Professor Steve Nickles Discusses Asset Transfers in Bankruptcy Case

1.18.2011 Article, Faculty News, General

Trustee wants claims denied
Reposted from Winston-Salem Journal | by Richard Craver

The bankruptcy trustee for three Davie County tobacco manufacturers has filed complaints aimed at ending their financial obligations for loans taken by the companies' owner, Calvin Phelps.

The complaint, filed Thursday with the U.S. Bankruptcy Court in Greensboro, addressed $3.74 million in loans currently the obligation of Renegade Holdings Inc., Alternative Brands Inc. and Renegade Tobacco Co.

The companies filed for Chapter 11 bankruptcy protection on Jan. 29, 2009, and exited bankruptcy June 1, 2010.

They were put back into bankruptcy July 19, 2010, when Judge William Stocks vacated the reorganization plan, in part because of a criminal investigation of Phelps and the companies regarding what authorities called "unlawful trafficking of cigarettes."

As of December, the manufacturers have a combined 120 employees in Davie.

Peter Tourtellot, the trustee, wants the judge to deny claims made against the companies by three creditors, including $1.89 million by Carolina Bank and $348,063 by Bank of Granite Corp. Phelps used money from the banks to buy aircraft.

Phelps wrote promissory notes to the creditors, using the manufacturers as commercial guarantors.

John Northen, the counsel for Tourtellot in the bankruptcy, said Friday that there could be four to five more complaints filed. He also said Tourtellot could be weeks away from filing an amended reorganization plan with the judge.

Northen said the complaints are "parallel" to the lawsuit filed in September by Gene Tarr, the bankruptcy examiner for the three companies.

That lawsuit alleges that Phelps made a fraudulent transfer of $8.1 million in assets, which he used to help buy Chinqua-Penn Plantation, two corporate jets, cigar-manufacturing equipment and a 2008 Maserati Quattroporte.

The suit was filed against Phelps, his wife, Lisa Yamaoka Phelps, and 13 limited liability companies, including Chinqua-Penn, that Phelps owns or controls.

The Tarr lawsuit and the Tourtellot complaints differ in objective.

Northen said Tourtellot wants to clear out some claims against the companies.

Tarr wants to void and recover "fraudulent transfer of assets" from the companies that went to either Phelps, his wife or the LLCs.

"Phelps failed to act in good faith as an officer and director, put his own self-interests above the interests of debtors, squandered and wasted corporate assets and otherwise breached his fiduciary duties of loyalty and care" to the three companies, according to the lawsuit.

Transferring assets from one company to another by common ownership is not unusual, said Steve Nickles, a law and management professor at Wake Forest University. What makes for a fraudulent transfer is when assets shifted from one company to another do not result in an equal or better return for the first company.