In re N & D Properties, Inc.
| Decision Date | 30 September 1985 |
| Docket Number | Bankruptcy No. 83-03501A,Civ. A. No. C85-2226A. |
| Parties | In re N & D PROPERTIES, INC., d/b/a the Sofa Galleries on Paces, Debtor. Julia Schou ESTES, Plaintiff/Appellee/Cross-Appellant, v. David W. CRANSHAW, Chapter 7 Trustee for N & D Properties, Inc., d/b/a the Sofa Galleries on Paces, Defendant/Appellant/Cross-Appellee. |
| Court | U.S. District Court — Northern District of Georgia |
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Nolan B. Harmon, Harmon, Smith & Bridges, Atlanta, Ga., for plaintiff/appellee/cross-appellant.
Peter J. Quist, Steven K. Bender, Robert A. Bartlett, Hicks, Maloof & Campbell, Atlanta, Ga., for defendant/appellant/cross-appellee.
This appeal from a final judgment of the United States Bankruptcy Court for the Northern District of Georgia is before this court pursuant to 28 USC § 158. The appellant in this case is the trustee appointed to oversee the debtor corporation's Chapter 7 liquidation proceeding. The appellee and cross-appellant is Mrs. Julia Estes, a claimant against the estate of the debtor corporation. Both parties to this appeal have moved for leave to exceed this court's page limitations for briefs. In view of the complexity of this case and the parties' good faith compliance with the requirements of Bankruptcy Rule 8010, leave to exceed page limitations imposed by this court with respect to the briefs already filed by the parties is GRANTED.
In reviewing the decision of the bankruptcy court, this court is mindful that the bankruptcy court's "findings of fact should not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Bankruptcy Rule 8013.1 Of course, this court may make a de novo review of the bankruptcy court's conclusions of law. Borg-Warner Acceptance Corp. v. Fedders Federal Corp. (In Re: Hammons), 614 F.2d 399, 403 (5th Cir.1980).
After a four and one-half day hearing, consisting of seventeen witnesses and the presentation of 616 exhibits, the bankruptcy court made eighty separate findings of fact regarding the events and transactions involving Mrs. Estes' claim against the debtor corporation's estate. Having reviewed the transcript of this hearing and considered the evidence before the bankruptcy court, this court cannot conclude that the findings of fact were clearly erroneous. The findings of fact of the bankruptcy court are hereby adopted and incorporated by reference. Although reference to the order of the court below would give a complete understanding of the facts which this court takes to be true, those facts which are central to the legal issues in this appeal are summarized as follows.
The debtor corporation, N & D Properties, Inc., was formed on November 30, 1979 by James H. Dowis. N & D Properties did business as Sofa Galleries on Paces, a furniture store which N & D Properties agreed to manage for AGAPE, Inc. When Dowis initially formed N & D Properties he looked to the claimant, Mrs. Julia Estes, for assistance in financing the venture. Dowis was a long-time family friend of the Estes and had been the family accountant for ten to fifteen years prior to the formation of N & D Properties.
In February of 1980 Mrs. Estes agreed to make a $40,000 loan to N & D Properties. She understood that she would receive interest on her loan in the amount of three percent of the monthly sales of the furniture store and that she would recover the principal amount when "the store got on its feet." Over the life of the corporation she received approximately $22,421 in such interest payments. The principal amount was never repaid.
In October of 1980 plaintiff pledged to First National Bank of Gwinnett (FNBG) four bonds worth $25,000 each to secure a loan from FNBG to N & D Properties in the amount of $60,010.50. Plaintiff received 450 shares of common stock of the debtor corporation as well as a $25,000 personal loan for the construction of a swimming pool in consideration for having pledged her bonds to FNBG. This transaction made Mrs. Estes an owner of forty-five percent of the outstanding shares of the debtor corporation. Mrs. Estes subsequently repaid the swimming pool loan in full on September 24, 1982.
Dowis approached Mrs. Estes in the spring of 1981 requesting stock pledges for the benefit of the debtor corporation so that its volume of furniture could be expanded.2 Mrs. Estes agreed to hypothecate shares of American Brands, Inc. stock in favor of N & D Properties as collateral for a loan with First National Bank of Cobb (FNBC). She executed a hypothecation certificate on April 28, 1981 covering 500 shares of her American Brands stock and simultaneously co-signed a promissory note for a loan to N & D Properties in the amount of $25,000. On June 12, 1981 this promissory note was renewed and the principal amount of the loan was increased to $46,200. Mrs. Estes also cosigned this second promissory note.
Mrs. Estes received a copy of a demand letter on July 29, 1981 from FNBG stating that N & D Properties was in default on the payment of notes secured by her pledge of bonds in October of 1980. In an apparent effort to refinance the FNBG loan, plaintiff agreed to execute a new hypothecation certificate in favor of N & D Properties with FNBC. On August 13, 1981 she hypothecated an additional 3,694 shares of American Brands stock and contemporaneously co-signed a promissory note for a loan to N & D Properties in the amount of $87,000. A portion of this additional amount acquired from FNBC was used to pay the FNBG loans. Mrs. Estes received the four bonds held by FNBG as collateral upon repayment of the FNBG loan. The remainder of the money acquired as a result of the August 13, 1981 transaction was used to pay back Mrs. Estes for a short-term loan of $8,000 apparently made to N & D Properties earlier in August of 1981.
In addition to the collateral represented by the stock hypothecated by Mrs. Estes, FNBC acquired a security interest in the debtor corporation's inventory by virtue of a security agreement executed on September 30, 1981. This security interest was perfected by the filing of a UCC financial statement. On the strength of Mrs. Estes' American Brands stock and the subsequent security agreement, FNBC renewed the initial promissory notes referred to above and extended further loan amounts and credit to the debtor corporation between September of 1981 and July of 1983. Mrs. Estes participated in the renewal of the initial promissory notes, as well as the extension of further credit to the debtor corporation. N & D Properties eventually amassed an indebtedness to FNBC of $191,669.11.
In April of 1983 Mrs. Estes learned from her husband that there was "big trouble" with the FNBC loans and that her stock might be sold to satisfy the debtor corporation's debt. Mrs. Estes received a copy of a demand letter to N & D Properties from FNBC on June 23, 1983 outlining default by N & D Properties in the repayment of $191,669.11. Mrs. Estes hired an attorney who negotiated an extension of time before the sale of her stock by FNBC. Mrs. Estes' attorney commissioned a study of the finances of the debtor corporation by a retail business consultant who concluded on July 18, 1983 that the business was insolvent. On that same day FNBC sold the American Brands stock which had secured the obligations previously outlined and returned the excess of $79,692.61 realized from the liquidation of the stock to Mrs. Estes. On July 21, 1983 FNBC executed an assignment to Mrs. Estes of the promissory note which the liquidation of her stock satisfied, and of the security agreement and financing statement representing the security interest which FNBC had acquired in the debtor corporation's inventory.
On July 22, 1983 plaintiff made a secured loan to the debtor corporation for the purpose of allowing it to file for Chapter 11 bankruptcy. The loan was in the amount of $1,200. On July 29, 1983 N & D Properties elected plaintiff as secretary for the purpose of filing a Chapter 11 bankruptcy petition. On August 2, 1983 N & D Properties filed a Chapter 11 petition and Mrs. Estes resigned as secretary. The present action was commenced on August 17, 1983 when Mrs. Estes filed a motion for relief of stay or adequate protection, seeking to foreclose on the security interests which she acquired from FNBC and as a result of the loan she made to the debtor corporation enabling it to petition for bankruptcy. Because N & D Properties converted the bankruptcy proceeding from a Chapter 11 corporate reorganization to a Chapter 7 liquidation proceeding, Mrs. Estes re-filed her motion as an adversary complaint on September 8, 1983 seeking recovery of the money held by the trustee as a result of Chapter 7 liquidation. The trustee responded to plaintiff's complaint, and following a hearing a decision was rendered by the bankruptcy court from which both parties appealed.
It is unclear what precipitated the demise of the debtor corporation. Dowis has noted that the debtor corporation struggled financially as a new business suffering from slow furniture sales during a recessionary period. Tr. V. IV, p. 53. It is disputed whether initial undercapitalization contributed to the eventual bankruptcy of the debtor corporation. The bankruptcy court made no findings regarding undercapitalization, but a review of the record reveals that pursuant to its initial agreement with AGAPE, Inc., to manage its furniture business $30,000 was raised as initial capital. Tr. V. IV, pp. 44-54 (Dowis). It is disputed whether this money, contributed by three friends of Dowis who were originally listed as officers of the corporation, constituted loans or outright capital contributions. Id. Expert testimony on behalf of the trustee revealed that if this initial $30,000 were considered paid-in capital, then it would be adequate capitalization for the...
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