Tuesday, September 7, 2010

California judge rules CEO's bonus was a constructive fraudulent transfer

Judge Claudia Wilken ruled on Wednesday that a $450,000 bonus Forrest I. Nolin received for being CEO of Advance Building Maintenance, Inc. was a "constructive fraudulent transfer."  This allowed the judge to enter a judgement against Mr. Nolin for $450,000 in favor of the union benefits fund which claims it was due the money in order to pay benefits to Advance's former employees.

According to court documents, the California Service Employees Health and Welfare Trust Fund (the "Trust") exists to provide benefits for Union members pursuant to Collective Bargaining Agreements (CBAs).  Advance had a CBA with the Local 1877 of the Service Employees International Union (SEIU) which provided certain benefits to be funded by Advance by payments to the Trust.  In May 2006, the Trust sued Advance stating that it had failed to adequately fund the Trust in violation various state and federal laws including the Employee Retirement Income Security Act of 1974 (ERISA).

In June 2007, Advance made a $450,000 payment to Nolin, "in exchange for 35 years of good management services."  On November 1, 2007, Judge Wilken granted judgment to the Trust in the amount of $647,382.02.  On January 9, 2008 Advance filed a voluntary dissolution proceeding, where Nolin via H. L. Hogg, Inc. would buy the assets of the company for $300,000.  Apparently, Nolin hoped this would make the $647k judgment against noncollectable by virtue of destroying the entity that owed the debt, Advance.

While it's generally true that corporate debts expire when the corporation expires there are some exceptions.  Here, the Trust offered two theories: first, that the $450k bonus was a fraudulent transfer which Nolin completed only to remove that money from creditors - such as the trust.  Second, that H.L. Hogg is the successor corporation of Advance and it should be liable for Advance's debts.  The court agreed with the trust on both points.

The court explained that under the Uniform Fraudulent Transfer Act, the plaintiff must show that the company did not receive "reasonably equivalent value" for the transfer in order for the court to void the transfer.  Here, the court cited correspondence from Advance's attorney who stated in April 2007, "Advance is now fighting for its survival." The court did not believe that Nolin had earned the money given his knowledge of Advance's precarious financial situation.  It voided the transfer and ordered that Nolin pay the Trust $450k.

Mr. Nolin's problems did not end there.  On Friday, the court entered a certificate of contempt stating that he had not adequately responded to discovery requests and that he must explain to the court why he has failed to do so or be held in civil contempt.

The case is Cal. Serv. Emples. Health & Welfare Trust Fund v. Advance Bldg. Maint. No. C 06-3078.  The summary judgment opinion and the contempt certificate are below the jump.

Here is the Motion for Summary Judgment:
CSEHW Trust Fund v. Advance Building Maintenance MSJ
Here is the Contempt Certificate:
CSEHW Trust Fund v. Advance Building Maintenance Contempt

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