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Wheeler Bros, Inc. v. Jones

United States District Court, M.D. Alabama, Northern Division

May 15, 2017

WHEELER BROS., INC., Plaintiff,
v.
ROBERT L. JONES, JR., VIRGINIA JONES, ADVANCED FLEET SERVICES, LLC, ROBERT L. JONES, III, JONATHAN CATON JONES, PIRATES TOW, LLC, LAVENIA A. JONES, ROBERT L. JONES, SR., A&B DEVELOPMENTS, LLC, A&B PROPERTIES, LLC, BEST BUY AUTOMOTIVE & TIRES, LLC, JONES BROTHERS ENTERPRISES, LLC, and KYLE BREECE JONES, Defendants.

          MEMORANDUM OF DECISION

          PAUL G. BYRON JUDGE.

         This cause comes before the Court following a one-day bench trial conducted on March 13, 2017.[1] Having considered the pleadings, evidence, arguments, and relevant legal authority, and having made determinations on the credibility of the witnesses, the Court now announces its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52.

         TABLE OF CONTENTS

         INTRODUCTION ............................................................................................................. 3

         APPLICABLE LAW ........................................................................................................ 4

         Subject Matter Jurisdiction ........................................................................................... 4

         The Alabama Uniform Fraudulent Transfer Act ........................................................... 5

         Piercing the Corporate Veil and Alter Ego ................................................................... 9

         FINDINGS OF FACT .................................................................................................... 11

         The Parties ................................................................................................................ 11

         Wheeler's Business With AFS and Junior ................................................................. 13

         Tracking the Money ................................................................................................... 16

         Testimony of Richard Harbin .................................................................................. 16

         Testimony of Tara Gearhart ................................................................................... 22

         CONCLUSIONS OF LAW ............................................................................................. 36

         Subject Matter Jurisdiction ......................................................................................... 36

         Breach of Contract, Unjust Enrichment, and Breach of Guaranty .............................. 36

         Piercing the Corporate Veil and Alter Ego ................................................................. 36

         Fraudulent Transfers-Actual Fraud .......................................................................... 38

         Fraudulent Transfers-Constructive Fraud as to Present Creditors .......................... 53

         Fraudulent Transfers-Constructive Fraud as to Present and Future Creditors ........ 73

         Who Owes What ........................................................................................................ 90

         INTRODUCTION

         1. This dispute arises out of a contractual debt owed to Plaintiff and Defendants' subsequent actions to evade the payment of that debt.

         2. Plaintiff initiated this lawsuit on December 30, 2014 by filing a forty-five-count Complaint. In Counts I, II, and III, Plaintiff alleges claims for the breach of a sales contract, unjust enrichment relating to the goods that were the subject of the sales contract, and for the breach of a personal guaranty of the sales contract, respectively. In Counts IV through XLIV, Plaintiff seeks to avoid fraudulent transfers of assets by Defendants pursuant to the Alabama Uniform Fraudulent Transfer Act (“AUFTA”), Ala. Code §§ 8-9A-1 to -12. Lastly, in Count XLV, Plaintiff seeks to pierce the corporate veils of the Defendant limited liability companies and to disregard those companies as the alter egos of the individual Defendants who own and operate them, so as to impose direct liability against the individual Defendants for the fraudulent transfers alleged in Counts IV through XLIV.

         3. On March 4, 2016, the Court entered summary judgment in favor of Plaintiff on Counts I, II, and III of the Complaint. (Doc. 109). Accordingly, this matter proceeded to trial on Counts IV through XIX (except that portion of Count X alleged against Jonathan Caton Jones), Counts XXI through XXV, Counts XXVII through XXXI, Counts XXXIII through XXXIX, and Counts XLI through XLV (except that portion of Count XLV alleged against Jonathan Caton Jones).

         APPLICABLE LAW

         Subject Matter Jurisdiction

         4. Federal courts are courts of limited jurisdiction, meaning that they are conscribed to hearing only those types of cases and controversies enumerated by Article III of the United States Constitution or otherwise granted to them by the United States Congress. Univ. of S. Ala. v. Am. Tobacco Co., 168 F.3d 405, 409 (11th Cir. 1999). A federal court has the power to examine its subject matter jurisdiction at any time during the proceedings, and may raise the issue on its own initiative. Id. at 410. A federal court is powerless to hear a case over which it lacks subject matter jurisdiction. Id.

         5. Federal courts have original jurisdiction over all civil actions between citizens of different states where the amount in controversy exceeds $75, 000.00. 28 U.S.C. § 1332(a)(1). An individual is a citizen of the state in which he or she is domiciled, which is the state where the individual maintains his or her “true, fixed, and permanent home.” McCormick v. Aderholt, 293 F.3d 1254, 1257-58 (11th Cir. 2002) (per curiam) (quoting Mas v. Perry, 489 F.2d 1396, 1399 (5th Cir. 1974)). A corporation is a citizen of the state in which it is incorporated and the state in which the corporation's principal place of business is located. Rolling Greens MHP, L.P. v. Comcast SCH Holdings L.L.C., 374 F.3d 1020, 1021 n.1 (11th Cir. 2004) (per curiam). Unincorporated business entities, such as limited liability companies, are citizens of every state in which each of its individual members are citizens. Id. at 1022. Diversity of citizenship “must be present at the time the complaint is filed” in order to invoke a federal court's subject matter jurisdiction under § 1332. Mas, 489 F.2d at 1399.[2]

         The Alabama Uniform Fraudulent Transfer Act

         6. The AUFTA provides a cause of action for a creditor to avoid a fraudulent transfer of assets made by a debtor. See Ala. Code. § 8-9A-7(a)(1).

         7. A “creditor” is “[a] person who has claim, ” id. § 8-9A-1(4), and a “debtor” is “[a] person who is liable on a claim, ” id. § 8-9A-1(6). A “claim” is “[a] right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Id. § 8-9A-1(3).

         8. Under the AUFTA, the word “transfer” means “[e]very mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” Id. § 8-9A-1(13).

         9. The AUFTA distinguishes between actual fraud and constructive fraud in characterizing the nature of a transfer made by a debtor and sought to be avoided by a creditor.

         10. A transfer of assets is the result of actual fraud when “the debtor [makes] the transfer with actual intent to hinder, delay, or defraud any creditor.” Id. § 8-9A-4(a). The AUFTA provides a non-exhaustive list of factors-commonly referred to as “badges of fraud”-to consider when determining whether a debtor made a transfer “with actual intent to hinder, delay, or defraud.” Those factors include whether:

(1) The transfer was to an insider;
(2) The debtor retained possession or control of the property transferred after the transfer;
(3) The transfer was disclosed or concealed;
(4) Before the transfer was made the debtor had been sued or threatened with suit;
(5) The transfer was of substantially all 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;
(9) The debtor was insolvent or became insolvent shortly after the transfer was made;
(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Id. § 8-9A-4(b).

         11. A transfer of assets is constructively fraudulent in one of three scenarios. First,

A transfer made by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made, if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer and the debtor:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(2) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.

Id. § 8-9A-4(c). Second,

A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer.

Id. § 8-9A-5(a). Third,

A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt and the debtor was insolvent at that time and the insider had reasonable cause to believe that the debtor was insolvent.

Id. § 8-9A-5(b).

         12. For a debtor who is an individual, the term “insider” includes “[a] relative of the debtor” and “[a] corporation in which the debtor is a director, officer, or person in control.” Id. § 8-9A-1(8)(a). For a debtor who is a corporate entity, the term “insider” includes a “director, ” “officer, ” or “person in control” of the debtor and any “relative of a . . . director, officer, or person in control of the debtor.” Id. § 8-9A-1(8)(b).

         13. “A debtor is insolvent if the sum of the debtor's debts is greater than all the debtor's assets at a fair valuation.” Id. § 8-9A-2(a). “A debtor who is generally not paying his debts as they become due is presumed to be insolvent.” Id. § 8-9A-2(b).

         14. Whether a debtor receives “reasonably equivalent value” for a transaction is determined from the viewpoint of the debtor's creditors. SE Prop. Holdings, LLC v. Center, No. 15-0033-WS-C, 2016 WL 7493623, at *9 (S.D. Ala. Dec. 30, 2016). “Consideration having no utility from a creditor's viewpoint does not satisfy the statutory definition [of ‘reasonably equivalent value'].” Id. (alterations omitted). Stated differently, “the ‘touchstone' of the ‘reasonably equivalent value' analysis is ‘whether the parties exchanged comparable realizable commercial value.'” Id. at *9 n.16 (quoting In re David Cutler Indus., Ltd., 502 B.R. 58, 73 (Bankr. E.D. Pa. 2013)). A debtor who gives nothing of intrinsic monetary value in exchange for an asset has not given “reasonably equivalent value.” See Id. at *9-10; Ala. Code § 8-9A-3(a) (excluding from the definition of “reasonably equivalent value” unperformed promises to provide future support to the debtor or to a third person on the debtor's behalf).

         15. To avoid a fraudulent transfer of assets based on actual fraud under § 8-9A-4(a), a plaintiff must prove two elements: (1) the plaintiff is a creditor of the defendant, and (2) the defendant transferred an asset or an interest in an asset with the actual intent to injure, delay, or defraud the plaintiff or any other creditor. 1 Ala. Pattern Jury Instr. Civ. 18.22.

         16. To avoid a constructively fraudulent transfer of assets under § 8-9A-4(c), a plaintiff must prove three elements: (1) the plaintiff is a creditor of the defendant, (2) the defendant transferred an asset or an interest in an asset without receiving reasonably equivalent value in exchange, and either (3)(a) the defendant intended to incur (or believed or reasonably should have believed that he would incur) debts beyond his ability to pay, or (3)(b) the defendant was engaged or was about to engage in a business transaction for which the defendant's remaining assets were unreasonably small in relation. 1 Ala. Pattern Jury Instr. Civ. 18.21.

         17. To avoid a constructively fraudulent transfer of assets under § 8-9A-5, a plaintiff must prove three elements: (1) the plaintiff is a creditor of the defendant, (2) the plaintiff's claim arose before the defendant made the transfer at issue, and either (3)(a) the defendant made the transfer without receiving reasonably equivalent value in exchange and the defendant was insolvent when he made the transfer or became insolvent as a result of the transfer, or (3)(b) the transfer was made to an insider for an antecedent debt, the defendant was insolvent when he made the transfer, and the insider had reasonable cause to believe that the defendant was insolvent when he made the transfer. 1 Ala. Pattern Jury Instr. Civ. 18.20.

         18. The plaintiff who prevails against a debtor for having made a fraudulent transfer “may recover judgment for the value of the asset transferred . . . or the amount necessary to satisfy the [plaintiff's] claim, whichever is less.” The judgment may be entered against the first transferee of the asset, the person for whose benefit the transfer was made, or any subsequent transferee of the asset other than a good faith transferee who took the asset either for value or from a first subsequent transferee. Ala. Code. § 8-9A-8(b).

         Piercing the Corporate Veil and Alter Ego

         19. The general rule is that a corporation is a distinct legal entity form the individuals who own and operate the corporation; as a result, a corporation's owners and operators ordinarily are not responsible for acts committed by the corporate entity. Cohen v. Williams, 318 So.2d 279, 281 (Ala. 1975).

         20. However, Alabama law recognizes a well-established equitable exception to the general rule that owners and operators of a corporation are not responsible for the corporation's acts. When the owner or operator of a corporation uses the corporation for the sole purpose of avoiding personal liability, it is said that the corporation is merely the “alter ego” of the owner or operator, and the corporate entity may be disregarded-that is, the corporate “veil” may be “pierced”-and liability may be imposed directly against the owner or operator for the corporation's acts. Hill v. Fairfield Nursing & Rehab. Ctr., LLC, 134 So.3d 396, 407 (Ala. 2013).

         21. It is well-settled that the doctrines of piercing the corporate veil and alter ego apply equally where the business entity at issue is a limited liability company. Mama's Enters., LLC v. United States, 883 F.Supp.2d 1128, 1134-35 (N.D. Ala. 2012); see also Hill, 134 So.2d at 411 (applying the doctrines of piercing the corporate veil and alter ego to a limited liability company).

         22. To pierce the corporate veil and impose liability against a member or manager of a limited liability company, a plaintiff must prove three elements: (1) the member or manager exercised complete control and dominion over the company's finances, policies, and business practices such that the company “had no separate mind, will, or existence of its own, ” (2) the member or manager misused his or her control and dominion over the company, and (3) the misuse caused the plaintiff's injuries. Messick v. Moring, 514 So.2d 892, 894-95 (Ala. 1987).

         23. The question of whether to pierce the corporate veil and impose liability against a member or manager of a limited liability company is fact-intensive and must be resolved on a case-by-case basis. Hill, 134 So.3d at 411. A non-exhaustive list of factors to consider when answering the question include: (1) whether the member or manager is the sole individual who owns and operates the company; (2) whether the company was set up as a means to evade or defraud creditors; (3) whether the member or manager observes the corporate form; (4) whether the company adheres to the laws governing its existence; (5) whether the company maintains regular business records; (6) whether the company maintains its own bank account; (7) whether the company has any employees; (8) whether the member or manager comingles his personal funds and assets with the company's funds and assets; (9) whether the member or manager uses the company's funds and assets for personal purposes; (10) whether the member or manager drains the company of its funds and assets; and (11) whether the member or manager holds himself or herself out as the company or confuses his or her identity with the company's identity. See S. Ala. Pigs, LLC v. Farmer Feeders, Inc., 305 F.Supp.2d 1252, 1258 (M.D. Ala. 2004); Simmons v. Clark Equip. Credit Corp., 554 So.2d 398, 401 (Ala. 1989).

         FINDINGS OF FACT

         The Parties

         24. Plaintiff, Wheeler Bros., Inc. (“Wheeler”), is a Pennsylvania corporation with its principal place of business located in Pennsylvania. (Compl. ¶ 3; Pl.'s Ex. 239).

         25. Defendant, Robert L. Jones, Sr. (“Senior”), is an individual who was domiciled in the State of Alabama at the time this lawsuit was commenced. (Pl.'s Ex. 227, 9:21-23, 79:19-80:18)

         26. Defendant, Robert L. Jones, Jr. (“Junior”), is an individual who was domiciled in the State of Alabama at the time this lawsuit was commenced. (Pl.'s Ex. 229, 128:5-15; Pl.'s Ex. 230, 350:8-12).

         27. Defendant, Robert L. Jones, III (“Laslie”), is an individual who was domiciled in the State of Alabama at the time this lawsuit was commenced. (Pl.'s Ex. 233, 7:20- 9:5).

         28. Defendant, Virginia Jones (“Virginia”), is an individual who was domiciled in the State of Alabama at the time this lawsuit was commenced. (Pl.'s Ex. 228, 17:18- 18:10).

         29. Defendant, Lavenia A. Jones (“Ann”), is an individual who was domiciled in the State of Alabama at the time this lawsuit was commenced. (Pl.'s Ex. 226, 17:13- 19).

         30. Defendant, Kyle Breece Jones (“Kyle”), is an individual who was domiciled in the State of Alabama at the time this lawsuit was commenced. (Pl.'s Ex. 232, 17:1- 20:15).

         31. Defendant, Advanced Fleet Services, LLC (“AFS”), is an Alabama limited liability company. Junior is the sole member and owner of AFS. (Pl.'s Ex. 309).

         32. Defendant, Pirates Tow, LLC (“Pirates Tow”), is an Alabama limited liability company. Jonathan Caton Jones is the sole member and owner of Pirates Tow. (Pl.'s Ex. 314). Jonathan Caton Jones is an individual who was domiciled either in the State of Alabama or the State of Arkansas at the time this lawsuit was commenced. (Pl.'s Ex. 234, 6:4-17, 11:10-17:7).

         33. Defendant, A&B Properties, LLC (“A&B Properties”), is an Alabama limited liability company. Junior and Senior are the only members of A&B Properties. Junior and Senior each hold a 50% ownership interest in A&B Properties. (Pl.'s Ex. 311).

         34. Defendant, A&B Developments, LLC (“A&B Developments”), is an Alabama limited liability company. (Pl.'s Ex. 250, p. 3). Senior and Ann are the only members of A&B Developments. Ann holds a 99% ownership interest in A&B Developments, while Senior owns the remaining 1%. (Pl.'s Ex. 310).

         35. Defendant, Best Buy Automotive & Tires, LLC (“Best Buy”), is an Alabama limited liability company. Senior and Ann are the only members of Best Buy. Senior and Ann each hold a 50% ownership interest in Best Buy. (Pl.'s Ex. 312).

         36. Defendant, Jones Brothers Enterprises, LLC (“JBE”), is an Alabama limited liability company. Laslie is the sole member and owner of JBE. (Pl.'s Ex. 313).

         37. The individual Defendants are all related to each other either by blood or by marriage. Senior is married to Ann, and Junior is their son. Junior is married to Virginia, and Laslie is their son. Laslie is married to Kyle. (Tr. 90:2-25).

         Wheeler's Business With AFS and Junior

         38. Wheeler designs, manufactures, and distributes motor vehicle parts. In 1989, the United States Postal Service (“USPS”) awarded Wheeler a national ordering agreement through which USPS purchased Wheeler's parts to service its national fleet of postal vehicles. (Tr. 20:3-22:5).

         39. At some point, USPS found that it could no longer keep up with the maintenance of its vehicles and needed to find a way to take care of its overflow maintenance needs. Seeing an opportunity, Junior approached Wheeler with the idea that Wheeler should contract with his company, AFS, to perform the labor aspect of USPS's overflow maintenance work. AFS would open a number of facilities in different states and Wheeler would sell AFS the parts it needed to repair USPS's vehicles. (Tr. 22:6-16).

         40. On October 15, 2010, Wheeler and AFS executed a Parts Sale Agreement (the “Agreement”) memorializing the terms of their arrangement. On December 28, 2010, Junior executed an unconditional personal guaranty in which he assumed full responsibility for AFS's performance of the Agreement. Junior's execution of the personal guaranty was a necessary condition for Wheeler entering into the Agreement with AFS. (Tr. 22:20-24:14; Pl.'s Exs. 239, 348).

         41. AFS breached the Agreement from the outset by failing to pay for Wheeler's parts as required, and AFS never became current on its contractual obligations. (Tr. 25:4-10, 30:7-11).

         42. Nevertheless, Wheeler continued to sell parts to AFS pursuant to the terms of the Agreement due to AFS's representations of profitability and viability as a business. Specifically, on October 25, 2011, Junior emailed Wheeler a copy of AFS's income and balance sheet as of July 31, 2011. The income and balance sheet reflected that AFS had received $4, 733, 322.23 in total revenues for a gross profit of 59.22% and retained $414, 256.88 for a net profit of 8.75%. Additionally, on April 18, 2012, Junior emailed Wheeler “to discuss . . . a plan to get the pay issue put to bed once and for all.” To that end, Junior revealed that AFS was opening a new service center in ...


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