Geremia v. First Nat. Bank of Boston, 80-1134

• Decision Date: 01 June 1981
• Docket Number: No. 80-1134,80-1134
• Citation: 653 F.2d 1
• Parties: , Bankr. L. Rep. P 68,314 Louis GEREMIA, Trustee in Bankruptcy of Avtek Manufacturing Corp., Plaintiff-Appellant, v. The FIRST NATIONAL BANK OF BOSTON, Defendant-Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 1

653 F.2d 1

7 Bankr.Ct.Dec. 1254, Bankr. L. Rep. P 68,314

Louis GEREMIA, Trustee in Bankruptcy of Avtek Manufacturing Corp., Plaintiff-Appellant, v. The FIRST NATIONAL BANK OF BOSTON, Defendant-Appellee.

No. 80-1134.

United States Court of Appeals First Circuit.

Argued Sept. 11, 1980.

Decided June 1, 1981.

Stephen L. Howard, Providence, R. I., with whom Adler, Pollock & Sheehan, Inc., Providence, R. I., was on brief, for plaintiff-appellant.

Francis H. Fox, Boston, Mass., with whom Joseph L. Kociubes, Paul G. Boylan and Bingham, Dana & Gould, Boston, Mass., were on brief, for defendant-appellee.

Before COFFIN, Chief Judge, CAMPBELL, Circuit Judge, and NELSON, ^* District Judge.

NELSON, District Judge.

This appeal involves three corporations: Avtek Manufacturing Corporation (AMC), its parent company Avtek Incorporated (Avtek, Inc.), and the First National Bank of Boston (the bank). AMC and Avtek Inc. are both Rhode Island corporations; the former manufactured recreational vehicles in that state, while the latter was engaged primarily in the sale of snowmobiles in Vermont. In April of 1973, AMC terminated its operations and liquidated its assets. As discussed below, certain proceeds from the sale of its inventory, in the amount of $269,077.91, were eventually paid to the bank in partial satisfaction of an outstanding loan to Avtek Inc. AMC's creditors filed a petition in bankruptcy some eight months later, on December 21, 1973. Plaintiff, the trustee in bankruptcy of AMC, subsequently brought the present suit, claiming that the payment to the bank constituted a fraudulent conveyance under § 67(d)(2) of the former Bankruptcy Act, 11 U.S.C. § 107(d)(2) (1970). ¹ The district court upheld the transfer on two independent grounds and entered judgment for the defendant bank. Plaintiff, represented by new counsel, filed this timely appeal. We affirm.

I.

Avtek, Inc., the parent of AMC, is in turn a subsidiary of Avtek Corporation (Avtek Corp.). This arrangement between Avtek Inc. and Avtek Corp. resulted from a merger in March of 1972. Prior to that time, Avtek Inc. was an independent company called Rodco Incorporated (Rodco). On June 8, 1971, Rodco entered into a revolving loan and security agreement with the bank. As collateral for the bank's financing, Rodco granted a continuing security interest in, inter alia, its inventory, contract rights, accounts receivable, and "(a)ll other rights of the Borrower to the payment of money, now existing or hereafter arising." This agreement authorized the bank to collect directly from a contract debtor of Rodco. Subsequent to the merger between Avtek Corp. and Rodco and the creation of Avtek Inc. as a subsidiary of Avtek Corp., the bank agreed to continue financing Rodco (now Avtek Inc.) under the terms of the 1971 security agreement. As confirmed in a letter agreement dated April 5, 1972, Avtek Inc. in return agreed, inter alia, not to "make any loans or payments of any kind to Avtek Corp., or any of its subsidiaries or affiliates" without the bank's prior permission. The revolving loan and security agreement with the bank constituted Avtek Inc.'s sole source of financing.

AMC became a wholly-owned subsidiary of Avtek Inc. on December 8, 1972 when the latter purchased all of the stock of a company called Williamscraft of Rhode Island, Inc. and renamed it AMC. Throughout its short-lived period of operation, AMC acquired no independent source of financing and received all operating funds from Avtek Inc. Except for a payroll account funded by its parent, AMC maintained no bank accounts. Avtek, Inc. paid all of AMC's suppliers and creditors out of and deposited all funds received by AMC into its own bank account in Vermont. ² In reflection of the disbursements by Avtek Inc. to or for its subsidiary, the intercompany accounts in Avtek Inc.'s balance sheets listed a debt of $479,650 as of January 27, 1973, and of $850,414 as of March 31, 1973. The statement of affairs of AMC, which accompanied the bankruptcy petition, listed Avtek Inc. as a creditor of AMC in the amount of $529,670.

Both parties stipulated, and the district court found, that this "downstreaming" of funds to its subsidiary violated Avtek Inc.'s agreement with the bank. In response to this violation, and in lieu of calling in the loan, the bank executed a second security agreement with both Avtek Inc. and AMC, under which it acquired a security interest in the inventory and accounts receivable of each company. This agreement, manifested in a letter dated February 2, 1973, was signed by Rodney Hughes, the president of Avtek Inc., and by Charles Shuff, the vice-president of AMC. On March 6, 1973, the Avtek Inc. board of directors adopted a corporate borrowing resolution which authorized and ratified agreements to borrow signed singly by Mr. Hughes. The AMC board of directors adopted an identical resolution that same day with respect to Mr. Shuff. Each company then executed and delivered to the bank U.C.C. financing statements which were subsequently filed. AMC ceased operations and liquidated its assets shortly thereafter. The proceeds from the sale of its inventory ultimately were used as described further below to repay part of the bank's outstanding loan to Avtek Inc. The trustee contends that this transfer was fraudulent.

II.

Before the district court, both parties concentrated on the question of whether the 1973 security agreement created a security interest in, inter alia, the inventory of AMC. As articulated before us, plaintiff's challenge to the validity of the 1973 agreement is two-pronged. First, he contends that the agreement only benefited Avtek Inc., by enabling it to continue borrowing from the bank; AMC received no fair consideration for the granting of a security interest, and the agreement was thus a fraudulent conveyance under 11 U.S.C. § 107(d)(2)(a) (1970). ³ Second, he argues that Shuff's execution of the security agreement was neither authorized by the corporate by-laws nor subsequently ratified. In plaintiff's view, the corporate borrowing resolution was adopted not to ratify Shuff's action, of which neither AMC's treasurer nor its general counsel was aware, but rather in connection with an anticipated direct line of credit between AMC and the bank. Moreover, he contends that the subsequent financing statement was executed for the same purpose; the security agreement thus was not only unauthorized but unperfected as well.

The district court rejected plaintiff's first argument, ruling that the downstreaming of funds to AMC provided adequate consideration for AMC's transfer of a security interest. AMC benefited not only from the bank's decision not to call the loan, an action that would have deprived Avtek Inc. and hence AMC of their sole source of financing, but also from the bank's sanctioning of future downstreaming. The court declined to address plaintiff's second argument, however. Instead, it relied on two other, alternative grounds for rejecting plaintiff's claim. The court found as a factual matter that AMC transferred the proceeds from the inventory sale not to the bank, as plaintiff had alleged but rather to Avtek Inc., which deposited them in its Vermont bank account. Then, because the outstanding balance of the loan to Avtek Inc. totalled over $2,000,000 at the time, and in accordance with its customary procedure, see note 2 supra, Avtek Inc. in a separate transaction transferred the money to the bank to be applied against the loan. The court concluded that plaintiff "has no cause for complaint under the Bankruptcy Act for these successive transfers." Since Avtek Inc. was both a creditor of AMC and a debtor of the bank, each transfer of funds was in partial satisfaction of an antecedent debt. Fair consideration therefore existed in both instances under the terms of 11 U.S.C. § 107(d)(1)(e) (1970). See note 3 supra. Alternatively, the court suggested that defendant should prevail even if the proceeds did travel directly from AMC. The 1971 agreement gave the bank a security interest in, and the right to enforce directly, all rights of Avtek Inc. "to the payment of money, now existing or hereafter arising" a category which was found to include AMC's debt to its parent.

III.

On appeal, in addition to his several arguments regarding the validity of the 1973 security agreement, plaintiff advances various procedural and substantive objections to the district court's rulings. The procedural challenges revolve primarily around the court's finding of successive transfers. Because we believe this finding to be supported by the evidence and dispositive of plaintiff's objections to the transfer of AMC's assets, see Part IV infra, we treat plaintiff's procedural challenges at length before proceeding to his substantive claims. He first alleges that the court erred in admitting evidence on this issue, since the parties had agreed before trial to limit the contested issues to those surrounding the validity of the 1973 agreement. Reference is made in this regard to a pretrial memorandum, signed by both sides and filed with the court at a conference on November 17, 1976, in which the parties designated nine "contested issues of law and fact." Seven of those issues, it is true, involved the 1973 agreement, and an eighth simply raised a matter to which the parties had earlier stipulated. However, the final designated issue, which asked whether "there (was) any transfer of assets from AMC to (the bank) for less than a fair consideration," would seem to have expanded the contemplated scope of inquiry beyond that described by plaintiff. That such provisions in a pretrial memorandum should be interpreted broadly cannot be gainsaid; even pretrial orders, specifically issued by the district court under Fed.R.Civ.P. 16, are "to be liberally construed to cover any of the legal or factual theories that might be embraced by their language." Rodrigues v. Ripley Indus., Inc., 507 F.2d 782,...