Rieser v. Clayton et al

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	EQUITY L AND TITLE AGENCY, I NC.,
Debtor
Case No. 	02-34260
Adv. No. 	04-3148
JOHN P AUL RIESER, CHAPTER 7 T RUSTEE,
Plaintiff
v.
STEVEN L. CLAYTON
JOANNE CLAYTON,
Defendants
Judge Waldron
Chapter 7
DECISION ON ORDER GRANTING IN
PART, AND DENYING IN PART, THE
MOTION OF THE TRUSTEE FOR
PARTIAL SUMMARY JUDGMENT
AGAINST STEVEN L. CLAYTON AND
JOANNE CLAYTON
DATED AT DAYTON, OHIO this 24th day of June, 2005:
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: June 24, 2005
____________________________________________________________
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Background
On June 4, 2004, John Paul Rieser, the chapter 7 Trustee (the “Trustee”) of the
Debtor, Equity Land Title Agency, Inc. (“ELT”), filed a Complaint Of Trustee For Breach
Of Fiduciary Duties; For Theft And Conversion; To Avoid And Recover Pre-Petition
Transfers Received By Defendants Pursuant To 11 U.S.C. Sections 547, 548, And 550
And Pendent Or Incorporated By 11 U.S.C. § 544 And State Statutory And Common
Law Causes Of Action, Specifically The Ohio Uniform Fraudulent Transfer Act O.R.C.
Chapter 1336; To Declare And Impose A Constructive Trust; To Order The Return Of
Money Had Or Retained By Defendants, For Accounting, And Disgorgement And
Return Of All Monies Received By Defendants; To Disallow Any And All Proofs Of
Claim Filed Or To Be Filed By Defendants; For Prejudgment Interest And Punitive
Damages; And For An Accounting For Costs, Reasonable Attorney Fees And Other
Relief against Steven L. Clayton and Joanne Clayton (the “Defendants”). (Doc. 1) 	The
extensive Complaint and its multiple attachments sets forth a series of transfers, which
are categorized by specifically defined terms, asserts nine separate claims for relief and
seeks multi-million dollar judgments and other relief against both Defendants. Steven
Clayton was, at all relevant times, the former president, director and sole stockowner of
ELT. (See Doc. 1 and Paragraph 4 of the Amended Answers – Docs. 20 and 21)
Joanne Clayton was, at all relevant times, his wife and an employee of ELT (See Doc. 1
and Paragraph 6 of Docs. 20 and 21).
On July 7, 2004, Steven Clayton, appearing pro se, filed an unnumbered answer,
which contained a blanket assertion of the Fifth Amendment protection and, to the
extent the complaint asserted allegations not subject to Fifth Amendment protection, a
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total denial of all the claims asserted by the Trustee. (Doc. 10) 	On October 12, 2004,
Joanne Clayton, also appearing pro se, filed a similar answer which contained a blanket
assertion of the spousal privilege or, to the extent the privilege did not apply, a total
denial. (Doc. 11) 	Following various Trustee motions and court orders, the Debtors filed
amended 	answers 	(Docs. 	20 	and 	21); 	however, 	these 	amended 	answers, 	while
containing paragraph by paragraph responses to the complaint, continued to assert
spousal privilege and, for the first time, Joanne Clayton’s amended answer asserted her
Fifth Amendment protection.
The Trustee filed a Motion of Trustee For Partial Summary Judgment Against
Defendants Steven L. Clayton and Joanne Clayton on February 28, 2005. (Doc. 32)
Also, on February 28, 2005, the Trustee filed a Certification of No Response By the
Defendants of Requests for Admission by the Trustee. (Doc. 30)
Although 	the 	Defendants 	did 	not 	respond 	to 	any 	of 	the 	Trustee’s 	specific
discovery 	requests, 	and 	did 	not 	participate, 	in 	any 	manner, 	in 	discovery 	in 	this
adversary, the Defendants filed responses (Docs. 39 and 40) to the motion for summary
judgment, including an affidavit. 	The Trustee filed a reply and a Motion of Trustee to
Strike Defendant’s Affidavit (Doc. 42) on March 29, 2005. 	The Court has separately
entered 	an 	Order 	Granting 	Motion 	of 	Trustee 	to 	Strike 	Defendant’s 	Affidavit.
Accordingly, the affidavit of Joanne Clayton in Document 39, which was also referenced
in the response of Steven Clayton in Doc. 401 , was not considered in this decision.
Additionally, 	based 	on 	the 	Trustee’s 	requests 	for 	admissions, 	which 	the
Defendants failed to respond to, together with the uncontradicted affidavits and other
1 For clarity of the record, the court notes the response of Steven L. Clayton (Doc. 40) is incorrectly
captioned as a response of Joanne Clayton.
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evidence presented by the Trustee, although the determinations in this decision are
binding upon the Defendants Steven Clayton and Joanne Clayton, the Court does not
intend to give preclusive effect, including law of the case, to the determinations in this
adversary in connection with other pending adversaries in which other defendants are
actively participating in pending pretrial discovery proceedings.
Jurisdiction
This proceeding arises in a case referred to this court by the Standing Order Of
Reference entered in this district. 	It is also determined to be a core proceeding
pursuant to 28 U.S.C. § 157(b)(2)(A), (F) and (H).
Summary Judgment Standard
The summary judgment standard is contained in Federal Rule of Civil Procedure
56(c) 	and 	is 	applicable 	to 	bankruptcy 	adversary 	proceedings 	by 	incorporation 	in
Bankruptcy Rule 7056. Federal Rule of Civil Procedure 56(c) states, in part, that a court
must grant summary judgment to the moving party if:
the pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no genuine issue
as to any material fact and that the moving party is entitled to a judgment
as a matter of law.
In order to prevail, the moving party, if bearing the burden of persuasion at trial, must
establish all elements of its claim. 	Celotex Corp. v. Catrett, 477 U.S. 317, 331, 106
S.Ct. 2548, 2556 (1986). 	If the burden is on the non-moving party at trial, the movant
must: 	1) 	submit 	affirmative 	evidence 	that 	negates 	an 	essential 	element 	of 	the
nonmoving party’s claim; or 2) demonstrate to the court that the nonmoving party’s
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evidence is insufficient to establish an essential element of the nonmoving party’s claim.
Id. at 331-332, 106 S.Ct. at 2557. 	Thereafter, the opposing party “must come forward
with ‘specific facts showing that there is a genuine issue for trial.’” 	Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587, 106 S.Ct. 1348, 1356 (1986)
(citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-251, 106 S.Ct.
2505, 2510-12 (1986). All inferences drawn from the underlying facts must be viewed in
a light most favorable to the party opposing the motion. 	Matsushita, 475 U.S. at 586-
588, 106 S.Ct. at 1356-57. “The nonmoving party cannot rest on its pleadings, but must
identify 	specific 	facts 	supported 	by 	affidavits, 	or 	by 	depositions, 	answers 	to
interrogatories, and admissions on file that show there is a genuine issue for trial.
Although we must draw all inferences in favor of the nonmoving party, it must present
significant and probative evidence in support of its complaint. ‘The mere existence of a
scintilla of evidence in support of the [nonmoving party's] position will be insufficient;
there must be evidence on which the jury could reasonably find for the [nonmoving
party].’" Gibson v. Gibson (In re Gibson), 219 B.R. 195, 198 (B.A.P. 6th Cir. 1998), citing
Hall v. Tollett, 128 F.3d 418, 421-22 (6th Cir.1997) (internal citations omitted).
Parties who ignore a properly filed motion for summary judgment, do so at their
own peril.
Analysis
Introduction
The 	Trustee 	seeks 	partial 	summary 	judgment 	on 	five 	legal 	theories: 	(1)
fraudulent conveyance – 11 U.S.C. § 548; (2) preference recovery – 11 U.S.C. § 547;
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(3) Ohio Uniform Fraudulent Transfer Act (“UFTA”) – Chapter 1336, et seq. of the Ohio
Revised Code; (4) breach of fiduciary duty under Ohio law and (5) the Ohio tort of civil
conversion. 	In addition, pursuant to 11 U.S.C. § 502(d), the Trustee requests that any
proof 	of 	claim 	of 	the 	Defendants 	be 	disallowed 	until 	any 	judgment 	against 	the
Defendants is paid in full.
The Trustee has defined three categories of transfers which appear in his initial
complaint and its attachments, his subsequent discovery requests and in his motion for
partial summary judgment: (1) “Direct Transfers”; (2) “Indirect Transfers” and (3) “Waste
Transfers.” 	Direct transfers are transfers of ELT assets directly to the Defendants. 	As
will be detailed, the uncontradicted evidence establishes ELT assets in the form of
checks payable to Steven Clayton went to the Defendants for their own personal use
with no benefit to ELT. 	See Exhibit K 2 (copies of the Direct Transfer checks) and
Exhibit L (summary of the Direct Transfer checks). Indirect transfers are transfers which
provided economic benefits to the Defendants, although the transfers were not made
directly to the Defendants. 	The Trustee does list a final amount for the indirect
transfers, and those transfers were not detailed in the motion. 	Finally, the Trustee
refers to Waste Transfers as use of ELT funds for various perks for realtors, employees
and senior management including, but not limited to, gambling junkets, tickets to
sporting events and raffles for ELT employees. See Exhibit M (copies of Waste Transfer
checks) and Exhibit L (summary of Waste Transfer checks). 	The evidence establishes
that the Defendants “wasted” assets of ELT by using funds with no significant benefit to
ELT.
2 Any reference to an exhibit is part of Doc. 32.
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ADMISSIONS
As the Court previously noted, and as further detailed in the simultaneously
entered Decision On Order Striking Defendant’s Affidavit, the Defendants failed to
answer or respond to the Trustee’s discovery request, including the requests for
admissions. (See Doc. 30 – Certification Of No Response By the Defendants Of
Requests For Admission By The Trustee.) 	Due to the failure of the Defendants to
answer these admissions, the admissions are “conclusively established” and are part of
the evidentiary presentation in connection with the Trustee’s Motion.
Federal Rule of Civil Procedure 36, applicable in adversary proceedings by
Bankruptcy Rule 7036, states in pertinent part:
(a) Request for Admission. A party may serve upon any other party a
written request for the admission, for purposes of the pending action only,
of the truth of any matters within the scope of Rule 26(b)(1) set forth in the
request that relate to statements or opinions of fact or of the application of
law to fact, including the genuineness of any documents described in the
request. . . .
Each matter of which an admission is requested shall be separately set
forth. The matter is admitted unless, within 30 days after service of the
request, or within such shorter or longer time as the court may allow or as
the parties may agree in writing, subject to Rule 29, the party to whom the
request is directed serves upon the party requesting the admission a
written answer or objection addressed to the matter. . . . .
* * * * *
(b) Effect of Admission. Any matter admitted under this rule is conclusively
established unless the court on motion permits withdrawal or amendment
of the admission.
As this court has explained:
Federal Rule of Civil Procedure 56(c) specifies that “admissions on file”
can be an appropriate basis for the entry of summary judgment. 	It is also
settled that “[a]dmissions made under Rule 36, even default admissions
can serve as the factual predicate for summary judgment. 	Rule 36(b)
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provides 	that 	a 	matter 	admitted 	is 	conclusively 	established.” 	U.S. 	v.
Kasuboski, 834 F.2d 1345, 1350 (7th Cir.1987); Rainbolt v. Johnson, 669
F.2d 767, 768 (D.C.Cir.1981); National Advertising Co., Inc. v. Dick, 640
F.Supp. 	1474, 	1475 	(S.D.Ind.1986); 	Goodnow 	v. 	Adelman 	(In 	re
Adelman), 90 B.R. 1012, 1015 (Bankr.D.S.D.1988). “The rule is designed
to expedite litigation, and it permits the party securing admissions to rely
on their binding effect.” Rainbolt, 669 F.2d at 768.
The scope of Rule 36(a) is quite broad and permissible requests include
even “ultimate facts” or facts dispositive of a case, Campbell v. Spectrum
Automation Co., 601 F.2d 246, 253 (6th Cir.1979).
See Friedly v. Niswonger (In re Niswonger), 116 B.R. 562, 565-66 (Bankr. S.D. Ohio
1990). See also McKinnie v. Roadway Express, Inc., 341 F.3d 554 (6th Cir. 2003)
(Court not required to inform pro se defendants of the consequences of failing to
respond to a summary judgment motion); Lovejoy v. Owens, 86 F.3d 1156, 1996 WL
287261 (6th Cir. May 28, 1996) (table decision) (unresponded to admissions may be
used against a pro se defendant); Buckaloo v. Pressley, 889 F.2d 1086, 1989 WL
140176 (6th Cir. Nov. 21, 1989) (Court entered partial summary judgment against a pro
se defendant where the defendant failed to respond to admissions or a motion for partial
summary judgment.)
The following admissions as to each Defendant are established for purposes of
the Trustee’s Motion for partial summary judgment:
JOANNE CLAYTON
RA1. Admit that Defendant was an insider of the Debtor as defined in 11 U.S.C. §
101(31).
RA2. Admit that Defendant personally benefitted [sic] from Steven L. Clayton’s looting
of the Debtor.
RA3. Admit the Defendant received Direct Transfers, Indirect Transfers, and Waste
Transfers of property in which the Debtor had an interest in the amount of Five Million
Nine Hundred Forty-Four Thousand Dollars ($5,944,000.00).
RA4. Admit the Defendant received Unknown Transfers of property in which the Debtor
had an interest within one year before the Petition Date.
RA5. Admit that the Transfers of property in which the Debtor had an interest to the
Defendant, were made for less than reasonably equivalent value.
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RA6. Admit that the Transfers to the Defendant of property in which the Debtor had an
interest were made to or for the benefit of the Defendant.
RA7. Admit that the Transfers of property in which the Debtor had an interest to the
Defendant in the one year prior to the Petition Date enabled the Defendant to receive
more than Defendant would have if the case were a case under Chapter 7 of the
Bankruptcy Code, the transfer had not been made and Defendant received payment of
the debt to the extent provided by the provisions of the Bankruptcy Code.
RA8. Admit that all documents attached as (1) exhibits to the Complaint, (2) attached to
the Plaintiff’s initial disclosures and (3) documents produced by the Defendant in
response to the Requests for Production are true and accurate copies of the originals,
and may be introduced at trial or into evidence, and/or used in connection with any
motion for summary judgment in whole or in part, the same as the originals.
STEVEN L. CLAYTON
RA1. Admit that Defendant at all times relevant hereto was an officer (president),
director, and sole stock owner of the Debtor.
RA2. Admit that Defendant was the sole person in control of the Debtor from March 28,
1986 to March 29, 2002.
RA3. Admit that the Defendant owed a fiduciary duty to the Debtor and breached that
fiduciary duty by failing to exercised [sic] that degree of skill, diligence, and due care
that a reasonably prudent person would as an officer, director, and/or controlling
shareholder.
RA4. Admit that the Defendant knew or should have known the Debtor was insolvent
from at least 1995-2002.
RA5. Admit Defendant was an “insider” of the Debtor as that term is defined in 11
U.S.C. § 101(31).
RA6. Admit that Defendant engaged in a pattern of fraudulent activities undertaken both
personally and through his agents, of fraudulently converting, withdrawing, diverting,
and/or transferring from the Debtor monies and assets and/or the proceeds thereof
belonging to the Debtor or in which the Debtor had an interest, to himself, his family, his
employees, and/or to his own personal benefit.
RA7. Admit the Defendant moved money between the Debtor’s escrow and operating
accounts.
RA8. 	Admit 	the 	Defendant 	converted, 	embezzled, 	misappropriated, 	or 	otherwise
defrauded the Debtor by transferring funds to or for his benefit of at least Three Million
Three Hundred Thousand Seventy-Nine Thousand Four Hundred Forty-Four Dollars
and Seventy-Seven Cents (3,379,444.77).
RA9. Admit that Defendant is liable to the Trustee for theft and conversion of the Direct
Transfers as plead in Paragraph 13 of the Complaint and including, but not limited to
those transfers listed in Exhibit A of the Complaint.
RA10. 	Admit 	Defendant 	and/or 	the 	Defendant 	directed 	others 	to 	make 	Indirect
Transfers of the Debtor’s fund to or for the Defendant’s personal and/or the Defendant’s
family’s benefit.
RA11. Admit the Defendant made Waste Transfers, including but not limited to those
transfers listed on Exhibit B of the Complaint.
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RA12. Admit the Defendant received Direct Transfers, Indirect Transfers, and Waste
Transfers of property in which the Debtor had an interest in the amount of Five Million
Nine Hundred Forty-Four Thousand Dollars ($5,944,000.00).
RA13. Admit the Defendant received Unknown Transfers of property in which the
Debtor had an interest within one year before the Petition Date.
RA14. Admit that the Transfers from the Debtor to the Defendant were made for less
than reasonably equivalent value.
RA15. Admit that the Transfers of property were made to or for the benefit of the
Defendant.
RA16. Admit that the Transfers of the Debtor’s property enabled the Defendant to
receive more than Defendant would have received if the case were a case under
Chapter 7 of the Bankruptcy Code, had the Transfers not been made and had the
Defendant received payment of the debt to the extent provided by the provisions of the
Bankruptcy Code.
RA17. Admit that all documents attached as exhibits to the Complaint and the exhibits
attached to Initial Disclosures provided by the Plaintiff and produced by the Defendant
in response to the Requests for Production are true and accurate copies of the originals,
and may be introduced at trial or into evidence, and/or used in connection with any
motion for summary judgment in whole or in part, the same as the originals.
The remainder of the Defendants’ responses to the Motion for Partial Summary
Judgment do not demonstrate “specific facts showing that there is a genuine issue for
trial.” Matsushita Elec. Indus. Co, 475 U.S. at 586-587, 106 S.Ct. at 1356.
Parties who ignore the discovery process, particularly properly filed requests for
admission, do so at their own peril.
Fraudulent Conveyance – 11 U.S.C. § 548
11 U.S.C. § 548 states, in relevant part:3
(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any
obligation incurred by the debtor, that was made or incurred on or within one year
before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) 	made such transfer or incurred such obligation with actual intent to
hinder, delay, or defraud any entity to which the debtor has or
3 The various recent changes to 11 U.S.C. § 548 (and § 547, which is also addressed in a separate
section of this opinion) in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 do not
apply to this adversary proceeding.
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became, on or after the date that such transfer was made or such
obligation was incurred, indebted; or
(B)(i) 	received less than a reasonably equivalent value in
exchange for such transfer or obligation; and
(I) 	was insolvent on the date that such transfer was
made or such obligation was incurred, or became
insolvent as a result of such transfer or obligation;
(II) 	was engaged in business or a transaction, or was
about to engage in business or a transaction, for
which any property remaining with the debtor was an
unreasonably small capital; or
(III) 	intended to incur, or believed that the debtor would
incur, debts that would be beyond the debtor's ability to pay
as such debts matured.
11 U.S.C. § 548(a)(1)(A)
In order to establish a fraudulent conveyance under 11 U.S.C. § 	548(a)(1)(A),
the Trustee must show the Defendants transferred an interest of ELT’s property (within
a year before the petition date) with an actual intent to hinder, delay or defraud other
creditors of the estate. 	Between June 7, 2001 and the petition date, June 7, 2002,
checks written to Steven Clayton total $652,000. See Exhibit J. 	These were Direct
transfers as defined in the Trustee’s various filings. The admissions of the Defendants,
and the otherwise uncontradicted evidence of the Trustee, establishes, for purposes of
this decision, that these funds were from the Operating Account and are property of the
estate. See generally Begier v. I.R.S., 496 U.S. 53, 59, 110 S.Ct. 2258, 2263 (1990)
(discussing the definition of “property of the estate” under 11 U.S.C. § 541(a)(1));
Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 443 (6th Cir. 2003)
(similar). 	As noted, all the transfers sought to be avoided under § 548 were within one
year of the bankruptcy.
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The evidence establishes the transfers were made with intent to hinder, delay or
defraud other creditors of the estate. 	The uncontradicted evidence establishes that
Steven Clayton was engaged in a check kiting scheme for the Defendants’ benefit. The
evidence shows (See page 4 – 6 of the Trustee’s Motion – Doc. 32 and referencing
exhibits) that Steven Clayton instructed ELT employees to draw checks on an account
that did not have sufficient funds to cover the checks. 	These checks were deposited in
a second account. 	Just before a check was returned for payment to the first account,
ELT employees (on Steven Clayton’s instructions) would deposit checks drawn on the
second account into the first account. 	Thus, although there were no, or insufficient,
actual funds to cover checks from either account, the time delay in the processing of the
checks created an intentional false balance. See United States v. Stone, 954 F.2d 1187,
1188, fn. 1 (6th Cir. 1992) (brief explanation of check kiting).
It is also undisputed in this record that ELT was operated after February 20, 1999
without authority in the State of Ohio, since the Articles of Incorporation were cancelled
by the Ohio Secretary of State. (See Exhibit F – Doc. 32).
The Trustee has proven the claim under 11 U.S.C. § 548(a)(1)(A).
11 U.S.C. § 548(a)(1)(B)
Under 11 U.S.C. § 548(a)(1)(B), the Trustee can avoid transfers made within one
year of an interest in the debtor’s property for less than reasonably equivalent value and
while 	the 	debtor 	was 	insolvent. 	The 	Trustee 	seeks 	a 	finding 	that 	the 	$652,000
(previously referenced in the section addressing § 548(a)(1)(A)) is also a fraudulent
conveyance pursuant to § 548(a)(1)(B). The evidence presented by the Trustee, for
purposes of this decision, demonstrates the Debtor was insolvent while the transfers
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were occurring. See 11 U.S.C. § 101(32). 	As this court has noted, “[i]nsolvency is
essentially a balance sheet test—that is, a debtor is insolvent when the debtor’s
liabilities exceed the debtor’s assets, excluding the value of preferences, fraudulent
conveyances and exemptions.” Whittaker v. CITRA Trading Corp. (In re Int’l Diamond
Exchange Jewelers, Inc.), 177 B.R. 265, 269 (Bankr. S.D. Ohio 1995), quoting In re
Taubman, 160 B.R. 964, 979 (Bankr. S.D. Ohio 1993) (citing Foreman Indus., Inc. v.
Broadway Sand & Gravel (In re Foreman Indus., Inc.), 59 B.R. 145, 149 (Bankr. S.D.
Ohio 1986)).
The check kiting scheme demonstrates insufficient funds were in the accounts of
ELT to pay checks drawn on ELT’s Operating Account. The report of the state court
receiver, which preceded this involuntary bankruptcy (See Doc. 32 – Exhibit O), lists
$162,650.56 as the assets of ELT. 	The summary of non-contingent, non-duplicative
and not amended proof of claims prior to June 7, 2001 (one year from the filing date), as
compiled by the Trustee, list $6,325,525.46 as the debts of ELT. (See Doc. 32 – Exhibit
N.) Based on a balance sheet method of insolvency this court has previously used, the
court finds that ELT was insolvent during the time of all these transfers.
The uncontradicted evidence shows the Defendants received $652,000 and
provided no reasonable equivalent value to ELT. 	Accordingly, pursuant to 11 U.S.C. §
548(a)(1)(A) and § 548(a)(1)(B), the Trustee is entitled to avoid all the § 548 fraudulent
transfers between June 7, 2001 and June 7, 2002 for a total of $652,000.
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Preference Recovery – 11 U.S.C. § 547
The 	Trustee 	seeks 	summary 	judgment 	on 	transfers 	totaling 	$652,000 	as
preferences. 	These 	are 	the 	exact 	same 	transfers 	detailed 	in 	the 	prior 	section
concerning 11 U.S.C. § 548. 	The motion of the Trustee concedes the preference
recovery is dependent on the court finding that the Defendants were creditors of ELT.
See page 27-28 of Doc. 32. 	The court does not sufficient evidence in the Trustee’s
Motion to conclude that these transfers were to a “creditor.” See 11 U.S.C. § 101(10)
and § 547(b)(1). 	As a corollary and additional necessary element, there is nothing in
the record to conclude that the Defendants were owed funds from ELT at the time of the
transfers that would constitute an antecedent debt. 	See 11 U.S.C. § 547(b)(2);
Roberds, Inc. v. Broyhill Furniture (In re Roberds, Inc.), 315 B.R. 443, 451-53 (Bankr.
S.D. Ohio 2004). 	Instead, the evidence shows, the Defendants simply, in the language
of the Trustee’s motion, “looted” ELT of Operating Accounts funds for their personal
use. 	Accordingly, as to the preference count, the motion for partial summary judgment
is DENIED.
Ohio Uniform Fraudulent Transfer Act – Chapter 1336 of the Ohio Revised Code
The elements of a cause of action under the Ohio Uniform Fraudulent Transfer
Act are in Ohio Revised Code § 1336.04:
(A) A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor,
whether the claim of the creditor arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or incurred the obligation in
either of the following ways:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor;
(2) Without receiving a reasonably equivalent value in exchange for the transfer
or obligation, and if either of the following applies:
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(a) The debtor was engaged or was about to engage in a business or a
transaction for which the remaining assets of the debtor were
unreasonably small in relation to the business or transaction;
(b) The debtor intended to incur, or believed or reasonably should have
believed that he would incur, debts beyond his ability to pay as they
became due.
(B) In determining actual intent under division (A)(1) of this section, consideration may
be given to all relevant factors, including, but not limited to, the following:
(1) Whether the transfer or obligation was to an insider;
(2) Whether the debtor retained possession or control of the property transferred
after the transfer;
(3) Whether the transfer or obligation was disclosed or concealed;
(4) Whether before the transfer was made or the obligation was incurred, the
debtor had been sued or threatened with suit;
(5) Whether the transfer was of substantially all of the assets of the debtor;
(6) Whether the debtor absconded;
(7) Whether the debtor removed or concealed assets;
(8) Whether the value of the consideration received by the debtor was
reasonably equivalent to the value of the asset transferred or the amount of the
obligation incurred;
(9) Whether the debtor was insolvent or became insolvent shortly after the
transfer was made or the obligation was incurred;
(10) Whether the transfer occurred shortly before or shortly after a substantial
debt was incurred;
(11) Whether the debtor transferred the essential assets of the business to a
lienholder who transferred the assets to an insider of the debtor.
The Ohio Uniform Fraudulent Transfer Act (“UFTA”) has a four year reachback
period and, therefore, can apply to transfers beyond those of 11 U.S.C. § 548 – which
has a one year reachback period. Ohio Revised Code § 1336.09(A). Under the strong
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arm clause of 11 U.S.C. § 544(b), the Trustee steps into the shoes of an unsecured
creditor and can assert claims under applicable state law. Corzin v. Fordu (In re Fordu),
201 F.3d 693, 678-98 (6th Cir. 1999). 	The Trustee seeks recovery of $2,261,755.40 of
Direct Transfers to the Defendants in the four years prior to filing (June 7, 1998 – June
7, 	2002). 	See 	Exhibits 	C 	(Affidavit 	of 	Courtney 	Snyder 	[former 	ELT 	employee]
concerning the transfers), K (checks paid directly to Steven Clayton) and J (summary of
the checks in Exhibit K).
In order to avoid a transfer under UFTA, the Trustee must show either (1) the
transfers were made to or for the benefit of the Defendants and the transfers were done
with an actual intent to hinder, delay or defraud or (2) the transfers were made without
the Debtor receiving reasonably equivalent value when (a) the Debtor was engaged in a
business or transaction in which the remaining assets were unreasonably small in
relation to the business or transaction or (b) the debtor intended to incur, or believed or
reasonably should have believed that he would incur, debts beyond his ability to pay as
they became due.
The Trustee has shown, by the evidence presented, that all the transfers were
solely for the Defendants’ personal benefit and were simply an attempt to defraud ELT.
(The key language of “actual intent to hinder, delay, or defraud” is identical in §
548(a)(1)(A) and UFTA.) Concerning the factors of intent, the Defendants were insiders
[See 11 U.S.C. § 101(31) and (45)], transferred assets, concealed assets through check
kiting and failed to return assets of a reasonably equivalent value to ELT. 	See Ohio
Revised Code § 1336.04(B); See also Noland v. Morefield (In re Nat’l Liquidators, Inc.),
232 B.R. 915, 918-19 (Bankr. S.D. Ohio 1998).
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Concerning the alternative elements for a claim under UFTA, the Trustee has
proven that all the transfers in question under the UFTA claim were made without any
reasonably equivalent value being received by ELT and, as the final report of the state
court receiver demonstrates [See Exhibit O], left ELT with unreasonably small assets to
continue in business. 	In fact, there is no evidence any of the transfers were anything
but transfers for the personal benefit of the Defendants. See generally Dayton Title
Agency, Inc. v. The White Family Cos., Inc. (In re Dayton Title Agency, Inc.), 292 B.R.
857, 874 (Bankr. S.D. Ohio 2003) (“[C]ourts should keep the equitable purposes behind
fraudulent transfer law in mind, recognizing that any significant disparity between the
value received and the value surrendered will significantly harm innocent creditors.”).
Accordingly, the transfers to the Defendants in the total amount of $2,261,755.40
are avoided pursuant to the Ohio Uniform Fraudulent Transfer Act.
Ohio law of civil conversion
Under Ohio law, the tort of conversion “is the wrongful exercise of dominion over
property to the exclusion of the rights of the owner, or withholding it from his possession
under a claim inconsistent with his rights.” Joyce v. General Motors Corp., 49 Ohio
St.3d 93, 96, 553 N.E.2d 172, 175 (Ohio 1990), citing Zacchini v. Scripps-Howard
Broadcasting Co., 47 Ohio St.2d 224, 226, 351 N.E.2d 454, 456 (Ohio 1976) 4 ; Schafer
v. RMS Realty, 138 Ohio App.3d 244, 282, 741 N.E.2d 155, 182 (Ohio Ct. App. 2000).
Exhibit K lists checks written for the benefit of Steven Clayton and not ELT. Exhibit J is
a summary of those checks. The total value of the checks constituting Direct Transfers
4 Zacchini was reversed on other grounds by the U.S. Supreme Court. See Zacchini v. Scripps-Howard
Broadcasting Co., 433 U.S. 562, 97 S.Ct. 2849 (1977).
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from January 27, 2005 until June 7, 2002 is $3,379,444.77. 	There is undisputed
evidence that these checks were nothing more than the conversion of the property of
ELT for the Defendants’ benefit.
Admission 8 propounded to Steven L. Clayton stated “Admit the Defendant
[Steven L Clayton] converted, embezzled, misappropriated, or otherwise defrauded the
Debtor by transferring funds to or for his benefit of at least Three Million Three Hundred
Thousand [sic] Seventy-Nine Thousand Four Hundred Forty-Four Dollars and Seventy-
Seven cents (3,379,444.77).” (Doc. 30) 	Joanne Clayton admitted she benefited from
these transfers by her failure to respond to the admissions. Specifically, she was asked
in Admission 2 propounded to her whether she “personally benefitted [sic] from Steven
L. Clayton’s looting of the Debtor.” (Doc. 30) 	See also Admission 3 propounded to
Joanne 	Clayton. 	Joanne 	Clayton 	exercised 	dominion 	over 	these 	funds. 	See
Niswonger, 116 B.R. at 556. 	Accordingly, the court grants summary judgment against
the Defendants for the claim of civil conversion in the amount of $3,379,444.77.
Breach of Fiduciary Duty
The Trustee seeks summary judgment on transfers totaling $4,157,856.35 for
transfers from January 27, 2005 until the filing date, June 7, 2002 for breach of fiduciary
duty. 	These Transfers, which have been reduced to a sum certain, constitute Direct
Transfers ($3,379,444.77) and Waste Transfers ($778, 411.58).
“A person who occupies a fiduciary relationship to another acts as an agent to
that person and owes the utmost loyalty and honesty to the principal.” Thompson v.
Central Ohio Cellular, Inc., 93 Ohio App.3d 530, 540, 639 N.E.2d 462, 468 (Ohio Ct.
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App. 1994), citing Testa v. Roberts, 44 Ohio App.3d 161, 165, 542 N.E.2d 654, 659
(Ohio Ct. App. 1988). 	In order to succeed on a claim of breach of fiduciary duty, the
Trustee must show a duty, a breach of that duty and damages proximately resulting
from the breach. The elements are the same as negligence, but a fiduciary carries a
higher standard of care. Strock v. Pressnell, 38 Ohio St.3d 207, 215, 527 N.E.2d 1235,
1242 (Ohio 1988) 	In admission 3 propounded to him (Doc. 30), Steven Clayton was
asked to “[a]dmit that the Defendant owed a fiduciary duty to the Debtor and breached
that fiduciary duty by failing to exercised [sic] that degree of skill, diligence, and due
care that a reasonably prudent person would as an officer, director, and/or controlling
shareholder.” These admission requests were not responded to by Steven Clayton and,
therefore, are deemed admitted. Niswonger, 116 B.R. at 556. 	The court GRANTS
summary 	judgment 	as 	to 	Steven 	L. 	Clayton 	for 	the 	breach 	of 	fiduciary 	duty 	for
$4,157,856.35.
The court does not find sufficient evidence to grant summary judgment against
Joanne Clayton for breach of fiduciary duty. Joanne Clayton was not an officer, director
or shareholder of ELT, nor is there sufficient evidence, including the admissions, to
conclude Joanne Clayton breached a fiduciary duty to ELT as an employee. 	Even
assuming arguendo such a tort is cognizable under Ohio law against a mere employee
(as opposed to an officer, director or shareholder) – an argument not briefed in the
Trustee’s motion – there is nothing in the record demonstrating what actions were taken
by Joanne Clayton specifically in regard to this claim. 	In regard to the fiduciary duty
claim against Joanne Clayton, summary judgment is DENIED.
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11 U.S.C. § 502(d)
11 U.S.C. § 502(d) states that:
Notwithstanding subsections (a) and (b) of this section, the court shall
disallow any claim of any entity from which property is recoverable under
section 542, 543, 550, or 553 of this title or that is a transferee of a
transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549,
or 724(a) of this title, unless such entity or transferee has paid the amount,
or turned over any such property, for which such entity or transferee is
liable under section 522(i), 542, 543, 550, or 553 of this title.
Under 502(d), any proof of claim of the Defendants is disallowed until the entire
judgment (including interest), representing the transfers of the Defendants of assets of
ELT, is paid by the Defendants. See Roberds, 315 B.R. at 476. 	Accordingly, the
Trustee’s claim under § 502(d) is GRANTED.
Conclusion
Therefore, the court GRANTS IN PART AND DENIES IN PART the Motion of
Trustee For Partial Summary Judgment Against Defendants Steven L. Clayton and
Joanne Clayton (Doc. 32) consistent with this decision, plus interest from the date of
judgment pursuant to 28 U.SC. § 1961 until paid in full. 	Additionally, any proof of claim
filed by either Defendant is DISALLOWED pursuant to 11 U.S.C. § 502(d) until the total
amount of the judgment is paid in full against that Defendant. 	The request of the
Trustee for an accounting, for costs and attorney fees and other relief not specifically
granted is, at this time denied, without prejudice to being presented in a future
proceeding. An order in accordance with this decision will be simultaneously entered.
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The Trustee shall separately submit an order containing the total dollar amounts
and other relief awarded against each Defendant.
SO ORDERED.
c:
John Paul Rieser, Esq., 1520 First National Plaza, 130 West Second Street, Dayton,
Ohio 45402 (Plaintiff)
Steven L. Clayton, 2545 Hilliard Rome Road, #305, Hilliard, Ohio 43026-9471
(Defendant)
Joanne Clayton, 2545 Hilliard Rome Road, #305, Hilliard, Ohio 43026-9471 (Defendant)
J. 	Michael 	Debbeler, 	Esq., 	Graydon 	Head 	and 	Ritchey, 	Post 	Office 	Box 	6464,
Cincinnati, Ohio 45201-6464 (Atty. for the Defendants, Union Savings Bank & The
Cincinnati Insurance Company)
Arthur R. Hollencamp, Esq., 2107 First National Plaza, 130 W Second Street, Dayton,
OH 45402 (Atty. for National City Bank)
Bryan K. Stewart, Esq., 249 South Garber Drive, Tipp City, Ohio 45371 (Atty. for
Monroe Federal Savings & Loan Association)
Robert G. Sanker, Esq.,/ Brian P. Muething, Esq., 1400 Provident Tower, One East
Fourth Street, Cincinnati, Ohio 45202 (Atty. for the Defendant, Fifth Third Bank)
Joel E. Sechler, Esq.,/Timothy R. Bricker, Esq., 280 Plaza, Suite 1300, 280 North High
Street, Columbus, Ohio 43215 (Atty. for Olympic Title Insurance Company)
Timothy J. Robinson, Esq.,/P. Brian See, Esq., 1300 Huntington Center, 41 South High
Street, Columbus, Ohio 43215 (Attys. for First American Title Insurance Company)
Courtesy Copy:
Dennis A. Lieberman, Esq., 318 West Fourth Street, Dayton, Ohio 45402-1437 (Atty. for
Defendants)
Montgomery County Prosecutor’s Office, George B. Patricoff, P.O. Box 972, Dayton,
Ohio 45422-0972
###
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