Schilling v. Heavrin ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0371p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Debtor, -
In Re: TRIPLE S RESTAURANTS, INC.,
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No. 04-5297
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J. BAXTER SCHILLING, Trustee, -
Appellee, -
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v.
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DONALD M. HEAVRIN,
Appellant. -
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Appeal from the United States District Court
for the Western District of Kentucky at Louisville.
No. 03-00396—John G. Heyburn II, Chief District Judge.
Argued: May 31, 2005
Decided and Filed: August 30, 2005
Before: BOGGS, Chief Judge; GILMAN, Circuit Judge; and CLELAND, District Judge.*
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COUNSEL
ARGUED: James A. Earhart, Louisville, Kentucky, for Appellant. J. Baxter Schilling, Louisville,
Kentucky, for Appellee. ON BRIEF: James A. Earhart, Louisville, Kentucky, for Appellant.
J. Baxter Schilling, Louisville, Kentucky, for Appellee.
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OPINION
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RONALD LEE GILMAN, Circuit Judge. Donald M. Heavrin appeals from the judgment
of the district court, which affirmed a decision of the bankruptcy court permitting J. Baxter
Schilling, the Trustee for Triple S Restaurants (TSR), to avoid the fraudulent transfer of a life
*
The Honorable Robert H. Cleland, United States District Judge for the Eastern District of Michigan, sitting
by designation.
1
No. 04-5297 In re Triple Restaurants, Inc. Page 2
insurance policy and to recover the value of the transfer on behalf of TSR’s creditors. The policy
on the life of Heavrin’s stepfather, Robert Harrod, was transferred from TSR to a trust benefitting
Heavrin and his stepsister, Bobbie Bridges, shortly before TSR filed for bankruptcy. When the
bankruptcy court determined that the transfer could be avoided, Heavrin and Bridges were ordered
to pay the TSR Trustee the $250,000 that they had received from the insurance carrier, plus interest.
The district court affirmed this decision, as well as the bankruptcy court’s denial of the motion that
Heavrin filed seeking to recuse the bankruptcy court judge.
On appeal, Heavrin argues that the transfer was not fraudulent because all of the proceeds
from the life insurance policy had previously been assigned by TSR to the McDonnell Douglas
Finance Corporation (MDFC), one of TSR’s creditors, and therefore the policy was of no value to
either TSR or the Trust. He also claims that the payment from MDFC, which he received through
the Trust, was in settlement of unrelated lender-liability claims that Harrod’s estate had against
MDFC. For the reasons set forth below, we AFFIRM the judgment of the district court.
I. BACKGROUND
A. Factual background
In 1988, Michael Macatee and Robert Harrod formed TSR to obtain a franchise for the
operation of Sizzler restaurants in Louisville, Kentucky. Each of them owned 50% of TSR’s stock.
Heavrin, a Kentucky lawyer who was Harrod’s stepson, served as TSR’s attorney.
Prior to the formation of TSR, negotiations regarding a loan had taken place between MDFC
and S&B of Indiana, Inc., a predecessor in interest of TSR. The terms of a December 1987
commitment letter issued to S&B by MDFC required “Robert E. Harrod and Michael R. Macatee
. . . to obtain Key Man Life Insurance in the minimum amount of $3,560,000.00 naming MDFC
Equipment Leasing Corporation as beneficiary.” When the loan agreement was actually executed
three months later, in March of 1988, TSR was substituted for S&B. Harrod, Macatee, and TSR
were all co-signers on the $3.56 million loan from MDFC, for which all three were jointly and
severally liable.
Three days after securing the loan from MDFC, S&B purchased an insurance policy on
Harrod’s life from Transamerica Occidental Life in the amount of $2 million. S&B then transferred
all of its interest in the Harrod policy to TSR. (Four policies were also obtained on the life of
Macatee, each in the amount of $500,000, although the details regarding these policies are not
reflected in the record.) In November of 1991, the Harrod policy from Transamerica was replaced
by a $2 million policy issued by Jackson National. TSR made this substitution in order to save
money on the premium payments for the Harrod policy. Shortly after the Transamerica policy was
replaced by the Jackson National policy, Michael Forrester, an insurance agent and friend of
Heavrin, completed a collateral assignment of the Harrod policy proceeds from TSR to MDFC.
Harrod and Macatee informed Heavrin in August of 1992 that TSR was in dire financial
straits and that they wanted TSR to file a Chapter 11 bankruptcy petition. Heavrin advised them
against filing for bankruptcy, instead counseling them to attempt to reach an arrangement with
TSR’s creditors that would enable TSR to remain in business. Less than a month later, a lawyer who
shared office space with Heavrin drafted an irrevocable trust agreement (the Trust) in which Harrod
was the grantor and trustee. The beneficiaries of the Trust were Heavrin and Bridges. Harrod
transferred his 500 shares of TSR stock to the Trust in September of 1992.
TSR’s financial condition continued to deteriorate, and, by November of 1993, it did not
have the resources to make the quarterly premium payments on the Harrod policy. As a result,
MDFC began to pay the premiums to ensure that the policy would not lapse. Making certain that
No. 04-5297 In re Triple Restaurants, Inc. Page 3
the premium payments were submitted promptly became even more crucial in March of 1994, when
MDFC was informed that Harrod had been diagnosed with lung cancer.
In June of 1994, Heavrin told MDFC that Harrod’s cancer was terminal. Shortly thereafter,
TSR transferred its ownership of the Harrod policy to the Trust without receiving any financial
consideration. This transfer was executed on TSR’s behalf by Macatee. At the time of the transfer,
TSR owed hundreds of thousands of dollars in outstanding unsecured debts and was insolvent.
Three days after the Trust became the owner of the Harrod policy, Heavrin began negotiating
with MDFC for a settlement on behalf of the Trust. On September 2, 1994, while these negotiations
were ongoing, Harrod died. MDFC and Heavrin signed a settlement agreement a month later, on
November 3, 1994. In accordance with this agreement, MDFC, as the beneficiary of the policy,
instructed Jackson National to pay $250,000 of the proceeds to the Trust. Jackson National
subsequently paid the Trust the $250,000 plus a small amount of post-death interest as required by
the policy. Although Heavrin and Bridges were equal beneficiaries of the Trust, they apparently
agreed that Bridges would receive $75,000 and that Heavrin would keep the remainder.
B. Bankruptcy court proceedings
In September of 1994, TSR filed for bankruptcy protection. MDFC filed a proof of claim
against TSR for $3,304,165.63 two months later. No mention is made in this document of the $2
million in life insurance proceeds that were paid as a result of Harrod’s death. At oral argument,
however, counsel for Heavrin acknowledged that MDFC eventually credited TSR for the $1.75
million payment that MDFC received from the proceeds of the Harrod policy. But MDFC did not
credit TSR for the entire $2 million of the policy proceeds, presumably because it subtracted the
$250,000 payment that it directed Jackson National to pay to the Trust.
In July of 1996, the Trustee for TSR filed suit in the United States Bankruptcy Court for the
Western District of Kentucky, seeking to avoid the transfer of the Harrod policy to the Trust under
11 U.S.C. §§ 544(b) and 548(a), and to recover the $250,000 plus interest paid to the Trust by
Jackson National. The TSR Trustee alleged that the payment directed by MDFC to the Harrod Trust
was facilitated by the Trust’s ownership of the Harrod policy. Heavrin insisted, however, that the
payment was in settlement of certain lender-liability claims that he had considered bringing against
MDFC on behalf of Harrod’s estate.
The bankruptcy court ordered the avoidance of the transfer under 11 U.S.C. §§ 544(b) and
548(a) on the grounds that the transfer was made without valuable consideration and with the intent
to defraud TSR’s creditors. Pursuant to 11 U.S.C. § 550(a), which permits a trustee to recover the
property or the value of the property whose transfer was avoided under § 544 or § 548, the
bankruptcy court held that the payment from Jackson National to the Trust was recoverable by the
Trustee for the benefit of TSR and its creditors. Heavrin and Bridges were therefore ordered to pay
the TSR Trustee the money that they had received through the Harrod Trust, together with interest
at 8% per annum.
The bankruptcy court also directed Heavrin to disgorge approximately $46,000 of the
roughly $153,000 in attorney fees that he was paid by TSR during the year preceding TSR’s
bankruptcy because Heavrin had failed to report these payments to the bankruptcy court as required
by the Federal Bankruptcy Rules. See 11 U.S.C. § 329; Fed. R. Bankr. P. 2016. Finally, the
bankruptcy court denied Heavrin’s petition requesting that Bankruptcy Judge David T. Stosberg
recuse himself on the grounds of his alleged bias against Heavrin.
No. 04-5297 In re Triple Restaurants, Inc. Page 4
C. District court proceedings
Heavrin appealed the bankruptcy court’s decision to the United States District Court for the
Western District of Kentucky. The district court upheld the decision of the bankruptcy court with
respect to the avoidance of the transfer, but did so under a different theory. It held that the transfer
was avoidable under 11 U.S.C. § 548(a) on the basis of constructive fraud rather than actual fraud.
The district court also upheld the denial by the bankruptcy court of Heavrin’s recusal motion, but
concluded that the bankruptcy court had erred in requiring Heavrin to disgorge approximately
$46,000 of the attorney fees that he had received from TSR prior to the bankruptcy.
Heavrin timely appealed to this court, claiming that the district court had erred in affirming
the avoidance of the transfer to the Trust and in upholding the bankruptcy court’s denial of his
recusal motion. He also argues, apparently for the first time, that the bankruptcy court erred in
requiring him to pay prejudgment interest at a rate of 8% per annum on the attorney fees that he was
ordered to disgorge.
D. Other appeals
Two previous appeals have been heard by this court in connection with the TSR bankruptcy.
In Schilling v. Heavrin (In re Triple S Restaurants), Nos. 04-5194/5402, 2005 WL 1140625 (6th Cir.
May 10, 2005) (unpublished) (per curiam) [hereinafter TSR I], we affirmed the bankruptcy court’s
denials of motions submitted by Heavrin, Bridges, and the Trust to recuse Bankruptcy Judge
Stosberg, to extend the time to appeal, and to permit amendment of the notice of appeal to include
the Trust and Bridges as appellants. We also affirmed the district court’s finding that the bankruptcy
court’s order was a final judgment. In Schilling v. Heavrin (In re Triple S Restaurants), No.
04-5330, 2005 WL 1109615 (6th Cir. May 10, 2005) (unpublished) (per curiam) [hereinafter TSR
II], we reinstated the bankruptcy court’s judgment requiring Heavrin to disgorge a portion of the
attorney fees that he received from TSR prior to the bankruptcy.
II. ANALYSIS
A. Standard of review
“When we review bankruptcy decisions, our standard of review is slightly different from our
normal standard of review because district courts are not the triers of fact of bankruptcy cases.”
Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 88 (6th Cir. 1993). Because the
bankruptcy court makes the initial findings of fact, the district court is bound by these findings
unless they are clearly erroneous. Id. “If the district court’s decision is appealed to this court, then
we review the district court’s conclusions of law de novo,” and we accord no deference to the
district court’s findings of fact. Id. (stating that “we do not review the district court’s assessment
of the bankruptcy court’s factual findings,” but instead “follow the bankruptcy court’s factual
findings . . . [unless] we consider them to be clearly erroneous”) (emphasis in original).
B. Avoidance of the transfer
The bankruptcy court determined that the transfer of the Harrod policy from TSR to the Trust
could be avoided by the TSR Trustee in accordance with either 11 U.S.C. § 544(b) or 11 U.S.C.
§ 548(a). Pursuant to section § 544(b), a trustee may avoid a transfer if the transferor was insolvent
at the time and if the transfer is voidable under applicable state law. There is no dispute in the
present case that TSR was insolvent at the time of the transfer. Thus, the dispositive question under
§ 544(b) is whether the transfer is voidable under Kentucky law. The bankruptcy court held that the
transfer of the Harrod policy is voidable under Kentucky Revised Statutes § 378.010, which
provides that transfers shall be void as to creditors if “made with the intent to delay, hinder or
defraud creditors, purchasers or other persons,” and under Kentucky Revised Statutes § 378.020,
No. 04-5297 In re Triple Restaurants, Inc. Page 5
which provides that transfers of a debtor shall be void against existing creditors if made “without
valuable consideration.”
In an alternative holding, the bankruptcy court also determined that the transfer of the Harrod
policy could be avoided by the TSR Trustee pursuant to 11 U.S.C. § 548(a). This section permits
the avoidance of a transfer made within one year of the filing of the bankruptcy petition if the
transfer was made with the intent to hinder, delay, or defraud the transferor’s existing or future
creditors, or if the transferor was insolvent at the time of the transfer and did not receive
consideration that was reasonably equivalent in value to the transferred asset.
Heavrin argues that the bankruptcy court erred in concluding that the transfer was avoidable
under either §§ 544(b) or 548(a) because, he asserts, the ownership of the Harrod policy had no
value for TSR. As a result, transferring the policy to the Trust purportedly did not diminish the
bankruptcy estate. He insists that (1) the Harrod policy proceeds were not the property of TSR
because they were fully assigned to MDFC, and (2) the $250,000 payment directed by MDFC to the
Trust was in settlement of certain lender-liability claims possessed by Harrod that were completely
unrelated to the Trust’s ownership of the Harrod policy.
1. Heavrin has not established that MDFC was unconditionally entitled to all of the
policy proceeds
If Heavrin is correct, and TSR did not lose anything of value when it transferred the Harrod
policy to the Trust, then TSR’s unsecured creditors were not defrauded and the transfer cannot be
avoided. See Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 55-56 (5th Cir. 1993) (“When
a payment by the insurer cannot inure to the debtor’s pecuniary benefit, then that payment should
neither enhance nor decrease the bankruptcy estate.”). The fact that the Trust was able to secure a
payment from MDFC by virtue of its ownership of the Harrod policy, in other words, does not make
the transfer avoidable if TSR would have been unable to extract a similar benefit had it retained
ownership of the policy.
Heavrin’s first contention—that no transfer of TSR’s property occurred because the Harrod
policy proceeds were fully assigned to MDFC—is not borne out by the evidence. Heavrin insists
that, because TSR had assigned the proceeds of the Harrod policy to MDFC, the entire $2 million
from Jackson National belonged to MDFC regardless of whether TSR retained ownership of the
policy or transferred ownership to the Trust. See Edgeworth, 993 F.2d at 55 (“Acknowledging that
the debtor owns the policy, however, does not end the inquiry. The question is not who owns the
polic[y], but who owns the liability proceeds.”) (citation and quotation marks omitted).
Whether MDFC was unconditionally entitled to the full proceeds of the Harrod policy,
however, is far from clear. The TSR Trustee points to the fact that there are no documents
demonstrating that the assignment of the Harrod policy was collateral for the loan from MDFC. In
the absence of such proof, the Trustee asserts that the issue was ripe for negotiation and litigation—
proceedings that could have resulted in TSR retaining at least a part of the Harrod policy proceeds.
See Demczyk v. Mut. Life Ins. Co. of N.Y. (In re Graham Square, Inc.), 126 F.3d 823, 831 (6th Cir.
1997) (stating that “property of the estate includes the debtor’s interest in a cause of action”).
Circumstantial evidence, admittedly, supports Heavrin’s contention that all of the Harrod
policy proceeds belonged to MDFC as collateral for the loan to TSR. For instance, three days after
securing the loan from MDFC, TSR’s predecessor in interest, S&B, purchased the original policy
on Harrod’s life from Transamerica. An internal MDFC memorandum also states that MDFC’s loan
to TSR was “secured by a lien on the equipment in the stores it financed, a letter of credit in the
amount of $356K, and a key man insurance policy on the partners in the amount of $2,000K.”
No. 04-5297 In re Triple Restaurants, Inc. Page 6
On the other hand, there is no direct evidence to establish that MDFC was entitled to all of
the proceeds from the Harrod policy. The policy is not mentioned in any of the loan documents
between MDFC and TSR. And, although the policy on Harrod’s life was purchased three days after
the loan was made, the assignment of the policy proceeds to MDFC did not take place until
November of 1991, more than three years later.
There is also evidence that TSR had intended another use for at least some of the Harrod
policy proceeds. A stock purchase agreement entered into by Harrod and TSR in 1988 states that,
upon Harrod’s death, the “proceeds of the life insurance policy(s) pertaining to this Agreement shall
be used for the purpose of redemption.” The insurance policy referenced in the agreement is the
Jackson National policy on Harrod’s life. This potential dual use of the proceeds—for both loan
repayment and stock redemption—creates an obvious ambiguity.
Finally, the facts support another theory under which TSR would be entitled to some of the
insurance proceeds without resorting to extortionate litigation tactics. TSR’s $3.56 million loan was
secured by $4 million worth of life insurance—$2 million on the life of Harrod and $2 million on
the life of Macatee. Thus, although MDFC was theoretically entitled to collect up to $2 million upon
the death of either man, a proportional division of liability would result in approximately $1.75
million being applied to MDFC’s loan and leave roughly $250,000 to the owner of the policy. This
is precisely the amount that Heavrin gained through the transfer of the policy from TSR to the Trust,
an amount that presumably would have redounded to TSR in the absence of the transfer.
Although the record is ambiguous as to why MDFC ceded $250,000 to the Trust, there is no
question that the settlement agreement between the Trust and MDFC acknowledges that
“[s]ubsequent to the Trust becoming the beneficiary of the Policy, a dispute ha[d] arisen between
the Trust and MDFC as to the amount of the Policy proceeds payable to MDFC.” In order to “settle
the dispute in a manner which [would] expedite payment of the Policy proceeds,” MDFC agreed to
pay the Trust $250,000 plus interest. This evidence severely weakens Heavrin’s assertion that the
entire proceeds of the Harrod policy undisputably belonged to MDFC and consequently were of no
value to TSR. We therefore cannot say that the bankruptcy court erred when it rejected Heavrin’s
claim on this basis.
Heavrin’s contention that all of the Harrod policy proceeds belonged to MDFC is further
undercut by an argument in Heavrin’s appellate brief. He contends that, regardless of whether TSR
retained ownership of the Harrod policy or transferred it to the Trust, TSR was entitled to
“$2,000,000 in debt reduction upon payment of all the Policy proceeds to MDFC.” But Heavrin’s
counsel acknowledged at oral argument that, in the proof-of-claim documents that MDFC filed in
the TSR bankruptcy proceedings, MDFC credited TSR with only $1.75 million in debt reduction
after receiving that amount from the proceeds from the Harrod policy. This amount is $250,000 shy
of the full $2 million in policy proceeds payable on Harrod’s death, and corresponds to the allocation
of the proceeds that Heavrin negotiated on behalf of the Trust. The fact that MDFC credited TSR
for only a portion of the proceeds of the Harrod policy is an indication that MDFC did not consider
all of the proceeds to be its property.
Furthermore, even if the primary effect of avoidance would be to send the $250,000 back to
MDFC, that money would offset TSR’s outstanding debt to MDFC, thereby freeing up funds in that
amount to pay the unsecured creditors. Avoiding the $250,000 transfer, in other words, decreases
the amount of secured debt and increases the Trustee’s ability to pay the remaining creditors.
Because such avoidance establishes a benefit to TSR’s unsecured creditors, we can—and do— reject
Heavrin’s argument that avoiding the transfer would benefit only MDFC.
No. 04-5297 In re Triple Restaurants, Inc. Page 7
2. Heavrin has not established that the payment from MDFC was in settlement of
lender-liability claims
Heavrin also advances the argument that the transfer of the Harrod policy to the Trust did
not harm TSR’s unsecured creditors because the payment that the Trust received from MDFC was
in settlement of certain lender-liability claims possessed by Harrod that were completely unrelated
to the Trust’s ownership of the Harrod policy. He contends that MDFC had the settlement to the
Trust paid from the proceeds of the Harrod policy merely as a matter of convenience, not because
the policy proceeds were in any way related to the payment.
The circumstances surrounding the payment from MDFC, however, do not support Heavrin’s
contention on this ground either. As the bankruptcy court noted, a letter written to Heavrin by
MDFC states that “[t]he disbursement of the $250,000 would represent the full settlement of all
matters relating to this insurance policy.” This letter alone constitutes persuasive evidence that the
payment authorized by MDFC was related to the Trust’s ownership of the Harrod policy. Moreover,
the settlement was paid to the Trust, not to Harrod’s estate. If the $250,000 payment authorized by
MDFC was in settlement of lender-liability claims that Harrod possessed personally, as Heavrin
argues, then MDFC would presumably have directed the payment to Harrod’s estate. The fact that
this was not done suggests that ownership of the Harrod policy, which the Trust possessed but
Harrod’s estate did not, was an important consideration for MDFC in authorizing the payment to the
Trust.
Also problematic for Heavrin is the fact that the payment by MDFC came directly out of the
Harrod policy proceeds as a transfer of funds from Jackson National to the Trust. Heavrin explains
that he arranged for this payment to be made in this manner in response to his “fear[] that MDFC
would renege on the settlement after it received the Policy proceeds.” But this admission suggests
that the owner of the Harrod policy had at least some additional leverage when negotiating with
MDFC, which is contrary to Heavrin’s argument that ownership of the policy was “essentially
meaningless and absolutely worthless.”
The core of Heavrin’s argument is that he asserted lender-liability claims on behalf of
Harrod’s estate and that he collected the $250,000 as a result of those claims. The bankruptcy court
rejected this argument, observing that the Trust did not stand in a borrower–lender relationship with
MDFC and finding that Heavrin had not pointed to any egregious conduct by MDFC that could have
formed the basis for such claims. Although we agree with the bankruptcy court’s observation that
the Trust did not stand in a borrower-lender relationship with MDFC, Heavrin has a legitimate
argument to the extent that he was negotiating on behalf of Harrod’s estate rather than the Trust.
Nevertheless, Heavrin’s consistent failure to explain the legal basis for the alleged lender-liability
claims is fatal to his defense.
Heavrin does not insist that he is prevented from making such a disclosure by any
confidentiality agreement with MDFC. And the disclosure of any grounds possessed by Harrod for
such a suit could not possibly harm MDFC because the litigation between the Trustee and MDFC
has already been settled. See Schilling v. MDFC Equip. Leasing Corp., AP No. 95-3096 (Bankr.
W.D. Ky. Dec. 11, 1995) (unpublished) (stating that the agreed-upon order was entered in
“settlement and compromise of any and all causes of action of plaintiff and/or this bankruptcy estate
against defendant”). Heavrin’s inability to provide a description of the alleged lender-liability
claims suggests that there were no such claims. Instead, the Trust’s ownership of the Harrod policy
appears to have been the key factor that caused MFDC to have the $250,000 paid to the Trust. We
therefore agree with the bankruptcy court that Heavrin has failed to establish that the policy
proceeds paid to the Trust were in settlement of any lender-liability claims.
No. 04-5297 In re Triple Restaurants, Inc. Page 8
In agreeing with the courts below regarding Heavrin’s inability to explain the nature of the
alleged claims, we also affirm those courts’ decision to shift the burden of proof to Heavrin on this
point. Indeed, Heavrin does not argue that he presented evidence that justified a contrary finding
as to the lender-liability claims, but instead maintains that the bankruptcy court erred in shifting the
burden of proof to him to do so. He contends that the TSR Trustee had the burden to demonstrate
that the policy proceeds paid to the Trust were made to settle claims that would have rightfully
belonged to TSR had it retained ownership of the Harrod policy. This is the contention to which we
now turn.
3. Heavrin’s position as an insider and his status as a close relative constitute
“badges of fraud” that justify shifting the burden of proof
Heavrin is correct in pointing out that a trustee attempting to avoid an allegedly fraudulent
transfer normally bears the burden of proof on that issue, but the bankruptcy court in the present case
found that the transfer of the Harrod policy from TSR to the Trust displayed several “badges of
fraud” that justified shifting the burden of proof to Heavrin to demonstrate that the transfer did not
harm TSR’s unsecured creditors. See United States v. Westley, No. 98-6054, 2001 WL 302068, at
*6 (6th Cir. Mar. 21, 2001) (unpublished) (“[I]f there are ‘badges of fraud’ which cast suspicion on
the transaction, the burden of proof shifts to the defendant to explain the transaction and show that
it was not fraudulent.”). “Badges of fraud are circumstances so frequently attending fraudulent
transfers that an inference of fraud arises from them.” United States v. Isaac, No. 91-5830, 1992
WL 159795, at *4 (6th Cir. July 10, 1992) (unpublished) (citation and quotation marks omitted).
One badge of fraud identified by the bankruptcy court with respect to the transfer of the
Harrod policy was that the beneficiaries of the Trust—Heavrin and Bridges—were the children of
one the co-owners of TSR. See Isaac, 1992 WL 159795, at *4 (stating that “Kentucky courts treat
transfers between close family members or people in confidential relationships, in the context of
impending financial difficulties, as a badge of fraud”); Cooper v. Osbourne (In re Osbourne), 124
B.R. 726, 728 (Bankr. W.D. Ky. 1989) (listing “transfers made to a family member or close relation”
as a badge of fraud).
Another badge of fraud identified by the bankruptcy court was Heavrin’s position as
corporate counsel for TSR, which made him an insider with respect to TSR’s transfer of the Harrod
policy to the Trust. Because he benefitted from the transfer, the court found that Heavrin’s insider
status was a badge of fraud that justified shifting the burden of proof. See Isaac, 1992 WL 159795,
at *4 (“We have often written that courts look with suspicion upon transactions between persons
occupying confidential relations. When such a transaction is exposed to scrutiny, the burden is
always upon the recipient of the property acquired to show that the conveyance was fairly made and
not tainted with an intent to accomplish a fraudulent purpose.”) (citation and quotation marks
omitted).
In shifting the burden of proof to Heavrin after finding that the transfer of the Harrod policy
was attended by badges of fraud, the bankruptcy court cited to Green v. Stevenson (In re Stevenson),
69 B.R. 49 (Bankr. E.D. Mo. 1986), for support. The court in Stevenson, however, decided to shift
the burden of proof to the defendant only after concluding that the transfer at issue was made
without adequate consideration. Id. at 50 (“Where a transfer is between related parties, the transfer
is subject to close scrutiny and gives rise to a presumption of actual fraudulent intent where the
transfer is without adequate consideration.”) (citation and quotation marks omitted); see also Peter
Spero, Fraudulent Transfers: Applications and Implications § 15:3 (2005) (“Where the transaction
involves family members . . . and the transaction was made without any tangible consideration, a
heavier burden is placed upon the grantee to demonstrate fair consideration for the transfer.”)
(citation and quotation marks omitted) (emphasis added).
No. 04-5297 In re Triple Restaurants, Inc. Page 9
In the present case, the parties dispute whether the Trust provided adequate consideration
for the transfer of the Harrod policy. The TSR Trustee argues that the Trust provided no
consideration. Heavrin, on the other hand, contends that the Trust’s diligence in having MDFC keep
up the premium payments was adequate consideration. The bankruptcy court resolved this dispute
by concluding that the consideration received by TSR for the transfer was inadequate, but we need
not reach this issue in order to affirm the district court’s finding that the transfer may be avoided
pursuant to 11 U.S.C. § 548(a). We also do not have to reach the issue in order to decide whether
the bankruptcy court erred in shifting the burden of proof on this issue to Heavrin, because we hold
that the burden of proof may shift even where consideration has not been shown to be inadequate.
Our holding is based on a survey of the limited caselaw on this issue and a consideration of the
purposes served by shifting the burden of proof when badges of fraud are shown.
In Westley, 2001 WL 302068, at *6, this court concluded that the fact that insiders were the
beneficiaries of the transfer was a “badge of fraud” that, in and of itself, “cast suspicion on the
transaction” and shifted the burden of proof to the defendants. See also Anderson & Assocs. v.
S. Textile Knitters de Honduras Sewing Inc. (In re S. Textile Knitters), Nos. 01-2369, 02-1365, 2003
WL 124771, at *6 (4th Cir. Jan. 16, 2003) (unpublished) (“Since the transfers at issue here were
made to members of the family, Defendants have the burden to establish both a valuable
consideration and the bona fides of the transaction by clear and convincing testimony.”). The above-
referenced treatise, Fraudulent Transfers: Applications and Implications, also acknowledges that,
where a transfer is made to an insider, “[t]he burden may change . . . [if] the evidentiary facts as to
the nature and value of the consideration are within the transferee’s control, in which case the
burden of coming forward with evidence on the fairness of the consideration shifts to the transferee.”
§ 15:3 (citation and quotation marks omitted).
MDFC’s true reason for directing the $250,000 payment to the Trust is unclear. This enigma
is due in part to the fact that Heavrin, as the chief negotiator of the deal with MDFC, offered very
little evidence with respect to why the Trust received the money. The assignment of the burden of
proof thus becomes the key to determining whether the transfer of the Harrod policy may be
avoided. Given the badges of fraud attending to the transaction—revolving around the fact that the
lawyer for the failing business was the stepson of one of its founders and the primary beneficiary
of the transfer—we find no good reason to require the Trustee to produce evidence that could much
more readily be supplied by Heavrin. Under such circumstances, equitable principles call upon
Heavrin to demonstrate that the transfer of the insurance policy did not harm TSR’s unsecured
creditors. See Doss v. Green (In re Green), 986 F.2d 145, 150 (6th Cir. 1993) (“This court marvels
at the debtor’s attempt to circumvent the fraudulent conveyance laws. However, bankruptcy courts
are courts of equity. A court of equity will not relieve a party with ‘unclean hands.’ This doctrine
closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the
matter in which he seeks relief.”) (citations and quotation marks omitted).
Heavrin has failed to demonstrate that the transfer of the Harrod policy to the Trust did not
harm TSR’s unsecured creditors. We therefore conclude that the bankruptcy court did not err in
determining that the transfer of the policy could be avoided pursuant to 11 U.S.C. § 548(a), which
permits the avoidance of a transfer if it was made with the intent to hinder, delay, or defraud a
transferor’s existing and future creditors. See Zenter GBV Fund IV, LLC v. Vesper, Nos.
00-5385/5386, 2001 WL 1042217, at *5 (6th Cir. Aug 29, 2001) (unpublished) (“‘Because proof
of actual intent to hinder, delay or defraud creditors may rarely be established by direct evidence,
courts infer fraudulent intent from the circumstances surrounding the transfer.’”) (quoting Brown
v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348, 1353 (8th Cir. 1995)).
No. 04-5297 In re Triple Restaurants, Inc. Page 10
C. Assessment of prejudgment interest
Heavrin raises, for the first time on appeal, the contention that the bankruptcy court erred in
imposing prejudgment interest on the roughly $46,000 in attorney fees that he was required to
disgorge. He did not list this as one of the issues to be appealed from the bankruptcy court and did
not raise the issue before the district court. The issue is therefore waived. See United States v.
Ninety-Three (93) Firearms, 330 F.3d 414, 424 (6th Cir. 2003) (“This court has repeatedly held that
it will not consider arguments raised for the first time on appeal unless our failure to consider the
issue will result in a plain miscarriage of justice.”) (citation and quotation marks omitted).
Even if this claim had not been waived, however, it would have no merit. As Heavrin
concedes, the assessment of prejudgment interest is left to the sound discretion of the bankruptcy
court. Heavrin was paid over $153,000 in attorney fees by TSR in the year preceding TSR’s filing
for bankruptcy, and the bankruptcy court required Heavrin to disgorge less than a third of this
amount. This court reviewed the bankruptcy court’s partial disgorgement order in TSR II, No.
04-5330, 2005 WL 1109615, at *6 (6th Cir. May 10, 2005) (unpublished) (per curiam), and
concluded that the bankruptcy court’s “final order was, if anything, unduly generous to Heavrin.”
Thus we cannot say that the bankruptcy court abused its discretion in imposing prejudgment interest
at a rate of 8% per annum on the approximately $46,000 in attorney fees that Heavrin was required
to disgorge. See Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714, 720 (6th Cir. 2001)
(stating that the court “will find an abuse of discretion only upon a definite and firm conviction that
the trial court committed a clear error of judgment”) (citation and quotation marks omitted).
D. Recusal of the bankruptcy judge
The final issue raised on appeal is whether Bankruptcy Judge Stosberg erred in not recusing
himself. This court partially addressed the issue in TSR I, Nos. 04-5194/5402, 2005 WL 1140625
(6th Cir. May 10, 2005) (unpublished) (per curiam), when we reviewed the bankruptcy court’s
denial of a motion for recusal originally filed by Heavrin in 1995. We affirmed the bankruptcy
court’s order denying Heavrin’s motion because it was not timely. Id. at *1 (“As the bankruptcy
court found, the defendants’ motion to recuse was untimely and was therefore properly denied.”).
But Heavrin filed a second recusal motion in 2001 that was based on events occurring after his 1995
motion was filed. This second motion was denied by the bankruptcy court on the merits, with no
mention made of untimeliness. In the present appeal, we are therefore bound by the decision of this
court in TSR I with respect to all arguments raised in Heavrin’s 1995 recusal motion, but we reach
the merits of the arguments that Heavrin raises in his 2001 motion.
We will uphold a lower court’s denial of a recusal motion so long as the court’s decision
does not constitute an abuse of discretion. Youn v. Track, Inc., 324 F.3d 409, 422 (6th Cir. 2003).
The relevant federal recusal statute, 28 U.S.C. § 455, provides in pertinent part as follows:
(a) Any justice, judge, or magistrate judge of the United States shall disqualify
himself in any proceeding in which his impartiality might reasonably be questioned.
(b) He shall also disqualify himself in the following circumstances: (1) Where he has
a personal bias or prejudice concerning a party, or personal knowledge of disputed
evidentiary facts concerning the proceeding . . . .
A judge’s unfavorable disposition toward an individual or his case, however, does not
typically constitute judicial “bias or prejudice.” See Liteky v. United States, 510 U.S. 540, 550
(1994). Rather, “[t]he words [bias and prejudice] connote a favorable or unfavorable disposition or
opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it
rests upon knowledge that the subject ought not to possess . . . or because it is excessive in degree.”
Id. (emphasis in original). Bias on the part of a judge commonly stems from an “extrajudicial”
No. 04-5297 In re Triple Restaurants, Inc. Page 11
source, meaning knowledge that the judge has acquired that is not based on either the proceedings
before him or on other legal proceedings involving the same parties. Id. at 551.
In rare cases, a “favorable or unfavorable predisposition can also deserve to be characterized
as ‘bias’ or ‘prejudice’ because, even though it springs from the facts adduced or the events
occurring at trial, it is so extreme as to display clear inability to render fair judgment.” Id. These
rare cases aside, however, opinions held by judges as a result of what they learn in the proceedings
at issue or in earlier proceedings are “not subject to deprecatory characterization as ‘bias’ or
‘prejudice.’” Id. (“It has long been regarded as normal and proper for a judge to sit in the same case
upon its remand, and to sit in successive trials involving the same defendant.”).
Heavrin alleges that Bankruptcy Judge Stosberg was biased against him because of dealings
that the two of them had prior to Stosberg’s appointment to the bench, during which Heavrin
opposed the payment of $1,400 in fees to then-examiner Stosberg on the basis that Stosberg’s
examination was “incompetent, incomplete, and worthless.” This dispute was resolved by the
federal district court when the debtor was ordered to pay Stosberg’s fee over the objection of
Heavrin. Although the characterization by Heavrin of Stosberg’s work as “incompetent, incomplete,
and worthless” might have offended or angered Stosberg at the time, Heavrin’s opposition to the
payment of the fees was ultimately unsuccessful, and Bankruptcy Judge Stosberg suffered no
pecuniary loss as a result. We thus have no reason to believe that Bankruptcy Judge Stosberg
remained so upset by Heavrin’s past opposition to his fee request that he was unable to decide this
case on the merits.
Heavrin further contends that Bankruptcy Judge Stosberg became biased against him as a
result of events that occurred during the TSR bankruptcy proceedings. The bankruptcy court
imposed sanctions against David Chinn, a bankruptcy attorney hired by TSR and a tenant in
Heavrin’s offices, for paying Heavrin a portion of Chinn’s retainer from TSR as a rent payment.
Heavrin was criticized by the court for accepting the payment in light of his status as a TSR insider
and because he had referred the case to Chinn. In its opinion, the bankruptcy court described
Heavrin’s conduct and characterized his behavior as “deplorable,” but then struck these comments
from its modified opinion after Heavrin objected. This characterization of Heavrin’s behavior,
however, was an opinion formed by the bankruptcy court during the proceedings involving Heavrin,
and can therefore be deemed an indicium of bias only if it is “so extreme as to display clear inability
to render fair judgment.” Liteky, 510 U.S. at 551. The bankruptcy court removed the offending
language from its opinion at Heavrin’s request, which leads us to conclude that the court’s conduct
was not so extreme as to require recusal.
Finally, Heavrin contends that Bankruptcy Judge Stosberg exhibited bias by deciding to
place the burden on Heavrin to prove that he was entitled to retain the money paid to him by the
Trust, rather than on the TSR Trustee to prove that the transfer should be avoided. According to
Heavrin, the “trial was little more than a means to an inevitable end, during the course of which the
court was openly hostile to counsel and his client.” This argument is without merit not only because
we find that the bankruptcy court properly placed the burden of proof on Heavrin, but because
Heavrin has failed to produce any concrete examples that demonstrate Bankruptcy Judge Stosberg’s
alleged hostility. See Gen. Aviation, Inc. v. Cessna Aircraft Co., 915 F.2d 1038, 1043 (6th Cir.
1990) (requiring the moving party to allege “facts which a reasonable person would believe would
indicate a judge has a personal bias against the moving party. Conclusions, rumors, beliefs, and
opinions are not sufficient to form a basis for disqualification.”) (citations and quotation marks
omitted).
None of Heavrin’s three complaints regarding Bankruptcy Judge Stosberg give rise to the
necessary “definite and firm conviction that the trial court committed a clear error of judgment.”
No. 04-5297 In re Triple Restaurants, Inc. Page 12
Youn, 324 F.3d at 422 (citation and quotation marks omitted). We therefore conclude that the
bankruptcy court did not abuse its discretion by denying Heavrin’s motion to recuse.
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the judgment of the district court.