LOUISVILLE, KY.

JUDGES: JOHN G. HEYBURN II, CHIEF JUDGE, U.S. DISTRICT JUDGE.

OPINIONBY: JOHN G. HEYBURN II

OPINION: MEMORANDUM OPINION

This Memorandum Opinion concerns three separate appeals arising out of Triple S Restaurants, Inc.
("TSR") bankruptcy. Each of these appeals is related. Some of the issues raised in each are the
same, others are distinct. In addition, the Court is considering another related case on remand
from the Sixth Circuit, United States of America v. Donald M. Heavrin, Criminal Action No. 3:99CR-
113-H. Contemporaneously, the Court is issuing an opinion in that case and makes reference to it
here.

In these appeals the Court will consider the following issues in turn: (1) whether the Bankruptcy
Court erred by determining that the payment of $ 252,000 of insurance proceeds from Jackson
National Insurance Company ("Jackson National") to the Harrod Irrevocable Trust (the "Trust") was
void; (2) whether the Bankruptcy Court erred by requiring Donald Heavrin ("Heavrin") and Bobbie
Bridges ("Bridges") to reimburse the TSR bankruptcy estate for the full amount of the insurance
proceeds which they received; (3) whether the Bankruptcy Court erred by requiring Heavrin to
disgorge attorney's fees that TSR paid to him within one year of its bankruptcy; and (4) whether
Judge David Stosberg erred by not recusing himself from these cases.

The general circumstances of these cases are well known to everyone. The Court will proceed with
its analysis drawing on such parts of the evidence as is necessary.

I.

The first two issues are related and concern whether the Bankruptcy Court erred in ordering
Heavrin and Bridges to reimburse the TSR estate for $ 252,000 which they received from the Harrod
Trust. The Bankruptcy Court found that Heavrin's conduct amounted to actual fraud. This Court
disagrees. For reasons quite different than those set out by the Bankruptcy Court, however, this
Court concludes that its result is correct.

Section 548 of the Bankruptcy Code, 11 U.S.C. § 548, empowers a trustee in bankruptcy to avoid
fraudulent transfers. The trustee may set aside transfers infected by actual fraud. Certain other
transactions categorized as constructively fraudulent transfers are also subject to those same
powers. The constructive fraud provision permits avoidance where the trustee can establish (1)
that the debtor had an interest in property; (2) that a transfer of that interest occurred within
one year of the filing of the bankruptcy petition; (3) that the debtor was insolvent at the time
of the transfer or became insolvent as a result thereof; and (4) that the debtor received "less
than a reasonable equivalent value in exchange for such transfer." 11 U.S.C. § 548(a)(2)(A); BFP
v. Resolution Trust Corporation, 511 U.S. 531, 535, 128 L. Ed. 2d 556, 114 S. Ct. 1757 (1994). In
our circumstances, the Trustee meets all of these requirements.

A.

One could make reasonable arguments about whether a fully assigned insurance policy remains
property of a bankrupt estate. This is the critical issue concerning the avoidance of the
transaction.

Prior to June 17, 1994, TSR had an interest in the Jackson National policy (the "Policy"), even
though it had executed a collateral assignment of the Policy to McDonald Douglas Finance
Corporation ("MDFC"). Foremost, it was the legal owner of the Policy. TSR retained the right to
any proceeds remaining after satisfaction of the MDFC debt. Its ownership had little actual value
other than that the Policy would ultimately reduce TSR's debt to MDFC. Its interest as owner may
have been a legal formality, but an interest nonetheless. Its interest in the Policy proceeds to
offset the debt of MDFC was quite real and apparent. Its reverter interest, in the circumstance
that the Policy proceeds exceeded TSR's indebtedness to MDFC, appeared to have almost no actual
value as to the circumstances in June, 1994. Though its value may have been questionable, the
interest as a matter of law cannot be ignored. Under 11 U.S.C. § 541(a)(5)(C), the Court finds
that the Harrod Policy did constitute an interest in property of TSR as of June 17, 1994. TSR did
retain an interest in the Harrod Policy.

TSR did transfer the Policy to the Harrod Trust within a year TSR filed its bankruptcy petition.
The term "insolvent" is defined at 11 U.S.C. § 101(26) to mean, generally stated, that the sum of
one's debts is greater than the value of his property in a fair evaluation. Even though actual
bankruptcy filing was still several months away, no one would seem to dispute that even in June
TSR's debts greatly exceeded its assets. TSR appears to have been insolvent at the time of the
transfer. Thus, the second element is established.

The last remaining question is whether the debtor received a reasonable equivalent value in
exchange for the transfer. This question is made somewhat easier due to the fact that TSR
received no consideration for the transfer of the Policy. Previously this Court has said that the
reverter interest had almost no value. In June, 1994, this certainly seemed the case. The Court
should look at all the circumstances when determining whether TSR received reasonable value in
exchange for such a transfer. Two events unrelated to TSR's transfer convince the Court that the
absence of any consideration cannot be deemed reasonable or equitable under the whole
circumstances.

As a result of the transfer, TSR lost something--MDFC eventually claimed only $ 1,750,000 rather
than $ 2,000,000 as a setoff on its secured debt; and Heavrin gained something--the apparent
opportunity and leverage to negotiate a $ 252,000 settlement with MDFC. Under those
circumstances, the transfer created value for Heavrin and caused a determent to TSR. In return,
for providing this value and undertaking a determent, TSR received no consideration. The Court
concludes that the Trustee has satisfied all the requirements of constructive fraud under Section
548(a)(2)(A).

B.

The Bankruptcy Code empowers the Court to employ equitable remedies to recover the value of
property avoided under Section 548 from any person who is the immediate or mediate transferee of
the original transferee. 11 U.S.C. § 550(a). Heavrin and Bridges fit precisely that definition as
each was the immediate transferee from the Harrod Trust.

The evidence is completely confusing as to why MDFC would settle with Heavrin and agree to
Jackson National paying $ 252,000 from the proceeds of the policy directly to the Harrod Trust.
What cannot be seriously disputed is that the Harrod Trust did obtain those proceeds directly
from Jackson National which otherwise would have reduced MDFC's unsecured claim against the TSR
estate. Neither the Harrod Trust nor Heavrin can be faulted for MDFC limiting its setoff to $
1,750,000 rather than $ 2,000,000. As a matter of equity, however, it cannot be disputed that the
Harrod Trust benefitted and the creditors of TSR were harmed by this result. Consequently, both
as a matter of law and equity, the Court concludes that it is proper to require repayment of the
Policy proceeds from Heavrin and Bridges to the TSR estate. n1

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -


n1 The Court disagrees with the Bankruptcy Court's finding of actual fraud. See U.S. v. Heavrin,
144 F. Supp.2d 769 (W.D.Ky. 2001). The evidence before the Bankruptcy Court appears similar to
that which this Court considered in the criminal trial. The standard of proof, of course, is much
different. Moreover, the elements necessary are different. The Court need not review the
Bankruptcy Court's determination of actual fraud.


- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -

II.

The Court must next determine whether the Bankruptcy Court erred in determining that Heavrin must
disgorge approximately $ 46,000 in attorney's fees which he received from TSR within one year of
the bankruptcy petition. This issue has been the subject of some difference of opinion between
the bankruptcy and district courts. The Bankruptcy Court believes that because TSR reported the
fees as insider payments and because Heavrin did not independently report the fees, these
payments within the year prior to the bankruptcy should be disgorged. After reviewing this matter
in its entirety, the Court concludes that it is best to start its analysis from scratch. This is
necessary because numerous mistakes and misconceptions seem to have invested the arguments on
this issue. The Court does not excuse itself from this indictment. The basic and original
assertion here is that Heavrin must be required to disgorge all his fees because he did not
disclose those fees as required by 11 U.S.C. § 329. The Court now believes that the entire
premise of this assertion is incorrect.

Section 329 requires "any attorney representing a debtor in a case under this title, or in
connection with such a case" must file a statement of compensation received from the debtor
within the year preceding filing of the petition. Heavrin was counsel for TSR prior to
bankruptcy. He was not counsel for the debtor TSR. As yet the Court has not seen evidence that
Heavrin represented the debtor while in bankruptcy. By its terms § 329 applies only to attorneys
for the debtor and does not apply to counsel generally who provided services for a corporation
prior to bankruptcy. The Court cannot find a single case in which a court applied the § 329
obligations to pre-petition counsel. Now reading the provision, the words seem so clear that the
Court is uncertain how one could state a view so confidently to the contrary.

It does not seem to this Court that Heavrin should be sanctioned for Mr. Chinn's failure to
disclose fees which TSR paid to Heavrin. The duty to disclose such fees and other disbursements
bound Chinn, TSR and perhaps corporate officers, not Heavrin. Moreover, the payments were not
concealed. Chinn disclosed the fees in the petition as payment to a related person.

The Court has previously conducted a perhaps overly thorough analysis of Mapother & Mapother,
P.S.C. v. Cooper (In Re Downs), 103 F.3d 472 (6th Cir. 1996). In that case, Mr. Friedman replaced
the original counsel for the debtor, Downs. Friedman represented Downs in the on-going bankruptcy
proceedings. Thus, § 329 clearly applied to him. This Court's analysis of Downs appears correct
except for the assumption that the § 329 disclosure requirements bound Heavrin. Not being an
attorney for the debtor, Heavrin is in a different position than Friedman. To that extent this
Court has been in error.

A few other comments are in order. This Court did not intend to determine that Heavrin's services
for the year preceding the bankruptcy were "in connection with the bankruptcy." Heavrin performed
substantial services for TSR prior to its petition. That Heavrin was probably aware that TSR was
in danger of a bankruptcy is quite irrelevant to the Court's analysis.

The thrust of the Trustee's argument seems to be that Heavrin was paid more than he deserved to
receive. No one seems to disagree that Heavrin engaged in an arrangement for a $ 10,000 monthly
retainer from TSR and that he performed a substantial amount of work. If this amounted to a
preferential payment or a fraudulent transfer, the Trustee could have advanced such a claim. He
did not make either such claim. Instead, the Trustee sought disgorgement based on Heavrin's
failure to comply with his duty to report fees under § 329. Absent a duty that the statute would
impose if Heavrin was an attorney for the debtor, the Trustee cannot maintain a claim of
disgorgement under § 329.

III.

Finally, the Court must determine whether the Bankruptcy Court erred in denying Heavrin's motion
that Judge Stosberg be recused from this case. Heavrin argues that Judge Stosberg should have
recused himself, mostly on the grounds of comments and rulings which the judge made during the
course of the litigation. The Court disagrees.

This litigation has been hotly contested. In the course of it, Judge Stosberg has made numerous
decisions which required that he assess Mr. Heavrin's truthfulness and motivation. That he made
those decisions adversely to Heavrin, does not require Judge Stosberg to recuse himself. The
Court agrees with Judge Stosberg's handling of the recusal motion and concludes that his denial
of that motion is supported by the law and sufficient facts of record. The Court finds no basis
for concluding that Judge Stosberg erred or abused his discretion in denying the motion.

The Court will enter an order consistent with this Memorandum Opinion.

JOHN G. HEYBURN II

CHIEF JUDGE, U.S. DISTRICT COURT

ORDER

The Court has considered numerous issues on appeal in these three cases. The Court has issued a
Memorandum Opinion discussing those issues. Being otherwise sufficiently advised,

IT IS HEREBY ORDERED that the Bankruptcy Court's order determining that the payment of $ 252,000
of insurance proceeds from Jackson National Insurance Company to the Harrod Irrevocable Trust to
be void is AFFIRMED.

IT IS FURTHER ORDERED that the Bankruptcy Court's order requiring Donald Heavrin and Bobbie
Bridges to reimburse the TSR Trustee in the amount of $ 252,000 for the proceeds of insurance
policy received is AFFIRMED.

IT IS FURTHER ORDERED that the Bankruptcy Court's order requiring Donald Heavrin to disgorge
attorney's fees in the amount of $ 46,000 received from TSR is REVERSED.

IT IS FURTHER ORDERED that the Bankruptcy Court's order denying Donald Heavrin's motion that
Judge Stosberg recuse himself is AFFIRMED.

This is a final and appealable order.

This 23rd day of February, 2004.

JOHN G. HEYBURN II

CHIEF JUDGE, U.S. DISTRICT COURT