Reed v. Griggs (In re Cash Rewards, Inc.)

The following constitutes the ruling of the court and has the force and effect therein described.

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United States Bankruptcy Judge

FINDINGS OF FACT AND CONCLUSIONS OF LAW

In this adversary proceeding, the Trustee seeks to recover over $500,000 in funds which the Trustee alleges were fraudulently transferred by the debtor, Cash Rewards, Inc., to Defendants. A trial on this adversary proceeding was held from February 28 to March 1, 2012. The Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052:

FINDINGS OF FACT 1. Parties

A. Trustee
I. Diane Reed is the Chapter 7 Trustee for debtor Cash Rewards, Inc. ("Cash Rewards"), and is the Plaintiff in this adversary proceeding.
B. Defendants
I. Defendant Leo Griggs ("Griggs") is, and was at all times relevant to this case, the sole owner, officer, and employee of Defendant Great Southwest Acquisitions, Inc. ("GSA"). Griggs described GSA as a "pass-through company," and referred to GSA's bank account as his own.
ii. Griggs, individually and through his interest in GSA, owns, and at all times relevant to this case owned, a controlling interest in Defendant LGPC Enterprises, L.P. d/b/a Park Cities Dodge ("Park Cities"). LGPC Enterprises, L.P. was formerly known as LGPC Dodge, LP. GSA is, and was at all times relevant to this case, the sole general partner of Park Cities.
iii. Griggs, along with his and GSA's business partners, purchased the Dodge automobile dealership they later operated as Park Cities in or around February 2005. Of the partners in Park Cities, only Griggs held an office at thedealership, and Griggs controlled Park Cities' day-to-day operations and its finances. Griggs was considered to be Park Cities' "dealer," the individual designated to represent the brands sold at Park Cities to the public.
iv. Park Cities ceased operations as such on or about September 9, 2009 when Griggs resigned the Park Cities franchise. Park Cities' lender, Chrysler Financial and/or its successors and assigns, subsequently sued Park Cities and alleged that Park Cities defaulted on one or more loan obligations.
v. GSA and Park Cities Dodge are, and were at all times relevant to this case, alter egos of Griggs.

2. Cash Rewards, Inc.

I. Cash Rewards was, at all times relevant to this suit, a Texas corporation.
ii. David Maloy incorporated Cash Rewards in 2003. Maloy was the president and sole shareholder of Cash Rewards from its founding until it filed its petition for relief under Chapter 7 of the Bankruptcy Code on June 10, 2010 (the "Petition Date"). Maloy was involved in and directed the operations of Cash Rewards from its founding in 2003 until the Petition Date.
iii. While it was in operation, Maloy marketed Cash Rewards to certain retail merchants as a customer incentive program. Maloy represented to potential merchants that, after paying a one-time setup fee to enroll in the Cash Rewards program, they could purchase cash reward certificates ("Certificates") from Cash Rewards for a small percentage of the Certificates'face value. Participating merchants could then offer the Certificates free-of-charge as a sales incentive to prospective customers
iv. After a participating merchant awarded a Certificate to a Customer, the merchant was required to pay Cash Rewards a percentage of the face value of the Certificate, usually around 15%. The merchant's customer then had to register the Certificate with Cash Rewards and provide certain supporting documents within seven days of accepting the Certificate. Certificate holders who met Cash Rewards' initial registration requirements could attempt to redeem the Certificate during a seven-day period three years later. However, those customers faced procedural hurdles, including an onerous list of required supporting documents and Cash Rewards' strict enforcement of the seven-day redemption window.
v. According to the Trustee, Cash Rewards represented to merchants that its business model centered on the concept of "breakage," or the tendency of Certificate holders to fail to redeem their Certificates. To induce wary Merchants to financially support the Cash Rewards (or "CRI") scheme, Maloy made at least the following materially false representations to prospective merchants and did so knowingly and with the intent to defraud:

(a) After CRI took out a small percentage of the money paid by retailers to cover CRI's administrative costs, funds paid to CRI to purchase cash reward certificates would be held in an escrow account so that they would be protected and available for repayment at the time for

redemption three years later. Maloy and CRI would not have access to those funds. Only CRI's escrow agent would have access to the funds.
(b) Reward money owed to a certificate holder would be paid out of the pool of funds collected in the month that the customer made a purchase and received a cash reward certificate. As a result, even if CRI went bankrupt, claim-fund money would always be available at the time of redemption because each month's funds would be kept in a separate monthly pool in the escrow account. If there was not enough money in the pool to pay in full all the cash rewards owed in a particular month, customers would be paid proportionately based on the amount of their cash reward certificates. If there was money left over in the pool after all certificates for a particular month were paid in full, the excess money would be given to charity.
(c) At the end of a certificate holder's three-year waiting period, an independent third-party administrator (ITPA) would determine whether the particular certificate holder was entitled to a cash reward, i.e., whether the certificate holder properly registered the certificate within seven days after it was issued and satisfied the instructions on the certificate at the time of redemption. Given the independent role of the ITPA, Maloy and CRI could not reject any certificate holder for failing to satisfy any of CRI's redemption requirements.

disclose the assets within his control to the Trustee and, acting with the intent to place assets beyond the reach of Cash Rewards' creditors, the Trustee, and the Court, conveyed assets stolen from Cash Rewards to one or more third parties. Maloy also failed to comply with and intentionally frustrated the Trustee's attempts to carry out her duties with regard to Cash Rewards' bankruptcy estate. As a result of Maloy's intentional disregard of this Court's order, he was held in contempt and incarcerated for a time in July 2010.

3. Transfer One

I. On February 8, 2005, $250,000 was transferred froma Cash Rewards account at Compass Bank styled "Claim Fund Escrow" ("Account No. 2828") into a second Cash Rewards account at Compass Bank ("Account No. 2852").
ii. Also on February 8, 2005, Maloy drafted and gave to Griggs a check for $250,000 drawn on Account No. 2852 ("Check No. 9308"), which check bore the notation "Investment Loan Due by 3-4-05." Later the same day, Griggs deposited Check No. 9308 into a GSA account at Compass Bank ("Account No. 9151").
iii. Maloy and Griggs have given conflicting accounts of the purpose of Transfer One. In his affidavit in support of Defendants' Motion for Summary Judgment, Griggs claimed that "[t]he purpose of these funds was to assist [him] in purchasing a new Dodge dealership, though the Dodge dealership purchase did not materialize." During the first of two depositions he gave in this case, however, Griggs testified that he used the funds conveyed in Check$250,000 cashier's check to Maloy, which Maloy deposited into the Compass Bank accoun the shared with Charlyn ("Account No. 1514"). The same day, Maloy drafted a check in the amount of $250,000 and made out to Griggs ("Check No. 9156") on Account No. 1514. On March 31, 2005, Griggs deposited Check No. 9156 into Account No. 9151. On April 1, 2005, Check No. 9156 was debited from Account No. 1514. According to credible testimony from Cynthia Aranda of Bank of the West, the loan was repaid, over the course of several months, by Park Cities. Griggs' testimony on the repayment was inconsistent, but he appeared to verify the repayment. Defendants, therefore, repaid the $250,000 received as a result of Check No. 9156.
viii. Maloy's fraudulent attempt to hide Transfer One from view by moving the $250,000 that was eventually transferred to Defendants through several bank accounts and negotiable instruments at two different banks is typical of the manner in which he kept the Cash Rewards scheme afloat. For example, over April 18 and 19, 2005, Maloy moved $100,000 from a Cash Rewards account at Compass Bank, through a series of certificates of deposit and cashier's checks drawn on Compass Bank and Bank of the West accounts and payable to himself or Cash Rewards, into the Compass Bank checking account he shared with his wife. Maloy's actions regarding Transfer One are some evidence of his actual fraud in Transfer Two.

4. Transfer Two

I. Cash Rewards made a fraudulent transfer of approximately $250,000 in Cash Rewards' funds to Defendants in March 2008, the purpose of which was to place Cash Rewards' assets beyond its creditors' reach. On February 7, 2008, Cash Rewards, acting through Maloy and Charlyn, purchased a $100,000 certificate of deposit (the "$100,000 CD") using funds from a Cash Rewards account at Bank of the West ("Account 3321").
ii. On February 8, 2008, Maloy took out a personal loan from Bank of the West in the amount of $249,681.70 ("Maloy's Bank of the West Loan") and pledged the title to a Lamborghini ("Lamborghini 6026"), which he purchased with the proceeds of Maloy's Bank of the West Loan, as collateral. Maloy also pledged the $100,000 CD as collateral for Maloy's Bank of the West Loan.
iii. On or about March 13, 2008, Maloy traded Lamborghini 6026 in for a new Lamborghini ("Lamborghini 6576"). On March 17, 2008, Bank of the West accepted Maloy's substitution of Lamborghini 6576 for Lamborghini 6026 as collateral for Maloy's Bank of the West Loan and released its lien on Lamborghini 6026.
iv. Griggs testified during his first deposition that Maloy approached him in March 2008 and asked for a loan of $250,986.59 because "hewas exchanging - changing banks." In exchange for the $250,986.59 loan, Griggs testified, Maloy said he would repay Griggs "in a week or two" and offered to allow Park Cities to hold the title to a Lamborghini until the loan was repaid.equivalent value in exchange for the transfer of funds accomplished by Check No. 1045.
xiii. At the time of Transfer Two, one or more creditors of Cash Rewards had one or more claims against Cash Rewards and would have been entitled to avoid Transfer Two under applicable state law. As such, the Trustee has standing to pursue her claim under Tex. Bus. & Com. Code § 24.005(a)(1) through 11 U.S.C. § 544(b) against Defendants relating to Transfer One. The Trustee further has standing to pursue her claims under 11 U.S.C. § 544(a). At the time of Transfer Two, Cash Rewards was insolvent, engaged in or was about to engage in business or a transaction for which any remaining property was unreasonably small, and intended to incur or believed it would incur debts beyond its ability to pay them as they came due.

5. Insolvency

I. Cash Rewards was insolvent before, during, and after Transfer Two. As of the end of 2007, Cash Rewards reported an annual loss of $126,540, $1,133,790 in assets supposedly held in escrow for the Certificate claims fund, and $1,257,111 in liabilities for Certificate redemptions payable. Thus, very shortly before Transfer Two was executed, Cash Rewards lacked sufficient assets to cover at least $123,321 in Certificate redemption claims. By the end of 2008, as the fraudulent scheme neared its demise and after Transfer Two deprived Cash Rewards of $250,986.59 of funds, the situation had worsened. Cash Rewards reported an annual loss of $141,260 for 2008, and reported no funds escrowed for payment of $95,107 in Certificate redemptions payable. There is no evidence that Cash Rewards' financial situation materially improved before or after Transfer Two which would contradict the clear picture of worsening insolvency painted by Cash Rewards' tax returns. Indeed, since Cash Rewards filed for bankruptcy in June 2009, nearly 600 claims totaling at least $5,849,271.46 have been filed against the bankruptcy estate.
ii. At the time of Transfer Two, Cash Rewards was also presumed to be insolvent. Maloy's testimony in the Statement of Facts (Pl.'s Ex. 6) offered in his criminal proceeding lead to the conclusion that during the time Transfer Two occurred, Cash Rewards was not generally paying its debts as they became due. While Maloy has lied to this Court before, at this stage, his testimony appears credible for finding a presumption of insolvency exists.

6. Griggs and Maloy

I. Maloy and Griggs are close, childhood friends and Griggs has testified that he has known Maloy "as well as any good friend could." Over the course of their decades-long friendship, Griggs has loaned money to Maloy several times and has obtained loans on Maloy's behalf.
ii. Cash Rewards was not in the business of making loans or investments in car dealerships. There was no business justification for the transfers from Cash Rewards to either Griggs or Park Cities Dodge. The transfers from Cash Rewards to Griggs and Park Cities Dodge were totally inconsistent with thebusiness operations of Cash Rewards, which was to administer a customer rewards program to assist merchants in the marketing of their product. The transfers of assets of Cash Rewards were solely for Griggs' benefit and were to the detriment of Cash Rewards.
iii. After the Petition Date and after this Court ordered Maloy not to convey away his assets, Griggs gave or loaned Maloy at least $235,000 in cash. Maloy used said funds to pay approximately $20,000 in legal fees associated with claims the Trustee brought against Maloy and his family, and used the balance to purchase luxury automobiles for himself and family members and several recreational vehicles, all in violation of this Court's injunction regarding the use of Maloy's assets.

7. Attorney's Fees

I. The Trustee has incurred reasonable and necessary attorneys' fees and costs of court in this matter. Costs and reasonable attorneys' fees are allowed under Section 24.013 of the Texas Business and Commerce Code in an amount to be determined after trial.

CONCLUSIONS OF LAW
1. Jurisdiction and Venue

I. The Trustee's Complaint and First Amended Complaint were filed pursuant to Rule 7001 of the Federal Rules of Bankruptcy Procedure; 11 U.S.C. §§ 544, 548, and 550; Tex. Bus. & Com. Code §§ 24.005, 24.006 and 24.008; and Texas common law and commenced an adversary proceeding in the above captioned bankruptcy case.
ii. Venue is proper pursuant to 28 U.S.C. § 1409.
iii. This Court has jurisdiction over the subject matter of this adversary proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding. 28 U.S.C. § 157(b)(2)(H).

2. Defendants

I. Griggs was an insider of Cash Rewards. 11 U.S.C. § 101(31)(B); In re Premiere Network Services, Inc., 333 B.R. 126, 128 (Bankr. N.D. Tex. 2005).
ii. Griggs is an alter ego of Park Cities Dodge. Sommers v. Sorce (In re Major Funding Corp.), 126 B.R. 504 (Bankr. S.D.Tex. 1990) ("The court follows a two step test in determining alter ego. The first step is to determine if there is such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist . . . The second step is to determine if failure to disregard the corporate form would result in fraud or injustice . . .) (internal citations omitted).iii. Griggs is an alter ego of GSA. Id.

3. Transfer One

I. Although many of the elements of an actual fraudulent transfer were met in this case, the credible evidence of Cynthia Aranda of Bank of the West shows that Transfer One was repaid in a series of payments by Park Cities. Griggs' somewhat inconsistent testimony supports this conclusion. Accordingly, as the estate was placed back to where it should have been, Cash Rewards suffered no damage, and the Trustee may not recover for Transfer One.

4. Transfer Two

I. Section 548 of the Bankruptcy Code allows the Trustee to avoid transfers of debtor property made within one year prior to filing bankruptcy, if, inter alia, the debtor made the transfers with actual intent to hinder, delay, or defraud creditors. See 11 U.S.C. § 548. The Trustee may also avoid any transfer of an interest of the debtor in property that is avoidable under applicable state law by a creditor holding an allowed unsecured claim. See 11 U.S.C. § 544(b).
ii. Since direct proof of fraud often is not available, courts may rely on circumstantial evidence to establish fraudulent intent. Roland v. United States, 838 F.2d 1400 (5th Cir. 1998); Williams & Chastain v. Laird, 32 S.W.2d 502, 505 (Tex. Civ. App. 1930). When several indicia of fraud are found, they may form the foundation for an inference of fraud. Id . 838 F.2dxv. Pursuant to 11 U.S.C. § 544(b)(1), the Trustee is entitled to recover $250,986.59, as the value of the property which was fraudulently transferred to Defendants via Transfer Two.

5. Attorney Fees

I. The Trustee has incurred reasonable and necessary attorneys' fees and costs of court in this matter, which are allowable under Section 24.013 ofthe Texas Business & Commerce Code, in an amount to be determined after trial. Within fourteen days of entry of these findings and conclusions, counsel for the Trustee shall submit an affidavit for a statement of attorney fees and costs incurred and a proposed judgment. Counsel for Debtor shall have fourteen days to respond to such affidavit.

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