Case jms Doc 78 Filed 04/10/12 Entered 04/10/12 11:59:10 Desc Main Document Page 1 of 19

Transcription

1 Document Page 1 of 19 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF KENTUCKY ASHLAND DIVISION IN RE: CASE NO LARRY CONRAD ADDINGTON CHAPTER 11 DEBTOR JOINDER TO UNITED STATES TRUSTEE S MOTION TO CONVERT CASE TO CHAPTER 7 OR IN THE ALTERNATIVE TO APPOINT A CHAPTER 11 TRUSTEE Comes the Liquidating Trustee of the App Fuels Creditors Trust (the App Fuels Trustee ), by counsel, and hereby files this joinder to the United States Trustee s (the UST ) Motion to Convert Case to Chapter 7 or in the Alternative to Appoint a Chapter 11 Trustee (the UST Motion ) [ECF No. 67]. While the App Fuels Trustee agrees with the UST that Larry Conrad Addington (the Debtor or Mr. Addington ) should not remain in possession of his bankruptcy estate, the App Fuels Trustee respectfully submits that appointment of a Chapter 11 trustee, as opposed to conversion of this case to a Chapter 7, is clearly in the best interest of creditors of the Debtor. BACKGROUND 1. On January 26, 2012, the Debtor filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code ). 2. On February 29, 2012, the Debtor s first meeting of creditors was held pursuant to 11 U.S.C A transcript of the Debtor s first meeting of creditors (the 341 Meeting ) is attached hereto as Exhibit A. 3. On March 28, 2012, the UST filed the UST Motion.

2 Document Page 2 of Based upon the investigation undertaken in the Appalachian Fuels, LLC, bankruptcy case, and the testimony of the Mr. Addington at the 341 Meeting, it is clear that Mr. Addington should not continue in possession of his Estate. At the same time, conditions exist with respect to Mr. Addington s bankruptcy that render the Chapter 11 process, and a Chapter 11 trustee, more appropriate than conversion of the matter to a Chapter 7 proceeding. Appointment of a Chapter 11 trustee is clearly in the best interest of Mr. Addington s creditors. ARGUMENT 5. Chapter 11 is designed to allow a debtor in possession to retain management and control of the debtor s business operations. See In re Eurospark Indus., Inc., 424 B.R. 621, 627 (Bankr. E.D.N.Y. 2010). Appointment of a Chapter 11 trustee is governed by 11 U.S.C. 1104(a). It provides: (a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee (1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; (2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor In the instant proceeding, cause is present and appointment of a Chapter 11 trustee is in the best interest of creditors due to Mr. Addington s irresolvable conflicts of interest that prohibit him from exercising his fiduciary duties. I. Appointment of a Chapter 11 Trustee is Appropriate under 11 U.S.C. 1104(a)(2) 6. Section 1104(a)(2) of the Bankruptcy Code uses a flexible standard to provide the Court with discretion to appoint a trustee if such appointment is in the interests of creditors. 2

3 Document Page 3 of U.S.C. 1104(a)(2); In re National Staffing Services, LLC, 338 B.R. 31, 33 (Bankr. N.D. Ohio 2005) ( Unlike 1104(a)(1), which provides for the mandatory appointment of a trustee upon a specific finding of cause, 1104(a)(2) envisions a flexible standard. It affords the bankruptcy court the discretion to appoint a trustee when to do so would serve the parties' and estate's interests. This is necessarily an equitable approach. ) (internal citations omitted); In re Nartron Corp., 330 B.R. 573, 592 (Bankr. W.D. Mich. 2005) ( Subsection (a)(2) creates a flexible standard which allows for appointment of a trustee, even though cause may not exist, when so doing would serve the interests of creditors and the estate. Factors which justify appointment of a trustee under this subsection are highly diverse and in essence reflect the practical reality that a trustee is needed to manage the debtor's affairs. ); In re The 1031 Tax Group, LLC, 374 B.R. 78, (Bankr. S.D.N.Y. 2007) ( Section 1104(a)(2) envisions a flexible standard and gives the district court discretion to appoint a trustee when doing so would serve the parties' and estate's interests. ) (further citations omitted). 7. This Court is not required to find fault on the part of the Debtor before appointing a Chapter 11 trustee. Eurospark, 424 B.R. at 627 (further citations omitted). When deciding whether relief under 1104(a)(2) is warranted, a court will consider: (i) the trustworthiness of the debtor; (ii) the debtor in possession's past and present performance and prospects for the debtor's rehabilitation; (iii) the confidence-or lack thereof-of the business community and of creditors in present management; and (iv) the benefits derived by the appointment of a trustee, balanced against the cost of the appointment. Id. The factors are amorphous, diverse, and necessarily involve a great deal of judicial discretion. In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518, 527, n.11 (Bankr. E.D.N.Y. 1989). The standard under 1104(a)(2) is flexible and [u]ltimately, the court should consider the practical realities and necessities of the case. Eurospark, 424 B.R. at 627 (further citations omitted). 3

4 Document Page 4 of 19 A. Appointment of a Chapter 11 trustee is necessary because the Debtor is unable to fulfill his fiduciary duties 8. Appointment of a Chapter 11 trustee is warranted under 1104(a)(2) because the interests of Mr. Addington are not aligned with his Estate s interest. It is well established that courts may appoint a chapter 11 trustee where a debtor in possession's management has a conflict of interest that interferes with its ability to fulfill its fiduciary duties to the estate. Eurospark Indus., 424 B.R. at 629 citing In re Euro Am. Lodging Corp., 365 B.R. 421, 428 (Bankr. S.D.N.Y. 2007) ( A chapter 11 debtor and its managers owe fiduciary duties to the estate. ); In re Bowman, 181 B.R. 836, 843 (Bankr.D.Md.1995) ( The presence of a conflict on the facts of this case compels the court to remove a debtor-in-possession from administration of the case. ). 9. Whether a debtor in possession has the ability to fulfill its duties of care to protect the assets of the estate, duty of loyalty, and duty of impartiality are important to the analysis of whether a Chapter 11 trustee should be appointed. In re Citizens Corp., 2012 WL , *9 (Bankr. M.D. Tenn. Feb. 27, 2012) citing In re Celeritas Tech., LLC, 446 B.R. 514, 520 (Bankr.D.Kan.2011) (citations omitted). The willingness of Congress to leave a debtor in possession of its assets is premised on the expectation that current management can be depended upon to carry out the fiduciary responsibilities of a trustee. V. Savino., 99 B.R. at 526; quoting Commodity Futures Trading Comm n v. Weintraub, 471 U.S. 343, 355 (1985). A debtor in possession owes fiduciary duties to creditors of its bankruptcy estate including a duty of care to protect the assets, a duty of loyalty and a duty of impartiality. Eurospark Indus., 424 B.R. at 627. To fulfill its duty of loyalty, a debtor in possession must avoid self-dealing, conflicts of interest and the appearance of impropriety. Id. 10. In this case, a Chapter 11 trustee must be appointed because Mr. Addington suffers from material and inherent conflicts of interest, he has shown that he is unable to effectively address those conflicts, and he is not a trustworthy fiduciary. In re Ridgemour Meyer 4

5 Document Page 5 of 19 Properties, LLC, 413 B.R. 101, 113 (Bankr. S.D.N.Y. 2008) 1. In Ridgemour, the Court found that appointment of a Chapter 11 trustee was necessary because the debtor s response to questions under oath exhibited an unwillingness to understand or take actions with which he disagreed; the debtor oversaw the majority of transfers during the year preceding the debtor s petition; and the debtor could not be expected to investigate, and if appropriate, sue to recover fraudulent transfers from close acquaintances. Ridgemour, 413 B.R. at Mr. Addington is in a similar situation. At the 341 Meeting, Mr. Addington stated that a fraudulent transfer action against his brothers was totally ludicrous, even though he had yet to read the complaint. [341 Meeting, p. 71, lines ] Mr. Addington has shown that he will not make decisions regarding the pursuit of litigation against his family on an informed basis, in good faith, and in the best interest of his estate, and as such, cannot remain in possession of his estate. See also Nartron, 330 B.R. at 593 ( As debtor in possession and principal of the corporation, Rautiola owed Nartron and its creditors the highest duties of care and loyalty. Rautiola's actions must be made on an informed basis, in good faith, and in the honest belief that the action taken was in the best interest of the Company. Business judgments will be respected. However, principals that derive personal financial benefit from a transaction or fail to inform themselves of all material information reasonably available to them, will not receive that protection. ) 1 A chapter 11 debtor and its managers owe fiduciary duties to the estate. Hirsch v. Penn. Textile Corp., Inc. (In re Centennial Textiles, Inc.), 227 B.R. 606, 612 (Bankr.S.D.N.Y.1998). An independent trustee should be appointed under 1104(a)(2) when they suffer from material conflicts of interest, and cannot be counted on to conduct independent investigations of questionable transactions in which they were involved. E.g., In re PRS Ins. Group, Inc., 274 B.R. 381, 389 (Bankr.D.Del.2001) (appointment of trustee appropriate under 1104(a)(2) where causes of action against insiders are a significant asset of this estate and there are no business operations requiring current management); In re Microwave Prods. of Am., Inc., 102 B.R. 666, 676 (Bankr.W.D.Tenn.1989) (chapter 11 trustee appointed where debtor was not in a strong posture to pursue possible claims due to conflicts of interest and fraudulent transfers, and a trustee would likely be able to investigate claims that could result in additional sums of money coming into the estate ); In re L.S. Good & Co., 8 B.R. 312, 315 (Bankr.W.Va.1980) (appointing trustee under 1104(a) (2) where [t]he magnitude of the number of inter-company transactions places current management of [the debtor] in a position of having grave potential conflicts of interest and the presumption arises that the current management of [the debtor] will be unable to make the impartial investigations and decisions demanded in evaluating and pursuing inter-company claims on behalf of [the debtor]. 5

6 Document Page 6 of Additionally, Mr. Addington oversaw each of the questioned transfers to insiders and family members. The transfers, as set forth on question number 18 of the Debtor s Schedule B [ECF No. 1, p ] include numerous loans, mostly to insiders of Mr. Addington: Ultra Energy/Carbon Fuels Properties 2 Midwestern BioFuels, LLC Robert Addington 3 Fountain Investments, LLC 4 $4,000, Loan $0 (on the basis that the $5,000,000 loan is uncollectible) $1,000, Loan $96, Note Mining Services, LLC 5 $130,000 Red Bush Coal, LLC 6 Danny Henry Beth Harper 7 $500,000 Note $19,000 Loan (uncollectible) $148,000 Loan (uncollectible) 13. Additionally, the Debtor listed several claims on question 21 of the Debtor s Schedule B [ECF No. 1, p ]. The majority of the claims are against entities in which the Debtor held or holds an ownership interest. [See Debtor s Schedule B, question 13 [ECF No. 1, p ] for a list of entities in which the Debtor holds an ownership interest]. The creditors of 2 The Debtor owns a 36% interest in Ultra Energy Resources, LLC ( Ultra ), which owns 100% of Carbon Fuel Properties, LLC [341 Meeting, p. 11, lines 14-19]. The owners of Ultra are Robert, Bruce, and Stephen Addington, brothers of the Debtor [341 Meeting, p. 13, lines 3-20]. 3 Robert Addington is the brother of the Mr. Addington. Mr. Addington does not remember when he loaned his brother $1,000,000 and there is no note to evidence the debt. [341 Meeting, p. 55, lines 5-25; p. 56, lines 1-12]. 4 Fountain Investments, LLC owns an interest in Energy Coal Resources, LLC [341 Meeting, p. 24, lines 3-13], as does Mr. Addington. 5 Amount is comprised of three notes: 6/15/2010 Note of $65,000; 5/19/2010 Note of $35,000; and May 4, 2010 Note of $30,000. Mr. Addington has a current consulting agreement with Mining Services, LLC and Mining Services, LLC provides Mr. Addington with a 2011 Escalade and auto insurance. [Supplement to Schedule I, ECF No. 1, p. 51]. Of course, Mr. Addington cannot be expected to bring a claim against a party that he is currently providing consulting services to and one on which he relies to provide his transportation. 6 Pursuant to the Kentucky Secretary of State s website, Red Bush Coal, LLC s registered agent is Erik Addington. The member of Red Bush Coal, LLC is EBA Development, LLC. Both Erik Addington and EBA Development, LLC are defendants in Adv. No styled Appalachian Fuels, LLC et al. v. Larry Addington et al., which is pending before this Court. 7 The Debtor testified that Beth Harper is his niece [341 Meeting, p. 26, lines 19-25; p. 27, lines 1-12] and has determined that the loan is uncollectible, even though the business is still operating. 6

7 Document Page 7 of 19 Mr. Addington s estate must have an unconflicted fiduciary to represent their interest and Mr. Addington cannot avoid the inherent conflict caused by his divided loyalties. Euro-American Lodging, 365 B.R. at The Debtor s bankruptcy schedules are rife with insider transactions and claims that must be investigated. Of course, Mr. Addington as Debtor cannot be expected to pursue such claims with the best interest of the estate in mind. Other courts have found the appointment of a trustee appropriate in analogous circumstances. Eurospark, 424 B.R. at citing In re Patman Drilling Int'l, Inc., No , 2008 WL , at *6 (N.D. Tex. Mar. 14, 2008) (appointment of trustee pursuant to 1104(a)(2) was appropriate because management held conflicts of interest, the majority of creditors supported the appointment of a trustee, and the creditor body lost confidence in the debtor's management); Euro Am. Lodging, 365 B.R. at (appointment of a chapter 11 trustee was warranted under 1104(a)(2) for a number of reasons, including management's conflict of interests and the creditors' loss of confidence in management); In re Cajun Elec. Power Coop., Inc., 191 B.R. 659, 663 (M.D. La. 1995) (appointing a chapter 11 trustee pursuant to 1104(a)(2) because management held conflicts of interest and it was absolutely necessary... that a neutral trustee be appointed to preside in an objective and impartial manner to bring this case to a swift and successful conclusion ); In re Nautilus of N.M., Inc., 83 B.R. 784, (Bankr. D. N.M. 1988) (appointing a chapter 11 trustee under 1104(a)(2) because management held conflicts of interest and freely admitted he would protect his own interests first ); In re L.S. Good & Co., 8 B.R. 312, 315 (Bankr. N.D. W.Va. 1980) (appointment of a chapter 11 trustee pursuant to 1104(a)(2) was warranted because there was no prospect of reorganization and because, under the facts of that case, current management... will be unable to make the impartial investigations and decisions demanded in evaluating and pursuing... claims ). 7

8 Document Page 8 of Collection efforts by Mr. Addington prior to the commencement of his bankruptcy do not show a vigorous attempt to collect debts and pursue claims against those to whom he holds close ties. The creditors of this estate need leadership free from actual or perceived conflicts. Although Mr. Addington testified at the 341 Meeting that he would pursue causes of action against family members, a well coached debtor cannot simply provide lip service to overcome the fact that he has done nothing to collect these debts and has irresolvable conflicts of interest. Citizens Corp WL at *8 ( An independent person must review many of the transactions involving the debtor, Mr. Lowery, and FiData. Mr. Lowery simply has too much at stake to act in the best interest of the debtor. Mr. Lowery has now disclosed that he owes the debtor almost $29,000,000. There are other various insiders and related entities that owe significant amounts to the debtor as well as many unexplained transfers out of the debtor and FiData. Moreover, Mr. Lowery testified that he should be able to reduce his personal debt by the transfer of his stock in Peoples State Bank and Farmers Bank to TCB that was part of the DPC agreement. An independent analysis of many issues is required. ) 16. An additional reason for appointment of a Chapter 11 trustee is due to a lack of trustworthiness and confidence in Mr. Addington to properly administer his estate. Eurospark, 424 B.R. at ( Also weighing in favor of the appointment of a Chapter 11 trustee is the lack of trust in Mr. Spiegel by the parties with the greatest economic stake in this case, i.e., Fleet and the administrative creditors, and their loss of confidence in Mr. Spiegel's ability to administer the estate's remaining asset the claims against the Insurance Companies in the best interests of the estate. Fleet and the administrative creditors all support the settlement and the UST's motion. While this is only one of the factors present in this case, acrimony between the creditors and the debtor's management, standing alone, has been found to be a basis to appoint a Chapter 11 trustee under 1104(a)(2). See Marvel Entm't Group, Inc., 140 F.3d 463, 8

9 Document Page 9 of (3d Cir.1998) ( The level of acrimony found to exist in this case certainly makes the appointment of a trustee in the best interests of the parties and the estate. ). Based on Mr. Addington s past history of aiding in, or benefiting from, fraudulent transfers to the detriment of his creditors, the App Fuels Trustee, for one, has zero trust or confidence in the ability of Mr. Addington to administer his estate in the best interest of his creditors. II. Appointment of a Chapter 11 Trustee is Appropriate under 11 U.S.C. 1104(a)(1) 17. Appointment of a Chapter 11 trustee is also appropriate under 1104(a)(1) as cause exists. Although 1104(a)(1) provides that cause can include including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, the list of wrongs constituting cause is non-exclusive. Nartron, 330 B.R. at 592 ( The inquiry into whether cause exists for such an appointment is not limited to the enumerated list of fraud, dishonesty, incompetency or gross mismanagement, but extends to similar cause. ). Factors on which the decision whether cause exists to appoint a trustee include: Materiality of misconduct; Evenhandedness or lack thereof in dealings with insiders and affiliated entities in relation to other creditors or customers; The existence of pre-petition voidable preferences or fraudulent transfers; Unwillingness or inability of management to pursue estate causes of action; Conflicts of interest on the part of management interfering with its ability to fulfill fiduciary duties to the debtor; Self-dealing by management or waste or squandering of corporate assets. Id. (further citations omitted); In re Intercat, Inc., 247 B.R. 911, 921 (Bankr. S.D. Ga. 2000); Citizens Corp., 2012 WL at *7. This Court may consider both pre-petition and postpetition misconduct of the Debtor when making a determination that cause exists for 9

10 Document Page 10 of 19 appointment of a Chapter 11 trustee. Citizens Corp., 2012 WL at *7 citing 1031 Tax Group, 374 B.R. at Once a movant satisfied the evidentiary burden regarding the appointment of a trustee 8, appointment of a trustee becomes mandatory. 11 U.S.C. 1104(a) (the court shall order the appointment of trustee where cause exists); In re Ford, 36 B.R. 501, 504 (Bankr. W.D. Ky.1983) ( Where such cause has been shown, the Courts have no discretion but must appoint a trustee. ) (further citation omitted). This Court has discretionary power to appoint a trustee when necessary to protect the rights of creditors of the Debtor s estate. Ford, 36 B.R. at 504 ( However, judicial considerations in determining the issue of whether to appoint a trustee are not limited to such cause as enumerated specifically in 1104(a)(1). Thus, the Court has discretionary power pursuant to 1104(a)(1) and (2) to appoint a trustee when necessary to protect rights of creditors of the estate. ) 8 Courts disagree on the appropriate evidentiary burden regarding appointment of a trustee. Compare Official Comm. of Asbestos Claimants v. G I Holdings, Inc. (In re G I Holdings, Inc.), 385 F.3d 313, (3rd Cir.2004)( The party moving for appointment of a trustee... must prove the need for a trustee under either subsection by clear and convincing evidence) with Tradex Corp. v. Morse, 339 B.R. 823, 829 (D.Mass.2006)( Having canvassed this case law, I have come to conclude that an appointment court need find the factual predicates cause or the best interests of relevant parties by only a preponderance of the evidence. ); In re Veblen West Dairy LLP, 434 B.R. 550, (Bankr. D. S.D. 2010)(Analyzing Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) and finding [t]he Court is thus persuaded a party seeking the appointment of a chapter 11 trustee bears the burden of persuasion by the preponderance of the evidence, not by clear and convincing evidence. ). While this Court has not addressed the issue, other courts within the Sixth Circuit have adopted the clear and convincing standard. See, e.g., In re Citizens Corp., 2012 WL , *7 (Bankr. M.D. Tenn. Feb. 27,2012); In re National Staffing Services, LLC, 338 B.R. 31, 34 (Bankr. N.D. Ohio 2005). Regardless, the App Fuels Trustee believes that it has presented sufficient evidence to meet either burden. 10

11 Document Page 11 of 19 A. The Debtor s Admitted Incompetence is Cause for Appointment of a Chapter 11 trustee 19. Appointment of a trustee is appropriate in this action because the Debtor has admitted that he is incompetent to manage his affairs and the Debtor s previous actions support these admissions. The Debtor has blamed his economic demise on the fact that he signed personal guarantees for the benefit of Appalachian Fuels, LLC. The signing of the personal guarantees was done when the Debtor was diagnosed with throat cancer and undergoing vast treatments. See, e.g., Debtor s Motion for First Day Motions and All Subsequent Motions to be Heard in Lexington Division [ECF No. 2, 5 ( In approximately 2006, Debtor was diagnosed with throat cancer and underwent multiple surgeries and endured vast treatments for this disease. During his illness and ensuing treatment, Debtor was approached by Appalachian Fuels, LLC personnel and asked to sign many personal guarantees for equipment purchases Appalachian Fuels, LLC needed to make. Up until this point in his 30 year career, Debtor had always refused to sign any personal guarantees. However, during this vulnerable time, he signed several personal guarantees totaling millions of dollars of exposure. ) 20. In numerous cases filed against Mr. Addington prior to his bankruptcy filing, he asserted the defense of mental incapacity. The Debtor s assertion of the mental incapacity defense was numerous: Mr. Addington is not liable under the Payment Guaranty that GATX alleges he signed because he was unable to consent to the terms of the contract since he lacked the necessary mental capacity. [GATX Corp. v. Larry Addington et al., Civil Action No. 09-CV-VI DLB filed in the United States District Court Eastern District of Kentucky; Northern Division at Ashland (the GATX Action ); Answer to Complaint, Affirmative and Other Defenses, [ECF No. 5] p. 7, 11, attached hereto as Exhibit B.] But Mr. Addington has responded that he was mentally incapacited during the period of time in question, does not remember signing any of 11

12 Document Page 12 of 19 the guaranties, and, even if he did sign them, certainly did not possess the requisite mental capacity to understand the terms of the guaranties or the legal consequences of his actions. [GATX Action, Defendant Larry Addington s Response in Opposition to Plaintiff s Motion to Compel [ECF No. 46], p. 1 9, attached hereto as Exhibit C.] Mr. Addington continued to put forth his incapacity defense and his inability to fulfill simply obligations, such as setting for a deposition, in a response to a motion for sanctions: Mr. Addington canceled the deposition on the advice of Dr. Dixon because of health issues that had arisen and the prescription medications that he was taking that may cloud his judgment. [GATX Action, Defendant Larry Addington s Response in Opposition to Plaintiff s Motion for Sanctions, [ECF No. 65] p. 1, attached hereto as Exhibit D]. The Exhibit D pleading also attaches a letter as Exhibit A from Mr. Addington s physician who stated that as of September 28, 2010, Mr. Addington continued to undergo treatment and should not undertake simple tasks because he had been proscribed mediations that would cloud his judgment. As discussed below, Mr. Addington continues to under go treatment for certain medical conditions. Mr. Addington used the mental incapacity defense in other litigation as well: Mr. Addington is not liable under the Guaranty that Republic alleges he signed because he was unable to consent to the terms of the contract since he lacked the necessary mental capacity. [Republic Bank v. Larry Addington, et al., Civil No filed in the Third Judicial District Court of Salt Lake County, State of Utah (the Republic Bank Action ); Defendant Larry Addington s Answer to Amended Complaint, Affirmative and Other Defenses, p. 5, 8, attached hereto as Exhibit E.] Mr. Addington also identified seven individuals who could testify as to his mental incapacity, including Dr. Siong-Chi Lin and Dr. Nelson Brewer at the Mayo Clinic in Jacksonville, FL. [Republic Bank Action, Defendant Larry Addington s Rule 26(a)(1) Initial Disclosures, attached hereto as 9 Mr. Addington additionally asserted that he may have to be reminded of matters such as the date of his birth to what percentage of what company he owns. GATX Action, Defendant Larry Addington s Response in Opposition to Plaintiff s Motion to Compel, p. 5. It is common sense that a Debtor that cannot recall his date of birth should not be burdened with the task of managing the affairs of his bankruptcy estate where the claims of creditors run in the millions of dollars. 12

13 Document Page 13 of 19 Exhibit F; see also FRCP 26.02(a)(1) & (2) Disclosures of Defendant, Larry Addington, filed in the GATX Action, attached hereto as Exhibit G.] As discussed below, Mr. Addington continues to undergo treatment at the Mayo Clinic in Jacksonville, FL. Moreover, in other litigation, Mr. Addington made similar assertions: Mr. Addington is not liable under the Personal Guaranty that Deere Credit alleges he signed because he was unable to consent to the terms of the contract since he lacked the necessary mental capacity. [Deere Credit, Inc. v. Larry Addington and Energy Coal Resources, Inc., Civil Action No. 09-CI-4376 filed in the Commonwealth of Kentucky, Fayette Circuit Court, Division 9 (the Deere Action ), Answer to Complaint, Affirmative and Other Defenses, p. 3, 8, attached hereto as Exhibit H.] Defendants are not liable under the Contracts that Caterpillar alleges they signed because Mr. Addington was unable to consent to the terms of the contract since he lacked the necessary mental capacity. Caterpillar Financial Services Corp. v. Appalachian Machinery, Inc., Larry Addington, and Energy Coal Resources, Inc., Case No IV filed in the Chancery Court for Davidson County, Tennessee at Nashville (the Cat Action ), Answer to Complaint, Affirmative and Other Defenses, p. 22, 8, attached hereto as Exhibit I.] 21. Mr. Addington cannot argue that he no longer suffers from this incapacity. As discussed above in Exhibit G, Mr. Addington identified Dr. Siong-Chi Lin and Dr. Nelson Brewer at the Mayo Clinic in Jacksonville, FL as individuals who could testify as to Mr. Addington s incapacity. Mr. Addington continues to undergo treatment at the Mayo Clinic in Jacksonville, FL. [See Exhibit A to the Debtor s Motion Pursuant to 11 U.S.C. 363 of the Bankruptcy Code for Entry of an Order (I) Authorizing the Use of Cash Collateral and (II) Approving Proposed Budget [ECF No. 7] (the Cash Collateral Motion ) which contains a monthly expense of $1,700 for Air fare to Mayo Clinic for medical treatment. ] The Debtor s estate should be administered by an individual with a clear mind who has the ability to perform the functions of a fiduciary. It is clear that Mr. Addington is unable to perform such function. 22. In addition, Mr. Addington s incompetence is illustrated by the fact that he needed his secretary of 24 years, Crystal Slutz, to attend his First Meeting of Creditors and answer basic questions regarding his financial affairs. [341 Meeting, p. 14, lines 10-25; p. 15, 13

14 Document Page 14 of 19 lines 1-17]. In many instances at the 341 Meeting, only Ms. Slutz was able to answer questions regarding Mr. Addington s estate. It is troubling that Ms. Slutz is not paid by or employed by Mr. Addington, but by Tri-State BioFuels, just another entity that must be investigated regarding its affairs with the Debtor. [341 Meeting, p. 65, lines 10-13]. B. The Debtor s Gross Mismanagement of His Affairs is Cause for Appointment of a Chapter 11 trustee 23. As set forth in the Debtor s schedules and confirmed at the 341 Meeting, the Debtor has admitted to making numerous transfer of funds to insiders of the Debtor. While the Debtor has attempted to avoid the appearance of impropriety by characterizing such transactions as loans, it seems clear that they were simply transfers of funds to family members or other insiders. The pre-petition transfer of funds for no consideration indicates gross mismanagement. Citizens Corp WL at *7. ( The proof regarding pre-petition transactions is disturbing.... While all transactions were recorded on the books of the debtor and FiData, many of the transactions were not satisfactorily explained ). Even if the Court believes that the transfers were intended to be loans, instead of pre-petition transfers of funds to avoid creditors, the fact that the loans are not documented lends further support of the Debtor s mismanagement. [341 Meeting, p. 55, line 25; p. 56, lines 1-12.] Mr. Addington s history of giving loans that are uncollectible and squandering assets shows that Mr. Addington lacks appropriate business judgment when dealing with his assets Even while in bankruptcy, Mr. Addington continues a history of preferring his family members to his creditors. Mr. Addington owns the majority interest (36%) in an entity that owns 100% of Ultra. Ultra owes Mr. Addington $4,000,000. [341 meeting, p. 12, lines See 341 Meeting, p. 26, line 19-25; p. 27, line 1-27 where Mr. Addington testified to loaning $150,000 to his niece to start a grocery business in Elliott County, Kentucky even though he did not believe that the business would be successful. 14

15 Document Page 15 of 19 25; Schedule B, question 18.] Despite the fact that Mr. Addington is owed $4,000,000 by Ultra, he allows the company to make distributions to its members. It is not surprising that Mr. Addington allows such unlawful distributions to occur when you realize that the other members in Ultra are his brothers, Robert, Bruce, and Stephen Addington, who each own 18% of Ultra. [341 Meeting, p. 13, lines 3-20]. Even more astonishing is that Mr. Addington s brothers paid nothing for their interest in Ultra [341 Meeting, p. 99, lines 16-25; p. 100, lines 1-4] yet they reap the benefits as a member of the Addington family, to the detriment of Mr. Addington s creditors. 25. Mr. Addington signed a deed in lieu to the Bank of Belize, with which Mr. Addington has close ties, only one year prior to his bankruptcy [341 Meeting, p. 120, lines 13-25; p. 121, line 1] 11. While the debt to the Bank of Belize was only approximately $25,000,000 when the deed in lieu was signed, [341 Meeting, p. 104, lines 1-3], Mr. Addington had listed the property at $75,000,000 and purportedly rejected an offer to purchase the island for $50,000,000 before giving it to the bank for half of that amount. [341 Meeting, p. 104, lines 4-25]. When asked about returning to Belize, Mr. Addington testified that he did not have any official arrangements with the Bank of Belize but that he knew the bankers and they were still friends. [341 Meeting, p. 105, lines 12-25]. Without further investigation, this appears to be a sweetheart deal to Mr. Addington s friends at the Bank of Belize. This is but one example of the numerous transfers, likely fraudulent, that a Chapter 11 trustee would need to thoroughly analyze and, likely, litigate on behalf of Mr. Addington s estate. C. The Debtor s Lack of Honesty is Cause for Appointment of a Chapter 11 trustee 26. While, as discussed above, Mr. Addington claims that he did not have the mental capacity to enter into guaranties or attend depositions, he amazingly had the wherewithal to 11 This transfer was not listed on Mr. Addington s SOFA, question 5 which asks for all repossessions, foreclosures and returns within one year prior to the bankruptcy. [SOFA, question 5; ECF No. 1, p. 59]. 15

16 Document Page 16 of 19 communicate with his attorney and ensure that his assets would be diverted and funneled to family members rather than creditors 12. These loans discussed above were not arms-length transactions, but were conducted to divest Mr. Addington of his assets at the expense of his creditors. It is clear that Mr. Addington foresaw his pending demise and took many actions to put his assets out of the reach of his creditors. 27. Moreover, Mr. Addington s testimony at the 341 Meeting contained several halftruths. Mr. Addington testified that $75,000 of his $150,000 retainer paid to his attorney was made possible by a friend in Belize named Ester Price. [341 Meeting, p. 39, lines 14-25; p. 40, lines 1-5]. Ester Price is not just a friend of Mr. Addington, but a business associate. Ester Price is, or was, a shareholder in Addington Properties, LLP. Mr. Addington owns a.001% indirect ownership interest in Addington Properties, LLP, which has an address of P.O. Box 192, Belize City, Belize. [Schedule B, question 13; ECF No. 1, p. 17]. Even though Mr. Addington was asked specific questions regarding his relationship with Ms. Price, he failed to disclose that she was a shareholder in an Addington related entity and managed Mr. Addington s highly valuable property in Belize for many years 13. Mr. Addington has exhibited a pattern of transferring funds to family members and other statutory insiders under ambiguous circumstances. These transfers must be investigated to determine whether they were truly debts or loans, or if they were simply a fraudulent mechanism to transfer money outside the reach of Mr. Addington s creditors. 12 The App Fuels Trustee has uncovered several s in the course of its investigation that illustrate that Mr. Addington was fully aware of the fraud that he was perpetrating on his creditors. The App Fuels Trustee does not believe that the s are privileged; however, to the extent that Mr. Addington would argue that they are privileged, the App Fuels Trustee has not filed them at this time to avoid a discovery dispute. Should the Court determine that an evidentiary hearing is necessary, the App Fuels Trustee reserves its right to submit such s in the record. In the meantime, the App Fuels Trustee is happy to provide the s in camera or through any other means that the Court deems appropriate. 13 This Motion is not intended to be an exhaustive list of every misstatement or misrepresentation made by Mr. Addington in his 341 Meeting testimony or in his schedules. 16

17 Document Page 17 of The Debtor has also exhibited a lack of candor and honesty in his bankruptcy petition and schedules. The Debtor listed the value of Appalachian Land, LLC on Schedule B as unknown. [ECF No. 1, p. 17]. However, at the 341 Meeting, the Debtor testified, with some specificity, that Appalachian Land, LLC had a net value of approximately $17,000,000. [341 Meeting, p. 84, lines 14-21]. The Debtor s use of unknown to value assets on his schedules, when he is fully aware of the value of the asset, is dishonest 29. Mr. Addington stated that he did not have any interest in a trust. [Schedule B, question 21; ECF No. 1, p. 22]. However, Mr. Addington listed a transfer to the Larry Addington Irrevocable Trust on November 10, 2010 [SOFA, question 10(a); ECF No. 1, p. 60]. Mr. Addington also failed to fully and honestly answer SOFA, question 10(b) which asks for transfers made to a self settled trust. In September, 2006, Mr. Addington established a revocable trust. [341 Meeting, p. 50, lines 15-18]. Mr. Addington testified that in December 2008, only five months prior to the Appalachian Fuels, LLC bankruptcy, Mr. Addington converted his revocable trust to an irrevocable trust. [341 Meeting, p. 50, lines 15-25; p. 51, lines 1-15]. In January, 2009, Mr. Addington transferred $1,000,000 to his irrevocable trust for no consideration [341 Meeting, p. 51, lines 16-25; p. 52, lines 1-3]. Mr. Addington also transferred one-half of an interest in a house for no consideration. [341 Meeting, p. 52, lines 19-23]. Mr. Addington s failure to disclose the conversion of his trust from a revocable trust to an irrevocable trust, and to inform his creditors of transfers to such trust, exhibits a lack of honesty. III. Appointment of a trustee as opposed to conversion of this case to a Chapter 7 case is in the best interest of all creditors. 30. While grounds may exist for conversion of the Debtor s bankruptcy to a Chapter 7 bankruptcy, the appointment of a Chapter 11 trustee is in the best interest of all creditors and the Debtor s estate. First, 11 U.S.C provides that the Debtor s post-petition income is property of the estate. Mr. Addington plans on receiving the significant sum of approximately 17

18 Document Page 18 of 19 $100,000 per month from limited liability company ( LLC ) distributions. See Exhibit A to Cash Collateral Motion. If this case were converted to a Chapter 7, the Estate is at risk of losing these payments. See In re Evans, 464 B.R. 429 (Bankr. D. Col. 2011) (discussion of whether LLC distributions are earnings and not property of the estate). 31. Further, unlike a Chapter 7 trustee, whose mandate is to expeditiously administer all assets of the Estate, a Chapter 11 trustee has the expanded possibility to use his or her independent judgment and good management to direct the affairs of the estate to optimize recovery for creditors. 11 U.S.C. 1106(a). A Chapter 7 trustee does not have the powers to manage the affairs of the Debtor, and at the early stage of this proceeding, parties have no way of knowing whether this may prejudice the rights of creditors. 32. The appropriate Chapter 11 trustee will be able to orchestrate an effort to uncover any and all schemes in which Mr. Addington may have participated. Mr. Addington did not make one or two isolated transfers, and the instant case is not simply a liquidation of assets. Rather, Mr. Addington was involved in dozens, if not hundreds, of questionable transactions, many with multiple layers, and many involving relatives and other statutory insiders. There are numerous transactions that must be investigated and the App Fuels Trustee believes that an appropriate Chapter 11 trustee is most likely to have experience investigating and uncovering such transactions Finally, it is not certain that a Chapter 11 trustee will be more costly than conversion of this case to a Chapter 7. It is likely that even a Chapter 7 trustee would need to retain litigation counsel, as well as financial experts, and if the case remains in a Chapter 11, any return to creditors will not be diminished by the statutory Chapter 7 commissions, which could 14 Should the Court find that conversion of this matter to a Chapter 7 proceeding is appropriate, the App Fuels Trustee respectfully requests that the UST hold an election to select a trustee with the requisite experience and knowledge to administer this complex case and pursue recovery of assets from all appropriate parties. 18

19 Document Page 19 of 19 add up quickly given the millions of dollars in fraudulent transfers that appear to have taken place. Moreover, the App Fuels Trustee is prepared to and would coordinate with Mr. Addington s Chapter 11 trustee as much as possible in an effort to streamline the costs of investigating the insider transactions about which the App Fuels Trustee has information. WHEREFORE, the App Fuels Trustee respectfully request that the Court enter an order appointing a Chapter 11 trustee and for such further relief as the Court deems necessary. 10, CERTIFICATE OF SERVICE DELCOTTO LAW GROUP PLLC /s/ T. Kent Barber, Esq 200 North Upper Street Lexington, Kentucky Telephone: (859) Facsimile: (859) kbarber@dlgfirm.com COUNSEL FOR THE LIQUIDATING TRUSTEE This document has been electronically filed and served via the Court s ECF System on April /s/ T. Kent Barber, Esq COUNSEL FOR THE LIQUIDATING TRUSTEE Z:\Clients\Appalachian Fuels LLC\Post-Confirmation\L. Addington\Pleadings\Convert Appoint Trustee Joinder doc 19