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United States of America v. Rocky Mountain Holdings

March 10, 2011

UNITED STATES OF AMERICA,
PLAINTIFF,
v.
ROCKY MOUNTAIN HOLDINGS, INC., DIMELING, SCHREIBER & PARK, L.P., DIMELING, SCHREIBER & PARK REORGANIZATION FUND, L.P., AND DUPONT CONOCO PRIVATE MARKET GROUP TRUST, DEFENDANTS.



The opinion of the court was delivered by: Buckwalter, S. J.

MEMORANDUM

Presently before the Court are (1) the Motion for Summary Judgment by Plaintiff the United States of America; (2) Defendant Dupont Conoco Private Market Group Trust's ("Dupont") Motion for Summary Judgment; (3) Plaintiff's Objection to and Motion to Strike Exhibit 3 of Dupont's Reply in Opposition to Plaintiff's Motion for Summary Judgment; and (4) Defendant's Cross-Motion to Disregard and/or Strike. For the following reasons, all Motions are denied.

I. FACTUAL AND PROCEDURAL BACKGROUND

At issue in this action is whether Plaintiff United States can recover, pursuant to Pennsylvania's Uniform Fraudulent Transfer Act, more than $3 million in federal tax liability owed by Rocky Mountain Holdings, Inc. ("RMH") from Defendant Dupont, as subsequent transferee of an allegedly fraudulent conveyance.*fn1 Defendant Dupont, a pension trust fund located in Delaware, holds and manages pension fund assets for the benefit of employees of E.I. du Pont de Nemours & Co. and Conoco, Inc. (Def.'s Mot. Summ. J., Ex. 5, Dep. of Holly Lissner, 108:2-108:4, 171:18-172:9, Mar. 24, 2010 ("Lissner Dep.").) At the time of the transfers in question, Dupont held an 88.99% limited partnership interest in a Delaware limited partnership known as the Dimeling, Schreiber & Park Reorganization Fund, L.P. ("the Fund"). (Pl.'s Mot. Summ. J., Ex. 201; Def.'s Mot. Summ. J., Ex. 7.) An entity known as Dimeling, Schreiber & Park, L.P. ("DS&P") held the other 10.01% of the Fund as a limited partner, and also held a 1% interest in the Fund as a general partner. (Id.) According to the facts on record, the Fund's purpose was, in part, to create wholly-owned subsidiaries to indirectly invest in and dispose of assets of companies that were making major changes to their capital structure. (Def.'s Mot. Summ. J., Ex. 3 § 1.2; Pl.'s Mot. Summ. J., Ex. 224.) Between March 1994 and October 2004, Defendant made nearly $57 million in capital contributions to the Fund in its capacity as limited partner. (Def.'s Mot. Summ. J., Ex. 9.)

On August 30, 1994, the Fund formed RMH, a Delaware corporation, for the sole purpose of acquiring an air medical transport business known as Rocky Mountain Helicopter, Inc. ("Target Entity"). (Id. Ex. 1, Ex. 14.) RMH was to act as a "blocker" corporation to protect Dupont from unrelated taxable business income. (Id.) Due to the large size of the acquisition, the Fund brought in American Manufacturing Corporation, Inc. ("AMC"), a Delaware corporation, to finance 50% of the equity required to fund the acquisition. (Id. Ex. 14.) For tax purposes, RMH and AMC created Rocky Mountain Holdings, LLC ("RMH LLC"), a Delaware flow-through limited liability company, to acquire the Target Entity. (Id. Exs. 18, 19.)

On October 16, 2002 in Philadelphia, Pennsylvania, RMH and AMC sold their membership interest in the target company for $28 million, subject to post-closing adjustments. (Id. Ex. 14.) As a result of the sale, RMH received $15,157,403 in proceeds, representing 50% of the adjusted purchase price. (Id. Ex. 12; Pl.'s Mot. Summ. J., Decl. of Richard Schreiber ¶ 5, Apr. 29, 2010 ("Schreiber Decl.").) On October 17, 2002, RMH transferred $14,860,895 of these proceeds to the Fund, RMH's only shareholder. (Def.'s Mot. Summ. J., Ex. 14; Schreiber Decl. ¶¶ 3, 6.) That same day, the Fund wired 88.9% of the $14,860,895 (or $13,224,710.46) to the State Street Bank and Trust Company as Trustee of Defendant, and 11.01% (or $1,636,184.50) to DS&P. (Def.'s Mot. Summ. J., Ex. 14; Schreiber Decl. ¶ 6.) Later that day, DS&P transferred its $1,636,184.50 to Defendant in partial repayment of a loan, which was secured by DS&P's interest in the Fund. (Id.)

On November 21, 2002, RMH received and immediately transferred to the Fund additional proceeds in the amount of $296,508. (Schreiber Decl. ¶ 7.) As before, the Fund transferred 88.99% of that amount (or $263,863) to the State Street Bank and Trust Company as Trustee of Defendant, and 11.01% (or $32,646) to DS&P. (Id.) DS&P then wired its share to Defendant. (Id.) In total, RMH transferred approximately $15,157,403 from the proceeds of the October 17, 2002 sale, all of which ended up in Defendant's account. (Id. ¶ 8; Def.'s Mot. Summ J., Stmnt. Facts ¶ 36.) Since the transfer, the Fund and DS&P have wound down their businesses. (Lissner Dep. 129:8-11; Def.'s Mot. Summ. J., Ex. 8, Dep. of Carmen J. Gigliotti, 102:23-103:5, Mar. 24, 2010 ("Gigliotti Dep.").)

Prior to the sale, RMH mistakenly believed it would incur no taxable gain on the transaction. (Def.'s Mot. Summ. J., Ex. 14; Schreiber Dec. ¶ 10.) Contrary to this belief, the sale in fact generated over $1.8 million in federal tax liability, plus state tax liability. (Pl.'s Mot. Summ. J., Exs. 249, 250; Def.'s Mot. Summ. J., Ex. 16.) Because RMH had sold its only asset and subsequently wound down its business, it did not have assets sufficient to pay its tax liability. (Def.'s Mot. Summ. J., Ex. 26.) In September 2003, RMH filed its federal income tax return for 2002, showing $1,813,601 of taxes due and unpaid. (Id. Ex. 16; Pl.'s Mot. Summ. J., Exs. 249, 250.)

On November 10, 2003, a delegate of the Secretary of the Treasury of the United States issued corporate income tax, interest, and penalty assessments against RMH for the year 2002, based on the corporation's Form 1120 return, in the amount of $1,813,601. (Def.'s Mot. Summ. J., Ex. 31.) As a result of Rocky Mountain's failure to pay these assessments after due notice and demand, federal tax liens arose as of the date of each assessment in favor of the United States and against all property and rights belonging to RMH and the Fund. (Id.; Am. Compl. ¶ 12.) In addition, statutory penalties and interest were assessed against RMH. (Pl.'s Mot. Summ. J., Ex 375; Am. Compl. ¶ 13.) To date, Plaintiff has recovered only $15,972.27 of the assessed tax liability. (Def.'s Mot. Summ. J., Ex. 31.)

On July 18, 2008, Plaintiff initiated the current litigation against RMH, the Fund, DS&P, and Defendant Dupont seeking to (1) reduce its tax assessment against RMH to judgment (Count I), and (2) set aside the alleged fraudulent transfers by and among the Fund, DS&P, and DuPont (Count II). On December 12, 2008, Dupont, DS&P, and the Fund moved to dismiss the fraudulent transfer claim. The Court denied the motion on March 3, 2009. By order entered on March 25, 2010, RMH consented to judgment against it "for unpaid income taxes and statutory additions to tax for the year 2002 in the amount of $3,237,969 as of July 21, 2008, plus statutory additions to tax according to law until fully paid." (Docket No. 44.) The Fund and DS&P consented to judgment for the same amount as fraudulent transferees under the Pennsylvania Uniform Fraudulent Transfer Act ("PUFTA"), 12 PA. CONS. STAT. § 5101 et seq. (Id.) These three Defendants were then dismissed from the case. (Id.) Plaintiff now seeks to collect the full amount of the judgment from Dupont, the only remaining Defendant, as subsequent transferee of a constructively fraudulent conveyance under PUFTA.

After the remaining parties engaged in discovery, both filed Motions for Summary Judgment on June 30, 2010. The parties filed their respective Responses in Opposition to the opposing party's Motion on July 23, 2010. On August 25, 2010, each party filed a Reply in Support of their respective Motions. Plaintiff filed a Motion to Strike and an Objection to Exhibit 3 of Defendant's Reply Brief on September 7, 2010. On September 21, 2010, Defendant filed a Cross-motion to Strike and a Response to Plaintiff's Motion to Strike. Plaintiff filed a Response in Opposition to Defendant's Cross-motion to Strike on October 5, 2010. The Court now considers these Motions.

II. STANDARD OF REVIEW

Summary judgment is proper "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c)(2). A factual dispute is "material" only if it might affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). For an issue to be "genuine," a reasonable fact-finder must be able to return a verdict in favor of the non-moving party. Id.

On summary judgment, the moving party has the initial burden of identifying evidence that it believes shows an absence of a genuine issue of material fact. Conoshenti v. Pub. Serv. Elec. & Gas Co., 364 F.3d 135, 145-46 (3d Cir. 2004). It is not the court's role to weigh the disputed evidence and decide which is more probative, or to make credibility determinations. Boyle v. County of Allegheny, 139 F.3d 386, 393 (3d Cir. 1998) (citing Petruzzi's IGA Supermkts., Inc. v. Darling-Del. Co. Inc., 998 F.2d 1224, 1230 (3d Cir. 1993)). Rather, the court must consider the evidence, and all reasonable inferences which may be drawn from it, in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)); Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 361 (3d Cir. 1987). If a conflict arises between the evidence presented by both sides, the court must accept as true the allegations of the non-moving party, and "all justifiable inferences are to be drawn in his favor." Anderson, 477 U.S. at 255.

Although the moving party bears the initial burden of showing an absence of a genuine issue of material fact, it need not "support its motion with affidavits or other similar materials negating the opponent's claim." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). It can meet its burden by "pointing out . . . that there is an absence of evidence to support the nonmoving party's claims." Id. at 325. Once the movant has carried its initial burden, the opposing party "must do more than simply show that there is some metaphysical doubt as to material facts."

Matsushita Elec., 475 U.S. at 586. "[T]he non-moving party must rebut the motion with facts in the record and cannot rest solely on assertions made in the pleadings, legal memoranda, or oral argument." Berckeley Inv. Group. Ltd. v. Colkitt, 455 F.3d 195, 201 (3d Cir. 2006). If the nonmoving party "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden at trial," summary judgment is appropriate. Celotex, 477 U.S. at 322. Moreover, the mere existence of some evidence in support of the non-movant will not be adequate to support a denial of a motion for summary judgment; there must be enough evidence to enable a jury to reasonably find for the non-movant on that issue. Anderson, 477 U.S. at 249-50.

Notably, "[t]he rule is no different where there are cross-motions for summary judgment." Lawrence v. City of Philadelphia, 527 F.3d 299, 310 (3d Cir. 2008). As stated by the Third Circuit, "'[c]ross-motions are no more than a claim by each side that it alone is entitled to summary judgment, and the making of such inherently contradictory claims does not constitute an agreement that if one is rejected the other is necessarily justified or that the losing party waives judicial consideration and determination whether genuine issues of material fact exist.'" Id. (quoting Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir. 1968)).

III. CHOICE OF LAW

As an initial matter, the parties disagree over whether the Court should apply Pennsylvania or Delaware law. Federal courts sitting in Pennsylvania apply Pennsylvania law absent a true conflict of law. Van Doren v. Coe Press Equip. Corp., 592 F. Supp. 776, 782 (E.D. Pa. 2008). Both Pennsylvania and Delaware have adopted the same relevant language of the Uniform Fraudulent Transfer Act. See 12 PA. CONS. STAT. § 5101 et seq. ("PUFTA") and 6 DEL. CODE ANN. § 1301 et seq. ("DUFTA"). Defendant argues, however, that there is a "crucial divergence" between the laws of the two states because DUFTA, unlike PUFTA, yields to protections for limited partners afforded by the Delaware Revised Uniform Limited Partnership Act ("DRULPA").

The Court comes to no such conclusion. First, Defendant cites no statutory text indicating any relevant difference between the degree of protection afforded to limited partners by the two states. The DRULPA provision Defendant cites merely states the general proposition that limited partners are insulated from the obligations of a limited partnership. In fact, this provision essentially mirrors that of Pennsylvania's Revised Uniform Limited Partnership Act ("RULPA").*fn2

Next, Defendant offers no persuasive evidence that the legislative purpose or public policy of the two states differ with respect to the liability of limited partners in fraudulent transfer actions. Again, the judicial commentary Defendant cites merely restates the basic premise of limited partnership liability -- that limited partners are generally not liable for partnership obligations. (Def.'s Reply Supp. Mot. Summ. J. 15.) While it is true that only Pennsylvania offers legislative commentary explicitly stating that limited partnership distributions are subject to PUFTA, Defendant points to no DUFTA or DRULPA commentary expressing a contrary intent. Moreover, Defendant's argument that "the Delaware legislature has always been willing to expand DRULPA beyond the uniform act and into conflict with fraudulent transfer law" is patently undercut by explicit language yielding to DUFTA elsewhere in the Act. (Id.) Specifically, 6 DEL. CODE ANN. § 17-804, which governs the winding up of limited partnerships, expressly states that liability for limited partners receiving wrongful distributions could arise under "other applicable law." Del. C. § 17-804(c). As commentators have noted, this provision "recognizes that liability for a wrongful distribution could arise outside of the Act, including under the provisions of the Uniform Fraudulent Transfer Act." MARTIN I. LUBAROFF AND PAUL M. ALTMAN, LUBAROFF AND ALTMAN ON DELAWARE LIMITED PARTNERSHIPS § 8.4 (Supp. 2001).

Finally, Defendant offers no persuasive legal authority articulating a difference between DUFTA and PUFTA. As the Court will discuss below, the case Defendant cites for the proposition that Defendant's "freedom from transferee liability is more clearly articulated in Delaware jurisprudence than in Pennsylvania jurisprudence" in fact conflicts with a wealth of authority from both Delaware and Pennsylvania courts espousing a contrary position. (Def.'s Reply Supp. Mot. Summ. J. 17.) Compare Territory of United States Virgin Islands v. Goldman, Sachs & Co., 937 A.2d 760, 764 n.155 (Del. Ch. 2007) with In re Joshua Slocum, Ltd., 103 B.R. 610, 623 (Bankr. E.D. Pa. 1989), In re Fidelity Bond and Mortg. Co., 340 B.R. 266, 286-87 (Bankr. E.D. Pa. 2006), In re Color Tile, Inc., No. CIV.A.98-358, 2000 WL 152129, at *5 (D. Del. Feb. 9, 2000).

Further, a wide range of cases from other districts -- including the District of Delaware -- have found that no choice of law conflict exists where both states have adopted the same relevant portions of the UFTA. See, e.g., In re Mervyn's Holdings, LLC, 426 B.R. 488, 496 (Bankr. D. Del. 2010) ("[Delaware, California, and Minnesota] have similarly adopted the UFTA, and therefore the result is the same regardless of the choice of law issue."); In re Halpert & Co., Inc., 254 B.R. 104, 123-24 (Bankr. D.N.J. 1999) ("Initially, the Court notes that since both New Jersey and Florida have adopted the same relevant language for the Uniform Fraudulent Transfer Act, and no conflict appears in the relevant case law, no choice of law analysis is required.") (citations omitted); Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 666 (Bankr. D.R.I. 1998) ("[I]f there is no conflict between the two states' laws, then the Court need not engage in a choice-oflaw analysis. The California and Rhode Island versions of the UFTA are for all practical purposes identical.").

In sum, Defendant has offered no legislative or judicial authority showing a true conflict between Pennsylvania and Delaware law with regard to the issues at hand. Given the lack of conflict between the law of the two states, no choice of law ...


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