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SE Property Holdings, LLC v. Judkins

United States District Court, S.D. Alabama, Southern Division

January 11, 2019




         A non-jury trial was held in this matter before the undersigned that began on October 31, 2018, and concluded on November 5, 2018. Pursuant to Rule 52(a)(1) of the Federal Rules of Civil Procedure, the Court finds the facts specially and states its conclusions of law separately.

         I. Nature of the Case

         This fraudulent transfer action was brought by Plaintiff, SE Property Holdings, LLC (“SEPH” or “Plaintiff”), against Defendants Russell Judkins (“Judkins”) and Highway 59, LLC (“Hwy 59”) (collectively, “Defendants”). The only cause of action at issue in this case is Plaintiff's claim for actual fraudulent transfer pursuant to section 8-9A-4(a) of the Alabama Uniform Fraudulent Transfer Act (the “AUFTA”). Plaintiff alleges Judkins transferred his interest in a parcel of real property to Hwy 59 with the actual intent to hinder, delay, or defraud SEPH, as his creditor.

         In the parties' Joint Pretrial Document, they agreed to the elements of Plaintiff's claim, which are set out in the AUFTA, Ala. Code § 8-9A-1 et seq., and, further, agreed SEPH is a creditor of Judkins, and Judkins transferred an interest in an asset. (Doc. 53, at 3). The disputed fact, as defined by the parties in their Joint Pretrial Document, is whether the transfer was made with the intent to hinder, delay, or defraud a creditor. (Doc. 53, at 3). In resolving the triable issues, the Court has reviewed and considered the arguments presented, the testimony and exhibits admitted into evidence during the bench trial, and other portions of the Court's file where appropriate.

         II. Findings of Fact

         The Court finds Plaintiff proved the following facts by clear and convincing evidence:

         1. SEPH is the successor by merger to Vision Bank. Vision Bank made a series of loans to Coastal Construction, LLC (“Coastal”), a company that focused on the development of residential real estate on the Gulf Coast. Judkins, Hans Van Aller, III, and Robert Harris were the members of Coastal. Coastal's members, including Judkins, signed guaranties that made them jointly and severally liable for the funds that were loaned by Vision Bank. The final four loans by Vision to Coastal were in the amount of $1, 695, 000.00, $1, 599, 900.00, $1, 248, 143.50, and $1, 073, 258.66.

         2. Coastal, also, borrowed money from banks other than Vision Bank, such as Trustmark and RBC, and the Coastal members, including Judkins, guaranteed those loans. Additionally, Judkins, Van Aller, and Harris were the principal borrowers (rather than guarantors) on loans from Pen Air Federal Credit Union. In all, Judkins was a guarantor or borrower of between $15 million and $18 million in loans.

         3. Prior to the transfer at issue, Coastal's business was struggling. With the economy and real estate market in decline, Coastal was unable to sell its properties, and its members were required to personally pay the interest payments on Coastal's substantial loans. Further, at some point prior to early 2008, Harris ceased making contributions to Coastal. In early 2008, Coastal sued Harris in an effort to require him to make contributions. Coastal was unsuccessful in that regard, so Judkins and Van Aller continued to be the only members who made Coastal's interest payments.

         4. Coastal and its guarantors began to default on their loans in 2008. Most, if not all, of Coastal's loans went into litigation.

         5. For example, Coastal's (and Judkins') last voluntary payment to Vision Bank was in September 2008. Vision Bank filed suit against Coastal, Judkins, Harris, and Van Aller on February 2, 2009. RBC Bank sued Coastal, Judkins, Harris, and Van Aller on March 10, 2009. Wachovia Bank sued Judkins and others on October 27, 2009. Pen Air Federal Credit Union sued Judkins, Harris, and Van Aller in June 2010. Although these lawsuits were filed after the subject transfer, they were imminent and foreseeable at the time of the transfers.

         6. Vision Bank ultimately obtained a judgment against Judkins in the amount of $4, 551, 860.05.

         7. On or about June 25, 2008, Judkins met with a Florida attorney, David Hightower, in a scheme to shield his assets from creditors. With Hightower's assistance, beginning on July 28, 2008, Judkins transferred select assets that were unencumbered and non-exempt, which could be reached by his creditors, to either himself and his wife, Linda Judkins (“Mrs. Judkins”), “as tenants by the entirety, ” a status under Florida law that makes such assets exempt from a creditor of only one spouse, or to Florida limited liability companies that were created by Hightower and owned in whole, or in part, by Judkins and Mrs. Judkins as tenants by the entirety.

         8. One of those transfers is the subject of this lawsuit. Judkins and his business partner, Gary Sluder, owned real property located off Alabama State Route 59 (“Highway 59”) in Gulf Shores, Alabama. Sluder and Judkins each owned a one-half interest in the real property as tenants in common. Since June 1993, for over fifteen (15) years, Sluder and Judkins owned this real property in their personal names and leased it to Gene's Floor Covering II, Inc., their floor covering business that is located in Baldwin County, Alabama. Sluder and Judkins were partners with respect to Gene's Floor Covering II, Inc., but Judkins testified he controlled all aspects of the business and Sluder was a “silent partner” in the business.[1] As part of the scheme, on July 28, 2008, Hightower organized Hwy 59, a Florida limited liability company of which Judkins and Mrs. Judkins owned fifty percent (50%) as tenants by the entirety and Sluder and his wife, Cynthia Sluder, owned fifty percent (50%) as tenants by the entirety. Judkins and Sluder, then, transferred their interests in the subject real property to Hwy 59. The deed to Hwy 59 is dated August 29, 2008, and the deed was recorded on September 16, 2008. Judkins was not provided consideration in exchange for the transfer.[2] After the transfer to Hwy 59, Judkins continued to possess, and control, the property and use it for his floor covering business.

         9. At trial, Plaintiff offered a real estate appraiser's testimony that the value of one hundred percent (100%) of the subject property was $795, 000.00. Defendants did not offer any testimony in regard to the value of the property.

         10. Contemporaneous with the subject transfer, and as part of the same representation, Hightower handled other transfers for Judkins.[3] Similar to the Hwy 59 transfer, Judkins transferred his shares of Gene's Floor Covering II, Inc., to GFC Holdings, LLC, another Florida company that was formed by Hightower on July 28, 2008. Judkins and Mrs. Judkins owned one hundred percent (100%) of GFC Holdings, LLC, as tenants by the entirety. With Hightower's assistance, Judkins, also, transferred his and his wife's real property directly to themselves as tenants by the entirety. Hightower, also, drafted a mortgage agreement pursuant to which Judkins and his wife as tenants by the entirety secured a purported loan to Judkins and Van Aller.

         11. The effect of the foregoing transfers was property that would have been reachable by Judkins' personal creditors became exempt from, or unreachable by, his creditors. Indeed, the testimony was, after the foregoing transfers, Judkins did not have unencumbered, non-exempt assets that remained in his name.

         12. Judkins and Mrs. Judkins testified they employed Hightower's legal services because Judkins' father-in-law was dying, which gave them a sense of urgency to have their estates planned. Hightower testified to the estate planning advantages of the foregoing transfers and, in addition to the transfers, Judkins and Mrs. Judkins executed documents such as wills, durable powers of attorney, and advance healthcare directives. However, the testimony that estate planning was the reason for the subject transfer was simply not credible. Judkins' father-in-law was in poor health for years prior to the transfers, and Judkins and Mrs. Judkins had not made an estate plan. Additionally, Judkins testified at his deposition his father-in-law did not have a will and left his estate in disarray upon his death, but at trial, the undisputed evidence was Judkins' father-in-law did have a will. Judkins admitted one of the reasons for the subject transfer was in the case he was sued, but he claimed he was concerned about a premises liability suit rather than collection cases by Coastal's lenders. This testimony was not credible. Hightower had little to no independent recollection of the representation, but his notes reflected Judkins' joint and several guarantor liability of $15 million to $18 million of Coastal's debt was one of the topics discussed by Judkins with Hightower.

         13. At the time of the transfer, and immediately following the transfer, Judkins was “insolvent” as that term is defined by the AUFTA. On this topic, Plaintiff's expert Stacy Cummings testified the sum of Judkins' debts was greater than the sum of his assets at the time of the transfer(excluding property to the extent generally exempt under nonbankruptcy law). Defendants did not offer an expert on the issue of insolvency.

         14. Judkins did not disclose the subject transfer to Vision Bank. Judkins made some changes to his Personal Financial Statement but none that would have put Vision Bank on notice that, following the transfers that were handled by Hightower, he had placed significant non-exempt assets out of the reach of his creditors.

         15. At the same time as Judkins transferred assets, Judkins' fellow Coastal member, Van Aller, made transfers to a family-owned limited partnership. Judkins and Van Aller denied they spoke to each other about the asset transfers. However, some of Van Aller's transfers were within days of Judkins' transfers, and Judkins and Van Aller admitted they spoke to each other frequently and were close friends. Further, Van Aller actually signed the mortgage agreement that Hightower handled for Judkins and Mrs. Judkins in connection with the “estate planning.”

         16. Judkins transferred his interest in the subject real property with the actual intent to hinder, delay, or defraud his creditor, SEPH. Hwy 59 was created at the direction of Judkins for the purpose of fraudulently transferring assets, and Hwy 59 was an instrument of, and participant in, fraud since its inception. Hwy 59 was controlled by Judkins with respect to this transfer and shared Judkins' intent that this transfer hinder, delay, or defraud Judkins' creditor, SEPH. Further, in effecting the subject transfer, Defendants consciously or deliberately engaged in fraud, wantonness, and malice with regard to SEPH.

         III. Conclusions of Law: Liability

         This case is before the Court in diversity jurisdiction, and the parties agree the substantive law of the State of Alabama applies. (Doc. 53, at 3.) When this action was commenced, Plaintiff was a citizen of Ohio, and Defendants were citizens of Florida.

         SEPH brings a claim for actual fraudulent transfer pursuant to section 8-9A-4(a) of the AUFTA. That section provides, “[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 with the actual intent to hinder, delay, or defraud any creditor.” Ala. Code § 8-9A-4(a). Thus, to prevail, SEPH was required to prove “[t]hat the plaintiff is a creditor of the debtor, ” and “[t]hat the debtor transferred an asset or an interest in an asset with the actual intent to injure, delay or defraud the plaintiff or any other creditor of the debtor.” Ala. Pattern Jury Instr. Civ. 18.22 (3d ed.).[4]

         At trial, it was undisputed SEPH is a creditor of Judkins, and Judkins is a debtor of SEPH, as those terms are defined by the AUFTA. Judkins was also a debtor of SEPH at the time of the subject transfer.[5] Also, it was undisputed at trial Judkins transferred an interest in an asset, namely his interest in the subject real property.

         The critical issue is whether the transfer was effected with the requisite level of intent. “Actual fraud denotes the actual mental operation of intending to defeat or delay the rights of the creditor.” Cox v. Hughes, 781 So.2d 197, 201 (Ala. 2000). The AUFTA includes a list of eleven (11) factors that may be considered to determine “actual intent.” Ala. Code § 8-9A-4(b). These factors are sometimes called “badges of fraud.” See In re XYZ Options, Inc., 154 F.3d 1262, 1271 (11th Cir. 1998) (referring to the eleven factors that may be considered to determine fraudulent intent and are found in the AUFTA as “badges of fraud”). The factors are not exclusive, as indicated by the statute. See Ala. Code § 8-9A-4(b) (providing “consideration may be given” to the listed factors). The statutory factors are whether:

(1) The transfer was to an insider;
(2) The debtor retained possession or control of the property transferred ...

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