The chapter 7 trustee filed a complaint against Beads and Steeds, Inn, LLC ("B&S") seeking to avoid a transfer of real estate from the debtors' closely-held entity under Code sections 544 and 548. B&S sought and obtained judgment on the pleadings.  The trustee sought leave to file an amended complaint, adding the debtors and their closely-held entity as parties, and asserting theories of reverse veil-piercing and substantive consolidation.  The bankruptcy court denied the motion to amend, finding it would be futile since Kentucky did not recognize reverse veil piercing, and grounds were not alleged to justify substantive consolidation.  The trustee appealed, and the District Court for the Eastern District of Kentucky affirmed.  The trustee appealed to the Sixth Circuit, which also affirmed.

The debtors formed a limited liablity company to acquire a 133-acre farm in Lancaster, Kentucky for $1.6 million in July, 2007, financed with a mortgage loan. When the mortgage loan matured, the lender declined to renew it.  In November, 2010, the debtors paid approximately $760,000 of the underlying mortgage debt.  In December, 2010, the LLC sold the farm to B&S for $800,000 - enough to satisfy the mortgage loan.  The debtors entered into a below-market lease with B&S and continued to operate a business on the farm.  In May, 2012, the debtors sought bankruptcy relief, and two years later, the trustee filed her complaint, seeking to avoid the LLC's transfer to B&S as a fraudulent transfer.