Brookworth Partners, LP v. Frankford Machinery ( 2017 )


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  • J-A10027-17
    NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
    BROOKWORTH PARTNERS, L.P.                             IN THE SUPERIOR COURT OF
    PENNSYLVANIA
    Appellant
    v.
    FRANKFORD MACHINERY, INC.,
    NICHOLAS KASHKASHIAN, JR., AND
    RONALD KASHKASHIAN
    Appellees                   No. 2967 EDA 2016
    Appeal from the Order Dated August 23, 2016
    In the Court of Common Pleas of Delaware County
    Civil Division at No(s): 2013-08010
    BEFORE: DUBOW, J., SOLANO, J., and FORD ELLIOTT, P.J.E.
    MEMORANDUM BY SOLANO, J.:                         FILED SEPTEMBER 26, 2017
    Appellant Brookworth Partners, L.P., appeals from the judgment
    entered   in   favor    of    Appellees   Frankford    Machinery,   Inc.,   Nicholas
    Kashkashian, Jr., and Ronald Kashkashian in Appellant’s action claiming a
    fraudulent transfer in violation of the Pennsylvania Uniform Fraudulent
    Transfer Act (“PUFTA”), 12 Pa.C.S. §§ 5101-5110. After careful review, we
    affirm.
    Frankford Associates, Inc., though no longer an entity and not a party
    to this litigation, is central to Brookworth’s claim. Frankford Associates was a
    Pennsylvania corporation which began operating in 1966. Trial Ct. Op.,
    11/29/16, at 4. It was a family business founded by Arson Kashkashian, who
    was the sole shareholder until his death. N.T., 4/14/16, at 59. Arson had two
    J-A10027-17
    sons who became involved in the business, Ronald Kashkashian and Nicholas
    Kashkashian, Sr. 
    Id. Ronald was
    initially a salesman for Frankford
    Associates; after Arson’s death in 2006, he became a shareholder, director,
    and officer; and after Nicholas Sr.’s death in 2009, he became president. 
    Id. at 22,
    59-60. Nicholas Sr. had two sons, Nicholas Kashkashian, Jr. and Eric
    Kashkashian, who succeeded to his ownership interest in the company. 
    Id. at 60.
    By 2011, Nicholas Jr. was an employee, shareholder, director, and
    officer of Frankford Associates. 
    Id. at 60,
    63-64.1
    Frankford Associates’ main business was servicing commercial dry-
    cleaning equipment and selling replacement parts for such equipment. Trial
    Ct. Op. at 5. It had four employees, including a parts manager, two service
    technicians, and a receptionist. N.T. at 23, 63. By the 1990’s, Frankford
    Associates had also begun selling turn-key dry-cleaning operations, for
    which it would guarantee leases of rental properties. 
    Id. at 23,
    25, 62.2 This
    aspect of its business accumulated significant debts. 
    Id. at 43-45;
    Brookworth’s Ex. 11 (bankruptcy schedules showing $938,068.31 of debt
    was primarily comprised of commerical real estate leases).
    ____________________________________________
    1
    Ronald testified that Nicholas Jr. was a 25% shareholder of Frankford
    Associates at the time of trial. N.T. at 23. However, the 2011 federal income
    tax return for Frankford Associates (covering the period July 1, 2011 through
    June 30, 2012) shows that Ronald and Nicholas Jr. were both 50% owners of
    Frankford Associates the year it went out of business. Brookworth’s Ex. 5.
    2
    Ronald Kashkashian described this portion of the business as “industry
    package plants where they would take a lease on a particular property, build
    out the facilities, find a buyer.” N.T. at 23.
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    In 2002, Ronald and Nicholas Sr. opened defendant-Appellee Frankford
    Machinery, Inc., another Pennsylvania corporation. N.T. at 24.3 Its main
    area   of   business    was    selling   commercial   dry   cleaning   and   laundry
    equipment, for which Ronald would solicit customers “door to door.” 
    Id. at 24-25,
    59, 78. Both Ronald and Nicholas Jr. are now employees, directors,
    and officers of Frankford Machinery. 
    Id. at 58,
    82-83, 148. Ronald owns
    50% of the company, and Nicholas Jr. owns 25%. 
    Id. at 58.4
    Ronald is
    president. 
    Id. Both businesses
    maintained their respective corporate offices and
    warehouses at 4500 Torresdale Avenue in Philadelphia, where they shared
    such common business resources as a telephone number, receptionist,
    stationary, and computers. Trial Ct. Op. at 4-5; N.T. at 30. Both businesses
    were insured by a single common property and casualty commercial
    insurance policy. Trial Ct. Op. at 5. They filed separate tax returns, used
    separate billing systems, and used separate letterheads. N.T. at 80-81. The
    businesses served many of the same customers, Trial Ct. Op. at 5, and the
    two companies would often refer customers to each other — for example,
    ____________________________________________
    3
    At the time that it opened, Ronald and his brother were the only two
    employees of Frankford Machinery. N.T. at 24. It is unclear how many
    employees Frankford Machinery has subsequently employed.
    4
    Eric Kashkashian, Nicholas Jr.’s brother, owns the remaining 25% of
    Frankford Machinery, but is not active in the business. N.T. at 58.
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    Frankford Machinery would refer customers who needed their equipment
    repaired to Frankford Associates. N.T. at 79-80, 155-56.
    Brookworth is a landlord (or a successor in interest to a landlord)
    under a commercial lease agreement for which Frankford Associates was
    guarantor. Trial Ct. Op. at 2. After Brookworth’s tenant (Frankford
    Associates’ customer) defaulted on the lease, Brookworth sued Frankford
    Associates and obtained a judgment in the amount of $249,100 on June 5,
    2011. 
    Id. In mid-August
    2011, Brookworth executed on a bank account
    belonging to Frankford Associates and collected $117,422.60 against its
    judgment. Trial Ct. Op. at 2. Frankford Associates then began borrowing
    money from Frankford Machinery in order to continue operating. 
    Id. On December
    31, 2011, Frankford Associates closed. Trial Ct. Op. at 3
    At that point, it owed Frankford Machinery $133,000. 
    Id. Frankford Associates
    transferred its remaining physical property, including office
    furniture and fixtures, a van, a truck, office computers, and old or used dry
    cleaning or laundry equipment, to Frankford Machinery for a loan reduction
    of $83,000. Id.; N.T. at 65-69. After December 31, 2011, Frankford
    Machinery began to service commercial laundry and dry-cleaning equipment
    and sell replacement parts (the business in which Frankford Associates had
    engaged). 
    Id. at 81.
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    On February 25, 2013, Frankford Associates filed for bankruptcy. Trial
    Ct. Op. at 3. Brookworth was listed in the proceeding as one of Frankford
    Associates’ unsecured creditors, as was Frankford Machinery. 
    Id. The bankruptcy
    schedules listed one asset: receivables due from “Premier
    Cleaners” in the amount of $13,207.33, which was indicated to be in
    litigation; they listed liabilities of $938,068.31. Brookworth’s Ex. 11. On
    May 21, 2013, the appointed bankruptcy trustee filed his final report with
    the bankruptcy court. Trial Ct. Op. at 4. The report confirmed that there was
    no property available for distribution to creditors, id.; the amount due from
    Premier Cleaners was described as an abandoned asset. Defendants’ Ex. 2.
    The trustee’s report was adopted by the court, and on June 3, 2013, the
    bankruptcy proceedings were concluded. Trial Ct. Op. at 4.
    On July 15, 2014, Brookworth filed the complaint in the instant case.5
    In the complaint, Brookworth claimed that Frankford Associates violated the
    PUFTA when it transferred “assets” to Frankford Machinery after Frankford
    Associates was insolvent (or was rendered insolvent by the transfer), at a
    time when Brookworth was a creditor of Frankford Associates, and without
    receiving reasonably equivalent value from Frankford Machinery. Compl.,
    7/15/14, at ¶¶ 25-28. Brookworth alleged that the assets were transferred
    “to insulate Franklin [sic] Associates from the claims of creditors such as
    ____________________________________________
    5
    Brookworth initiated the case on August 14, 2013, and conducted pre-
    complaint discovery.
    -5-
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    Brookworth” and “to give Franklin [sic] Machinery the control and benefit of
    the assets, property and business of Franklin [sic] Associates.” 
    Id. at ¶¶
    29,
    33. The complaint did not specifically describe what assets were transferred,
    except to specify that Frankford Machinery succeeded in the use of the
    website “frankfordonline.com.” 
    Id. at ¶
    20.6 The complaint also did not give
    a specific timeframe for the alleged transfer of assets. The complaint claimed
    that Ronald and Nicholas Jr., as shareholders, officers, and directors of both
    companies, acted “with intent to hinder, delay and defraud Brookworth and
    other creditors.” 
    Id. at ¶
    38.
    Frankford Machinery and the Kashkashians responded on July 31,
    2014. They denied that any assets had been transferred from Frankford
    Associates to Frankford Machinery except those tangible assets listed on the
    bill of sale from December 31, 2011. Response, 7/31/14, at ¶ 28. They also
    asserted that the website frankfordonline.com had always served both
    companies, although the companies are separate and distinct. 
    Id. at ¶
    20.
    A non-jury trial was held on April 14, 2016. In Brookworth’s opening
    statement, its counsel stated that Brookworth intended to prove that on
    December 31, 2011, Frankford Associates possessed intangible assets which
    “stayed in the room” after its business closed, and were thus fraudulently
    transferred to Frankford Machinery in violation of the PUFTA. N.T. at 9, 13-
    ____________________________________________
    6
    Other allegations included in the complaint which were abandoned at the
    time of trial or appeal have not been included here.
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    14. In his opening statement, counsel for Frankford Machinery and the
    Kashkashians argued that the evidence would show that no intangible assets
    changed hands on December 31, 2011, or at any other time; that the two
    companies were separate and distinct; and that neither Frankford Machinery
    nor Ronald or Nicholas Jr., as principals of Frankford Machinery, are liable for
    the debts of Frankford Associates. 
    Id. at 16-19.
    At trial, Ronald Kashkashian testified that after Brookworth executed
    on the Frankford Associates bank account on August 15, 2011, that
    company was financially depleted and forced to borrow money from
    Frankford Machinery in order to keep operating. N.T. at 61. He agreed that
    by December 31, 2011, Frankford Associates was no longer able to pay its
    financial obligations and owed more than the company “had available to use
    to make payments.” 
    Id. at 32.
    When asked whether Frankford Associates
    was insolvent as of December 31, 2011, Ronald responded “yes.” 
    Id. at 31.
    Ronald was not asked on what date Frankford Associates first became
    insolvent.7
    Ronald denied that Frankford Associates transferred any intangible
    assets to Frankford Machinery, including good will8 or a customer list, and
    ____________________________________________
    7
    Ronald testified that Frankford Associates never received the money it was
    owed from Premier Cleaners (the sole asset listed on its bankruptcy
    schedules), as that company also went into bankruptcy. N.T. at 71.
    8
    Brookworth’s expert later defined “good will” as “time in business,
    reputation in the marketplace and so forth.” N.T. at 104.
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    stated that because the customer lists for the two companies had been
    virtually identical, the Frankford Associates customer list had no value for
    Frankford Machinery. N.T. at 76, 80, 84-87. Ronald testified that after
    December 31, 2011, Frankford Machinery did begin to sell replacement parts
    for commercial dry-cleaning equipment, as Frankford Associates had done.
    
    Id. at 81.
    He said that it was a small component of Frankford Machinery’s
    business, and that “because Frankford Associates was no longer in business,
    it almost became something that we had to do because Frankford Associates
    was no longer there.” 
    Id. When asked
    whether Frankford Machinery was
    selling parts to the same customers that had been Frankford Associates’
    customers before it went out of business, Ronald testified, “Well that would
    be speculation, but there might be some cross over, correct. Most of these
    clients were outside of the area so there [is] no way of determining, very
    few.” 
    Id. at 50.
    Brookworth     introduced     a     screenshot   of   a   page   on   the
    frankfordonline.com website from 2013. N.T. at 47-49; Brookworth’s Ex. 12.
    The top of that page listed the contact details for Frankford Machinery. 
    Id. After a
    list of links for various services, the bottom of the page stated, “Also
    . . . be sure to check out our parts website at . . . frankfordparts.com,” and
    it included links to that website. 
    Id. Ronald testified
    that Frankford Machinery had used its own website,
    frankfordparts.com, for many years. N.T. at 48. Frankford Machinery did not
    -8-
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    begin     using   frankfordonline.com,         the   website   created   for   Frankford
    Associates, until 2012, after Frankford Associates had gone out of business.
    
    Id. at 50,
    53. Ronald believed any income since generated from that website
    to be nominal. 
    Id. at 77,
    85. Ronald was unsure who owned either website.
    
    Id. at 50.
    Nicholas Jr. testified that he created frankfordonline.com in 1999. N.T.
    at 149-50. He was listed as the registered owner, but the website was
    created for the promotion of Frankford Associates, who employed him at the
    time. 
    Id. at 150.
    In 2007, after Frankford Machinery was in existence,
    Nicholas Jr. created the website frankfordparts.com; he did so in his own
    name “and then maybe Frankford Associates at that time.” 
    Id. at 150.
    Frankford Machinery has used the frankfordparts.com website since 2009,
    when Nicholas Jr. became a partial owner of that company. 
    Id. at 151.9
    Nicholas Jr. stated that only the frankfordparts.com website generates sales.
    
    Id. at 151-52.10
    Nicholas was not asked at what point Frankford Machinery
    began to use frankfordonline.com, or whether the ownership and registration
    of that website ever changed. He also was not asked if Frankford Associates
    had ever used frankfordparts.com to generate sales, or whether the
    ownership and registration of that website ever changed.
    ____________________________________________
    9
    It is unclear if Frankford Machinery used the website prior to 2009.
    10
    In 2011, the site generated around $10,000 of sales for Frankford
    Machinery, and that number has consistently increased by roughly 20% a
    year. N.T. at 152.
    -9-
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    Robert Gerber, the accountant for both Frankford Associates and
    Frankford Machinery, testified that in mid-July 2011, Frankford Associates
    stopped its revenue-generating activities. N.T. at 133-34, 139-40. After that
    time, Frankford Associates continued with the “collection of receivables,
    payment of payables, sales taxes, payroll taxes.” 
    Id. at 139.
    Mr. Gerber was
    not asked why the company stopped its traditional business-generating
    operations in mid-July, prior to the depletion of its cash account.
    Mr. Gerber stated that if Frankford Associates or Frankford Machinery
    owned any intangible assets, they were not listed on the companies’ balance
    sheets or tax returns. N.T. at 139-40, 146. Frankford Associates did not
    keep a perpetual inventory,11 and the assets listed on its internal documents
    and tax returns were inaccurate and were often carried over from numbers
    given to Mr. Gerber by Nicholas Kashkashian, Sr. 
    Id. at 134-35.
    Regarding
    good will, Mr. Gerber testified that the name “Frankford Associates” might
    have had some value, but also “the name Frankford was attached to a lot of
    businesses during the 12 years. There was Frankford Dry Cleaners that were
    licensed under the name Frankford. There was Frankford Machinery, so
    people knew the name Frankford.” 
    Id. at 140.
    ____________________________________________
    11
    Mr. Gerber did not explain the concept of a perpetual inventory. One court
    has explained that such a system offers a running summary of inventory
    items on hand by maintenance of individual accounts for each class of
    goods. See Alexandre of London, Washington, D.C. Corp. v. Indemnity
    Ins Co. of N. Am., 
    182 F. Supp. 748
    , 752 n.3 (D.D.C. 1960). We provide
    this explanation solely to clarify our narrative; it is not part of the evidence
    in the record.
    - 10 -
    J-A10027-17
    Brookworth introduced Frankford Machinery’s customer lists from 2010
    (4 pages), 2011 (9 pages), and 2012 (18 pages). N.T. at 38-39;
    Brookworth’s Ex. 9.12 Brookworth introduced a “schedule of gross receipts
    and gross profit,” which showed Frankford Machinery’s 2009 and 2010 gross
    receipts were $1,807,688 and $1,636,627, respectively, while its 2011 and
    2012     gross   receipts   were     $1,319,693    and   $2,402,062,   respectively.
    Brookworth’s Ex. 8. Frankford Machinery’s 2009 and 2010 gross profits were
    $8,300 and $20,627, while the 2011 and 2012 gross profits jumped to
    $85,986 and $633,290. 
    Id. Brookworth offered
    the testimony of P. Dermot O’Neill, CPA, an expert
    on the topic of business valuation and financial forensics. N.T. at 89-92. Mr.
    O’Neill was asked to testify as to the value of the intangible assets which
    may have been transferred by Frankford Associates.
    Mr. O’Neill testified that there are three different approaches to
    evaluating a company’s intangible assets, but that two of them — the “asset
    approach” (based on appraisals) and the “income approach” (based on
    forecasts generated from accounting documents) were not available here.
    N.T. at 95-96.13 Mr. O’Neill therefore utilized the “market approach,” which
    ____________________________________________
    12
    Each full page listed approximately 25 customers. N.T. at 38-39.
    13
    Mr. O’Neill believed the “income approach” was unavailable because the
    underlying accounting documents needed to generate the forecasts were
    unreliable and because he needed to depend on management to make the
    projections. N.T. at 95-96, 108.
    - 11 -
    J-A10027-17
    is typically used in bankruptcy situations. 
    Id. at 96.
    This approach uses a
    guideline     developed    from    other,      similar   companies   —   in   this   case
    wholesalers of equipment sold in service industries — which suggested that
    the approximate “market value of invested capital” of such companies was
    the product of .45 multiplied by the company’s annual revenue. 
    Id. at 96.
    14
    In this case, using data from Frankford Associates’ income statement
    for the period from July 1, 2010 through June 30, 2011,15 the “market value
    ____________________________________________
    14
    The market value of invested capital is considered the “value of the
    company as a whole.” N.T. at 104.
    15
    Regarding the source of this data, Mr. O’Neill testified:
    Q: And sir what is the source of that financial information?
    A: The source of that financial information is shown back in the
    income statements.
    Q: Or was it the tax return?
    A: Oh it would be the tax returns.
    Q: So you looked at the tax return for the period ending – for
    2011 you would have to have looked at the 2010 tax return for
    Frankford Associates?
    A: Correct, that is illustrated on Exhibit B.
    N.T. at 101. However, “Exhibit B” to the expert’s report is not the 2010
    federal income tax return for Frankford Associates (which was not entered
    into evidence), but a compilation of historic income statements for the years
    ending on December 31 of 2010, 2011, and 2012. Brookworth’s Ex. 13 at 9.
    The numbers used in the expert’s calculations appear to be drawn from
    exhibits “C” and “D” of his report, which reflect the historic income
    statements for the years ending on June 30 of 2010 and 2011. Brookworth’s
    Ex. 13 at 10-11
    - 12 -
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    of invested capital for Frankford Associates was $868,785. N.T. at 101, 104;
    Brookworth’s Ex. 13 at 4.16 To that total, Mr. O’Neill added $53,791 of
    liabilities to find the “estimated fair market asset value” for the company;17
    in this case that value was $922,576. N.T. at 104; Brookworth’s Ex. 13 at 4.
    From that number, Mr. O’Neill subtracted $72,976 in operating cash and
    $192,743 of accounts receivable, which left approximately $657,000. N.T. at
    104; Brookworth’s Ex. 13 at 4.18 Mr. O’Neill testified (and his report reflects)
    that this figure represents the estimated fair market value for the
    combination of Frankford Associates’ inventory, fixed assets, and intangible
    assets. N.T. at 104, 106; Brookworth’s Ex. 13 at 4. Inconsistently, however,
    Mr. O’Neill also testified, and his report elsewhere suggests, that this figure
    represents the fair market value of the intangible assets alone. N.T. at 98,
    99; Brookworth’s Ex. 13 at 5.
    Mr. O’Neill stated that the market approach does not give a breakdown
    of what comprised the $657,000. N.T. at 97.19 He stated that a breakdown
    ____________________________________________
    16
    This number represents .45 times $1,930,634, the amount of gross sales
    in 2010. The market value of invested capital is the same as the equity in
    this case, as Frankford Associates had no interest bearing debt.
    Brookworth’s Ex. 13 at 4.
    17
    “In other words it is the old accounting equation[:] the assets equal
    liabilities plus equity.” N.T. at 109.
    18
    The exact number was $656,857; Mr. O’Neill referred both to this number
    and to $657,000.
    19
    Nevertheless, his report broke down the sum of $657,000 into estimated
    intangible assets of (a) $341,000 for “customer-related intangibles,” (b)
    (Footnote Continued Next Page)
    - 13 -
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    of the intangible assets would require a forecast or projection that could not
    be done in this case from the data available to him. 
    Id. Mr. O’Neill
    testified that the loss of Frankford Associates’ cash as a
    result of the execution on its bank account on August 15, 2011, would not
    have reduced the enterprise value of the company under the market
    approach. N.T. at 102-03, 107-09.20 However, he stated that if the amount
    of cash and accounts receivable had changed in July or August, it would
    have impacted the estimated fair market value of the tangible and intangible
    _______________________
    (Footnote Continued)
    $250,000 for workforce in place, the website, and goodwill, and (c) cash
    deposits totaling $66,000. Brookworth’s Ex. 13 at 5. The report did not
    explain the basis for this estimated breakdown.
    20
    Mr. O’Neill testified as follows:
    Q. If $117,000 or the total amount of money available to the
    company was taken out of the company a month after the date
    6/30/11 would this have a substantial impact on the valuation of
    the company going forward?
    ...
    A. Cash on hand no . . .
    N.T. at 102 (emphasis added). When asked whether the change in operating
    cash in August 2011 would “affect the method evaluation you selected as
    among the asset approach, income approach, or market approach,” Mr.
    O’Neill responded,
    Whether or not a thousand dollars of cash or ten thousand
    dollars of cash or a million dollars of cash went in or out would
    not impact that million dollars, it is still going to be a million
    dollars because that is the value of the business if you will,
    what we call that enterprise value.
    
    Id. at 107-09
    (emphasis added). Mr. O’Neill repeated that he would still
    have applied the market approach, rather than the asset or income
    approach, to estimate the value of the company’s assets, despite the
    reduction in cash. 
    Id. at 109.
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    assets. 
    Id. at 110.21
    When asked whether his opinion would change “if the
    opinion was provided as of June 30, 2012,” or after the company
    discontinued all activity, Mr. O’Neill responded that a valuation after
    discontinuance of business activity would not be done under the market
    approach (which contemplates an on-going business), but under the
    “liquidation premise of value.” 
    Id. at 101,
    104-05, 114-15.
    On June 16, 2016, the court found in favor of Frankford Machinery,
    Nicholas Kashkashian, and Ronald Kashkashian. The court concluded: (1)
    Frankford Machinery was not liable for any alleged transfer made by
    Frankford Associates, because the two entities are separate and distinct,
    ____________________________________________
    21
    His testimony was:
    The Court: Knowing that this event took place[,] the execution
    on substantially all the cash assets of Frankford Associates took
    place in [August] of 2011, would that have impacted either
    negatively or positively the valuation you have calculated at
    page four of your report?
    Mr. [O’Neill]: Well as you see on page four of the report I did
    subtract cash and accounts receivable that existed as of June
    30th [(to find the combined value of tangible assets, intangible
    assets, and inventory)]. Now under normal business operations
    your accounts receivable would go down, your cash would go up
    in collecting receivables and so forth. So there was some
    consideration. Now any variance would be a reduction from the
    [$922,576], the total estimated fair market value assets. So if
    there was a variance between the [$265,719 (the amount of
    cash and accounts receivable as of June 30, 2011)] and what
    happened in July or August then that would impact that
    estimated fair market value [of the combination of tangible
    assets, intangible assets, and inventory].
    N.T. at 110 (emphasis added).
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    “[n]on-transferees cannot be liable for alleged fraudulent conveyances”
    under the PUFTA, and a “purchasing or receiving company is not responsible
    for the debts and liabilities of the selling company”; (2) no claim could lie
    against    Nicholas    Kashkashian       and   Ronald   Kashkashian   because   the
    complaint did not allege and no evidence established that any assets were
    transferred to them as individuals; (3) Brookworth failed to carry its burden
    of proving that Frankford Associates was insolvent on December 31, 2011;
    and (4) Brookworth failed to carry its burden of proving the (a) existence or
    (b) value of any intangible assets on December 31, 2011. See Trial Ct. Op.,
    at 17-20 (citations omitted).
    Brookworth filed a timely appeal, and presents the following question:
    Did the lower court commit legal error and/or abuse its
    discretion, by rendering a Decision in favor of [Frankford
    Machinery, Nicholas Kashkashian and Ronald Kashkashian] and
    against Brookworth, when the Decision was contrary to the
    weight of the trial evidence and/or trial admissions by [Frankford
    Machinery, Nicholas Kashkashian and Ronald Kashkashian], and
    Brookworth had proffered, at the non-jury trial, clear and
    unrebutted evidence which proved both liability and damages in
    this statutory fraudulent transfer claim?
    Brookworth’s Brief at 3.22
    We have held:
    The general rule for a grant of a new trial on the basis that it is
    against the weight of the evidence allows the granting of a new
    trial only when the jury’s verdict is contrary to the evidence as to
    shock one’s sense of justice and a new trial is necessary to
    ____________________________________________
    22
    Brookworth preserved this claim in a motion for post-trial relief filed on
    June 29, 2016, and denied on August 22, 2016.
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    rectify this situation. . . . [T]he appellate court, in reviewing the
    refusal to grant a new trial, ordinarily considers all of the
    evidence. The court is not required to consider the evidence in
    the light most favorable to the verdict winner when passing on
    the question of whether a verdict is against the weight of the
    evidence. Rather, the court is to view all of the evidence.
    Lanning v. West, 
    803 A.2d 753
    , 765-66 (Pa. Super. 2002). In addition:
    In prior matters involving review of alleged fraudulent
    conveyances, we have stated that our standard of review of a
    decree in equity is particularly limited and that such a decree will
    not be disturbed unless it is unsupported by the evidence or
    demonstrably capricious. The findings of the [judge] will not be
    reversed unless it appears the [judge] clearly abused the court’s
    discretion or committed an error of law. The test is not whether
    we would have reached the same result on the evidence
    presented, but whether the [judge’s] conclusion can reasonably
    be drawn from the evidence.
    Fell v. 340 Assocs., LLC, 
    125 A.3d 75
    , 81 (Pa. Super. 2015) (citation
    omitted), appeal denied, 
    140 A.3d 13
    (Pa. 2016).
    Brookworth claims that the weight of the evidence produced at trial
    established that Frankford Associates transferred intangible assets to
    Frankford Machinery, and repeatedly describes these assets as “workforce in
    place, customer lists, internet presence and goodwill.” Brookworth’s Brief at
    5-6, 12, 15.
    Brookworth contends that the lower court erred in focusing on
    December 31, 2011, as the date of the transfer of intangible assets.23
    Brookworth claims that “by December 31, 2011, Frankford Associates no
    ____________________________________________
    23
    Brookworth claims “Brookworth did not contend that the transfer date was
    December 31, 2011,” Brookworth’s Brief at 22.
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    J-A10027-17
    longer had any intangible assets to be valued, because it had transferred
    them to Frankford Machinery.” Brookworth’s Brief at 19. Brookworth states
    that it was “unable to pinpoint the exact date when the Frankford Associates
    intangible assets were transferred to Frankford Machinery.” 
    Id. at 17.
    It
    asserts that the transfer happened “sometime between July 14, 2011 and
    December 31, 2011,” 
    id. at 7,
    12-13, 22, but “most likely by July 14, 2011,”
    when Frankford Associates ceased generating revenue and Frankford
    Machinery began to generate income from the business activities that
    historically were done by Frankford Associates. 
    Id. at 15-17,
    20.24
    Brookworth relies on Mr. O’Neill’s testimony that the value for the
    intangible assets was $657,000 on June 30, 2011, and that this value had
    not changed by, or following, the date of transfer. Brookworth’s Brief at 6.
    Brookworth points to Mr. O’Neill’s testimony that the reduction of cash in
    mid-August would not have affected the valuation of intangible assets, 
    id. at 6-7,
    and that the intangible assets “continued to hold the same value
    through December 31, 2011, even after transfer to Frankford Machinery.”
    
    Id. at 22.
    Brookworth claims that although Mr. O’Neill testified that the
    value of intangible assets owned by Frankford Associates on December 31,
    ____________________________________________
    24
    Brookworth posits: “[i]t was reasonable to conclude that the intangible
    assets were transferred sometime between July 14, 2011 (the more likely
    date, that Mr. Gerber testified was the date when Frankford Associates
    stopped generating income) and December 2011 (the date when Frankford
    Associates transferred the tangible assets to Frankford Machinery and totally
    ceased operations).” Brookworth’s Brief at 17-18.
    - 18 -
    J-A10027-17
    2011, would have been done by a liquidation analysis rather than a market
    approach, such an analysis “would have been totally irrelevant. By
    December 31, 2011, the subject intangible assets were no longer owned by
    Frankford Associates and had already been transferred to Frankford
    Machinery.” Brookworth’s Brief at 23.
    Brookworth also argues that the trial court erred in concluding that the
    evidence    did   not    establish   that Frankford   Associates   was   insolvent.
    Brookworth argues that the evidence establishes that “as of mid-August,
    2011, Frankford Associates became impecunious, unable to have sufficient
    cash to pay its obligations,” Brookworth’s Brief 16, but was “insolvent likely
    from as early as July 14, 2011 when it stopped generating sales income.”
    
    Id. at 18,
    19.25 Brookworth claims that the company was definitely insolvent
    at the latest by December 31, 2011, as Ronald had testified. Brookworth’s
    Brief at 24.
    Finally, Brookworth asserts that Ronald and Nicholas Jr. “stood to
    profit from Frankford Machinery’s significantly enhanced business revenues
    (freed from Frankford Associates’ significant debts) which resulted from their
    direct effectuation of the 2011 fraudulent transfer of intangible assets from
    Frankford Associates to Frankford Machinery.” Brookworth’s Brief at 28.
    ____________________________________________
    25
    In a footnote, Brookworth contradicts itself by stating that Frankford
    Associates was likely not insolvent in mid-July, but chose to stop operating
    because of the debt incurred by its lease guarantees. Brookworth’s Brief at
    19 n.4.
    - 19 -
    J-A10027-17
    Brookworth claims that Frankford Machinery, with Nicholas Jr. and Ronald as
    principals, “implemented a pre-planned scheme to defraud all of the
    creditors of Frankford Associates (including Brookworth), by shutting down
    Frankford Associates during mid-July 2011 and shifting its business activities
    and revenues to Frankford Machinery.” 
    Id. at 27
    (footnote omitted).
    Brookworth contends that the PUFTA allows for joint and several liability,
    and that shareholders of a transferee corporation can be the subject of
    equitable relief for a fraudulent transfer. 
    Id. at 28.
    For ease of disposition, we begin by reviewing the trial court’s
    conclusion that Brookworth failed to prove the existence or value of
    intangible   assets   transferred   from   Frankford     Associates   to   Frankford
    Machinery. We conclude that this issue is dispositive of this appeal.
    “Generally, [the] PUFTA permits a creditor to void a transfer or
    obligation upon direct or indirect proof of fraud. See 12 Pa.C.S. §§ 5101–
    5110.” 
    Fell, 125 A.3d at 81
    . The relevant provision of the PUFTA provides:
    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.
    12 Pa.C.S. § 5105. The PUFTA defines “transfer” as “[e]very mode, direct or
    indirect, absolute or conditional, voluntary or involuntary, of disposing of or
    parting with an asset or an interest in an asset. The term includes payment
    - 20 -
    J-A10027-17
    of money, release, lease and creation of a lien or other encumbrance.” 
    Id. § 5101.
    “Asset” is defined, with some exceptions inapplicable here, as
    “[p]roperty of a debtor.” 
    Id. “Property” includes
    “[a]nything that may be the
    subject of ownership.” 
    Id. A debtor
    violates Section 5105 if “(1) the
    creditor’s claim arose before the transfer, (2) the debtor made the transfer
    without receiving a reasonably equivalent value in exchange for the transfer,
    and (3) the debtor became insolvent as a result of the transfer.” Knoll v.
    Uku, 
    154 A.3d 329
    , 333 (Pa. Super.), appeal denied, No. 77 WAL 2017,
    
    2017 WL 2874721
    (Pa. July 6, 2017). For the purposes of this section,
    a person gives reasonably equivalent value if the person
    acquires an interest of the debtor in an asset pursuant to a
    regularly conducted, noncollusive foreclosure sale or the exercise
    of a power of sale for the acquisition or disposition of the interest
    of the debtor upon default under a mortgage, deed of trust or
    security agreement or pursuant to a regularly conducted,
    noncollusive execution sale.
    12 Pa.C.S. § 5103.
    The party opposing the transfer bears the burden to prove the
    statutory elements of a fraudulent transfer claim under the PUFTA by a
    preponderance of the evidence. See 
    Knoll, 154 A.3d at 336
    (relying on In
    re Wettach, 
    811 F.3d 99
    (3rd Cir. 2016)). Where expert testimony is
    presented, a fact-finder may accept or reject the expert’s credibility, and is
    free to believe all, part, or none of the expert’s opinion. Nemirovsky v.
    Nemirovsky, 
    776 A.2d 988
    , 993 (Pa. Super. 2001).
    - 21 -
    J-A10027-17
    In this case, Brookworth bore the burden to prove to the trial court
    that assets were transferred by Frankford Associates for less than their
    reasonably equivalent value. 12 Pa.C.S. § 5105; 
    Knoll, 154 A.3d at 336
    .
    The trial court concluded that Brookworth failed to meet this burden, and we
    agree.
    Brookworth claims that Frankford Associates transferred “workforce in
    place,     customer    lists,   internet   presence   and    goodwill”     to    Frankford
    Machinery. But Frankford Associates presented no evidence regarding the
    transfer    of   a   workforce.    Rather,    testimony     established    that     Ronald
    Kashkashian had ceased working for Frankford Associates in 2002, when he
    began working for Frankford Machinery. No evidence established the date
    that Nicholas Jr. began working for Frankford Machinery, and no testimony
    addressed the identity or number of other employees working for Frankford
    Machinery.
    The only evidence regarding Frankford Associates’ customer list
    established that the two businesses had similar customer lists. While
    Brookworth introduced the customer lists for Frankford Machinery between
    2009 and 2012, showing an increase in customers during that time period,
    no evidence was introduced establishing which new customers were former
    customers of Frankford Associates, if those customers were added from
    records     received   from     Frankford    Associates,    or   whether        those   new
    - 22 -
    J-A10027-17
    customers   patronized   Frankford    Machinery   to   receive   services   that
    historically had been performed by Frankford Associates.
    Brookworth did elicit testimony that Frankford Associates may have
    had “good will” — meaning that due to its years in operation, its name would
    have been recognized by potential customers. However, no evidence was
    presented that Frankford Associates’ name or logo began to be utilized by
    Frankford Machinery between July 14, 2011 and December 31, 2011.
    Testimony surrounding the transfer of the website was unclear. Either
    Frankford Machinery had use of the frankfordonline.com website well before
    Frankford Associates went out of business, or Frankford Machinery did not
    utilize the website until well after Frankford Associates went out of business.
    The evidence was similarly unclear regarding the progression of ownership
    or use of frankfordparts.com.
    Brookworth presented evidence that Frankford Machinery experienced
    a dramatic increase in profits in the two years following the closing of
    Frankford Associates, and that Frankford Machinery began servicing dry
    cleaning equipment and selling replacement parts after December 31, 2011.
    However, no evidence established that Frankford Machinery began offering
    such services prior to December 31, 2011, let alone in mid-July 2011, as
    Brookworth claims in its brief. The financial statements showing the increase
    in revenue for Frankford Machinery show the profits for all of fiscal years
    - 23 -
    J-A10027-17
    2011 and 2012, and the record lacks clarity as to whether Frankford
    Machinery experienced any upswing in business in mid-July 2011.26
    The expert testimony presented by Brookworth did not establish either
    that any intangible assets were transferred, or the value of any such assets
    at the time of transfer. Mr. O’Neill’s opinion that intangible assets existed as
    of June 30, 2011, was based on what he deemed a “market approach” to
    calculating their value. Using that approach, he found the total value of a
    company based on an estimated market rate, added the amount of
    liabilities, and subtracted the cash held by the company and the amount of
    its accounts receivable; what remained was an estimate for the total value
    of tangible and intangible assets and inventory, in this case $657,000. But
    Mr. O’Neill’s testimony was inconsistent as to whether this number included
    the combination of inventory, tangible assets, and intangible assets or just
    the intangible assets alone, and we note that his June 30, 2011, estimate
    did not exclude the tangible assets valued at $83,000 that are presumed to
    have later left the company. Most importantly, Mr. O’Neill’s testimony did
    not identify exactly what the intangible assets were; from his amalgamated
    number alone it is impossible to determine which assets may have been
    ____________________________________________
    26
    As noted above, to the extent the record established an increase in profits
    for Frankford Machinery, Brookworth still bore the burden of establishing
    that some assets were transferred during the insolvency of Frankford
    Associates or that their transfer caused the insolvency.
    - 24 -
    J-A10027-17
    absorbed by Frankford Machinery or the value of those assets, and he
    testified that he was unable to provide such a breakdown.
    That the trial court focused on the expert’s failure to opine on the
    value of the intangible assets as of December 31, 2011, rather than on the
    now-claimed (but uncertain) transfer-date of “between” July 14, 2011, and
    December 31, 2011, is of no import.27 The trial court is correct that the
    expert simply did not testify to the value of the intangible assets (or, rather,
    the combination of tangible and intangible assets and inventory) following
    June 30, 2011. Despite Brookworth’s assertions, Mr. O’Neill did not say that
    his estimated value of intangible assets based on the market approach and
    the 2010 tax returns would remain constant for the following year. To the
    contrary, Mr. O’Neill testified that a change in the revenue of the company
    or a change to the amount of cash on hand would affect the top-down
    calculation of intangible assets. And, if the company were to close or to
    cease generating revenue, as it did, Mr. O’Neill testified that the market
    approach would not even be the appropriate tool to yield a valid estimate for
    intangible assets.
    Given the foregoing, we cannot say that the weight of the evidence is
    contrary to the verdict or that the verdict shocks the conscience of the court.
    
    Lanning, 803 A.2d at 765-66
    . We conclude, as did the trial court, that
    ____________________________________________
    27
    We note that Brookworth inconsistently asserted in its opening statement
    at trial that the operative date of the transfer was December 31, 2011, and
    is therefore in part to blame for any resulting confusion.
    - 25 -
    J-A10027-17
    Brookworth failed to carry its burden to prove by a preponderance of the
    evidence that any intangible assets were transferred to Frankford Machinery
    for less than their reasonably equivalent value, and we affirm the judgment
    of the trial court on that basis.28
    Judgment affirmed.
    Judgment Entered.
    Joseph D. Seletyn, Esq.
    Prothonotary
    Date: 9/26/2017
    ____________________________________________
    28
    Because we conclude that the weight of the evidence does not establish
    that a transfer of intangible assets occurred, we need not address whether
    the evidence established the other statutory requirements necessary to
    prevail on a claim of fraudulent transfer.
    - 26 -
    

Document Info

Docket Number: 2967 EDA 2016

Filed Date: 9/26/2017

Precedential Status: Precedential

Modified Date: 9/26/2017