CNH Capital America LLC v. Hunt Tractor, Inc.

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0430n.06
No. 13-6007
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT FILED
Jun 13, 2014
DEBORAH S. HUNT, Clerk
CNH CAPITAL AMERICA LLC, )
)
Plaintiff-Appellant, ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
v. ) THE WESTERN DISTRICT OF
) KENTUCKY
HUNT TRACTOR, INC., et al., )
)
Defendants, )
)
DOMINICK PAGANO, )
) OPINION
Defendant-Appellee. )
Before: COLE and ROGERS, Circuit Judges; and HOOD, District Judge.*
HOOD, District Judge. Plaintiff-Appellant CNH Capital America LLC (“CNH”) appeals
from the summary judgment entered in favor of the Defendant-Appellee Dominick Pagano
(“Pagano”) by the district court on CNH’s claims for conversion, breach of contract, fraudulent
conveyance, and civil conspiracy to commit fraudulent conveyance, as well as the district court’s
decision to deny CNH’s own motion for summary judgment on its claims of conversion and
fraudulent conveyance.
Hunt Tractor, Inc., of which Pagano was a minority shareholder, and CNH entered into a
Wholesale Financing and Security Agreement to cover Case brand earth-moving equipment.
*The Honorable Joseph M. Hood, United States District Judge for the Eastern District of Kentucky,
sitting by designation.
Following the receipt of a large sum of proceeds covered by the agreement, Hunt Tractor fully paid
off its term loan and line of credit loan with another creditor, Commonwealth Bank and Trust
Company (“Commonwealth”), remitting none of the proceeds to CNH, in contravention of the
agreement between Hunt Tractor and CNH. The payment to Commonwealth benefitted Pagano by
allowing him to terminate his personal guaranty and request the release of previously pledged assets
securing the loans from Commonwealth to Hunt Tractor.
Based upon Hunt Tractor’s violation of the Financing Agreement, CNH brought multiple
claims against Hunt Tractor, Scott Hunt, Jr. (“Hunt”), and Dominick Pagano. CNH appeals the
district court’s grant of summary judgment in favor of Pagano on its claims of conversion, breach
of contract, fraudulent conveyance, and civil conspiracy to commit fraudulent conveyance. CNH
further appeals the district court’s denial of its own motion for summary judgment on its claims of
conversion and fraudulent conveyance. For the reasons that follow, the Court will affirm in part and
reverse in part.
I.
Hunt Tractor was in the business of selling, renting, and repairing new and used earth-
moving equipment. [R. 110–36, Page ID 1634]. In 2007, at the insistence of Hunt, Pagano’s son-in-
law, Pagano made a number of loans to Hunt Tractor, which facilitated Hunt’s purchase of the
company. After loaning Hunt Tractor $400,000, Pagano converted the debt to equity in the
company, making Pagano a minority shareholder. [R. 110–11, Page ID 1481–83; R. 102–5, Page
ID 879–84]. Once a stockholder, Pagano made additional advances of $225,000. [R. 102–4, Page
ID 874; R. 102–9; Page ID 892; R. 110–11, Page ID 1508, 1511]. Pagano gave business advice to
Hunt about running the company, [R. 102–4, Page ID 867], but was never an officer, employee, or
2
director of Hunt Tractor, [R. 102–2, Page ID 859; R. 102–7, Page ID 887], despite being listed as
Chairman of the Board on an organizational chart prepared when Hunt was applying for Hunt
Tractor to continue as a Case brand dealership. See [R. 110–37, Page ID 1637].
Hunt Tractor operated as a licensed Case brand equipment dealer many years before Hunt
purchased the company. See [R. 102–2, Page ID 860]. On May 30, 1991, before Hunt became the
owner, and before Pagano was a stockholder, Hunt Tractor entered into a Wholesale Financing and
Security Agreement (“WFSA”) with Case Credit Corporation. [R. 110–2, Page ID 1363–78].
Subsequently, Case Credit Corporation was converted from a corporation to a limited-liability
company and changed its name to CNH Capital America LLC. [R. 110–3, Page ID 1380–81]. Thus,
CNH became the successor to the WFSA. The WFSA granted CNH a security interest in inventory,
equipment, all proceeds of inventory, Hunt Tractor’s accounts with CNH, and other collateral
requested by CNH. [R. 110–2, Page ID 1363–64]. The WFSA required Hunt Tractor to remit the
proceeds of the sale of any equipment to CNH within seven days. [R. 110–2, Page ID 1364; R.
110–9, Page ID 1449]. However, Hunt’s interrogatory responses indicate that “[t]he standard
protocol was that proceeds were used to keep the doors open before any vendor was paid.” [R.
110–13, Page ID 1550]. According to Hunt, CNH was aware of this practice and knew Hunt Tractor
was regularly behind on payments. [R. 110–13, Page ID 1550].
CNH was not Hunt Tractor’s only source of financing. After acquiring Hunt Tractor, and
with help from Pagano, Hunt began moving Hunt Tractor’s corporate bank accounts from Fifth
Third Bank to Commonwealth. [R. 110–11, Page ID 1488]. In March 2008, Hunt Tractor entered
into a $500,000 line of credit and took out a $600,000 term loan with Commonwealth. [R. 110–14,
Page ID 1562–63; R. 110–17, Page ID 1572–73]. According to Hunt, the negotiations for these
3
loans were completely handled by Pagano because “he had done business with banks and loans
before.” [R. 110–10, Page ID 1452–53]. Pagano claims that he was only the initial contact and was
not involved in the discussions with Commonwealth on behalf of Hunt Tractor. [R. 102–4, Page ID
870].
Before extending financing to Hunt Tractor, Commonwealth required Hunt Tractor, Hunt,
and Pagano to provide security for the loans. Pagano and Hunt executed non-revocable personal
guaranties for the full amount of Hunt Tractor’s line of credit. [R. 1–6 Page ID 70–72; R. 110–15,
Page ID 1565–67; R. 110–12, Page ID 1536–37]. Hunt Tractor granted Commonwealth a security
interest in its business assets. [R. 103–22, Page ID 1157].
Additionally, Commonwealth, after noting that Pagano had significant wealth, required a
pledge of collateral from Pagano. Pagano pledged securities and executed a control agreement for
a Commonwealth trust account, which was composed of EDAC stock, a company owned and run
by Pagano. [R. 110–16, Page ID 1569–70; R. 110–11, Page ID 1497]. Pagano initially placed
around 300,000 shares of EDAC stock in the trust account. [R. 110–11, Page ID 1502].
Commonwealth demanded more collateral when the value of the EDAC stock fell, and Pagano
placed an additional 148,333 shares of EDAC stock in the trust account. [R. 110–11, Page ID
1497–98, 1501; R. 110–19, Page ID 1582]. Pagano could only have his collateral in the trust
account released when “all of the obligations secured by Collateral ha[d] been satisfied,” or upon
the consent of Commonwealth Bank. [R. 110–16, Page ID 1569; R. 110–18, Page ID 1575].
Pagano also pledged a TD Banknorth brokerage account. [R. 110–22, Page ID 1592–98]. The
control agreement executed on the TD Banknorth brokerage account was expressly irrevocable. [R.
110–22, Page ID 1595].
4
Eventually, Hunt Tractor began having problems meeting its payment obligations to CNH.
In early 2009, CNH extended some of the payments, but Hunt Tractor requested further extension
in June. [R. 102–10, Page ID 893]. In July 2009, Pagano learned that Hunt Tractor had been
missing principal payments to CNH. [R. 110–11, Page ID 1513]. This led Pagano to begin
considering withdrawing his personal guaranty and collateral on the loans extended by
Commonwealth. [R. 102–4, Page ID 875]. However, under the terms of the agreements, Pagano
could only be released from his obligations when the term note and line of credit reached a zero
balance. [R. 110–25, Page ID 1605].
Meanwhile, in July 2009, the Kentucky Department of Transportation (“KYDOT”) placed
a large order with Hunt Tractor. [R. 110–13, Page ID 1560]. Hunt Tractor received payment for
this order on November 9, 2009. [R. 110–13, Page ID 1560]. The check from the KYDOT, made
out for $825,347.00, was deposited in Hunt Tractor’s bank account at Commonwealth on November
12. [R. 110–27, Page ID 1609]. On the same day, Commonwealth received notification from
Pagano that he wished to remove his guaranties from the term loan and line of credit and Pagano
requested the payoff amounts and documents to release his collateral. [R. 110–28, Page ID 1611].
On November 13, 2009, Hunt was sent payoff and close out letters for both he and Pagano. [R.
110–29, Page ID 1615]. Additionally, Hunt was informed that, if Hunt Tractor intended to maintain
a credit relationship with Commonwealth, Pagano would need to notify the bank, within 48 hours,
that he was willing to continue to guarantee the debts of Hunt Tractor. [R. 110–29, Page ID 1615].
Thereafter, on November 16 and 17, 2009, Hunt Tractor fully paid off its debts to
Commonwealth. The line of credit was paid down to zero on November 16, 2009 when an
automatic sweep of Hunt Tractor’s bank account with Commonwealth took place, pursuant to the
5
conditions placed on Hunt Tractor’s deposit account. See [R. 110–33, Page ID 1627]. The term
loan was paid off when Hunt wrote checks for $501,549.87 on November 16, [R. 110–31, Page ID
1622], and another for $27,089.77 on November 17. [R. 110–31, Page ID 1623]. On November 16,
Hunt informed Commonwealth not to advance any more funds on the line of credit and to turn off
the automatic sweep feature of the bank account. [R. 102–14, Page ID 903]. The majority of the
money used to pay off the loans came from the sale to the KYDOT. None of the proceeds from the
sale to the KYDOT were remitted to CNH, as required by the WFSA.
On the morning of November 18, 2009, at 6:52 a.m., Pagano again requested that his
personal guaranty and assets be released. [R. 110–11, Page ID 1524; R. 110–32, Page ID 1625].
With the loans fully paid off, and after completing the necessary paperwork, Pagano was released
of his personal guaranty and the security interest on his collateral was released. [R. 110–32, Page
ID 1625]. Pagano testified that he did not recall the payment from the KYDOT coming to Hunt
Tractor and he was not notified of its receipt. [R. 102–4, Page ID 877].
According to Mike Litke, the regional supervisor for CNH and manager of Hunt Tractor’s
account with CNH, CNH was notified of Hunt Tractor’s transactions with Commonwealth by Hunt.
[R. 110–6, Page ID 1394]. Litke testified that Hunt told him the bank had called the line of credit
and all the money from the sale to the KYDOT had gone to the bank. [R. 110–6, Page ID 1394].
Ultimately, despite attempting to operate without Pagano, Hunt Tractor was unable to meet
its obligations to CNH. CNH notified Hunt Tractor of default and termination of the dealer
agreement on March 15, 2010. [R. 102–19, Page ID 909]. Hunt Tractor is no longer an operating
business.
6
Based upon Hunt Tractor’s failure to remit the proceeds of the KYDOT sale to CNH
pursuant to the WFSA, CNH brought claims against Hunt Tractor, Hunt, and Pagano. CNH brought
claims of breach of contract against Hunt Tractor, breach of guaranty against Hunt, breach of
fiduciary duty against Pagano and Hunt, fraudulent concealment against Pagano and Hunt, civil
conspiracy to commit fraud against Pagano and Hunt, preferential conveyance against Pagano and
Hunt, civil conspiracy to make a preferential conveyance against Pagano and Hunt, fraudulent
conveyance against Pagano and Hunt, civil conspiracy to make a preferential conveyance against
Pagano and Hunt, breach of contract under a theory of piercing the corporate veil against Pagano,
conversion against Pagano and Hunt, and punitive damages against Pagano and Hunt. [R. 1, Page
ID 1–34].
The district court granted CNH’s motion for summary judgment on the breach of contract
claim against Hunt Tractor and for breach of guaranty against Hunt. [R. 117, Page ID 1861–74].
The district court granted summary judgment in favor of Pagano on all claims against him. [R. 117,
Page ID 1874–87]. CNH appeals the district court’s decision to grant Pagano’s motion for summary
judgment on its claims of conversion, breach of contract under a theory of piercing the corporate
veil, fraudulent conveyance, and civil conspiracy to commit fraudulent conveyance. CNH also
appeals the district court’s decision to deny its motion for summary judgment on its claims of
conversion and fraudulent conveyance.
II.
“The standard of review for a district court’s grant of summary judgment is de novo.”
Agristor Fin. Corp. v. Van Sickle, 967 F.2d 233, 235 (6th Cir. 1992) (citing Massey v. Exxon Corp.,
942 F.2d 340, 342 (6th Cir. 1991)). A motion for summary judgment may only be granted “if the
7
movant shows that there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). “On summary judgment the inferences to be
drawn from the underlying facts . . . must be viewed in the light most favorable to the party opposing
the motion.” United States v. Diebold, Inc., 369 U.S. 654, 655 (1962). “[T]he plain language of
Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon
motion, against a party who fails to make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the burden of proof at trial.”
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “Once the moving party has proved that no
material facts exist, the non-moving party must do more than raise a metaphysical or conjectural
doubt about issues requiring resolution at trial.” Agristor Fin. Corp., 967 F.2d at 236 (citing
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)).
III.
CNH appeals the district court’s decision to grant Pagano’s motion for summary judgment
on the claims of conversion, breach of contract under a veil piercing theory, fraudulent conveyance,
and civil conspiracy. Additionally, CNH appeals the district court’s decision to deny its own motion
for summary judgment on the claims of conversion and fraudulent conveyance. The Court will
reverse and remand the district court’s grant of summary judgment in favor of Pagano on the
conversion claim and affirm in all other respects.
First, CNH appeals the district court’s determination that Pagano was not liable for
conversion because he did not exercise dominion and control over the proceeds of the sale to the
KYDOT. Finding genuine issues of material fact on the issue of whether Pagano exercised
dominion and control over the proceeds, this Court will reverse.
8
To prove conversion under Kentucky law, a plaintiff must show:
(1) the plaintiff had legal title to the converted property; (2) the plaintiff had
possession of the property or the right to possess it at the time of the conversion;
(3) the defendant exercised dominion over the property in a manner which denied the
plaintiff’s rights to use and enjoy the property and which was to the defendant’s own
use and beneficial enjoyment; (4) the defendant intended to interfere with the
plaintiff’s possession; (5) the plaintiff made some demand for the property’s return
which the defendant refused; (6) the defendant’s act was the legal cause of the
plaintiff’s loss of the property; and (7) the plaintiff suffered damage by the loss of
the property.
Ky. Ass’n of Cntys. All Lines Fund Trust v. McClendon, 157 S.W.3d 626, 632 n.12 (Ky. 2005)
(citations omitted).
The district court granted summary judgment on this issue based on a finding that Pagano
did not exercise control over the proceeds of the sale to the KYDOT because the funds always
remained in accounts held by Hunt Tractor. [R. 117, Page ID 1886]. Finding it dispositive, the
district court only analyzed the dominion and control element of conversion.
CNH argues that because Pagano was neither an employee or officer of Hunt Tractor, Pagano
claims to have had no authority to act on behalf of Hunt Tractor, and that the district court found
Pagano directed the funds to be paid, Pagano must have asserted dominion and control over the
proceeds. CNH further argues that a corporate officer can be personally liable for acts committed
on behalf of a corporation. Pagano argues that he could not have exercised dominion and control
over the funds because the Hunt Tractor bank account was controlled solely by Hunt, and that any
benefit received by Pagano did not amount to dominion and control.
The district court erred when it found that Pagano was responsible for ordering the loans to
be repaid. There remains a genuine issue of material fact as to Pagano’s involvement in using the
proceeds of the sale to the KYDOT to pay off the loans owed to Commonwealth. Pagano testified
9
that he was “pleasantly surprised” to find out the term loan had been paid in full and that he had no
notice that Hunt Tractor would be paying off the term loan. [R. 103–12, Page ID 1094].
Furthermore, Pagano testified that he did not know how Hunt Tractor managed to pay off the loans,
but he assumed Hunt Tractor had acquired some receivables. [R. 110–11, Page ID 1522].
Conversely, Scott Hunt testified that Pagano had told Commonwealth “that we were going
to be paying [the term loan] off.” [R. 102–2, Page ID 860]. Additionally, Hunt testified that the
decision to close out the line of credit was made by Pagano. [R. 110–10, Page ID 1460]. Hunt
further testified that he and Pagano discussed the decision to pay Commonwealth instead of CNH.
[R. 102–2, Page ID 860]. Therefore, as the evidence on this issue is squarely at odds, there remains
a genuine issue of material fact as to whether Pagano exercised dominion and control over the
proceeds of the sale to the KYDOT.
The district court also erred, as a matter of law, when it found that Pagano could not be
personally liable for conversion because the proceeds were always maintained within the bank
account of Hunt Tractor. “[T]he law is well settled that an agent of a corporation is personally liable
for a tort committed by him though he was acting for the corporation. There are numerous cases
holding a corporate officer liable for conversion of personal property by him for the benefit of his
corporation.” Small v. Bailey, 356 S.W.2d 756, 757 (Ky. 1962) (citations omitted); see also KRS
271B.6-220(2) (“Unless otherwise provided in the articles of incorporation, a shareholder of a
corporation . . . may become personally liable by reason of his own acts or conduct.”). While
Pagano was never officially an officer, he was a minority shareholder and regularly gave advice to
Hunt, the president of the corporation. Thus, if Pagano was responsible for the transfer of the funds,
and was therefore acting on behalf of Hunt Tractor, he could be personally liable for the tort of
10
conversion. Accordingly, we affirm the district court’s denial of CNH’s motion for summary
judgment on the claim of conversion and reverse the district court’s grant of Pagano’s motion for
summary judgment. We remand this issue for proceedings consistent with this opinion.
Next, CNH appeals the district court’s decision to grant Pagano’s motion for summary
judgment on the breach of contract claim under a theory of piercing the corporate veil. The district
court granted Pagano’s motion for summary judgment on CNH’s claim for veil piercing upon a
finding that observing the corporate form would not sanction fraud or promote injustice. [R. 117,
Page ID 1885]. The district court did not address whether Hunt Tractor had lost its corporate
separateness. Because CNH does not present an injustice beyond the mere inability to collect a debt,
the Court will affirm the district court’s grant of summary judgment.
“[T]he doctrine of piercing the corporate veil arises in equity.” Schultz v. Gen. Elec.
Healthcare Fin. Servs., Inc., 360 S.W.3d 171, 175 (Ky. 2012) (citations omitted). “[A] court will
disturb the legal fiction of corporate separateness only in the rarest of circumstances.” Id. at 174.
Under any theory, a successful veil piercing claim in Kentucky must show “two dispositive
elements: (1) domination of the corporation resulting in a loss of corporate separateness and (2)
circumstances under which continued recognition of the corporation would sanction fraud or
promote injustice.” Inter-Tel Techs., Inc. v. Linn Station Props., L.L.C., 360 S.W.3d 152, 165 (Ky.
2012). This test requires “the trial court [to] state specifically the fraud or injustice that would be
sanctioned if the court declined to pierce the corporate veil[,]” and the fraud or injustice identified
“must be something beyond the mere inability to collect a debt from the corporation.” Id. at 165.
Fraud will be sanctioned or injustice promoted “where ‘a party would be unjustly enriched;
[where] a parent corporation that caused a sub’s liabilities and its inability to pay for them would
11
escape those liabilities; or an intentional scheme to squirrel assets into a liability-free corporation
while heaping liabilities upon an asset-free corporation would be successful.’” Id. at 164 (alteration
in original) (quoting Sea-Land Servs., Inc. v. Pepper Source, 941 F.2d 519, 524 (7th Cir. 1993)).
CNH has not asserted an injustice beyond the mere inability to collect a debt. Hunt Tractor
paid off a legitimate business debt with funds it received, albeit in violation of its agreement with
CNH. As a result of making the payments to Commonwealth, Hunt Tractor was left with no money
with which to pay its debts to CNH. Pagano’s ability to have his personal guaranty and pledged
assets released was just a byproduct of the payment, which, according to Hunt, was made because
Hunt believed a local bank “has a little bit more power tha[n] CNH Capital.” [R. 102–2, Page ID
860]. On these facts, the only injustice is that Hunt Tractor was unable to pay CNH. As stated by
the Kentucky Supreme Court, this is simply not enough to justify piercing the corporate veil.
Moreover, the equitable doctrine of piercing the corporate veil is the incorrect remedy for
the wrong alleged by CNH.
The type of fraud that [plaintiff] alleges is precisely that protected by fraudulent
conveyance law and does not rise to the level required to pierce the corporate
veil. . . . Fraudulent conveyance law is more carefully tailored to the interests of all
parties than the blunt instrument of piercing the corporate veil. . . . The remedy in
fraudulent conveyance stands in sharp contrast with the general remedy in veil
piercing. When the corporation’s veil is pierced, the individual shareholders are
liable for the corporation’s debts, which could exceed the value of the assets
fraudulently conveyed.
Waste Conversion Techs., Inc. v. Warren Recycling, Inc., 191 F. App’x 429, 434–35 (6th Cir. 2006).
Thus, the district court’s grant of Pagano’s summary judgment motion on the breach of contract
claim is affirmed.
CNH also appeals the district court’s grant of Pagano’s motion for summary judgment on
CNH’s claims of fraudulent conveyance under Kentucky Revised Statutes 378.010 and 378.020.
12
The district court granted Pagano’s motion for summary judgment on the basis that Pagano was not
a transferor or transferee, and the statutes do not authorize third-party liability. [R. 117, Page ID
1880]. The district court further concluded that compensatory damages were not available for
fraudulent conveyance under Kentucky law and, even if they were, damages could only be awarded
against a transferor or transferee. [R. 117, Page ID 1880–81]. We affirm the district court’s
decision.
Kentucky Revised Statute 378.010 provides, in pertinent part, that: “Every gift, conveyance,
assignment or transfer . . . made with the intent to delay, hinder or defraud creditors . . . shall be void
as against such creditors.” KRS 378.010. Kentucky Revised Statute 378.020 provides that:
Every gift, conveyance, assignment, transfer or charge made by a debtor, of or upon
any of his estate without valuable consideration therefor, shall be void as to all his
then existing creditors, but shall not, on that account alone, be void as to creditors
whose claims are thereafter contracted, nor as to purchasers from the debtor with
notice of the voluntary alienation or charge.
KRS 378.020.
First, the Court must determine which transfer CNH alleges was fraudulent, as CNH seeks
to impose liability upon Pagano based upon the fact that his pledged assets were transferred to him
free of any security interest when Hunt Tractor paid off its loans from Commonwealth. The
fraudulent transfer at issue must be the transfer from Hunt Tractor to Commonwealth because CNH
asserts no wrongdoing on the part of Commonwealth. See Appellant Br., p. 52 (“Commonwealth
Bank was merely a conduit.”); [R. 110, Page ID 1341] (“[Commonwealth Bank] was merely an
intermediary for the transfer.”). Additionally, CNH’s arguments that Commonwealth was a conduit
and that collapsing the transaction can allow Pagano to be considered the transferee are unavailing.
CNH cites McMurray v. McMurray, 410 S.W.2d 139 (Ky. 1966), for the proposition that a
beneficiary can be liable under Kentucky statutes and that the transactions can be collapsed, such
13
that Hunt Tractor is the transferor and Pagano is the transferee. See Appellant Br., p. 47. CNH
misreads McMurray’s holding on both accounts. In its citation of the case, CNH characterizes
McMurray as making a wife liable for a transfer received by a third party. Appellant Br., p. 46
(“[H]usband-debtor’s payment of funds to bank held to be a fraudulent transfer to wife by increasing
the value of wife’s interest in property.”). However, McMurray found “that the conveyance of an
interest to Joyce without consideration was avoidable as to Billy’s then existing debts.” McMurray,
410 S.W.2d at 141. Thus, even though multiple transfers were involved in the case, the fraudulent
transfer at issue was from Billy to Joyce, and Joyce was the transferee, not a beneficiary. It was
Billy’s transfer of an interest in real property to Joyce, without consideration, that was fraudulent.
In this transaction, Joyce was the direct, and only, transferee. The court did not collapse any of the
transactions and did not create a legal fiction to determine the transferor and transferee. Second,
when the court collapsed multiple transactions it did so only to determine the amount of the
fraudulent transfer, not to determine if there was a fraudulent transfer. Id. Thus, McMurray does
not support the conclusion that Pagano can be liable as a beneficiary.
CNH’s argument that Commonwealth was a conduit is also misguided. The cases cited by
CNH bear no factual resemblance to the matter before this Court. In Harris v. National Investment
& Finance Company (In re Akin), the debtor was transferring personal assets into a corporation he
controlled so that those assets could not be reached by creditors. 64 B.R. 510, 518 (Bankr. W.D.
Ky. 1986) (“National, as the conduit and recipient of these transfers, was merely the convenient
corporate vehicle through which Akin isolated those assets.”). Hunt Tractor was not attempting to
hide assets they could later control, but was instead, by paying one legitimate creditor over another,
relinquishing its right to control the proceeds. The other case relied upon by CNH, Schilling v.
Montalvo (In re Montalvo), simply held that a father was not a recipient of a fraudulent conveyance
14
when his son mailed him a loan payment, which the father took from a post office to the creditor
bank. 324 B.R. 619, 622–23 (Bankr. W.D. Ky. 2005). Here, Commonwealth, unlike the father, had
a right to the money and kept the money, rather than facilitating a transfer to the rightful transferee.
Thus, the transfer that was allegedly fraudulent was the transfer of the loan payment to
Commonwealth from Hunt Tractor.
As an initial matter, the Court finds that CNH’s claim under KRS 378.020, and CNH’s
argument that Pagano received a gift under KRS 378.010, must fail because adequate consideration,
the loan, was transferred for the loan payments from Hunt Tractor to Commonwealth. See Schilling
v. Montalvo (In re Montalvo), 324 B.R. 619, 623 (Bankr. W.D. Ky. 2005) (“The checks made
directly payable to the Bank were clearly made for valuable consideration, i.e., the initial loan.”).
The Kentucky statutes for fraudulent conveyances only allow recovery for a fraudulent
conveyance from a transferor or transferee. Unlike the Uniform Fraudulent Transfer Act, the
Kentucky statutes do not explicitly allow recovery from a beneficiary of the transfer. Compare Unif.
Fraudulent Transfer Act § 8(c) with KRS 378.010 – .100. The Kentucky statutes under which CNH
brought its claims both provide that a fraudulent transfer “shall be void.” KRS 378.010 – .020. This
language does not suggest that a mere beneficiary of a transfer can be held liable for the transfer.
To void a transfer implies only those party to the transfer need be involved. See Black’s Law
Dictionary 763 (3d pocket ed. 2006) (defining void as “of no legal effect”). The Kentucky General
Assembly has specifically chosen not to adopt the Uniform Fraudulent Transfer Act or a similar
section that would explicitly allow recovery from beneficiaries. This Court will not provide a
remedy the Kentucky legislature has not included in the statute. Furthermore, although Kentucky
state courts are silent on the issue, Kentucky federal district courts have interpreted the statutes as
precluding recovery from a beneficiary. See GATX Corp. v. Addington, 879 F. Supp. 2d 633, 642
15
(E.D. Ky. 2012) (citations omitted) (“[A] direct liability fraudulent conveyance claim is only
actionable against the transferor or transferee.”); see also Princesse D’Isenbourg et Cie, Ltd. v.
Kinder Caviar, Inc., No. 3:12-cv-4-DCR, 2013 WL 147841, at *6 (E.D. Ky. Jan. 14, 2013) (citing
GATX Corp., 879 F. Supp. 2d at 642) (holding that only the transferor or transferee can be liable for
a fraudulent conveyance claim). As Pagano was not was a direct transferee or transferor,
Commonwealth was not a conduit, and there is no justification for collapsing the transactions,
Pagano cannot be liable for fraudulent conveyance.1
The Court has considered the dissent and its position, and finds fault with the analysis for
the reasons which follow. The Court finds fault with the dissent’s reliance on Kentucky cases that
hold a payment of a valid, preexisting debt can serve as a fraudulent conveyance. Kentucky case
law on this point is mixed. See Jadco Enterprises, Inc. v. Fannon, No. 6:12-cv-225-DCR, 2014 WL
66521, at *4 (E.D. Ky. Jan. 8, 2014) (“[T]here is some inconsistency in Kentucky opinions
discussing fraudulent conveyances.”). To this end, the case cited by the dissent, Farmers’ Bank of
Fountain Run v. Hagan, holds that the transfer of a mortgage from a husband to a wife in satisfaction
of a valid, preexisting debt was not a fraudulent conveyance. Farmers’ Bank of Fountain Run v.
Hagan, 46 S.W.2d 1084, 1087–88 (Ky. 1932). The court affirmed the judgment giving the wife a
mortgage in the amount of $880.00, id. at 1086, after finding it was compelled to follow case law
holding that a transfer to satisfy a valid, preexisting debt could be preferential, not fraudulent. Id.
1
The Court will not address CNH’s argument that Kentucky law allows compensatory
damages as a remedy for fraudulent conveyance. Kentucky courts are silent on this issue and the
Court will not wade into murky waters when the Court’s decision would have no bearing on the
outcome of this appeal. See Princesse D’Isenbourg et Cie, Ltd. v. Kinder Caviar, Inc., No. 3:12-cv-
004-DCR, 2013 WL 147841, at *6 (E.D. Ky. Jan. 14, 2013) (“Because ‘Kentucky courts have not
explicitly reached this conclusion,’ the Court declines to extend Kentucky law to allow for
compensatory damages from a transferee.” (quoting GATX Corp., 879 F. Supp. 2d at 642)).
16
at 1088. Specifically, the court relied on Seiler v. Walz, which stated:
By preferring the son as a creditor, the father committed no actual fraud on his other
creditors. It was commendable in him to pay his debts, and he might prefer one
creditor over another without committing actual fraud, or doing aught that is
denounced in the statute relied on by the appellee. Relief from such a preference
must be sought under another and different statute.
Seiler v. Walz, 29 S.W. 338, 339 (Ky. 1895); see also Farmers’ Bank of Fountain Run, 46 S.W.2d
at 1087 (quoting Seiler, 29 S.W. at 339). Even if Farmers’ Bank had found a fraudulent conveyance
based upon the payment of a valid, preexisting debt, it would further support that Commonwealth
was the proper party to sue. In that case, the husband was the transferor and the wife was the
transferee. Those facts are analogous to this case, with Hunt Tractor in the position of the husband
and Commonwealth the wife. The creditor in Farmers’ Bank sued the direct transferee, the wife,
not a beneficiary of the transfer. Thus, the proper party for suit was the wife, or Commonwealth,
and this case does not provide support that Kentucky law allows a beneficiary of a transfer to be
liable on a theory of fraudulent conveyance. The cases relied upon by the dissent that allow a
fraudulent conveyance claim when a debtor improves the value of the property of another likewise
do not involve a recovery against a beneficiary because, even though the owner of the property may
have benefitted, as owner of the land they are the direct transferee of the value of the improvements.
See, e.g., Pierce v. J.B. Pierce’s Trustee in Bankruptcy, 38 S.W.2d 254, 259 (Ky. 1931) (“The lot
of Mrs. Pierce was not liable for the debts of her husband; but, to the extent his expenditures had
increased the vendible value of her lot, his creditors had a claim.”).
While the Court declines to address CNH’s argument that it is entitled to recover
compensatory damages, a discussion of the proper remedy for a successful fraudulent conveyance
claim further illustrates that a beneficiary cannot be liable for a fraudulent conveyance under
Kentucky law. Kentucky courts have not reached the conclusion that money damages are available.
17
See Princesse D’Isenbourg et Cie, Ltd. v. Kinder Caviar, Inc., No. 3:12-cv-4-DCR, 2013 WL
147841, at *6 (E.D. Ky. Jan. 14, 2013) (“Because ‘Kentucky courts have not explicitly reached this
conclusion,’ the Court declines to extend Kentucky law to allow for compensatory damages from
a transferee.” (quoting GATX Corp. v. Addington, 879 F. Supp. 2d 633, 642 (E.D. Ky. 2012))).
Rather, “the proper remedy for a fraudulent conveyance claim is the nullification of the transfer by
returning the property at issue back to the transferor.” Id. (quoting GATX Corp., 879 F. Supp. 2d
at 641); see also Mattingly v. Gentry, 419 S.W.2d 745, 747 (Ky. 1967) (“[T]he purpose of KRS
378.020 is to put the creditors back in the same position they would have enjoyed immediately prior
to the voidable conveyance.”). This remedy is best illustrated by the portion of the Farmers’ Bank
opinion that found the transfer of an automobile, without valuable consideration, was a fraudulent
transfer. See Farmers’ Bank, 46 S.W.2d at 1086–87 (declaring that the evidence shows that, as to
the automobile, “there was no consideration for the transfer”). “[T]he only relief appellant was
entitled to on this score was to have the transfer set aside and the automobile sold to satisfy the
attachment lien.” Id. at 1088. Thus, the proper remedy, an unwinding of the transaction, can only
be enforced against the transferor or a transferee that actually received the property, not a
beneficiary. In effect, the dissent would require Pagano to return an automobile he never received.
The Court does not agree that GATX Corp. v. Addington is distinguishable from the case at
hand. The holding in GATX Corp. was dictated by the fact that “a direct liability fraudulent
conveyance claim is only actionable against the transferor or transferee.” GATX Corp., 879 F. Supp.
2d at 642 (citations omitted). The Court finds that the alleged fraudulent transfer was the transfer
from Hunt Tractor to Commonwealth, and Pagano was neither transferor, nor transferee. Thus,
Pagano cannot be directly liable on a fraudulent conveyance claim.
The dissent may be persuaded by CNH’s jewelry store hypothetical because it is nonsensical
18
for the creditors of the husband to be forced to sue the jewelry store, rather than the wife, the
beneficiary of the transfer. However, this outcome is dictated by the express language of the statute
and the interpretations of the statute by Kentucky courts. Whether the statute provides the most
logical or most desirable avenue of relief is immaterial to our decision. Simply put, it is
inappropriate to read a remedy into a statute that is not there, especially given that in the 108 year
history of KRS 378.010 not a single recorded Kentucky case allows for recovery of a money
judgment against a beneficiary of a fraudulent transfer. Accordingly, the district court’s grant of
Pagano’s motion for summary judgment and denial of CNH’s motion for summary judgment on the
fraudulent conveyance claim is affirmed.
Finally, CNH appeals the district court’s decision to grant Pagano’s motion for summary
judgment on the count alleging civil conspiracy to commit a fraudulent conveyance. The district
court determined that CNH, by bringing this claim, was attempting to bypass Kentucky law, which
does not allow non-transferees to be liable for fraudulent conveyance. Thus, according to the district
court, CNH could not use a conspiracy claim to reach a result that could not be reached by bringing
a claim for the completed tort. [R. 117, Page ID 1882–83].
“Civil conspiracy . . . has been defined as ‘a corrupt or unlawful combination or agreement
between two or more persons to do by concert of action an unlawful act, or to do a lawful act by
unlawful means.’” Peoples Bank of N. Ky., Inc. v. Crowe Chizek & Co., 277 S.W.3d 255, 260–61
(Ky. Ct. App. 2008) (quoting Smith v. Bd. of Educ. of Ludlow, 94 S.W.2d 321, 325 (Ky. 1936)). The
damage must result “from some overt act done pursuant to or in furtherance of the conspiracy.”
Davenport’s Adm’x v. Crummies Creek Coal Co., 184 S.W.2d 887, 888 (Ky. 1945). “Civil
conspiracy is not a free-standing claim; rather, it merely provides a theory under which a plaintiff
may recover from multiple defendants for an underlying tort.” Stonestreet Farm, L.L.C. v. Buckram
19
Oak Holdings, N.V., Nos. 2008-CA-002389-MR, 2009-CA-000026-MR, 2010 WL 2696278, at *13
(Ky. Ct. App. July 9, 2010) (citations omitted). Thus, for a claim of civil conspiracy to be viable,
it must be based upon an underlying tort. See id. at *14 (“Stonestreet’s claim of civil conspiracy
thus has no tort to be based upon and cannot survive as a matter of law.”).
CNH’s claim of civil conspiracy to commit a fraudulent conveyance must fail. Pagano
cannot be liable for fraudulent conveyance because he was neither the transferee nor transferor.
Pagano cannot be liable for conspiring to perform a tort he could not commit as a matter of law.
CNH’s argument, that Kentucky law should not protect those who benefit from a fraudulent
conveyance, ignores the fact that, despite whatever CNH thinks the law should be, the Kentucky
General Assembly has chosen not to create a statute making beneficiaries of a fraudulent transfer
liable for that transfer. Therefore, the “claim of civil conspiracy thus has no tort to be based upon
and cannot survive as a matter of law.” Id. The district court’s decision to grant Pagano’s motion
for summary judgment on the civil conspiracy claim is affirmed.
IV.
For all of the reasons stated above, we AFFIRM the district court’s grant of Pagano’s
motion for summary judgment on the claim of breach of contract, fraudulent conveyance, and civil
conspiracy to commit a fraudulent conveyance, as well as the district court’s denial of CNH’s
motion for summary judgment on the claims of conversion and fraudulent conveyance. We
REVERSE and REMAND the district court’s grant of Pagano’s motion for summary judgment on
the conversion claim.
20
ROGERS, J., concurring in part and dissenting in part. I agree with all aspects of the
majority opinion, except with respect to the fraudulent conveyance claim. In this case, Scott Hunt
transferred corporate funds to relieve his father-in-law of encumbrances held by Commonwealth
Bank on his father-in-law’s property. Assuming that the funds, while owed to Commonwealth,
should have gone first to CNH (the record is not clear on that point), the fact that CNH did not sue
Commonwealth should not preclude a fraudulent conveyance claim against Pagano to the extent that
Hunt’s payment discharged Pagano’s liability as guarantor and any corresponding encumbrances
on his collateral.
So stated, this case is not materially different from a hypothetical suggested by CNH.
Suppose a debtor transfers funds to relieve his spouse’s debt to a jewelry dealer for a ring that the
spouse bought. If the debtor is trying thereby to protect his assets from his creditor, the creditor
should not have to sue the jewelry dealer. Instead, the jeweler should be able to sue the spouse for
the value of the ring.
This conclusion is supported by the numerous Kentucky cases that hold that the payment of
a valid, preexisting debt can be a fraudulent conveyance if done with intent to defraud or hinder a
creditor. See, e.g., Farmers’ Bank of Fountain Run v. Hagan, 46 S.W.2d 1084, 1087 (Ky. 1932);
Jadco Enters., Inc. v. Fannon, No. 6:12-225, 2014 WL 66521, at *3 (E.D. Ky. Jan 8, 2014).
Similarly, Kentucky courts have held that a creditor may have a fraudulent conveyance claim when
a debtor improves the property of another in an effort to keep his assets from falling into the hands
of creditors. See Pierce v. J.B. Pierce’s Trustee in Bankruptcy, 38 S.W.2d 254, 259 (Ky. 1931).
This case is similar because Hunt’s actions caused Pagano to receive lien-free collateral.
Furthermore, CNH has identified factually similar cases involving actions against guarantors. For
example, Permasteelisa CS Corp. v. The Airolite Co., No. 2:06-CV-569, 2007 WL 4615779 (S.D.
21
Ohio Dec. 31, 2007), involved a direct liability fraudulent conveyance claim brought against the
president of a corporation. The president argued that because “he [was] not the ‘transferee,’ no
judgment [could] be entered against him,” id. at *7 n.3, i.e. the same argument Pagano makes here.
The Permasteelisa court conceded that the president was not the first transferee, but noted that “it
could certainly be argued that the transfer was made for his benefit. He sought to sell TAC’s assets
so that he could pay off the debt to People’s Bank to avoid being held personally liable on the loan.”
Id.On the other hand, GATX Corp. v. Addington, 879 F. Supp. 2d 633 (E.D. Ky. 2012), is
distinguishable. In that case, the defendant Larry Addington had guaranteed the debts of a
foundering company. Id. at 637. Ostensibly to avoid paying the guaranty, Addington transferred
many of his assets into an irrevocable trust and named Stephen and Robert as co-trustees. Id. at 638.
GATX then sued Stephen and Robert in their individual capacities. Id. at 641. The court reasoned
that GATX could not bring a fraudulent transfer action against Stephen and Robert because they
were not transferees of any property in their individual capacity (property had only been transferred
to the trust and to the two in their capacities as trustees). Id. at 642–43. That ruling is perfectly
reasonable. The remedy for a fraudulent conveyance is the undoing of the transfer, but if no transfer
occurred, there is nothing to undo. Further, an individual that does not receive a transfer could
hardly be considered a transferee. But here, Pagano did receive a transfer of property: his
unencumbered, pledged collateral.
Finally, cases like Permasteelisa are persuasive even though they discuss the law of
jurisdictions that have adopted the Uniform Fraudulent Transfer Act. The UFTA specifically
provides that “judgment may be entered against . . . the person for whose benefit the transfer was
made.” See, e.g., Ohio Rev. Code § 1336.08. Kentucky has not adopted the UFTA, but rather has
22
enacted a fraudulent conveyance statute based on the English Statute of 13 Elizabeth. For that
reason, the district court held that case law involving the UFTA was not persuasive. See CNH
Capital Am. LLC v. Hunt Tractor Inc., No. 3:10-CV-350, 2013 WL 1310878, at *16 (W.D. Ky. Mar.
26, 2013). The fact that the Kentucky legislature has not chosen to adopt the UFTA does not mean
that Kentucky has rejected the possibility that a fraudulent transfer suit can be brought against the
beneficiary of a transfer. As the Kentucky Supreme Court recently held, “legislative inaction is a
weak reed upon which to lean and a poor beacon to follow in construing a statute.” Shawnee
Telecomm. Res., Inc. v. Brown, 354 S.W.3d 542, 560 (Ky. 2011) (internal alterations omitted). It
is just as likely that the Kentucky legislature chose not to adopt the UFTA because it assumed that
persons for whose benefit a transfer was made were already liable under the current regime as it is
that the legislature chose not to enact the UFTA to preclude liability against such individuals.
Assuming that there is a genuine issue as to whether Hunt acted with the requisite fraudulent
intent, I would allow this claim to proceed to trial.
23