Fraudulent Transfers Read online

  Friday afternoon I finished up the hearing brief that needed to be filed before the end of the day in order to have some chance that Judge Cloverton would actually read it prior to our hearing on Monday. I learned years ago from a crusty old judge named Pat Harris that “brief” in fact means “brief.” Judge Harris had an unwritten rule in his division of the El Paso County District Court which all lawyers appearing in his courtroom eventually learned about, often the hard way. This was referred to by the lawyers, and possibly by Judge Harris himself, as the “four page rule.” The rule was quite simple. Judge Harris would not read past the fourth page of anything, including opinions of the United States Supreme Court.

  My hearing brief, in a mere three pages, summarized for Judge Cloverton the law governing preliminary injunctions. Basically, a party asking for a preliminary injunction order—that is, an order requiring the other party to do something or not do something while the case is taking its usual slow path to a final resolution—had to establish six specific things. The one that is most important, and most problematic for a party asking for an injunction, is that you will be the prevailing party after the case has run its full course, through discovery and trial. This “probability of success on the merits” requirement sets up a mini-trial of the issues in controversy in a case before either side has had an opportunity to fully sort things out. Lawyers call this trial by ambush and trial by ambush can be good or bad depending on who is better at jumping out from behind rocks and shooting legal arrows at the other side. The stakes are high in a preliminary injunction hearing because the law allows evidence produced during the hearing to remain a part of the record in the case throughout the entire proceeding. Again, this can be good or bad depending on who puts on the best show at the preliminary injunction hearing.

  My brief, in a single paragraph, also told the judge that the evidence she would receive at the hearing would show her that neither of the defendants was a party to the Piranha Partners loan and neither had guaranteed the loan; no fraudulent transfer of family assets had occurred; and Piranha Partners had engaged in outrageous tactics in an effort to get Mrs. Marchant to pay a debt she didn’t owe.

  I spent Saturday morning in the office pulling together and organizing the files I would need for Monday’s hearing and finalizing my planned witness examinations, opening statement and closing argument. I then took Fletcher for a walk up into the Waldo Canyon burn area, parts of which had recently been reopened to the public. A few years ago, during a record late June heat wave accompanied by low humidity and high winds, the Waldo Canyon wildfire had raced through the foothills on the west side of Colorado Springs, burning over eighteen thousand acres, destroying three hundred forty-six homes, and killing two people, many pets and countless forest animals. The burn area was just now coming back to life with small islands of vegetation growing out of the black ash the fire left behind. On a day such as this, with grey cloudy skies and low winter light, the burn area presented a landscape having no color other than the occasional green shoots of the new plants. It was strangely beautiful in a stark monochromatic way but also served as a sad reminder of the horror of seeing entire hillsides of houses burning through the night and hearing trees exploding from the heat. Fletcher and I had been evacuated during the fire but, fortunately, the wind carried the fire north and not east, so our neighborhood was spared.

  Fletcher was not his usual frisky self on our walk, perhaps because there wasn’t much here to smell anymore. But he also had trouble getting into and out of my truck and he whimpered when I picked him up to help him with these tasks.

  Sunday produced a nicer day, with bright blue skies and a temperature in the low 50’s. Deciding I was as prepared for tomorrow’s hearing as I was ever going to be, I left Fletcher napping on his pooch pillow and spent the afternoon chasing trout in Eleven Mile Canyon. The river running through Eleven Mile Canyon is a stretch of the South Platte River that comes out of Eleven Mile Reservoir, meaning it’s a tail water where the water is warmer than would otherwise be the case. The trout here are wise to the ways of fishermen and have a dietary preference for insects that, to the naked eye, look like specks of dirt. But, with a stealthy approach by the fisherman and a carefully placed imitation of a tiny mayfly nymph made to drift up from the bottom of the river toward the surface, a fish can occasionally be caught. In two hours of effort, I brought three fish to net and released them back into the river. I hooked up with another three fish who demonstrated their own approach to catch and release fishing. All of these fish were healthy looking silvery rainbows in the fifteen inch range, a nice size for this part of the South Platte River.

  One problem with Eleven Mile Canyon in the winter is that the sun sets early, resulting in a quick drop in temperature from pleasant to cold. Today, this transition occurred at around 3:30 p.m. and that’s when I headed home. When I arrived, Fletcher had abandoned his pooch pillow in favor of my light-colored living room sofa, where tufts of his black fur were now generously deposited. Knowing he hadn’t been feeling his best the past few days, I let him stay on the sofa until dinner time, when he willingly moved.

  Chapter 25

  Monday morning, I was up early, took Fletcher for a short walk around the neighborhood, showered, shaved and put on one of the two suits I owned. This one was dark grey in color and was made out of a light weight wool blend more suited to summer than winter. I noted the pants seemed snugger than the last time I wore them but I felt they could survive a day in court without an embarrassing incident of seam failure. I chose a white shirt with a spread collar and a blue tie containing small pictures of corkscrews, no two of which were alike. (I have always marveled at the amount of engineering talent and creative genius that, over the centuries, has gone into removing a cork from a wine bottle.)

  Shortly after 11:30 on Monday morning, two hours before our hearing was to begin and in keeping with the spirit of trial by ambush, Thomas Stringer emailed to me a copy of the brief he had filed late on Friday, along with a short summary of the credentials, and the opinion, of the expert witness he was planning to call at the hearing. Stringer’s brief and mine recited the same rules of law governing preliminary injunctions since those rules are well established. His brief, however, in expected contrast to mine, told the judge the evidence she would receive at the hearing would show that Robert and Olivia Marchant had intentionally moved the family wealth into Olivia’s name, where Robert’s creditors couldn’t reach it. They did this, Stringer said, because they knew the market for single family home sites was about to begin a death spiral that would leave Mountain View Development insolvent and unable to pay its debts. Since Robert had guaranteed the Piranha Partners loan and Olivia had not, the couple’s nefarious plan was to give Olivia complete ownership of the family’s valuable business, Mountain View Property Management, and place ownership of the business on its way to insolvency, Mountain View Development, with Robert. The brief made no attempt to describe the evidence Stringer was planning to present in support of this proposition.

  Stringer’s designated expert witness was a man named Russell Wainwright, a certified public accountant from Lakewood, Colorado. Stringer’s on-the-eve-of-trial expert witness disclosure told me only that Wainwright had held a certified public accountant’s license in Colorado for the past ten years and that the license was in good standing. I asked our litigation paralegal, Susie Castle, to do a quick investigation into Wainwright’s education and experience. She couldn’t find much. He had graduated from Western State College in Gunnison, Colorado, ten years ago with a degree in accounting (and no doubt lots of practice snow boarding at nearby Crested Butte Ski Area). After college, he had worked for five years for an oil and gas exploration company active at the time in northwest Colorado. He then went to work for a small private accounting firm in Golden, Colorado and three years after that he set up his own solo practice in Lakewood, holding himself out as a specialist in small business tax matters. Susie checked with a couple of CPA’s our firm had previo
usly dealt with in the Lakewood area. They knew vaguely of Wainwright and thought his practice, because of the recession, was probably struggling to make ends meet. Susie could find no record of Wainwright having served as an expert witness in other cases or having any expertise in business valuations.

  Stringer’s summary of the opinion testimony he expected Wainwright to give contained none of the specifics it should have. (Again, trial by ambush.) It merely told me Wainwright’s opinion was that the interest in Mountain View Property Management Robert had transferred to Olivia was worth far more than the interest in Mountain View Development he had received in return.

  Olivia Marchant arrived at my office at 12:30, thirty minutes ahead of schedule. She brought with her, as I had requested, her daughter Roberta and her granddaughter Tracie. Although Roberta and Tracie would not be testifying at the hearing, I wanted Judge Cloverton to know that others in addition to Mrs. Marchant had suffered by reason of Piranha Partners’ out of bounds debt collection conduct.

  Olivia was nicely attired in a black dress with a stylish purple scarf. She was wearing only light makeup. Her hair must have been recently colored since the grey roots were gone. Roberta, who appeared to be in her early forties and, like her mother, was a bit on the plump side, was dressed more casually, in dark brown slacks, ankle high boots and a beige crew neck sweater. Tracie was maybe eighteen and, unlike her mother and grandmother, was tall and lean, although shapely. Her hair was blond and cut short, and she was wearing jeans and a sweatshirt, but without ragged cuffs on the jeans or rock band pictures on the sweatshirt. No sign of body piercing other than earrings. No tattoos. Based on my limited observation of current teenage fashion trends, she had dressed up for the hearing.

  Marvin Lang arrived right on schedule at 1:00 p.m. and I introduced him to Mrs. Marchant, Roberta and Tracie. Marvin, as usual, looked like a rumpled old professor dragged off the campus of some Ivy League college. He had on khaki colored chinos, a tweed sport coat that should have been donated to charity years ago, a light blue shirt with a slightly frayed collar, and a solid dark green tie of a width popular during the Nixon administration. His shoes were of the wing-tip variety and hadn’t seen polish for a long time. When she first saw Marvin, Mrs. Marchant gave me a questioning look, but as soon as he spoke and briefly described the testimony he would give at the hearing, she relaxed, knowing she was in the presence of an articulate, confident and charming (although frumpy) expert witness.

  The five of us walked over to the courthouse together and, after going through security, arrived in Judge Cloverton’s courtroom at 1:25 p.m. Marvin, Roberta and Tracie sat together in the spectator seats. I put Olivia next to me at the defendant’s counsel table.

  Stringer showed up a couple of minutes later. He had in tow a man in his thirties who I assumed was Russell Wainwright. He had another man with him, somewhat older than Wainwright, who I assumed was a fact witness for Piranha Partners. I nodded at Stringer but didn’t offer a handshake or other greeting. Stringer’s preferred method of practice was to show distain for opposing counsel, so I gave him the opportunity to do that. Stringer, similar in age to me—mid-fifties--was wearing a Navy blue blazer and casual green-colored slacks, a dark blue shirt with a button down collar, and a solid black tie. Wainwright and the other man with Stringer were both dressed in business suits, with white shirts and conservative ties. The man I assumed was a fact witness for Piranha Partners had slicked back black hair and Oakley sunglasses propped on his head, and he was chewing gum, somewhat fitting my image of what a Chicago loan shark should look like. His name, we would learn, was Anthony Costellanie and he was in fact from Chicago and one of the owners of Piranha Partners. Stringer put Costellanie with him at the plaintiff’s counsel table and had the good sense to tell him to get rid of the sunglasses and the gum before Judge Cloverton came into the courtroom.

  Right at 1:30, Judge Cloverton’s clerk/bailiff, a young man named John, came into the courtroom from the hallway between the courtroom and the judge’s chambers and asked if we were ready to begin the hearing. Stringer and I both said yes. John then ducked back in the hallway and relayed this information to Judge Cloverton who promptly came into the courtroom through the hallway door leading to her elevated station in the courtroom—the bench. Judge Cloverton was on the young side for a district court judge. She was in her early forties, had short brown hair, and hazel eyes. She was maybe five foot six, thin and with high cheek bones. She had been a competitive long distance runner during her college days and still competed in half-marathon and ten kilometer events. She had a pair of reading glasses attached to a lanyard around her neck.

  “All rise. The Honorable Melanie Cloverton presiding,” John shouted.

  “Please be seated,” Judge Cloverton said in the stern tone of voice judges are taught to use at the judges boot camp they attend after appointment to the bench. “The Court calls case number 32,456, Piranha Partners Credit Corporation, plaintiff, versus Olivia Marchant and Mountain View Property Management, LLC, defendants. Appearances please.”

  Stringer, without getting to his feet in the customary show of respect for the court, said: “Judge, Thomas Stringer appearing for the plaintiff. Let me introduce Anthony Costellanie, here from Chicago on behalf of the plaintiff. And Russell Wainwright who will testify as an expert witness for the plaintiff.”

  “Thank you Mr. Stringer. And for the defendants?”

  I stood and said: “Good afternoon Your Honor. Jack McConnell for the defendants. I have with me at counsel table Olivia Marchant, the individual defendant and counterclaimant. Mrs. Marchant is also the sole member of and chief executive officer of the limited liability company defendant, Mountain View Property Management, LLC. Mrs. Marchant’s daughter, Roberta Franklin, and her granddaughter, Tracie Franklin, are in the courtroom with us, as is Marvin Lang, who will testify as an expert witness for the defendants.”

  “Thank you Mr. McConnell. The initial matter I want to take up here has to do with which side will first present its evidence. Mr. McConnell, I know this is your motion for a preliminary injunction but traditionally the plaintiff would proceed first in an evidentiary proceeding where the merits of the parties’ positions are at issue. Your thoughts?”

  “Judge,” I responded, “I believe the law is to the effect that you at all times have discretion over the order in which evidence is presented. But the defendants will stipulate to the plaintiff going first.” I in fact wanted Stringer to go first since this would give Marvin Lang the opportunity to hear what Russell Wainwright had to say before he would testify. I was confident Marvin would then, in his customary manner, rip Wainwright’s testimony to shreds. “I would also remind the Court,” I continued, “that our motion arises out of our counterclaim to the effect that the plaintiff has been engaging in debt collection actions that are so unconscionable as to constitute outrageous conduct.”

  “Very well. Mr. Stringer, please call your first witness.”

  “Yes, Your Honor. We call Anthony Costellanie.”

  Costellanie, for a loan shark, wasn’t a bad witness. He was soft spoken and articulate, made eye contact with the judge and stuck to the script he and Stringer had worked out without undue exaggeration. There was, however, an arrogance about him that I, at least, thought diminished his credibility. Costellanie told Judge Cloverton that Piranha Partners Credit Corporation had been in business for twenty-three years. It was a source of lending for businesses that, for whatever reason, had difficulty borrowing money from banks. The interest rates it charged were higher than what banks charged because its borrowers presented greater risk and, in the lending world, risk and interest rates correlate.

  Stringer then had Costellanie authenticate, as plaintiff’s Exhibit A, a financial statement Robert Marchant had given Piranha Partners when he applied for a loan. This financial statement showed him owning a 50% interest in Mountain View Property Management, LLC and a 50% interest in Mountain View Development, LLC. Each of these interests was shown on
the financial statement as having an equity value of $2 million.

  As plaintiff’s Exhibit B, Stringer had Costellanie authenticate a financial statement Robert Marchant had given Piranha Partners after the loan to Mountain View Development went into default. This financial statement showed Robert Marchant owning a 100% interest in Mountain View Development, LLC, and no interest in Mountain View Property Management, LLC. The interest in Mountain View Development showed an equity value of zero.

  “Mr. Costellanie,” Stringer asked, “did the lender rely on Mr. Marchant’s ownership of a 50% interest in Mountain View Property Management when it agreed to make its loan?”

  “Absolutely. We knew Mountain View Development was a relatively new business without a long term track record and we knew it was involved in a cyclical and high risk business—residential lot development. On the other hand, Mountain View Property Management had been in business for several decades and was in a more stable and lower risk business—property management and ownership of small apartment complexes. Since we were receiving only the personal guarantee of Mr. Marchant and not Mrs. Marchant, Mr. Marchant’s ownership of an interest in the property management company was important to us.”

  “Did Mr. Marchant ask your permission to swap his interest in the property management company for an interest in the land development company?”

  “No he did not. We only found out about that after our loan went into default. That’s when we decided a hide-assets-from-creditors transfer had occurred and we needed to pursue a claim against Mrs. Marchant and Mountain View Property Management.”