Fraudulent Transfers Page 14

  Stringer next had Costellanie confirm that, after Piranha Partners took back through foreclosure the land owned by Mountain View Development, a balance of $3 million remained unpaid on its loan.

  “No further questions of Mr. Costellanie at this time. We, of course, reserve the right to recall him as a rebuttal witness.”

  “Mr. McConnell, cross examination please.”

  “Thank you Judge.”

  “Mr. Costellanie,” I began, “what is the interest rate on your loan to Mountain View Development, LLC?”

  “Eighteen percent.”

  “That’s fourteen percent over the prime rate in effect at the time the loan was made and twelve percent higher than the going rate for land development loans from commercial banks, correct?”

  “Yes, but again, banks at this time weren’t making loans to companies like Mountain View Development because the bank regulatory agencies were forcing banks to increase their capital and diversify their loan portfolios. Fourteen percent over the prime rate is how we priced our product, taking into account the significant risk of loss we were undertaking in making loans of this type.”

  “What due diligence did Piranha Partners engage in to confirm the equity values of the two Mountain View companies at the time the loan application was being processed?”

  “We obtained an opinion of value from a commercial real estate broker for the land owned by Mountain View Development, since we were taking that land as collateral. We probably looked at a list of the apartment projects owned by Mountain View Property Management, and an income statement for a couple of years showing the income and expenses of that company.”

  “What did your real estate broker tell you about the land owned by Mountain View Development?”

  “I don’t remember exactly. He would have given us a value of the land in its as is, pre-subdivision, condition and a second value of the land after it had been converted to finished and ready to build on residential lots. These values would have been high enough to convince us that a loan in the amount we were being asked to make would have had adequate collateral. Otherwise, we wouldn’t have made the loan.”

  “Let’s look at the dates of your Exhibits A and B. What’s the date of Exhibit A, the financial statement you received at the time the loan was applied for?”

  “September 14, 2007.”

  “And what’s the date of Exhibit B?”

  “April 13, 2009.”

  “And when did Mr. Marchant give up his fifty percent interest in Mountain View Property Management in exchange for a fifty percent interest in Mountain View Development?”

  “He told us, after his loan went into default, that this transfer had occurred in late December of 2007. I believe he said the exact date was December 24, 2007.”

  “Mr. Costellanie, do you know what the Dow Jones Industrial Average closed at on September 14, 2007?”

  “No, of course not.”

  “What about on April 13, 2009?”

  “Why in the world would I know that? I’m sure you can find it on the Internet if you want to know.”

  “What about December 24, 2007?”

  “Again, I don’t know that. Our loan involved real estate and not stocks.”

  “But wouldn’t you agree that real estate values tend to decline when stock values decline?”

  “Sometimes that’s true, but sometimes real estate goes up in value when stock values decline because people are looking for safer investments.”

  “Just to get the facts in front of Judge Cloverton, let me hand you a chart from Fidelity Investments showing closing prices for the Dow Jones Industrial Average from July 1, 2007 through June 30, 2009. Looking at that chart, tell us what the closing price was for September 14, 2007.”

  “It says here the closing figure that day was 13,442.52. I have no idea if that’s correct.”

  “Do you have any reason to think it’s not correct?”

  “No.”

  “What about December 24, 2007?”

  “It says here 13,450.65.”

  “Almost exactly the same as on September 14. And what about April 13, 2009?”

  “8,057.81”

  “So the Dow Jones Industrial Average was the same at the time the business interest exchange between Mr. and Mrs. Marchant occurred as it was when you received a financial statement from John Marchant in support of Mountain View Development’s loan application, is that right?”

  “According to this piece of paper you gave me, yes.”

  “And after the exchange occurred through the time your loan went into default and you obtained another financial statement from Robert Marchant, the Dow Jones Industrial Average had fallen some 5,000 points, right?”

  “According to this piece of paper. But maybe you don’t get it, Mr. McConnell. Our company deals in real estate and not the stock market. And by December 24, 2007, the Marchants knew damn well that residential real estate was going to take a gigantic hit.”

  At that point, Judge Cloverton decided to intervene. “Mr. Costellanie, we don’t use swear words in this courtroom. Please calm down a bit. And Mr. McConnell, you’re getting argumentative with the witness. I know this is cross examination, but let’s just stick to the facts and move this proceeding along. I have a criminal docket starting at 4:00 and we need to be done by then.”

  “Yes Your Honor. Sorry. I have just one more matter I’d like to discuss with Mr. Costellanie.”

  “Fine. Continue.”

  It was now time for further trial by ambush, thanks to a bit of interesting information Susie Castle had found for me earlier in the day. “Mr. Costellanie, am I correct that the Illinois attorney general, three years ago, brought a cease and desist action against Piranha Partners Credit Corporation alleging that it was engaging in illegal and unconscionable debt collection activities?”

  Costellanie looked at his lawyer, hoping he might get some help, but Stringer, who most likely knew nothing about the Illinois attorney general’s action, said nothing.

  “There was some kind of action brought by the attorney general and it was promptly settled. The allegations were totally false but we didn’t want to waste our time or our money fighting with a man who was running for re-election and who was looking to snag headlines wherever he could. The settlement agreement specifically said that we did not admit wrongdoing.”

  “Mr. Costellanie, isn’t it true that what the settlement agreement says is that Piranha Partners neither admits or denies any wrongdoing.”

  “You’re playing with words, Mr. McConnell. We did not admit any wrongdoing--because there had been no wrongdoing.”

  “But Piranha Partners did agree to pay $600,000 in restitution as part of the settlement, right?”

  “We paid that because it would have cost us that much in legal fees to fight with the attorney general who had an unlimited war chest of taxpayer money at his disposal.”

  “Just one last question, Mr. Costellanie. Did Piranha Partners kill Olivia Marchant’s dog as part of its debt collection strategy?”

  This finally got Stringer to his feet. “Objection!” he yelled at the top of his lungs, knocking a couple of books off his counsel table in the process.

  “Sustained,” Judge Cloverton said, giving me a well-practiced judicial scowl.

  “No further questions Your Honor. Thanks.”

  Stringer then did a brief redirect examination of his witness, allowing Costellanie to state again that Piranha Partners was a player in the real estate market and not the stock market, and that no wrongdoing was ever established in the Illinois attorney general’s action.

  Stringer’s next witness was his CPA expert, Russell Wainwright. Wainwright’s paid-for opinion was to the effect that anyone actively involved in residential real estate at the end of 2007, when the Marchants’ business ownership exchange transaction occurred, would have known that a bubble was about to burst in the housing market. This, Wainwright said, was because loose mortgage lending had allowed millions of people to borrow
money to buy homes with no ability to repay their loans, resulting in a rapid and insupportable increase in home prices. As for why anyone actively involved in residential real estate in late 2007 would know this, the best Wainwright could do was to reference a couple of articles appearing in the Wall Street Journal in late November of 2007 suggesting that loan defaults on sub-prime loans were starting to increase in a few states, notably Florida, Arizona and Nevada.

  My cross examination of Wainwright was brief since I knew Marvin Lang’s expert testimony would be much stronger than Wainwright’s. I limited my cross examination of Wainwright to getting him to admit that he had not investigated the status of the housing market in Colorado Springs in late 2007.

  After Stringer did a short and ineffective redirect examination of Wainwright, he told Judge Cloverton he had no other witnesses, meaning it was now my turn to put on evidence. I decided to start with Marvin Lang and save Olivia Marchant for last. I began by having Marvin state his credentials, clearly more impressive than Wainwright’s, and I then asked him to tell Judge Cloverton what, as an expert witness, he had been asked to do.

  “I was asked to render an opinion whether the 50% interest in Mountain View Development that Robert Marchant received from Olivia Marchant was at least equal in value to the 50% interest in Mountain View Property Management that he transferred to Olivia Marchant.”

  “And do you have such an opinion?”

  “Yes. My opinion is that the interest John Marchant received was, on the date he received it—December 24, 2007—of greater value than the interest he gave up.”

  “Now, Mr. Lang, please tell Judge Cloverton what you did to arrive at that opinion.”

  “Certainly,” Marvin began, immediately making eye contact with the judge. “What I needed to do was a business valuation analysis for each of the two businesses. There are well accepted tools in our profession for valuing small businesses and I applied those tools. In the case of the development company, the important inquiry was to determine the market value of the land the company owned once that land was converted into finished, ready to build on lots, and then deduct the costs that would be incurred in completing the conversion process. Here, I used the El Paso County assessor’s website to determine the sale price for all finished quarter acre residential lots from July 1, 2007 through December 31, 2007. I determined the average sale price for these lots and multiplied that by the number of lots that Mountain View Development would end up with after its land had been fully converted to finished lots. I used lot development cost information from our local Building and Housing Association. I then adjusted the lot value minus cost number downward to take account of the time value of money, because the development and sale of these lots would be occurring over a period of several months going forward into 2008.”

  “What then is your opinion of the value of the business known as Mountain View Development, LLC on December 24, 2007?”

  “$4,050,000.”

  “And, if my math is right, 50% of that is $2,025,000.”

  “Yes, Mr. McConnell, I believe your math skills are holding up well.”

  “Now, what about the other company—Mountain View Property Management, LLC?”

  “Here, I needed to determine the market value of the apartment buildings the company owned, less the mortgage loans against those properties, and I needed to value the net income stream the business had generated over the past five years doing property management work for third parties. A purchaser of a business such as this will be willing to pay an amount equal to three times annual net income. So, the sum of the equity in the company’s properties plus the value of its net income stream gives us the company’s market value.”

  “And based on that analysis, what is your opinion of the value of the business known as Mountain View Property Management, LLC on December 24, 2007?”

  “$3,980,000.”

  “And—this is a little trickier--half of that is $1,990,000, right?”

  “Yes. Very good again Mr. Connell.”

  “So, Mr. Lang, please summarize for the court your opinion about the fairness of the exchange that went on between Robert Marchant and Olivia Marchant on December 24, 2007.”

  “This exchange was totally fair. Mr. Marchant gave up an asset worth $1,990,000 in exchange for an asset worth $2,025,000. There was no unfair transfer intended to put assets out of the reach of Mr. Marchant’s creditors.”

  I could have continued on with Marvin and asked him why he thought Wainwright’s opinion was flawed, but I decided to let Stringer do that for me during his cross examination. Stringer fell nicely into the trap.

  “Mr. Lang,” Stringer began, “your analysis of the value of Mountain View Development used a backward look at land values, right? You didn’t discount the value of Mountain View Development’s land due to the storm clouds that, by December of 2007, were beginning to gather over residential real estate.”

  “Mr. Stringer, although a few people may have seen those storm clouds coming in late 2007 in other parts of the country, the residential real estate market in Colorado Springs didn’t see those storm clouds until well into 2008. I took a careful look at the sale price of finished residential lots after December 24, 2007 to determine when the housing market in this area might have started to show stress. The number of finished residential lots being sold, and the prices at which they were sold, remained stable in El Paso County through July of 2008. Only then did the market start to go soft. This coincides completely with the melt-down of Wall Street’s securitized mortgage loan bonds that took place starting in September of 2008. So I very much disagree with Mr. Wainwright’s opinion that anyone involved in residential real estate in late 2007 would have known the sky was falling. That premise is demonstrably, and completely, false. The sky did fall but not until the second half of 2008. I also very much disagree with Mr. Costellanie’s statements to the effect that the decline in the stock market which occurred in 2008 and 2009 didn’t correlate to what was happening in the real estate market. Those markets declined in tandem. The only difference is that the real estate market was slower to recover. The fact that the Dow Jones Industrial Average was essentially the same on December 24, 2007 as it was on September 14, 2007 wholly supports my opinion that the business ownership exchange between Mr. and Mrs. Marchant was fair and equitable, and was not a fraudulent transfer intended to hide assets from Mr. Marchant’s creditors, including your client.”

  After that, Stringer, realizing he was out-matched, shut down his cross examination of Marvin Lang.

  “Mr. McConnell, any redirect examination for Mr. Lang?”

  “No Your Honor. I call our next, and final, witness, Olivia Marchant.”

  “Very well. Mrs. Marchant, please come forward and be sworn.”

  Olivia turned out to be an excellent witness. She told Judge Cloverton just what she had told me at our first meeting, without exaggeration and, this time, without the tears, even when she described Robert’s suicide. When I asked her if she and Robert had seen the collapse of the residential housing market coming when they did the exchange of business interests transaction in December of 2007, she said absolutely not. At that time, she said, there was continuing demand in Colorado Springs for ready-to-build-on lots from home builders eager to cash in on what was still a housing market boom.

  “Robert and I felt our transaction was completely fair and had no impact on his or my personal net worth. We did the transaction because I no longer wanted to be involved in land development. We both agreed that we would be better off, and happier, if I handled the property management business and Robert did the land development work. It was as simple as that.”

  As anticipated, the proceedings became more contentious when I asked Mrs. Marchant about the intimidating phone calls she started receiving and the death of Tanya, her dog. Stringer objected to my questions, arguing they lacked relevance and there was no evidence to link the late night, deep breathing, phone calls or the death of Tanya to Piranha Partners.<
br />
  “Judge,” I responded when these objections were made, “these questions are absolutely relevant. The very purpose of our preliminary injunction motion is to shut down this kind of outrageous debt collection behavior while the case proceeds to conclusion on the question of whether a fraudulent transfer has occurred that would allow Piranha Partners to try to collect its debt from Olivia Marchant. And, as you very well know, you, as a finder of fact in a case without a jury, are entitled to consider circumstantial evidence. It is more than mere coincidence that these harassing phone calls and the poisoning of Tanya occurred at the same time Piranha Partners decided to go after Olivia Marchant for a debt only her husband was obligated to pay.”

  “Objection overruled,” Judge Cloverton said. “I’m not sure what weight I will give this testimony but I think, in the context of this hearing, it’s proper for me to let the testimony come in. I might decide differently if we were in front of a jury. Proceed Mr. McConnell.”

  Mrs. Marchant was then able to tell Judge Cloverton in detail about the “moral obligation” phone calls, which clearly came from Piranha Partners, and the late night deep-breathing phone calls and the poisoning of Tanya. Although judges are trained not to show emotion while on the bench, it was clear to me that Judge Cloverton was distressed by what she heard from Olivia Marchant.

  Stringer had the good sense not to cross examine Olivia, knowing this would only give her the chance to say again what she had already said in response to my questions on direct examination.

  “Very well,” Judge Cloverton said. “Let’s have brief closing argument and then we’ll shut this proceeding down. We’re now infringing on my criminal docket time so you each have two minutes. Mr. Stringer, you go first.”

  “Judge, our position is very simple. On December 24, 2007, Robert Marchant and Olivia Marchant got together and decided the real estate development business had turned risky and it was time to get Robert’s interest in the property management business, Mountain View Property Management, into Olivia’s name to put the value of that business out of the reach of Robert’s primary creditor, my client. The storm clouds in real estate were indeed gathering at this time and the Marchants knew this. They also knew that only Mr. Marchant, and not Mrs. Marchant, had guaranteed this loan. Mr. McConnell has failed to carry his burden of proof on the issue of probability of success on the merits and his clients are therefore not entitled to a preliminary injunction.”