712 F.2d 206 (5th Cir. 1983), 83-1044, Matter of Missionary Baptist Foundation of America, Inc.

Docket Nº:83-1044
Citation:712 F.2d 206
Party Name:In the Matter of MISSIONARY BAPTIST FOUNDATION OF AMERICA, INC., et al., Debtors. Robert B. WILSON, Trustee, Plaintiff-Appellee, v. Robert G. HUFFMAN, Defendant-Appellant.
Case Date:August 18, 1983
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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712 F.2d 206 (5th Cir. 1983)

In the Matter of MISSIONARY BAPTIST FOUNDATION OF AMERICA,

INC., et al., Debtors.

Robert B. WILSON, Trustee, Plaintiff-Appellee,

v.

Robert G. HUFFMAN, Defendant-Appellant.

No. 83-1044

United States Court of Appeals, Fifth Circuit

August 18, 1983

Page 207

James V. Hoeffner, Lubbock, Tex., for defendant-appellant.

John Sims, Robert B. Wilson, Lubbock, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before CLARK, Chief Judge, POLITZ and HIGGINBOTHAM, Circuit Judges.

Page 208

POLITZ, Circuit Judge:

This appeal requires an examination of the "insider" status contemplated by Section 101(25) of the Bankruptcy Code of 1978, 11 U.S.C. § 101(25) (1978), and the subordination of an insider's claim pursuant to Section 510(c)(1) of the Code, 11 U.S.C. § 510(c)(1). We affirm the resolution of the insider status issue and remand for further consideration and entry of findings on the subordination issue.

Facts

Land Wall, president, controller and director of Missionary Baptist Foundation of America, Inc. (MBFA), a religious non-profit corporation, filed a petition for reorganization of that corporation and its seven wholly-owned subsidiaries, together considered as one entity, under Chapter 11 of the Bankruptcy Code. The debtor's schedules included two promissory notes which are the subject of this appeal. These notes represent obligations of the debtor to Robert G. Huffman, claimant herein, and result from several transactions involving (1) Huffman, (2) Wall, (3) their partnership known as Wall and Huffman, (4) West Texas Home Health Care, Inc. (West Texas Homes), a nursing home management corporation owned by Huffman and Wall, and (5) one or more of MBFA's subsidiaries. 1

Huffman and Wall established both their partnership, Wall and Huffman, and their corporation, West Texas Homes, in 1975. The partnership purchased Dumas Convalescent Center, a nursing home in Dumas, Texas, borrowing $228,000 from a commercial lender to cover the downpayment and the costs of needed improvements. Huffman had no personal exposure on this loan. Shortly thereafter the partnership contracted with West Texas Homes for the operation of the facility. Wall handled the financial details; Huffman was involved exclusively in management.

In early 1977, Wall individually purchased the Crestview Home in Throckmorton, Texas. He entered into a management contract with West Texas Homes identical to that covering the Dumas home. On February 1, 1977, Wall transferred his interest in Crestview to Pampas Enterprises, a partnership composed of himself and three family members. That same day Pampas subleased the property to West Texas Homes.

Crestview and Dumas were sold to MBFA in April 1977. Under the terms of this package sale, MBFA assumed all indebtedness encumbering the properties and agreed to pay $148,014 for the equity. Huffman and Wall, individually, each received a promissory note for $74,007, secured by a second lien on the Dumas property. Through this en globo transaction Huffman shared equally with Wall in the equity in Crestview, despite the former's apparent lack of a proprietary interest therein.

Contemporaneously with the sale of the Dumas and Crestview homes, West Texas Homes assigned its contractual rights in both homes to MBFA receiving therefor two unsecured promissory notes, each in the amount of $88,860. West Texas Homes was subsequently dissolved and in the distribution of its assets, its shareholders, Huffman and Wall, each received one of the $88,860 notes.

Through August of 1980, MBFA made periodic payments to Huffman on the $74,007 and $88,860 notes. When the petition in bankruptcy was filed, MBFA's books reflected a balance of $37,170.96 owed Huffman on the $74,007 note. Although the corporate books did not evidence the $88,860 note, MBFA's representatives acknowledged the existence of a debt in this amount to West Texas Homes. The debtor's

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schedules reflected an aggregate balance on the two notes in favor of Huffman of $119,005.

The trustee formally objected to Huffman's claim, contending that MBFA was not indebted to him on the $88,860 note nor for the $37,170.96 balance, because the $74,007 note was invalid as the product of an arrangement by Huffman and Wall designed to improperly extract monies from the debtor. The bankruptcy court found, inter alia, that Wall's ownership or control of the debtor placed him within the definition of "insider of the debtor," 11 U.S.C. § 101(25)(B). Recognizing that Huffman's connection with MBFA differed from Wall's, the bankruptcy court then addressed the question whether Huffman could be characterized as an insider because of his business relationship with Wall and his stock ownership in West Texas Homes.

The bankruptcy judge found that MBFA's acquisition of the Dumas and Crestview homes and West Texas Homes' contractual position were effected by Wall on a less than arms-length basis. The judge concluded that because West Texas Homes was an affiliate of the debtor under 11 U.S.C. § 101(2)(B), its conveyance of the $88,860 note to Huffman was an insider transaction. Further, the judge determined that the $74,007 indebtedness to Huffman, in his capacity as general partner of a partnership which controlled the debtor, likewise resulted from an insider transaction.

Based on these findings, the bankruptcy judge allowed the...

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