Starnes v. Comm'r

T.C. Memo. 2011-63

UNITED STATES TAX COURT

ALBERT J. STARNES, TRANSFEREE, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 5199-09, 5200-09, Filed March 15, 2011.
5201-09, 5202-09.

Erik P. Doerring and Jeffrey T. Allen, for petitioners.

David B. Flassing, Frank W. Dworak, and James M. Cascino,

for respondent.

1
Cases of the following petitioners are consolidated
herewith: Estate of Sallie C. Stroupe, Deceased, Daniel R.
Stroupe, Executor, Transferee, docket No. 5200-09; Ronald D.
Morelli, Senior, Transferee, docket No. 5201-09; and Anthony S.
Naples, Transferee, docket No. 5202-09.
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MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Pursuant to separate notices of transferee

liability, respondent determined that Albert J. Starnes

(Starnes), Ronald D. Morelli, Senior (Morelli), Anthony S. Naples

(Naples), and Sallie C. Stroupe (Stroupe) (collectively, Tarcon

shareholders) are each liable to the extent of $649,034 as

transferees for the Federal income tax liability of $855,237,

penalty of $342,094, and interest assessed to Tarcon, Inc.

(Tarcon) for 2003. After the Internal Revenue Service (IRS) sent

the notice of liability to Stroupe, but before the petition was

filed in docket No. 5200-09, she died and her assets and

liabilities passed to the Estate of Sallie C. Stroupe. The cases

were consolidated for purposes of trial, briefing, and opinion.

The issue for decision is whether petitioners are liable as

transferees pursuant to section 6901 for Tarcon’s unpaid tax,

penalty, and interest for 2003. Unless otherwise indicated, all

section references are to the Internal Revenue Code in effect for

the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. At the

time their petitions were filed, petitioners Starnes, Naples, and
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Daniel R. Stroupe, executor of the Estate of Sallie C. Stroupe,

resided in North Carolina, and petitioner Morelli resided in

South Carolina.

Tarcon (a C corporation at all relevant times) was organized

in North Carolina in 1956 and operated a freight consolidation

business. In the early 1970s, the Tarcon shareholders each

acquired 25 percent of Tarcon’s stock and became members of

Tarcon’s board of directors and officers of Tarcon. Naples was

president, Starnes was executive vice president, Morelli was

senior vice president, and Stroupe was secretary and treasurer.

In the 1980s, Tarcon’s business operations and revenues

declined because of deregulation of the trucking industry. By

2003, Tarcon was no longer in the freight consolidation business,

and its primary business was leasing warehouse space in the

approximately 201,600-square-foot industrial building it owned

located on approximately 18.56 acres on Granite Street in

Charlotte, North Carolina (Granite Street property).

In addition to the Granite Street property, Tarcon owned

four vehicles and a condominium in Garden City, South Carolina,

during 2003. On May 12, 2003, the South Carolina property was

sold and Tarcon received net proceeds of $190,752 that were

deposited into Tarcon’s bank account. On October 30, 2003, the

Tarcon shareholders each purchased one of the four Tarcon
 - 4 -

vehicles, and their personal moneys paid were deposited into

Tarcon’s bank account.

The Tarcon shareholders discussed marketing the Granite

Street property for sale in early 2003. In February 2003, Brad

Cherry (Cherry), a commercial real estate broker with Keystone

Partners, L.L.C., was hired to act as an agent and adviser in

connection with leasing and/or a potential sale of the Granite

Street property or a sale of Tarcon stock. Almost one-half of

the building space and some parking lot space were already

rented. Tarcon entered into a listing agreement for lease and/or

sale with Keystone Partners on February 20, 2003.

In April and May 2003, multiple parties, including ProLogis,

sent letters of intent to purchase the Granite Street property to

Cherry. Other parties expressed an interest in purchasing

Tarcon’s stock.

In May 2003, Cherry learned of MidCoast Investments, Inc.

(including its affiliates MidCoast Credit Corp. and MidCoast

Acquisitions Corp., hereinafter referred to as MidCoast), as a

prospective purchaser of Tarcon’s stock. A MidCoast

representative sent a letter dated May 21, 2003, to Cherry that

stated:

MidCoast is interested in purchasing the stock of
certain C-corporations that have sold business assets
and/or real estate. In instances where a C-corporation
has sold assets for a gain, MidCoast may have an
interest in purchasing 100% of the stock from the
 - 5 -

shareholders for a price greater than the net value of
the corporation.

MidCoast pursues these acquisitions as an
effective way to grow our parent company’s core asset
recovery operations. It is important to note that
after we complete a stock acquisition, the target
company is not dissolved or consolidated, but is
reengineered into the asset recovery business and
becomes an income producer for us going forward. * * *

Cherry forwarded a MidCoast informational brochure and

confidentiality agreement with a letter dated May 27, 2003, to

Morelli. In his letter, Cherry noted:

it appears that this is something that they do often,
but also something in which I am definitely out of my
league. I would like to encourage you, when the time
is appropriate, to involve both your accountant and a
lawyer to help advise us through this transaction
should it move forward.

The brochure outlined purported benefits of undertaking a

transaction with MidCoast including:

P Shareholders sell stock of Company.
P Shareholders maximize net after-tax proceeds.
P MidCoast bridges gap between Shareholders’ desire to
sell stock and buyer’s desire to buy assets.
P Company maximizes sale of all assets (i.e., written-
off receivables, etc.).

* * * * * * *

P Should Company sell part or all of its assets to a
third party, MidCoast does not interfere with asset
sale negotiations or closing.
P Flexibility to include/exclude any remaining
assets/liabilities in the Company.
P Reduction of exposure to future claims, losses, and
litigation:
P MidCoast replaces Shareholders as owner of
Company.
 - 6 -

P MidCoast puts Company into asset recovery
business and operates Company on a go-forward
basis.
P Company is not dissolved, liquidated, or merged
into another Company.
P MidCoast causes the Company to satisfy its tax
and other liabilities.

Sale negotiations continued with multiple prospective

purchasers. Cherry communicated with Morelli regarding the

various offers, and Morelli then discussed terms of the offers

and developments with the other Tarcon shareholders.

On June 23, 2003, ProLogis submitted a revised letter of

intent with respect to purchasing the Granite Street property.

On June 30, 2003, two MidCoast representatives met with

Cherry and the Tarcon shareholders, along with their accountant

and attorney, in North Carolina. At the meeting, the MidCoast

representatives presented information similar to that in the

brochure and explained that MidCoast had undertaken a number of

transactions of this type. The representatives reiterated that

if MidCoast purchased Tarcon, Tarcon would continue to operate

under MidCoast’s ownership and that the 2003 Tarcon tax

liabilities would be satisfied.

After the meeting, on behalf of the Tarcon shareholders,

Morelli and Cherry negotiated with MidCoast regarding the Tarcon

stock purchase price. Morelli entered the negotiations with the

goal of obtaining a share purchase price of $2,800,000. MidCoast

proposed a purchase price based on a formula that applied a
 - 7 -

percentage to the outstanding calculated tax liabilities for the

current year. Thus, negotiations primarily focused on the

percentage applied to the tax liabilities to determine the share

purchase price.

The Tarcon shareholders decided that Tarcon should sell the

Granite Street property to ProLogis and the Tarcon stock to

MidCoast. Accordingly, on behalf of Tarcon, Morelli executed a

letter of intent dated July 7, 2003, to sell the Granite Street

property to ProLogis. On July 16, 2003, on behalf of Tarcon,

Morelli executed a letter of intent to sell the Tarcon stock to

MidCoast. The MidCoast letter of intent outlined that the share

purchase price was equal to Tarcon’s cash as of the share closing

less 56.25 percent of the local, State, and Federal corporate

income tax liabilities resulting to Tarcon for its current fiscal

year. MidCoast also agreed to reimburse the shareholders and

Tarcon for legal and accounting fees incurred in connection with

the share closing in an amount not to exceed $25,000.

MidCoast engaged the law offices of Womble, Carlyle,

Sandridge, and Rice (Womble) in Charlotte, North Carolina, to

assist with the Tarcon stock acquisition.

On or about July 30, 2003, Tarcon entered into an agreement

of purchase and sale with ProLogis for the Granite Street

property. Subsequently, the agreement was amended in September

and October 2003, establishing a reduced purchase price of
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$3,180,000 and extending the due diligence period. On October

30, 2003, the Granite Street property closing with ProLogis took

place, and Tarcon received net proceeds of $2,567,901.83.

As of October 31, 2003, after the Granite Street property

transaction, Tarcon had $3,091,955.54 cash in its bank accounts

and no tangible assets. Tarcon’s accountant prepared a pro forma

Form 1120, U.S. Corporation Income Tax Return, for Tarcon for

January 1 through October 31, 2003. The total gain from the sale

of the building and land, with dates acquired of January 1, 1978,

and dates sold of October 30, 2003, was calculated as $2,366,915.

The accountant calculated that as of October 31, 2003, Tarcon had

a Federal income tax liability of approximately $733,699 plus

State tax liabilities that resulted in a total of $881,627.74.

The accountant sent the prepared return to Stroupe and to the

Tarcon shareholders’ attorney on November 5, 2003. The Tarcon

shareholders’ attorney communicated with MidCoast representatives

and the Womble attorney handling the Tarcon stock transaction

regarding the Tarcon financial information prepared after the

Granite Street property sale, including the tax liabilities and

account balances as of October 31, 2003, MidCoast’s due diligence

progress, and anticipated closing procedures.

On November 13, 2003, the Tarcon shareholders entered into a

share purchase agreement with MidCoast that included a share

purchase price of $2,596,136.94. The purchase price was
 - 9 -

calculated by multiplying the Federal and State tax liabilities,

calculated through October 31, 2003, of $881,627.74 by 56.25

percent and deducting this amount, $495,915.60, from Tarcon’s

$3,092,054.54 cash ($3,091,955.54 plus interest earned in

November). MidCoast also agreed to reimburse Tarcon shareholders

for legal and accounting fees not to exceed $25,000, for a total

amount due from MidCoast of $2,621,136.94.

The share purchase agreement outlined that

After the Closing, the combined state and federal tax
liability of the Company [Tarcon] (the “Deferred Tax
Liability”) will be Eight Hundred Eighty-One Thousand
Six Hundred Twenty-Seven and 74/100 Dollars
($881,627.74). Other than the Deferred Tax Liability,
the Company has no Liabilities * * *

The agreement stated that MidCoast would “file all Federal

and state income tax returns related to the Deferred Tax

Liability on a timely basis, including extensions” and that

MidCoast’s

sole responsibility for preparation of tax returns and
payment of taxes arising prior to the Closing shall be
for filing the Company’s state and federal income tax
returns for the Company’s fiscal year ending December
31, 2003 and paying the federal and state income taxes,
if any, attributable thereto.

The sale of Tarcon stock to MidCoast was scheduled to close

on or before November 14, 2003. Before the closing, the Tarcon

shareholders officially resigned from their Tarcon positions,

gave their original Tarcon share certificates to their attorney,

and transferred the cash in the Tarcon accounts to their
 - 10 -

attorney’s escrow account. The Tarcon stock sale closing was to

take place at the Womble offices according to the share purchase

agreement.

On November 13, 2003, the Tarcon shareholders’ attorney hand

delivered the Tarcon share certificates and other original

closing documents to Womble’s office. Additionally, on November,

13, 2003, the Tarcon cash was transferred from the Tarcon

shareholders’ attorney’s escrow account to the Womble trust

account.

On November 13, 2003, MidCoast transferred $2,621,136.94 to

the Womble trust account according to the share purchase

agreement and the share purchase price outlined therein.

The executed closing statement, also dated November 13,

2003, outlined the deposits to the Womble trust account for the

Tarcon stock sale closing as (1) Tarcon’s cash balance of

$3,092,052.54, from the Tarcon shareholders’ attorney and (2)

$2,621,136.94 from MidCoast for the purchase price and

reimbursement amount, for a total of $5,713,189.48. The listed

disbursements from the Womble trust account related to the

closing were: (1) Total sale proceeds payable to sellers (the

Tarcon shareholders) of $2,596,136.94, with $649,034.23 payable

to each of Morelli and Naples and $649,034.24 payable to each of

Starnes and Stroupe; (2) legal and accounting fees reimbursement
 - 11 -

payable of $25,000; and (3) $3,092,052.54 wired to Tarcon’s

“post-closing” bank account, for a total of $5,713,189,48.

Following the closing statement, Womble’s disbursement

ledger identified a wire transfer of $3,092,052.54 to Tarcon

debited November 13, 2003. However, contrary to this

disbursement ledger and the closing statement, the closing

attorney at Womble signed a trust account wire transfer request

form to transfer funds from the Womble trust account to the

“MidCoast Credit Corp. Operating Account”. The Womble trust

account bank records show that this transfer occurred November

13, 2003. The Womble trust account disbursement information was

not a part of the closing documents or available to the Tarcon

shareholders at the closing.

On November 14, 2003, $3,092,052.54 was wired from the

MidCoast operating account to a new Tarcon account. The new

Tarcon account was at the same bank as MidCoast’s operating

account where the money was wired from the Womble trust account

on November 13, 2003.

After the Tarcon stock sale closing, the Tarcon shareholders

had no further communications with MidCoast or knowledge with

respect to Tarcon’s funds. The Tarcon shareholders reported

their respective Tarcon stock sale proceeds on their timely filed

2003 individual Federal income tax returns.
 - 12 -

On November 26, 2003, $3,092,052.54 was transferred out of

the new Tarcon account. A document prepared by the IRS

identified a Tarcon account with a different bank as receiving a

deposit of $3,092,052.54 before December 1, 2003. In November

2003, MidCoast sold the stock of Tarcon to Sequoia Capital,

L.L.C. (Sequoia), for $2,861,465.96.

The IRS received Tarcon’s Form 1120 for 2003 on July 26,

2004. The form reported a Nevada address for Tarcon. An

attached Form 4797, Sales of Business Property, identified two

entries under Part III, Gain From Disposition of Property Under

Sections 1245, 1250, 1252, 1254, and 1255, as (1) Building &

Improvements with a total gain of $1,557,315 and (2) Land with a

total gain of $1,009,483. Both reported dates acquired as

January 1, 1978, and dates sold as October 30, 2003.

The Form 4797 also reported ordinary losses of $1,950,000

for “DKK/USD BINA” as property held 1 year or less with an

acquired date of December 29, 2003, and a sold date of December

31, 2003. This resulted in a claimed loss of $392,685, after

deducting the building and improvements gain. The Tarcon 2003

Form 1120 also included a Schedule D, Capital Gains and Losses,

that reported the $1,009,483 gain from the land as a long-term

capital gain. Also reported on Schedule D was a short-term

capital loss of $1,010,000 for “INT RATE SWAP OPTI”, with an

acquired date of December 29, 2003, and a sold date of December
 - 13 -

31, 2003. The 2003 Tarcon tax return reported no tax due. On

the return, it was reported that Tarcon’s net assets per books at

the end of the tax year consisted of $132,320 cash.

On March 27, 2005, the IRS received Tarcon’s Form 1120 for

2004, which reported no tax due.

In 2005, the IRS undertook a promoter penalty examination of

MidCoast. The IRS also examined Tarcon and determined an income

tax deficiency of $855,237 for 2003. The IRS sent a notice of

deficiency dated April 11, 2007, to Tarcon at the Nevada address.

The deficiency primarily resulted from the IRS’ disallowing

losses claimed for the interest rate swap option sold on December

31, 2003, and DKK/USD BINA sold that same date. An attached

explanation stated:

It is determined that the short-term capital loss and
loss from the sale of the inflated basis assets are not
allowed. You have failed to prove that the disposition
of the inflated basis assets generated a bona fide
loss. In addition, it is determined that the inflated
basis assets transaction lacked economic substance.
Accordingly, taxable income is increased $2,959,483.00
for taxable year ending December 31, 2003.

In the notice, the IRS also determined an accuracy-related

penalty under section 6662(h) of $342,094.

Tarcon did not file a petition with this Court to contest

the IRS determinations outlined in the notice of deficiency. On

September 17, 2007, the IRS assessed the taxes and penalties

determined in the notice of deficiency, plus interest of

$298,310. Tarcon did not pay any portion of the assessment, and
 - 14 -

in March 2008 the IRS filed Federal tax liens with the Clerk of

Superior Court Union County, Monroe, North Carolina; the Clerk of

Superior Court Mecklenburg County, Charlotte, North Carolina; the

North Carolina Secretary of State, Raleigh, North Carolina; and

the County Recorder Clark County, Las Vegas, Nevada. Tarcon has

not paid any portion of the deficiency, penalty, or interest for

the underlying 2003 assessment.

In December 2008, the IRS sent notices of transferee

liability to each of the Tarcon shareholders. The notices

identified Tarcon as the transferor with an outstanding tax

liability of $855,237 and accuracy-related penalty under section

6662(h) of $342,094 for 2003. The notices identified the amount

each Tarcon shareholder received for the sale of Tarcon shares,

and stated that, as a transferee, each shareholder’s liability is

limited to that received amount (not including applicable

interest).

An attached notice of liability statement explained that the

IRS did not respect the “purported stock sale” by shareholders of

Tarcon to MidCoast and that “the stock sale and the transactions

involving the sale of Tarcon, Inc’s. assets to ProLogis * * * are

determined to be, in substance, a sale of the assets of Tarcon,

Inc., followed by a distribution by Tarcon, Inc. of its proceeds

to its shareholders”. The attachment further explained that the

transaction is “substantially similar to an Intermediary
 - 15 -

transaction shelter described in Notice 2001-16, 2001-1 C.B.

730,” or, alternatively, the transaction is in substance a sale

of the Tarcon assets to ProLogis followed by a redemption of

Tarcon stock owned by the Tarcon shareholders.

The IRS did not make adjustments to or issue a statutory

notice of deficiency with respect to any of the Tarcon

shareholders’ 2003 Federal income tax returns.

OPINION

Section 6901(a) provides that the liability, at law or in

equity, of a transferee of property “shall * * * be assessed,

paid, and collected in the same manner and subject to the same

provisions and limitations as in the case of the taxes with

respect to which the liabilities were incurred.” Section 6901(a)

does not independently impose tax liability upon a transferee but

provides a procedure through which the IRS may collect unpaid

taxes owed by the transferor of the assets from a transferee if

an independent basis exists under applicable State law or State

equity principles for holding the transferee liable for the

transferor’s debts. Commissioner v. Stern, 357 U.S. 39, 45

(1958); Hagaman v. Commissioner, 100 T.C. 180, 183 (1993). Thus,

State law determines the elements of liability, and section 6901

provides the remedy or procedure to be employed by the

Commissioner as the means of enforcing that liability. Ginsberg

v. Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), affg. 35 T.C.
 - 16 -

1148 (1961). The IRS bears the burden of proving that the

transferee is liable as a transferee of property of a taxpayer,

but not to prove that the taxpayer was liable for the tax. Sec.

6902(a); Rule 142(d).

The existence and extent of transferee liability is

determined by the law of the State where the transfer occurred--

in this case, North Carolina. See Commissioner v. Stern, supra

at 45. North Carolina has adopted the Uniform Fraudulent

Transfer Act (NCUFTA) that provides creditors with certain

remedies, including avoidance, when a debtor makes a fraudulent

transfer. If avoidance of a transfer is established, a creditor,

subject to some limitations, may obtain an attachment or other

provisional remedy against the asset transferred or other

property of the transferee. N.C. Gen. Stat. sec. 39-23.7(a)

(2003).

The NCUFTA provides that transfers to present and future

creditors are fraudulent when:

(a) A transfer made or obligation incurred by a
debtor is fraudulent as to a creditor, whether the
creditor’s claim arose before or after the transfer was
made or the obligation was incurred, if the debtor made
the transfer or incurred the obligation:

(1) With intent to hinder, delay, or defraud any
creditor of the debtor; or

(2) Without receiving a reasonably equivalent
value in exchange for the transfer or obligation, and
the debtor:
 - 17 -

a. 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; or

b. Intended to incur, or believed that the debtor
would incur, debts beyond the debtor’s ability to pay
as they became due.

Id. sec. 39-23.4(a).

Additionally, transfers are fraudulent to present creditors

according to the NCUFTA where:

(a) A transfer made or obligation incurred by a
debtor is fraudulent as to a creditor whose claim arose
before the transfer was made or the obligation was
incurred if the debtor made the transfer or incurred
the obligation without receiving a reasonably
equivalent value in exchange for the transfer or
obligation, and the debtor was insolvent at that time
or the debtor became insolvent as a result of the
transfer or obligation.

(b) A transfer made by a debtor is voidable as to
a creditor whose claim arose before the transfer was
made if the transfer was made to an insider for an
antecedent debt, the debtor was insolvent at that time,
and the insider had reasonable cause to believe that
the debtor was insolvent.

Id. sec. 39-23.5.

The creditor must establish the existence of a fraudulent

transfer to avoid the transfer. See Allman v. Wappler (In re

Cansorb Indus. Corp.), Adv. No. 07-6072 (Bankr. M.D.N.C. Nov. 20,

2009) (slip op. at 11). The standard of proof to be applied is

determined by State law. See, e.g., LR Dev. Co. LLC v.

Commissioner, T.C. Memo. 2010-203 (applying Illinois law to

determine the Commissioner’s standard of proof). It appears that
 - 18 -

North Carolina courts have not decided what standard applies in

NCUFTA cases.

Petitioners argue that under applicable North Carolina law,

respondent must establish by clear and convincing evidence, and

not merely by a preponderance of the evidence, the existence of a

fraudulent transfer for petitioners to be held liable as

transferees. Respondent contends that the preponderance of the

evidence standard should be applied because North Carolina courts

apply this standard to general fraud cases. We do not decide

what standard North Carolina courts might apply because,

considering the evidence and arguments herein, our application of

either standard renders the same results. Respondent argues that

the transfer should be avoided because it was fraudulent and that

NCUFTA sections 39-23.4(a)(1) and (2) and 39-23.5(a) are

satisfied.

NCUFTA Section 39-23.4(a)(2)

Under NCUFTA section 39-23.4(a)(2), a transfer made by a

debtor is fraudulent as to a creditor, whether the creditor’s

claim arose before or after the transfer was made, if the debtor

made the transfer without receiving a reasonably equivalent value

in exchange for the transfer and the debtor: (1) Was engaged or

was about to engage in a business or transaction for which the

remaining assets of the debtor were unreasonably small in

relation to the business or transaction; or (2) intended to
 - 19 -

incur, or believed that the debtor would incur, debts beyond the

debtor’s ability to pay as they became due.

The Uniform Fraudulent Transfer Act is a uniform act that

derived the phrase “reasonably equivalent value” from 11 U.S.C.

section 548 of the Federal Bankruptcy Code. See Leibowitz v.

Parkway Bank & Trust Co. (In re Image Worldwide, Ltd.), 139 F.3d

574, 577 (7th Cir. 1998). Reasonably equivalent value has been

construed to include both direct and indirect benefits to the

transferor, even if the benefit does not increase the

transferor’s net worth. See id. at 578; Miller v. First Bank,

696 S.E.2d 824, 827-830 (N.C. Ct. App. 2010). Reasonably

equivalent value is “a question of fact as to which the court is

to be given considerable latitude to make a determination by

considering all the facts and circumstances surrounding the

transaction in question.” Whitaker v. Mortg. Miracles, Inc. (In

re Summit Place, LLC), 298 Bankr. 62, 73 (Bankr. W.D.N.C. 2002).

What constitutes reasonably equivalent value is determined from

the standpoint of the debtor’s creditors. See Harman v. First

Am. Bank of Md. (In re Jeffrey Bigelow Design Grp., Inc.), 956

F.2d 479, 484 (4th Cir. 1992); Miller v. First Bank, supra at

827-830. The party claiming that the transaction was fraudulent

bears the burden of proving that no reasonably equivalent value

was received. See Cooper v. Ashley Commcns., Inc. (In re Morris

Commcns. NC, Inc.), 914 F.2d 458, 474-475 (4th Cir. 1990). Thus,
 - 20 -

respondent must show that Tarcon did not receive reasonably

equivalent value in exchange for the stock.

Respondent first argues that Tarcon received nothing because

the share purchase agreement between the Tarcon shareholders and

MidCoast did not specifically identify a money transfer to Tarcon

with respect to the sale. However, the share purchase agreement

identified the purchase price and closing date and stated that

the consummation of the purchase and sale of the Tarcon shares

would occur at the Womble offices. The closing statement,

prepared by Womble, outlined the disbursements that would occur,

including $3,092,052.54 to Tarcon, “wired to post-closing bank

account”. According to the share purchase agreement and closing

documents, MidCoast paid $2,596,136.94 for the Tarcon stock.

Thus, there was an infusion of cash into the transaction, not a

circular flow of cash.

Respondent next asserts that Tarcon did not receive any

consideration because the Womble closing attorney did not

disburse the moneys according to the closing statement. The

Womble attorney wired $3,092,054.54 to a MidCoast bank account,

from which it was transferred to the new Tarcon account the day

after closing. Although the record reveals this is accurate, it

does not show that Tarcon did not receive a “reasonably

equivalent value” for the stock. See Mancuso v. T. Ishida USA,

Inc. (In re Sullivan), 161 Bankr. 776, 781 (Bankr. N.D. Tex.
 - 21 -

1993) (noting that courts generally compare the value of the

property transferred with the value of the property received in

exchange for the transfer). The moneys were first wired to a

MidCoast account and MidCoast, as the new owner of Tarcon, did

not retain the funds or make them unavailable to Tarcon but

deposited those moneys in a newly established Tarcon account.

From respondent’s viewpoint, as creditor, although the funds were

transferred first to a MidCoast bank account, they were not made

unavailable to satisfy Tarcon’s liabilities, but were transferred

into a Tarcon account the following day.

Respondent argues alternatively that if the transfer of cash

to the new Tarcon account is regarded as part of the cashflows of

the Tarcon stock sale, then the subsequent transfer of the bulk

of these funds out of the Tarcon accounts within 3 weeks must

also be considered in determining whether Tarcon received

reasonably equivalent value. Respondent contends that Tarcon

never “meaningfully received” any moneys and cites United States

v. Tabor Court Realty Corp., 803 F.2d 1288, 1302-1303 (3d Cir.

1986), and Wieboldt Stores, Inc. v. Schottenstein, 94 Bankr. 488,

502-504 (N.D. Ill. 1988), as situations where “back-to-back fund

transfers” were collapsed as a single integrated cash transfer

under the Uniform Fraudulent Conveyances Acts (predecessor to the

Uniform Fraudulent Transfer Act) of the relevant States. Both

cases involved leveraged buyouts (LBOs).
 - 22 -

In Wieboldt Stores, Inc. v. Schottenstein, supra at 493, the

court explained:

The LBO reduced the assets available to Wieboldt’s
creditors. Wieboldt contends that, after the buyout
was complete, Wieboldt’s debt had increased by millions
of dollars, and the proceeds made available by the LBO
lenders was paid out to Wieboldt’s then existing
shareholders and did not accrue to the benefit of the
corporation. Wieboldt’s alleged insolvency after the
LBO left Wieboldt with insufficient unencumbered assets
to sustain its business and ensure payment to its
unsecured creditors. * * *

In Wieboldt, the court concluded that the various LBO transfers

should be collapsed into one transaction after reviewing the

knowledge and intent of the parties involved in the transaction.

In United States v. Tabor Court Realty Corp., supra at 1302-

1304, the court held that, when a series of transactions were

part of one integrated transaction, courts may look beyond the

exchange of funds and collapse the individual transactions of an

LBO and then consider the net effect on the creditors. See also

Liquidation Trust of Hechinger Inv. Co. of Del. v. Fleet Retail

Fin. Grp., 327 Bankr. 537, 546-547 (D. Del. 2005), affd. 278 Fed.

Appx. 125 (3d Cir. 2008). Courts with cases appealable to the

Court of Appeals for the Third Circuit have applied three factors

to determine whether to collapse multiple transactions: (1)

Whether all of the parties involved had knowledge of the multiple

transactions; (2) whether each transaction would have occurred on

its own, and (3) whether each transaction was dependent or

conditioned on the others. See Mervyn’s LLC v. Lubert-Adler Grp.
 - 23 -

IV, LLC, 426 Bankr. 488, 497-498 (D. Del. 2010); Liquidation

Trust of Hechinger Inv. Co. of Del. v. Fleet Retail Fin. Grp.,

supra at 546-547. Respondent has not addressed factors two and

three, above. In determining whether to collapse multiple

transactions, another court stated that the party arguing that

the transaction should be avoided must prove that the multiple

transactions were linked and that the purported transferee had

“‘actual or constructive knowledge of the entire scheme’” that

renders the purported transferee’s exchange with the debtor

fraudulent. See Sullivan v. Messer (In re Corcoran), 246 Bankr.

152, 160 (E.D.N.Y. 2000) (quoting and citing HBE Leasing Corp. v.

Frank, 48 F.3d 623, 635, 636 n.9 (2d Cir. 1995)).

Some courts have collapsed transactions in contexts other

than LBOs. See, e.g., Official Comm. of Unsecured Creditors of

Sunbeam Corp. v. Morgan Stanley & Co., 284 Bankr. 355, 370-371

(Bankr. S.D.N.Y. 2002); In re Best Prods. Co., 157 Bankr. 222,

229-230 (Bankr. S.D.N.Y. 1993) (collapsing sublease between

subsidiary and parent corporation which was used as mere

financing vehicle and treating loan as having been made directly

to parent corporation). “Where a transfer is actually ‘only a

step in a general plan,’ an evaluation is made of the entire plan

and its overall implications.” Official Comm. of Unsecured

Creditors of Sunbeam Corp. v. Morgan Stanley & Co., supra at 370

(quoting Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.
 - 24 -

1993)). To render the initial transferee’s exchange with a

debtor fraudulent, that transferee must have had either actual or

constructive knowledge of the entire scheme. See HBE Leasing

Corp. v. Frank, supra at 635; Official Comm. of Unsecured

Creditors of Sunbeam Corp. v. Morgan Stanley & Co., supra at 370-

371.

In all contexts, courts generally review whether all of the

parties involved had knowledge of the multiple transactions. The

evidence does not establish that the Tarcon shareholders had

actual knowledge of Tarcon’s postclosing activities.

Constructive knowledge may be found where the initial

transferee became aware of circumstances that should have led to

further inquiry into the circumstances of the transaction, but no

inquiry was made. See HBE Leasing Corp. v. Frank, supra at 636.

MidCoast represented to the Tarcon shareholders that Tarcon would

continue to exist after the stock sale and would engage in the

asset recovery business. Further inquiry by the Tarcon

shareholders, who were also officers and directors of Tarcon, was

likely warranted considering that they ultimately received

proceeds from the sale of their Tarcon stock that exceeded the

Tarcon cash on hand, less the calculated tax liabilities as of

October 31, 2003. The Tarcon shareholders failed to do so.

However, respondent bears the burden of proof. Respondent’s

contention that the Tarcon shareholders “could not have believed
 - 25 -

MidCoast planned to generate a profit with Tarcon in that manner”

following the closing of the Tarcon stock sale is insufficient to

support a finding that the Tarcon shareholders had constructive

knowledge of the entire “scheme”, including the sale of Tarcon to

Sequoia and Sequoia’s subsequent purchase and sale of “inflated

basis assets” to purportedly generate losses for Tarcon. Thus,

we do not collapse the transactions to determine whether Tarcon

received a reasonably equivalent value.

With respect to the stock sale transaction, the Tarcon

shareholders received a total of $2,596,136 for the Tarcon

shares, and $3,092,052 was deposited into the new Tarcon account

the day after the stock sale closing. Tarcon also retained the

outstanding Federal and State tax liabilities totaling

$881,627.74, calculated as of October 31, 2003. Thus, the

$3,092,052 cash in the new Tarcon account after the stock closing

was sufficient to pay these outstanding calculated liabilities.

Nothing in the record shows that Tarcon had value, or not, beyond

the cash and liabilities transferred. Thus, we cannot conclude

that Tarcon did not receive a reasonably equivalent value. See

generally Cooper v. Ashley Commcns., Inc. (In re Morris Commcns.

NC, Inc.), 914 F.2d at 466 (“‘The critical time is when the

transfer is “made.” Neither subsequent depreciation in nor

appreciation in value of the consideration affects the value

question whether reasonable equivalent value was given.’”
 - 26 -

(quoting Collier on Bankruptcy, par. 548.09, at 116 (15th ed.

1984)).

NCUFTA Section 39-23.4(a)(1)

A transfer made or obligation incurred by a debtor is

fraudulent as to a creditor, whether the creditor’s claim arose

before or after the transfer was made or the obligation was

incurred, if the debtor made the transfer or incurred the

obligation with intent to hinder, delay, or defraud any creditor

of the debtor. N.C. Gen. Stat. sec. 39-23.4(a)(1). In

determining intent under this section, consideration may be

given, among other factors, to whether:

(1) The transfer or obligation was to an insider;

(2) The debtor retained possession or control of the
property transferred after the transfer;

(3) The transfer or obligation was disclosed or
concealed;

(4) Before the transfer was made or obligation was
incurred, the debtor had been sued or threatened with
suit;

(5) The transfer was of substantially all the debtor’s
assets;

(6) The debtor absconded;

(7) The debtor removed or concealed assets;

(8) 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;
 - 27 -

(9) The debtor was insolvent or became insolvent
shortly after the transfer was made or the obligation
was incurred;

(10) The transfer occurred shortly before or shortly
after a substantial debt was incurred;

(11) The debtor transferred the essential assets of the
business to a lienor who transferred the assets to an
insider of the debtor;

(12) The debtor made the transfer or incurred the
obligation without receiving a reasonably equivalent
value in exchange for the transfer or obligation, and
the debtor reasonably should have believed that the
debtor would incur debts beyond the debtor’s ability to
pay as they became due; and

(13) The debtor transferred the assets in the course of
legitimate estate or tax planning.

Id. sec. 39-23.4(b).

Proof of the existence of any one or more of these factors

may be relevant evidence as to the debtor’s actual intent but

does not create a presumption that the debtor has made a

fraudulent transfer or incurred a fraudulent obligation. See id.

sec. 39-23.4 Official Comment (5); Rentenbach Constructors, Inc.

v. C.M. Pship., 639 S.E.2d 16, 18 (N.C. Ct. App. 2007) (holding

that although Official Comment to a section of North Carolina’s

Uniform Commercial Code was not binding because it was not

enacted into law, it could be used to ascertain legislative

intent).

To prevail under this section of the NCUFTA, respondent must

show that the transfer was made “With intent to hinder, delay, or
 - 28 -

defraud” creditors. Respondent contends that factors 1, 5, 7, 8,

9, 10, and 12 of NCUFTA section 39-23.4(b) are present.

Factor 1. The Transfer or Obligation Was to an Insider.

The Tarcon shareholders were insiders as officers,

directors, and persons in control of Tarcon before the sale of

Tarcon stock to MidCoast. See N.C. Gen. Stat. sec. 39-23.1(7)(b)

(2003). However, without collapsing the transactions, respondent

has not shown that the transfers to the Tarcon shareholders were

from Tarcon, not MidCoast.

Factor 5. The Transfer Was of Substantially All the
Debtor’s Assets.

Respondent again contends that the Tarcon sale to MidCoast

should be disregarded and argues that the Tarcon cash constituted

substantially all of Tarcon’s assets. Because respondent failed

to show that the transaction should be collapsed under North

Carolina law, this factor does not support a finding of

fraudulent intent.

Factor 7. The Debtor Removed or Concealed Assets.

Respondent contends that the Tarcon shareholders removed the

Tarcon cash from the Federal and State tax authorities’ reach by

transferring it to the Womble account and then receiving it into

their own bank accounts. We do not find this persuasive because

after the stock sale closing, cash exceeding the calculated

outstanding tax liabilities was deposited into a Tarcon

bank account.
 - 29 -

Factor 8. 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.

Respondent again makes the argument that Tarcon received no

consideration in exchange for the transfer of the Tarcon cash out

of its bank accounts. We conclude, above, that this argument

fails.

Factor 9. The Debtor Was Insolvent or Became Insolvent
Shortly After the Transfer Was Made or the
Obligation Was Incurred.

“A debtor is insolvent if the sum of the debtor’s debts is

greater than all of the debtor’s assets at a fair valuation.”

N.C. Gen. Stat. sec. 39-23.2(a) (2003). Additionally, a debtor

is presumed insolvent if the debtor is “generally not paying the

debtor’s debts as they become due”. Id. sec. 39-23.2(b).

After the transfer, moneys in the Tarcon account exceeded

the outstanding Federal and State tax liabilities, calculated as

of October 31, 2003. Tarcon’s 2003 Form 1120 reported $132,320

in net assets at the end of the tax year. Respondent has not

provided other evidence to show that Tarcon was insolvent or

became insolvent shortly after the transfer date.

Factor 10. The Transfer Occurred Shortly Before or Shortly
After a Substantial Debt Was Incurred.

Arguably, a transfer occurred shortly after Tarcon incurred

the State and Federal tax liabilities as calculated for the asset

sale in 2003. However, respondent has not shown that Tarcon
 - 30 -

transferred funds to the Tarcon shareholders leaving Tarcon with

moneys insufficient to satisfy the tax liabilities, calculated as

of October 31, 2003.

Factor 12. The Debtor Made the Transfer or Incurred the
Obligation Without Receiving a Reasonably
Equivalent Value in Exchange for the Transfer or
Obligation, and the Debtor Reasonably Should
Have Believed that the Debtor Would Incur Debts
Beyond the Debtor’s Ability to Pay as They
Became Due.

As discussed above, respondent has not shown that a

reasonably equivalent value was not received.

After weighing the factors, and recognizing that no one

factor is dispositive, we conclude that respondent has not shown

that a transfer was made with intent to hinder, delay, or defraud

respondent.

NCUFTA Section 39-23.5(a)

A transfer made or obligation incurred by a debtor is

fraudulent as to a creditor whose claim arose before the transfer

was made or the obligation was incurred if the debtor made the

transfer or incurred the obligation without receiving a

reasonably equivalent value in exchange for the transfer or

obligation and the debtor was insolvent at that time or the

debtor became insolvent as a result of the transfer or

obligation. N.C. Gen. Stat. sec. 39-23.5(a).

Respondent is required to show that Tarcon made a transfer

without receiving reasonably equivalent value in exchange for the
 - 31 -

transfer and that Tarcon was insolvent at that time or became

insolvent as a result of the transfer. See id. As discussed

above with respect to the requirement of NCUFTA section 39-

23.4(a)(2), respondent has not shown that Tarcon made a transfer

without receiving reasonably equivalent value in exchange. Thus,

we conclude that the requirements of NCUFTA section 39-23.5(a)

have not been satisfied.

Liability Under North Carolina’s Trust Fund Doctrine

Respondent argues that petitioners are liable as Tarcon’s

transferees under the North Carolina trust fund doctrine.

Respondent asserts that the four elements of North Carolina’s

trust fund doctrine are:

(1) a transferee receives assets from a corporation,
(2) the transferee pays inadequate or no consideration
for those assets, (3) the transferring corporation is
insolvent or rendered insolvent by the transfer, and
(4) the transferee knew or should have known of the
existence of the transferor’s liabilities.

In Snyder v. Freeman, 266 S.E.2d 593, 597-601 (N.C. 1980),

the court explained that

Directors of a corporation are trustees of property of
the corporation for the benefit of the corporate
creditors as well as shareholders. It is their duty to
administer the trust * * * for the mutual benefit of
all parties interested * * *. North Carolina adheres
to the “trust fund doctrine,” which means, in a sense,
that the assets of a corporation are regarded as a
trust fund, and the officers and directors occupy a
fiduciary position in respect to stockholders and
creditors, which charges them with the preservation and
proper distribution of those assets. * * * [Citations
and quotation marks omitted.]
 - 32 -

However, directors do not owe a fiduciary duty to creditors of a

corporation, except where circumstances exist “amounting to a

‘winding-up’ or dissolution of the corporation. Balance sheet

insolvency, absent such circumstances, is insufficient to give

rise to breach of a fiduciary duty to creditors of a

corporation.” Whitley v. Carolina Clinic, Inc., 455 S.E.2d 896,

899-900 (N.C. Ct. App. 1995).

We conclude above that respondent has not shown that Tarcon

was insolvent, and respondent has not presented evidence

regarding circumstances that existed amounting to a winding up or

dissolution of Tarcon aside from claiming that Tarcon no longer

had a business activity. Without a determination that

circumstances exist amounting to a winding up or dissolution, the

Tarcon shareholders, as directors, do not owe a fiduciary duty to

respondent under North Carolina law. Thus, we need not address

the trust fund elements as outlined by respondent, and do not

address whether those elements are indeed an accurate

distillation according to North Carolina law. Respondent has

failed to carry his burden of establishing that petitioners are

liable under the trust fund doctrine according to North Carolina

law.

We conclude that respondent has not established that a

fraudulent transfer occurred under North Carolina law or that the

North Carolina trust fund doctrine applies. We have considered
 - 33 -

all arguments of the parties. Those not addressed are

irrelevant, without merit, or moot.

To reflect the foregoing,

Decisions will be entered

for petitioners.