Opinion
Case No.: 1-00-02219, Adv. No.: 1-00-00233A
February 10, 2003
Michelle Wolfe, Esquire, for the Plaintiff.
Mark Witzig, Esquire, for the Defendants.
MEMORANDUM
Drafted with the assistance of John Kelly, Law Clerk.
Before me is a Complaint seeking a declaration that a pre-petition payment from the Debtors to the Defendant law firm was either a preferential payment or a fraudulent transfer. The facts are as follows.
Leo I. Bloom (Bloom) was the sole shareholder of Burlington Capital Corp. (BCC), for whom Cunningham and Chernicoff (CC) filed a Chapter 11 bankruptcy petition in October, 1999. BCC did business as Dutch Masters Meats.
When they filed their Petition, the Debtors held a mortgage against property of Werner Jonas (Jonas), who had been a principal of Dutch Masters. Eventually, Debtors foreclosed on the Jonas property which sold for approximately $115,000.00. Ten Thousand Dollars ($10,000.00) of the proceeds were distributed to CC. Sixty-Eight Thousand Dollars ($68,000.00) of these proceeds were distributed to the Debtors, who filed the instant Petition approximately one month thereafter.
The statement of financial affairs that accompanied the bankruptcy petition required the Blooms to list all payments made to insiders within one year immediately preceding the commencement of the case. CC was listed as having received $10,000.00 as a "partial payment owed by Burlington Capital Corp. for past due bills."
The Chapter 7 Trustee appointed to administer the Blooms' estate now seeks to regain that $10,000.00 for distribution to creditors. The Trustee relies on 11 U.S.C. § 547 and 548. The case has been tried and briefed, and it is ripe for decision.
I have jurisdiction pursuant to 28 U.S.C. § 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(F) and (H).
Discussion
Because I find that the Trustee has proven his case for fraudulent transfer, I need only address that part of the case. 11 U.S.C. § 548(a) provides that a trustee may avoid any transfer made by a debtor within one year before filing his Petition, if, in making that transfer, the debtor received "less than a reasonably equivalent value" in exchange, and if the debtor was insolvent before, or became insolvent as a result of, the transfer. Thus, in bringing the instant action, the Trustee must prove that the Blooms transferred to CC their interest in $10,000.00, within one year of the Petition and while they were insolvent and that they did not receive consideration reasonably equivalent in value to that amount. See, In re DeVito, 111 B.R. 527, 531 (Bankr.W.D. Pa. 1990).
The Trustee avers that the payment of the $10,000.00 to CC on behalf of Burlington was, in fact, made while the Blooms were insolvent, and that the Blooms received nothing in exchange for the payment, since it was not payment of a debt of their own, but a debt of the corporation. CC responds that the Trustee has not proven that the Blooms were insolvent when the transfer was made and that, moreover, the Blooms did receive "reasonably equivalent value" because they paid a bill of a corporation that they wholly owned, ergo, a benefit provided by CC to that corporation was in fact a benefit to them.
Two terms of art are pivotal to this case and must be defined. "Insolvency" means insufficiency of assets at fair valuation to pay debts. In re Metropolitan Metals, Inc. 217 B.R. 457 (Bkrtcy.M.D.Pa., 1997). "Value" means "property, or satisfaction of . . . an antecedent debt of the debtor. . . ." 11 U.S.C. § 548(d)(2).
Insolvency is established by a balance sheet test; a debtor is deemed insolvent if his liabilities exceed his assets. In re Barrett, 104 B.R. 688 (Bankr.E.D.Pa. 1989); In re Gabor, 280 B.R. 149 (Bankr.N.D.Ohio 2002). "The Trustee can use any appropriate means to prove insolvency on the date of the alleged preferential transfer." In re Strickland, 230 B.R. 276, 282 (Bankr.E.D.Va. 1999), citing, Porter v. Yukon National Bank, 866 F.2d 355, 356 (10th Cir. 1989). A Court "has broad discretion when considering evidence to support a finding of insolvency." Strickland, at 282, citing, In re Roblin Industries, Inc., 78 F.3d 30, 35 (2nd Cir. 1996). Thus, a bankruptcy court may use circumstantial evidence, such as the debtor's schedules of assets and liabilities, to determine insolvency on a date shortly before the Petition was filed. Strickland, at 283; In re Hodge, 200 B.R. 884 (Bankr.D.Idaho 1996), rev'd on other grounds, 220 B.R. 386 (D.Idaho 1998); In re Carter, 212 B.R. 972 (Bankr.D.Or. 1997); In re Blue Point Carpet, Inc., 102 B.R. 311, 320 (Bankr.E.D.N.Y. 1989); In re Trans Air, Inc., 103 B.R. 322, 325 (Bankr.S.D.Fla. 1988); Matter of Claxton, III, 32 B.R. 219, 222 (Bankr.E.D.Va. 1983). But c.f., In re Lease-A-Fleet, Inc., 141 B.R. 853, 860 (Bankr.E.D.Pa. 1992) (Court not obliged to use schedules in determining insolvency).
In the instant case, I find the Debtors' schedules to constitute sufficient evidence of insolvency. Those schedules show that Debtors' liabilities exceed their assets by some $1.9 million ($371,856.35 in assets, compared to $2,244,578.02 in liabilities). There is no evidence, and it is difficult to conceive, that the Debtors incurred $1.9 million in personal debt in the last weeks before they filed their Petition.
The next issue is whether, as CC contends, CC's pre-petition legal services to Debtors' corporation, BCC, provided the Debtors with reasonably equivalent value for the transfer. CC avers that BCC was simply an alter-ego of the Debtors, and Bloom in particular, and so any benefit to BCC was a benefit to Bloom and his wife.
"While it is well established that a transfer made solely for the benefit of a third party is not usually made for reasonably equivalent value, exceptions exist where the debtor benefits indirectly by reason of a symbiotic relationship with the third party, as in affiliated corporations, or where the debtor and the third party share an "alter-ego" relationship, such that consideration to one is consideration to the other and thus constitutes a direct benefit." In re KZK Livestock, Inc. 221 B.R. 471, 478 (Bankr.C.D.Ill. 1998), citing, In re Marquis Products, Inc., 150 B.R. 487 (Bankr.D.Me. 1993). Finding that a corporation is merely an alter ego of its principal can provide a basis for piercing the corporate veil; i.e. that the separation of assets and liabilities that is normally made between the corporation and its shareholders may be ignored.
The factors this Court has examined in order to determine whether the corporate veil can be pierced in the context of a bankruptcy transfer avoidance action are as follows: 1. Failure to observe corporate formalities; 2. Non-payment of dividends; 3. Insolvency of the debtor corporation; 4. Siphoning off funds of the corporation by the dominant shareholder; 5. Non-functioning of other officers or directors; 6. Absence of corporate records; 7. The fact that the corporation is merely a facade for operations of the dominant stockholder or stockholders; and 8. Gross undercapitalization of the corporation. In re Mass, 166 B.R. 595, 599 (Bankr.M.D.Pa. 1994); citing, B.D.W. Associates, Inc. v. Busy Beaver Building Centers, Inc., 865 F.2d 65 (3rd Cir. 1989).
Much of CC's case was intended to show that the payment was made in the ordinary course of business between the Debtors and CC. Of course, the "ordinary course" defense applies only in cases under Section 547 and not those under Section 548. In re Liberty Livestock Co. 198 B.R. 365 (Bkrtcy.D.Kan., 1996). Most of the remainder of CC's case was intended to show that, if the corporate veil were to be pierced, it would become apparent that the Blooms obtained reasonably equivalent value in exchange for the $10,000.00.
However, CC introduced little evidence fitting within the Mass criteria to support its allegation that BCC was Bloom's alter-ego. In fact, CC's brief cites no law on the subject of a principal's ability to reverse-pierce the corporate veil. Instead, CC's own testimony tended to support the idea that Bloom and BCC were functionally separate entities. For example, Robert Chernicoff, Esquire, testified that upon discovering an alleged error in Bloom's schedules, he was ethically obligated to contact Bloom's personal bankruptcy attorney, rather than Bloom himself. If CC truly regarded Bloom and BCC as interchangeable entities, the observation of such a formality would obviously not have been necessary. Moreover, CC introduced no evidence about whether BCC observed corporate formalities, maintained proper corporate records, or paid dividends. It introduced no evidence that Bloom siphoned off funds of the corporation. It introduced no evidence about the functioning of other officers or directors, or whether BCC was grossly undercapitalized. In short, CC did not sustain a case for piercing of the corporate veil, and such case would be necessary in order for CC to show that the Debtors obtained reasonably equivalent value to support the $10,000.00 transfer.
Additionally, A[f]raudulent conveyance laws are intended to protect creditors of an estate. The purpose of the laws is estate preservation; thus, the question whether the debtor received reasonable value must be determined from the standpoint of the creditors." In re Hefner, 262 B.R. 61, 65-66 (Bankr.M.D.Pa. 2001), citing, Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646 (3rd Cir. 1991) (other citations omitted). In the instant case, it is difficult to find that the Blooms' creditor's received reasonable value from CC's services to BCC. The fact of the matter is that BCC filed a Chapter 11 case that ended up in liquidation. The CC orchestrated Chapter 11 was not successful in that it resulted in no payment to unsecured creditors, and thus, under the absolute priority rule, 11 U.S.C. § 1129(b)(2)(B)(ii) no dividend to the Blooms. Therefore, it cannot be said that the Blooms' personal creditors received any value from CC's services.
For these reasons, I conclude that a constructively fraudulent transfer occurred when CC was paid $10,000.00 within one year before the instant Petition was filed. Therefore, CC will be ordered to return those funds to the Trustee.
An Order will follow.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY ORDERED that Cunningham and Chernicoff return $10,000.00 to the Trustee.