Robinson v. Watts Detective Agency, Inc., s. 81-1697

• Decision Date: 19 July 1982
• Docket Number: Nos. 81-1697,s. 81-1697
• Citation: 685 F.2d 729,10 Fed. R. Evid. Serv. 1333
• Parties: 10 Fed. R. Evid. Serv. 1333 Robert ROBINSON, Trustee in Bankruptcy of D. C. Sullivan & Co., Inc., Plaintiff-Appellee, v. WATTS DETECTIVE AGENCY, INC., et al., Defendants-Appellants. Daniel Sullivan, Defendant-Appellant. Billy R. Otte, Defendant-Appellant. to 81-1700.
• Court: U.S. Court of Appeals — First Circuit

Page 729

685 F.2d 729

10 Fed. R. Evid. Serv. 1333

Robert ROBINSON, Trustee in Bankruptcy of D. C. Sullivan &

Co., Inc., Plaintiff-Appellee, v. WATTS DETECTIVE AGENCY, INC., et al., Defendants-Appellants.

Daniel Sullivan, Defendant-Appellant.

Billy R. Otte, Defendant-Appellant.

Nos. 81-1697 to 81-1700.

United States Court of Appeals, First Circuit.

Argued April 9, 1982.

Decided July 19, 1982.

Timothy H. Gailey, Boston, Mass., with whom Mark N. Polebaum, and Hale & Dorr, Boston, Mass., were on brief, for Watts Detective Agency, Inc., et al.

James F. Freeley, Boston, Mass., with whom Feeney & Freeley, Boston, Mass., was on brief, for Daniel Sullivan.

Daniel F. Featherston, Jr., Boston, Mass., with whom Benjamin Goldman, Boston, Mass., was on brief, for Robert Robinson, Trustee.

Benjamin Brown, Boston, Mass., for Billy R. Otte.

Before CAMPBELL, BOWNES and BREYER, Circuit Judges.

BOWNES, Circuit Judge.

This appeal follows an action brought by the trustee in bankruptcy of D. C. Sullivan Company against the defendants-appellants to recover the value of assets allegedly misappropriated from the bankrupt Sullivan Company. The appellants are Watts Detective Agency, Inc., the recipient of the assets, Consolidated Services Corporation, Watts' parent corporation, and Christopher P. Recklitis, president of Watts and Consolidated (collectively, the Watts appellants); Daniel C. Sullivan, president and a director of the bankrupt company; and Billy R. Otte, vice-president and a director of the bankrupt. The complaint alleged three separate counts, each a different theory of liability, against all five defendants: (I) that within a year prior to Sullivan Company's bankruptcy defendants caused to be transferred to Watts the company's assets without fair consideration, rendering the company insolvent, in violation of the fraudulent conveyance section of the former Bankruptcy Act, 11 U.S.C. § 107(d)(2)(a) (repealed 1978); ¹ (II) that defendants caused such transfer to be made within a year prior to the company's bankruptcy with the intent to hinder, delay or defraud creditors in violation of former 11 U.S.C. § 107(d)(2)(d); and (III), a pendent state action claim, that Sullivan and Otte, in facilitating the transfer, breached their fiduciary duty to Sullivan Company and the other defendants all knowingly participated in the breach of duty. The jury found all five defendants liable for the fraudulent conveyance under Count I, found all defendants not liable on Count II, found only Sullivan and Otte liable for breach of fiduciary duty under Count III, and awarded damages to the trustee in the amount of $750,000.

The defendants all moved for judgment notwithstanding the verdict pursuant to Federal Rule of Civil Procedure 50(b) and in the alternative for a new trial pursuant to Federal Rule of Civil Procedure 59(a). In a lengthy and thorough opinion the district court denied the various motions, from which decision defendants appeal in addition to appealing generally from the judgment on the grounds of claimed trial errors. The trustee cross-appeals the district court's denial of his motion to alter or amend judgment to include prejudgment interest on the verdict and to enter judgment against Watts, Consolidated and Recklitis on Count III.

We begin by setting forth the relevant facts, mindful that we review the evidence and inferences fairly drawn therefrom in the light most favorable to the prevailing party. DeVasto v. Faherty, 658 F.2d 859, 861 (1st Cir. 1981); Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d 1, 9 (1st Cir. 1979), cert. denied, 446 U.S. 983, 100 S.Ct. 2964, 64 L.Ed.2d 839 (1980).

The evidence consisted largely of admitted facts and the testimony of Otte, Sullivan and Recklitis. The Sullivan Company was in the business of supplying security guards to businesses, industrial plants and others. Sullivan, who was president and a director, was in charge of the company's finances. Otte, vice-president and a director, was in charge of general management of operations for the company. The company's financial difficulties started prior to the time of the transfer at issue. Since 1968 it had owed the Internal Revenue Service for unpaid taxes which amounted by April 1970 to over $210,000. In 1969 and 1970 its sales were consistently exceeded by its disbursements, and for three weeks prior to the alleged transfer it issued payroll checks which were returned because of insufficient funds. ²

In May 1969 Recklitis, on behalf of Consolidated, negotiated with Otte over the possible purchase of the company. Nothing resulted from these negotiations. By early 1970 the IRS was pressing the company to pay its past due taxes, and, at that time, Otte and Recklitis met again to discuss a possible purchase by Consolidated or Watts. ³ In mid-April Recklitis made his first offer for the operating portion of the company's business, i.e. its customer accounts, employees and goodwill. He offered to pay in installments for each of the succeeding four years an amount equivalent to five percent of that portion of the gross sales attributable to Sullivan Company customers. Because the approximate annual gross sales of Sullivan was one million dollars, this meant a contemplated purchase price of two hundred thousand dollars. Otte was offered a job with Watts as part of the deal. The offer to purchase the company was contingent on agreement by the IRS to settle its claim.

Shortly after the offer was made, Otte telephoned all of Sullivan Company's seventeen customers to advise them of the potential sale, to assure them of uninterrupted guard service and to learn which customers would remain. The customers apparently indicated they would remain with the new company provided there were continuity of service.

This first offer by Recklitis was rejected by Daniel Sullivan as being too low. Within days, the IRS announced its intention to levy on Sullivan Company's past accounts receivable which, as of April 20, 1970, amounted to approximately $38,000. Cash was needed by the company to meet its weekly payroll, which was over $15,000, and within a few days Recklitis made his second offer to purchase the company. This time the proposed price was $50,000 cash and two percent of the gross sales per year for four years, which, calculated in the same manner as the first offer, amounted to a purchase price of approximately $130,000. This offer was also contingent on IRS approval. Neither the first nor second Recklitis offer included the assumption of the debts of Sullivan Company; only its operations were the subject of the negotiations.

On April 22, 1970, Recklitis, Otte and Sullivan met with representatives of the IRS in hopes of arriving at an arrangement that would meet with everyone's satisfaction. The IRS would not approve Recklitis' second offer and, at 5:00 P.M. the IRS agent walked out of the meeting stating that the company's accounts receivable would be levied upon the next morning. At that point, according to Otte, he, Sullivan and Recklitis believed that in light of the impending levies, the company was out of business. Recklitis then offered Otte a job with Watts, which Otte accepted, promising to contact the customer accounts and guards of Sullivan Company to try to secure them for Watts. According to Otte, Recklitis stated that "it's a dirty way to do it, but these accounts are up for grabs." During this conversation, Sullivan walked out "completely demoralized," according to his testimony, and told Otte to do whatever he had to do. At no time did Otte and Sullivan discuss the effect of a Watts takeover on Sullivan Company's creditors either with each other or with the other directors of the company.

That evening and the next morning Otte, on behalf of Watts, began calling Sullivan Company customers and supervisory personnel to arrange for uninterrupted guard service. He conducted this activity from the Sullivan Company offices and continued to utilize the offices, telephone and records of the company for a brief period. Nine of the company's former customers were serviced by Watts on April 23 and within several days Watts was servicing four more; of the seventeen customer accounts belonging to Sullivan Company on April 22, thirteen were ultimately serviced by Watts. In the year from April 23, 1970, to April 22, 1971, Watts received approximately $680,000 in gross sales from these former customers of Sullivan Company.

The trustee alleged in his complaint that what was transferred to Watts fraudulently and as a breach of fiduciary duty were the "operating and administrative organization of the Sullivan Company, its employees, customers, goodwill and business." All appellants argue that there was no evidence at trial that any "property," as that term is used in the Bankruptcy Act's fraudulent conveyance provision, was transferred. ⁴ In addition, they claim there was no proof of the amount by which the bankrupt's estate was purportedly diminished. Sullivan also argues that there was insufficient evidence to show he participated in the fraudulent transfer (Count I) and that the evidence does not prove that he breached his fiduciary duty to the corporation (Count III). Otte adopts all the arguments of his co-appellants.

Motions for Judgment N.O.V.

Our standard of review of a denial of a motion for judgment notwithstanding the verdict is well settled. "The motion is properly granted only when, as a matter of law, no conclusion but one can be drawn." Rios v. Empresas Lineas Maritimas Argentinas, 575 F.2d 986, 990 (1st Cir. 1978). See also DeVasto v. Faherty, 658 F.2d at 860; Hubbard v. Faros Fisheries, Inc., 626 F.2d 196, 199 (1st Cir. 1980).

We turn first to appellants' argument that no property of the bankrupt company was transferred to Watts. ⁵ Specifically, they claim: (1) that Otte and the Sullivan Company guards were not property; (2) that the Sullivan Company customers were not property of the bankrupt and that no...