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McCarthy v. Giron

United States District Court, E.D. Virginia, Alexandria Division

June 6, 2014

KEVIN R. McCARTHY, Trustee, Plaintiff,
v.
CARLOS INOCENTE GIRON, et a!., Defendants.

MEMORANDUM OPINION

GERALD BRUCE LEE, District Judge.

THIS MATTER is before the Court on Defendants Carlos I. Giron and Carlos A. Giron's Objection to United States Bankruptcy Judge Robert G. Mayer's Report and Recommendation regarding the Court's judgment that Carlos I. Giron and Carlos A. Giron are personally liable for their company C&C General Builders, Inc.'s ("C&C") debt and to disregard the Corporation's limited liability. This adversary proceeding arises out of Debtor C&C's Chapter 7 bankruptcy. Under Count I of the Complaint, Trustee seeks to avoid allegedly fraudulent transfers from C&C to other entities and under Count II, seeks to pierce the corporate veil to hold Defendants personally liable for the debts of C&C. The Report and Recommendation recommends that the District Court enter judgment against Carlos I. Giron and Carlos A. Giron on Count I in the amount of $114, 925.10 and on Count II in the amount of $177, 062.33.

There are essentially four issues before the Court. The first issue is whether the Court should adopt the various findings of fact of the Bankruptcy Court on matters such as contracting with a corporation, percent ownership of the corporations, production of documents, and arbitration fees. The Court adopts the Bankruptcy Court's findings of fact and overrules Defendants' objections because each of Defendants' objections is either directly rebutted by the evidence before the Court, or where there was no evidence in the record to support Defendants' objection, Defendants have not offered any additional documentation for the Court to consider.

The second issue is whether the Court should adopt the Bankruptcy Court's application of Virginia choice of law rules. The Court adopts the Bankruptcy Court's choice of Virginia substantive law because absent a compelling federal interest that dictates otherwise, a bankruptcy court is to apply the forum state's choice of law principles for claims that are the subject of state law, such as fraudulent conveyance and piercing the corporate veil. Because the forum state is Virginia, Virginia choice of law principles should apply. Virginia choice of law principles require the application of the substantive law of the place of the wrong for fraudulent conveyance, a principle known as lex loci delicti, making Virginia substantive law the appropriate law for fraudulent conveyance. Virginia's choice of law principles dictate that the law of the state of incorporation determines whether a corporate veil may be pierced, again making Virginia substantive law the appropriate law to apply because C&C was incorporated in Virginia.

The third issue is whether the Court should adopt the Bankruptcy Court's recommendation to avoid $114, 925.10 in allegedly fraudulent conveyances made by C&C after March 22, 2007 (the date the contract was executed with Creditors). The Court adopts the Bankruptcy Court's recommendation regarding fraudulent conveyance because Trustee made a prima facie case based on the presence of certain badges of fraud, which Defendants failed to rebut.

The final issue is whether the Court should adopt the Bankruptcy Court's recommendation to pierce the corporate veil of C&C and hold Carlos I. Giron and Carlos A. Giron personally liable for C&C's debts. The Court adopts the Bankruptcy Court's recommendation on piercing the corporate veil because Defendants failed to observe corporate formalities and used Debtor for improper purposes such that they should not be protected by the limited liability shield afforded by the corporate form.

I. BACKGROUND

Defendants in the present adversarial suit are Carlos I. Giron and Carlos A. Giron, father and son, who worked together as general contractors. Their company, C&C Contractors, Inc. was incorporated in Virginia in 1997, though the name was later changed to C&C General Builders, Inc. in 2005. (Doc. 2 at 11.) C&C is the Debtor in an underlying Chapter 7 bankruptcy proceeding, in which the Bankruptcy Court appointed Kevin R. McCarthy as Trustee. Subsequently, Trustee filed a complaint in an adversary proceeding against Carlos I. Giron ("Carlos Giron") and Carlos A. Giron ("Alex Giron"). John and Teresa Dodds ("Creditors") are the Debtors' sole creditors; though they are not a party to the adversary proceeding.

Debtor held a general contractor's license until August 2009. (Doc. 2, at 11.) Debtor worked on small projects in the Washington, DC area until it entered into a contract with Creditors on March 22, 2007 to renovate 1712 14th Street Northwest, Washington, DC 20009. (Doc. 2, at 13.) The contract was for $973, 400, and required Creditors to make weekly progress payments of about $34, 000 for twenty-three weeks, the duration of the project. (Doc. 9-3, at 10; Doc. 2, at 13.)

Creditors made regular payments through May 8, 2008, totaling $652, 447.50, which amounted to about sixty-seven percent of the total contract. (Doc. 2, at 13.) Creditors began to question if the work completed was comparable to the percent of the contract they had paid up to that point. (Doc. 9-5, at 3.) Creditors engaged a construction consultant to evaluate the progress of the project, who ultimately found that only thirty-nine percent of the project had been completed. (Doc. 9-4, at 31.) Creditors refused to continue payments until the quantity of work equaled the payments already made. Debtor disagreed with the conclusion of the consultant, and refused to continue work, though the exact reason for discontinuing work is disputed. (Doc. 2, at 13.)

In 2008, Creditors sued C&C in the Superior Court of the District of Columbia and the matter was referred to arbitration. (Doc. 9, at 12.) On July 27, 2009, the arbitrator awarded Creditors damages of $120, 872.42. (Doc. 2 at 13.) On July 31, 2009, when Creditors attempted to collect from Debtor, Debtor's attorney informed Creditors that Debtor had no assets. (Doc. 2, at 13.) Shortly thereafter, Defendants created a new company called C&A General Builders, though it is disputed whether C&A was wholly owned by Alex Giron or by both Girons. (Doc. 2, at 14.) On October 16, 2009, the Superior Court of the District of Columbia confirmed the arbitration award. (Doc. 9, at 19.)

On February 10, 2012, Debtor filed its Chapter 7 bankruptcy petition, at which time the Bankruptcy Court appointed Trustee. Trustee subsequently filed a complaint against Defendants with two counts: Count I for fraudulent conveyance, and Count II to pierce the corporate veil and hold the Girons personally liable. (Doc. 9, at 10.) On September 19, 2013, the Bankruptcy Court conducted a trial in the adversary proceeding ("Bankruptcy trial"). (Doc. 2, at 10.) John Dodds, Creditor, and Robert Lemay, tax accountant for Debtor, testified. (Doc. 9-5, at 38-39, 136.) Neither Carlos nor Alex Giron testified on their own behalf to explain or rebut any of the evidence against them. The Trustee offered portions of Defendants' depositions into evidence to use against them.

Trustee alleged that from 2007 through 2009 Defendants used the money in the C&C corporate bank account to pay personal expenses, including the mortgages on their homes, car payments, and even gym memberships, totaling $157, 047.30. (Doc. 2, at 14-15.) Trustee offered bank statements from Wachovia, Debtor's bank, and offered portions of the deposition testimony of Alex Giron confirming that Defendants used the corporate bank account to make personal payments. (Doc. 9, at 129.) The Trustee presented evidence that Alex Giron admitted that Debtor had no work other than Creditors' project, and no assets aside from the Creditors' progress payments. (Doc. 9, at 134-35.) Trustee alleged that the Debtor's assets were dissipated by Defendants' use of corporate funds for the Giron's personal debts.

Defendants' attorney attempted to explain Debtor's payments to Defendants' as payments for services reflected in 1099s forms (Doc. 9-5). However, Defendants did not present evidence in the record that these forms were actually filed. When Debtor's tax accountant, Robert Lemay, testified in the Bankruptcy trial, he explained that regardless of whether the 1099s were or were not filed, 1099s were inappropriate forms for Defendants to use because Defendants were not independent contractors. (Doc. 9-5, at 188.) Mr. Lemay testified that Defendants should have filed W-2s instead. Alex Giron confirmed in his deposition that C&C never filed any \V-2s for either his father or himself. (Doc. 9, at 126.)

Regarding the piercing the corporate veil claim, the Trustee put forth evidence that Defendants failed to observe any corporate formalities and in support, pointed to the fact that no corporate meetings were ever held with stockholders or directors, there were no corporate books, and the corporation was not adequately capitalized. (Doc. 2, at 15-16.) Defendants did not dispute Trustee's evidence. Trustee also put forth evidence that Defendants deposited and withdrew personal money from the corporate bank account without explanation. (Doc. 2, at 24.)

Because Defendants did not consent to the Bankruptcy Court entering final judgment, on November 18, 2013, the Bankruptcy Court issued a Report and Recommendation proposing judgment in favor of Trustee and against Defendants on Counts I and II in the amount of $114, 925.10, and $177, 062.33, respectively. (Doc. 2.) On Count I, the Bankruptcy Court recommended:

In light of the gross disparity between the value of the work performed and the payments made; the payments made for the benefit of the Girons; the significant cash withdrawals; and the absence of any explanation of the payments, the payments of $157, 047.30[1] are avoidable under Va. Code (1950) § 55-80 as incorporated by 11 U.S.C. §544(a).[2]

(Doc. 2, at 20.) On Count II, the Bankruptcy Court recommended, "The corporate veil should be pierced and Carlos Innocente [sic] Giron and Carlos Alexander Giron should be personally liable for the debts of C&C General Builders, Inc., " in the amount of $177, 062.33. (Doc. 2, at 24.)

On December 2, 2013, Defendants filed a Motion to Reconsider (Doc. 2, at 26), to which Trustee filed an Opposition on December 3, 2013 (Doc. 2, at 37). On December 6, 2013, the Bankruptcy Court denied Defendants' Motion because the arguments put forth by Defendants should have been filed as an objection to the Report and Recommendation in district court. (Doc. 2, at 44.) Defendants then filed an Objection on December 6, 2013. (Doc. 2-1.) Defendants made many objections to the Bankruptcy Court's proposed findings of fact and proposed recommendation, however, they do not object to paragraphs one, three to five, seven to seventeen, twenty-two to twenty-three, thirty-eight to thirty-nine, forty-one, and forty-three to forty-seven. Trustee responded to Defendants' Objection on December 13, 2013. (Doc. 2-2.) Defendants did not file a copy of the transcript from the Bankruptcy trial with this Court, nor did they provide any exhibits in support of their objections. Additionally, the vast majority of Defendants objections are not accompanied by any citations to the bankruptcy record. (See Doc. 2-1.)

On February 20, 2014, the Court set the matter for hearing on March 21, 2014 and sent notifications to counsel for both parties. At the hearing on March 21, 2014, only counsel for Trustee appeared. Neither the local counsel, nor the pro hac vice counsel for Defendants appeared. Oral argument on the objections was finally heard on April 1, 2014. (Doc. 7.) Neither Carlos Giron nor Alex Giron testified in the District Court hearing on April 1, 2014.

II. DISCUSSION

A. Standard of Review

Under Rule 9033 of the Federal Rules of Bankruptcy Procedure, where a bankruptcy court files proposed findings of fact and conclusions of law, if either of the parties objects to the bankruptcy judge's findings of facts or conclusions of law, the district judge will make a de novo review of the objections based on the record. Fed.R.Bankr.P. 9033(d). "The district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions." Id.

B. Analysis

The Court overrules Defendants' objections and adopts the Report and Recommendation in full. The Court adopts the Bankruptcy Court's proposed findings of fact because each of Defendants' objections is either directly rebutted by the evidence before the Court, or Defendants have not provided any documentation to support their objections. The Court adopts the Bankruptcy Court's choice of Virginia substantive law because a bankruptcy court is to apply the forum state's choice of law principles for claims that are the subject of state law, such as fraudulent conveyance and piercing the corporate veil. Virginia's choice of law rules for both of these claims require the application of Virginia substantive law.

The Court adopts the Bankruptcy Court's subsequent analysis and recommendation regarding fraudulent conveyance because Trustee made a prima facie case based on badges of fraud, which Defendants failed to rebut. The Court also adopts the Bankruptcy Court's analysis and recommendation on piercing the corporate veil because Defendants failed to observe corporate formalities and used Debtor for improper purposes such that they should not be protected by the limited liability shield afforded by the corporate form.

i. Defendants' Non-Compliance with the Federal Rules of Bankruptcy Procedure

As a preliminary issue, the Court notes that Defendants, who object to the Bankruptcy Court's Report and Recommendation, have failed to comply with Federal Rule of Bankruptcy Procedure 9033(b) in two major ways. Rule 9033(b) reads:

Within 14 days after being served with a copy of the proposed findings of fact and conclusions of law a party may serve and file with the clerk written objections which identify the specific proposed findings or conclusions objected to and state the grounds for such objection. A party may respond to another party's objections within 14 days after being served with a copy thereof. A party objecting to the bankruptcy judge's proposed findings or conclusions shall arrange promptly for the transcription of the record, or ...

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