Travelers Indemnity Company v. D & L Resources, L.L.C., Heartland Lease, Inc., D.J. Franzen Enterprises, Ltd., and Ics Logistics Corp. ( 2016 )

IN THE COURT OF APPEALS OF IOWA
No. 15-0083
Filed September 28, 2016
TRAVELERS INDEMNITY COMPANY,
Plaintiff-Appellant,
vs.
D & L RESOURCES, L.L.C., HEARTLAND LEASE, INC., D.J. FRANZEN
ENTERPRISES, LTD., and ICS LOGISTICS CORP.,
Defendants-Appellees.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Dennis J. Stovall,
Judge.
The plaintiff appeals from the district court’s denial of its request to impose
a constructive trust on assets of the defendants. AFFIRMED.
CeCelia C. Ibson of Ibson Law Firm, Des Moines, for appellant.
Jonathan N. Garner of Hartung & Schroeder, L.L.P., Des Moines, for
appellee ICS Logistics Corp.
Stanley J. Thompson of Davis, Brown, Koehn, Shors & Roberts, P.C.,
West Des Moines, for appellees D&L Resources, L.L.C., Heartland Lease, Inc.
and D.J. Franzen Enterprises, Ltd.
Heard by Potterfield, P.J., and Doyle and Tabor, JJ.
2
POTTERFIELD, Presiding Judge.
Travelers Indemnity Company, judgment creditor of Franzen Inc., appeals
from the district court’s denial of its request to impose a constructive trust on the
assets of the defendants, D & L Resources, L.L.C.; Heartland Lease, Inc.; DJ
Franzen Enterprises, Ltd.; and ICS Logistics Corp. Travelers challenges the
district court’s ruling that it failed to establish its theory of constructive fraud
involving D.J. Franzen, Inc., the judgment debtor, and the defendants named in
this suit.1
I. Background Facts and Proceedings.
In 2003, Travelers issued a workers’ compensation policy to D.J. Franzen,
Inc. At the end of the policy period, Franzen Inc. disputed the scope of coverage
for its drivers and the resulting amount of premium owed to Travelers. The issue
was decided by our supreme court in October 2010. In Travelers Indemnity Co.
v. D.J. Franzen, Inc., 792 N.W.2d 242, 251 (Iowa 2010), the court ruled that
Franzen Inc. owed Travelers $550,661 and remanded with instructions to enter
judgment in favor of Travelers. The present case stems from Travelers’ attempt
to execute that judgment.
1
As an alternative argument, Travelers maintains the evidence presented at trial
supported the imposition of an equitable lien in the amount of the judgment owed to
Travelers. Travelers concedes the district court never ruled on this issue but maintains it
is preserved for our review. Although there are situations where the district court’s
decision “necessarily” considered and preserved an issue, see Lamasters v. State, 821
N.W.2d 856, 864 (Iowa 2012), here the district court explicitly stated that Travelers’
motion to amend its petition to include the issue of an equitable lien was untimely. As
such, we agree with the defendants that it is not preserved for our review. See Bank of
America, N.A. v. Schulte, 843 N.W.2d 876, 883 (Iowa 2014) (“It is a fundamental
doctrine of appellate review that issues must ordinarily be both raised and decided by
the district court before we will decide them on appeal. To preserve error on even a
properly raised issue on which the district court failed to rule, ‘the party who raised the
issue must file a motion requesting a ruling in order to preserve error on appeal.’”
(citations omitted)).
3
The facts of this case are generally not in dispute. As Travelers stated in
its brief, “The dispute between the parties centers on what the facts mean. In
other words, not so much the ‘who’, ‘what’, or ‘when’ of each transaction, but the
‘how’ and why.’”
Denny Franzen started a trucking company as a sole proprietor in the
1980s. Denny2 retained Denman & Co. as his accountant. Based on Denman’s
recommendation, the trucking operations were incorporated into D.J. Franzen,
Inc. in 1987.
Denman later recommended that due to the liability inherent in the
trucking industry, it would be best for Franzen Inc. to set up a parent corporation
to whom annual earnings, if any, could be declared in the form of a dividend.
Consequently, D.J. Franzen Enterprises, Ltd. was formed for this purpose in
1991. Franzen Enterprises was the sole shareholder of Franzen Inc. and Denny
and Linda Franzen were the sole shareholders of Franzen Enterprises.
Additionally, Franzen Enterprises owned 100% of several other related
Franzen trucking entities, namely, Heartland Lease, Inc. and Southeast
Transportation Management Inc.
Throughout its operations, Franzen Inc. historically had negative net
equity and, on a balance sheet basis, was insolvent. As Franzen Inc. needed
operating revenue, Franzen Enterprises would make intercompany loans to
Franzen Inc. Those intercompany loans were properly documented on federal
tax returns filed during the relevant time periods. In fact, by January 1, 2003,
2
Because of the number of entities with the name Franzen in the title, we refer to Denny
Franzen as Denny throughout.
4
which was before Franzen Inc. had any contact with Travelers, Franzen Inc.
owed intercompany debt to Franzen Enterprises in excess of $3.3 million. By
2011, the intercompany loans were in excess of $3.7 million.
In addition to making intercompany loans, in 1994 Franzen Inc. granted a
blanket security interest in its assets to West Bank—its lender. Moreover, as
tractors and trailers were acquired, separate finance companies would loan funds
to Franzen Inc. to acquire those assets and in return, those companies would
become secured creditors of Franzen Inc. for the particular equipment.
According to Denny’s testimony, he formed an intent to retire from the
day-to-day management of the trucking company sometime before the Supreme
Court filed its ruling in favor of Traveler’s in October 2010. Consequently, he
began discussing the sale of his business to one of his long-term employees,
Chris Van Schepen. Chris had started working in the trucking industry in
approximately 1986, and he had been working for Franzen Inc. as the
maintenance director since 1997.
Starting in 2010, Franzen Inc. began transitioning its trucking operations to
ICS Logistics, Corp., a company formed by Chris to acquire the assets and
operations of Franzen Inc. Chris testified the gradual acquisition allowed both
parties to fully assess the viability of the anticipated transaction between them.
On October 18, 2011, the district court entered judgment on remand from
the Supreme Court in the amount of $550,661 against Franzen Inc. and in favor
of Travelers. In April 2012, Travelers sought execution on the judgment at Wells
Fargo—a bank Franzen Inc. had never used. No other execution was ever
5
attempted by Travelers. Travelers did not initiate a judgment debtor examination
on Franzen Inc. until September 19, 2012.
Meanwhile, in August 2011, Denny determined Franzen Inc. had assets
worth $2,896,569. Denny and Chris discussed that figure as a purchase price for
those assets. Chris sought an individual appraisal from a trucking expert.
Subsequently, Denny and Chris agreed to $2.8 million as the purchase price, a
value confirmed by the appraiser. Denny and Chris sought the assistance of
both legal and tax professionals to structure the transaction. Denman provided
tax guidance and attorney Dan Waters was retained to draft the legal
documentation.
Recognizing that Denny was a sole proprietor who developed the initial
customers and had the ability to retain those customers, multiple certified public
accounts testified at trial that Denny could have owned 100% of the customer list.
Regardless of this fact, due to tax considerations and at the advice of the tax
professionals involved, one-third of the customer list was allocated to Franzen
Enterprises and the other two-thirds were allocated to Denny.
Effective June 30, 2012, Franzen Inc. sold its assets, which consisted of
tractors, trailers and other equipment, to Franzen Enterprises. Franzen
Enterprises then sold the equipment to Logistics Corp. for $372,730 and one-
third of the customer list for an additional $809,246. In return, Logistics Corp.
issued promissory notes in those amounts to Franzen Enterprises. Franzen
Enterprises then assigned the notes to Denny and Linda Franzen, the sole
shareholders. Additionally, Denny sold his two-thirds of the customer list to
6
Logistics Corp. for an additional $1,618,492—Logistics Corp. issued him a
promissory note in that amount.
The assets of Franzen Inc. were not sufficient to satisfy its debt on
intercompany loans, so Franzen Inc. provided a secured note in the amount of
$1,022,551 to Franzen Enterprises and a secured note in the amount of
$1,932,510 to Heartland. Thereafter, Franzen Inc., Franzen Enterprises,
Southeast Transportation, and Heartland were all dissolved.
The bill of sale from Franzen Inc. to Franzen Enterprises states, “Seller
represents and warrants to Buyer that Seller has good and marketable title to
said assets, free of any and all liens, claims, restrictions, and encumbrances.
Buyer hereby consents to becoming the owner of said assets, and Buyer hereby
assumes the debt associated with said assets . . . .” The other bills of sale
include the same language.
All of the witnesses testifying on behalf of the defendants conceded that
Travelers’ judgment would or should have been considered a “claim” against the
assets of Franzen Inc. Denny, Chris, and Attorney Waters all testified that they
were aware of the Iowa Supreme Court’s decision regarding the judgment
around the time it was issued—October 2010. Denny admitted that no provision
had been made for the satisfaction of the judgment; in fact, he testified he never
had any intention of satisfying the judgment.
Following the advice of tax and legal professionals, Logistics Corp. was
converted into a newly formed entity named ICS Logistics, LLC. Logistics LLC
was organized on December 31, 2012. Counsel for the entity initially submitted
the conversion documents for filing with the Iowa Secretary of State on May 3,
7
2013, via fax. The filings were returned by mail on May 6, 2013, due to lines on
the page from the fax transmission. The conversion filings were resubmitted on
May 17, 2013—three days after Travelers filed its petition in this case.
Chris testified that Logistics Corp and then its successor Logistics LLC
have made timely payments of approximately $40,000 per month on the three
promissory notes—for the equipment and phone list—since February 2013.
Denny testified that he and his wife transferred the promissory note they
received from Logistics Corp. in exchange for their two-thirds of the customer list
and their right to receive monthly payments thereon to Iowa Cold Storage. 3 In
exchange, Denny and Linda received additional shares of stock in Iowa Cold
Storage. Logistics Corp. and then Logistics LLC has made periodic payments on
the note to Iowa Cold Storage.
Despite Denny’s structured sale of the business to Chris, Denny continued
to have an active role in the operation of the companies. According to the report
prepared by the certified public accountant hired by the defendants for trial,
neither Linda nor Denny Franzen had an ownership interest in ICS Logistics;
“[t]hus it [was] an arms-length transaction.”
Travelers brought suit to enforce its judgment against Franzen Inc. on a
theory of constructive fraud. The district court ruled against Travelers’ request
for a constructive trust on the assets of the defendants. Travelers appeals.
3
Denny was a minority shareholder in Iowa Cold Storage, a business with a cooperative
history with Franzen Inc.
8
II. Standard of Review.
The case was tried to the district court in equity, so our review is de novo.
Iowa R. App. P. 6.907; see also Berger v. Cas’ Feed Store, Inc., 577 N.W.2d
631, 632 (Iowa 1998) (stating the court’s review of the trial court’s decision to
impose a constructive trust would be de novo).
III. Discussion.
Travelers maintains Franzen Inc. fraudulently conveyed its property and
assets to the other named defendants in an attempt to escape the judgment
entered against Franzen Inc. Accordingly, Travelers brought this suit pursuant to
Iowa Code section 630.16 (2013) in an attempt to execute the judgment entered
against Franzen Inc. in October 2011.4
Iowa Code section 630.16 provides:
At any time after the rendition of a judgment, an action by
equitable proceedings may be brought to subject any property,
money, rights, credits, or interest therein belonging to the defendant
to the satisfaction of such judgment. In such action, persons
indebted to the judgment debtor, or holding any property or money
in which such debtor has any interest, or the evidences of securities
for the same, may be made defendants.
This section “furnishes means auxiliary to execution by which a creditor may
uncover property in which the debtor still holds an interest.” Powell v. Grewing,
4
Travelers sought to amend its pleadings prior to trial, but the district court did not allow
it do so. Travelers did not appeal the district court’s denial of its motion to amend.
Moreover, the district court only ruled on Travelers’ claims regarding section 630.16 and
constructive fraud, and Travelers did not file any after-trial motions to correct any alleged
errors regarding the scope of the trial court’s rulings. As such, we will not consider any
of Travelers’ arguments that are outside of that scope, as they are outside of our
purview.
Specifically, other arguments Travelers makes include: whether it could establish
the defendants committed actual fraud, whether the purchasers were good faith
purchasers for value, whether it was able to establish the defendants were involved in
collusion or a conspiracy, and whether an equitable lien was an appropriate remedy.
9
562 N.W.2d 761, 763 (Iowa 1997). It may be used as a means to uncover true
ownership where a debtor engaged in fraudulent conveyances. See id. (citing
Boyle v. Maroney, 35 N.W. 145, 147 (Iowa 1887)). In order to prove Franzen Inc.
still holds an interest in the property, Travelers has the burden to establish that
the transfer to the defendants was fraudulent. See First Sec. Bank & Trust Co. v.
King, No. 05-2039, 2007 WL 248021, at *3 (Iowa Ct. App. Jan. 31, 2007).
Here, Travelers only pled the theory of constructive fraud. “We presume a
transfer of property without consideration is fraudulent. In order to rebut this
presumption of constructive fraud, the transferee must prove the transferor
remained solvent after the transfer.” Benson v. Richardson, 537 N.W.2d 748,
756 (Iowa 1995) (citation omitted). Travelers has the burden to establish the
fraud by “clear and convincing evidence” and must “demonstrate the fraud has
caused [it] prejudice.” See id. It does not need to prove “actual dishonesty or
intent” to establish a claim of constructive fraud. See id. at 757.
The district court ruled Travelers had not met its burden in establishing
Franzen Inc. had engaged in a fraudulent transaction with the named defendants
because Franzen Inc. did not transfer its property without consideration. Rather,
Franzen Inc. transferred its assets to Franzen Enterprises, to which it owed more
than $3 million. Those assets of Franzen Inc. were not sufficient to satisfy its
debt on the intercompany loans. There is no dispute that Franzen Enterprises
was a creditor of Franzen Inc. well before Travelers became a creditor and even
before Travelers wrote the insurance policy underlying its claim against Franzen
Inc. “A debtor may prefer one creditor over another by way of sale, mortgage, or
the giving of security to others even if the debtor’s intentions toward the
10
nonpreferred creditor are spiteful and the action will delay or prevent the
nonpreferred creditor from obtaining judgment.” Id.Additionally, as the district court noted, although Franzen Inc. was
insolvent and ultimately dissolved after it transferred its assets to Franzen
Enterprises, Franzen Inc. was actually insolvent both in 2003 when Travelers
wrote the policy and in 2011 when the judgment against it was entered. See id.(“Under Iowa law, an individual debtor is insolvent ‘if the sum of the debtor’s
debts is greater than all of the debtor’s assets at fair valuation.’” (citation
omitted)).
After the transfer between Franzen Inc. and Franzen Enterprises, Franzen
Enterprises sold the equipment to Logistics Corp. for $372,730 and one-third of
the customer list for an additional $809,246. In return, Logistics Corp. issued
promissory notes in those amounts to Franzen Enterprises. Additionally, Denny
sold his two-thirds of the customer list to Logistics Corp. for an additional
$1,618,492—Logistics Corp. issued him a promissory note in that amount. Chris
testified that Logistics Corp and then its successor Logistics LLC5 have made
timely payments of approximately $40,000 per month on the three promissory
notes since February 2013.
Travelers implies that the consideration for this transaction is a façade.
First, we note the promissory notes themselves constitute consideration. See
Bjornsen Constr. Co. v. J.A. Whitmer & Sons, 119 N.W.2d 801, 804 (Iowa 1963)
(“The note itself imports a consideration.”). Second, although Travelers implies
5
Although Travelers implies this conversion was done in order to avoid or complicate
this lawsuit, as the district court noted, Logistics Corp. originally filed the conversion
documents before Travelers filed its petition.
11
the payments on the notes are not being made as Chris testified, Travelers has
the burden to establish a fraudulent conveyance took place; insinuations and
speculation regarding the consideration involved in the transaction are not
enough to do that.6 Finally, the $2.8 million purchase price was confirmed as fair
value by a trucking expert, and Travelers has not disputed that the amount was
adequate. See Benson, 537 N.W.2d at 754 (considering inadequacy of
consideration as an “indicia of fraud”).
Travelers has not established that Franzen Enterprises’ conveyance to
Logistics Corp. was without valuable consideration; it has not met its burden to
establish constructive fraud between the two entities. As such, we affirm the
district court’s denial of Travelers’ request to impose a constructive trust on the
assets of the named defendants.
IV. Conclusion.
Because Travelers has not met its burden to establish its theory of
constructive fraud involving D.J. Franzen, Inc and the named defendants, we
affirm.
AFFIRMED.
6
In its brief, Travelers states:
Franzen, Inc. transferred all its assets to ICS Corp. ICS Corp. is a
product of the ingenuity of Denny Franzen. While the company may be in
Chris Van Schepen’s name, it is nothing more than a reincarnation of D.J.
Franzen, Inc. Virtually all the drivers are former Franzen drivers. All the
clerical, office, managerial and other employees came directly from
Franzen. The trucks came from Franzen, Inc.’s affiliate, Heartland Lease.
Indeed, Chris Van Schepen testified at trial that his trucks still pull trailers
bearing the “D.J. Franzen” logo emblazoned on the sides.
Chris Van Schepen, who never made more than $68,000 a year
during his many years with the Franzen companies, paid nearly $3 million
for this widely-recognized concern. No money down, and monthly
payments in the tens of thousands of dollars, which he pays when due
and without difficulty.