In re Richards & Conover Steel, Co.
| Decision Date | 28 September 2001 |
| Docket Number | No. 01-6017WM,01-6018WM.,01-6017WM |
| Citation | 267 BR 602 |
| Parties | In re RICHARDS & CONOVER STEEL, CO., Debtor. Robert A. Pummill, Trustee, Plaintiff — Appellee, v. Greensfelder, Hemker & Gale, Defendant — Appellant. and Robert A. Pummill, Trustee, Plaintiff — Appellee, v. Ameristeel, Inc., Defendant — Appellant. |
| Court | U.S. Bankruptcy Appellate Panel, Eighth Circuit |
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A. Thomas DeWoskin, St. Louis, MO, for appellant.
Scott Brian Haines, Overland Park, KS, for appellee.
Before SCOTT, DREHER, and McDONALD,1 Bankruptcy Judges.
This is an appeal from an order of the bankruptcy court awarding Appellee, Robert A. Pummill, Debtor's Chapter 7 Trustee ("Trustee"), judgments against Appellants, Ameristeel Inc. ("Ameristeel") and the law firm of Greensfelder, Hemker & Gale, P.C. ("GHG") in the sums of $10,153.05 and $10,331.90 respectively. For the reasons stated below, we affirm in part and reverse in part.
In early 1999, Debtor Richard & Conover Steel, Co. ("Rich-Con"), in cooperation with one of its secured creditors, began the process of liquidating its operations. A representative of the secured creditor was placed on site to accomplish liquidation of the secured creditor's collateral. Ameristeel, Rich-Con's largest unsecured creditor, took the lead in forming an Unofficial Unsecured Creditors' Committee ("UUCC") to protect Rich-Con's unsecured creditors. The UUCC employed an attorney from GHG. During the initial meeting of the UUCC it was determined that Rich-Con would be asked to pay the fees of GHG, but that the members of the UUCC would ultimately be responsible for such payment should Rich-Con fail to pay. A representative of Rich-Con was present at this meeting, understood and agreed that Rich-Con was responsible for paying the attorney's fees and expenses of the UUCC, and was made aware that if it did not pay, the UUCC would be responsible for doing so.
The purpose of the UUCC was to maximize the value of Rich-Con's assets in the hopes of making some distribution to the unsecured creditors. GHG and the UUCC assisted in maximizing the assets of Rich-Con by helping to liquidate collateral in an organized fashion and collecting accounts receivable. As a result, approximately $125,000 was generated for payment to unsecured creditors. GHG and the UUCC also negotiated with a secured creditor and obtained its commitment to reduce the prepayment penalty on the secured loan by $100,000, thus reducing Rich-Con's obligations upon prepayment and freeing up more money for unsecured creditors.
GHG billed the UUCC on a regular basis until January 2000, but the UUCC did not pay. Instead, GHG sent a letter to Rich-Con requesting that Rich-Con pay GHG's bill because it believed Rich-Con had agreed to do so. At trial, a representative of Rich-Con acknowledged the agreement to do so. On January 28, 2000, Rich-Con wrote a check to Ameristeel in the amount of $10,153.05 to reimburse Ameristeel for legal fees and expenses paid by the UUCC to GHG. On the same date, Rich-Con paid $7,331.90 to GHG as payment of legal fees and expenses incurred by the UUCC. On February 1, 2000, Rich-Con paid another $3,000.00 to GHG for additional legal fees and expenses incurred by the UUCC.
On February 15, 2000, an involuntary Chapter 7 bankruptcy was filed against Rich-Con by four unsecured creditors who chose not to cooperate with the UUCC. At the time, checks had been prepared for delivery to unsecured creditors in partial pro rata distribution on their claims against Rich-Con. The funds to cover these checks were in large measure the product of the efforts of GHG. Upon being appointed, however, the Trustee invalidated the checks, and the unsecured creditors were not paid. Instead, the funds on hand at the time the involuntary bankruptcy was filed were expected to be used to help defray administrative expenses in the bankruptcy case.
The Trustee filed separate adversary proceedings against Ameristeel and GHG (collectively, "Defendants") seeking to recover the payments that had been made to them. The complaints specifically alleged that both Defendants had received preferential transfers under 11 U.S.C. § 547. In response, Defendants asserted that they were not creditors of Rich-Con because the efforts of GHG had been performed under direction, from and solely on behalf of, the unsecured creditors, and therefore the transfers to them were not subject to avoidance. Although Ameristeel was a creditor of Rich-Con, the parties agreed that the funds paid to Ameristeel were for reimbursement of the attorneys' fees and expenses incurred by the UUCC and not as payment of Ameristeel's trade debt.
During trial, the Defendants introduced evidence of the work GHG had done in assisting in liquidation, recovering receivables, and reducing the prepayment penalty. Defendants' witnesses testified that all such efforts were performed for the UUCC and not for Rich-Con. Accordingly, Defendants proved they were not creditors of Rich-Con. During trial, it became apparent to the Trustee that this evidence, while proving a lack of debtor-creditor relationship, also provided proof of an essential element of a fraudulent conveyance case under 11 U.S.C. § 548(a)(1)(B), namely lack of reasonably equivalent value. During closing arguments, the Trustee orally moved the court for leave to amend his complaint to conform to the evidence. There was no dispute that the UUCC was established to maximize the value of the Rich-Con's assets during the liquidation in hopes of providing payment to unsecured creditors. There was also no dispute that the funds paid to Defendants were for payment of or in reimbursement for attorneys' fees and expenses incurred by and on behalf of the UUCC, that payments by Rich-Con were made within a year of the filing date, and that Rich-Con was insolvent at the time of the transfers to Defendants. The only element remaining to be proved was whether Rich-Con had received less than reasonably equivalent value, or in fact any value, in exchange for the transfer of funds to the Defendants. Since the Defendants testified they were not creditors of Rich-Con, the Trustee argued that Rich-Con could not have received any value in exchange for the transfer of such funds to Defendants.
Defendants opposed the motion to amend on the basis that it was not a trivial amendment. They asserted that if they had known they were trying a fraudulent conveyance case, they would have tried their case differently. They argued that the focus of the defense would have been different and they would have had their witnesses testify that Debtor, as well as the UUCC, had received the benefit of the work done by GHG. Alternatively, they argued the merits, asserting that there was no fraudulent conveyance because, on the evidence produced at trial, reasonably equivalent value had been given in exchange for the payment of the UUCC's attorneys' fees and expenses.
Before taking the case under advisement, the bankruptcy court offered Defendants an opportunity to further brief the issues. Defendants declined and did not ask for a continuance or for an opportunity to offer additional evidence.
The bankruptcy court granted the Trustee's oral motion to amend the pleadings to conform to the evidence, specifically finding that the fraudulent conveyance issue was actually tried by the parties and that the Defendants had been given a full opportunity to defend against that claim. In defense of the section 547 action, Defendants had presented evidence showing that GHG and Ameristeel were not creditors of Rich-Con for purposes of section 547 and that the benefits of the work done by GHG and the UUCC flowed to the unsecured creditors, not to Rich-Con. Based upon this evidence, the court determined that an action for fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B) had been tried by the parties and there would be no denial of due process if the amendment was allowed.
The bankruptcy court then addressed the merits of an action under 11 U.S.C. § 548(a)(1)(B). The court found that the Trustee had established the four elements of a cause of action under 11 U.S.C. § 548(a)(1)(B): (1) a transfer of property, (2) made or incurred within one year of the date of the filing of the petition, (3) the Debtor's insolvency on the date of the transfer, and (4) a transfer in exchange for less than the reasonably equivalent value. Steffens v. Citicorp Mortgage, Inc., 148 B.R. 914, 916 (Bankr.W.D.Mo.1993). Defendants conceded the first three elements, leaving only the issue of whether reasonably equivalent value had been exchanged. The court concluded that Rich-Con had received no value in exchange for the payment of the attorneys' fees and expenses and the transfers were fraudulent under 11 U.S.C. § 548(a)(1)(B). A judgment in the amount of $10,331.90 plus interest was entered against GHG. A judgment in the amount of $10,153.05 plus interest was entered against Ameristeel.2
In these cases, consolidated for the purposes of appeal, GHG and Ameristeel appeal both the bankruptcy court's allowance of the amendment to conform to the evidence and the finding that Rich-Con did not receive reasonably equivalent value in exchange for its payments to the Appellants.
An appellate court reviews the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. See FED. R. BANKR. P. 8013; Martin v. Cox (In re Martin), 140 F.3d 806, 807 (8th Cir.1998); Merchants Nat'l Bank v. Moen (In re Moen), 238 B.R. 785, 790 (8th Cir. BAP 1999). "A finding of fact is `clearly erroneous' when, although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer, 470 U.S....
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