Matter of Baker & Getty Financial Services, Inc., Bankruptcy No. B87-00074-Y.
| Decision Date | 08 September 1987 |
| Docket Number | Bankruptcy No. B87-00074-Y. |
| Citation | 78 BR 139 |
| Parties | In the Matter of BAKER & GETTY FINANCIAL SERVICES, INC., Baker & Getty Diversified, Inc., and Baker & Getty Securities, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
Russell A. Kelm, Daniel R. Swetnam, Schwartz, Kelm, Warren & Rubenstein, Columbus, Ohio, George J. Limbert, Mitchell, Mitchell & Reed, Youngstown, Ohio, for petitioning creditors.
Robert Morrow, Means, Bichimer, Burkholder & Baker Co., L.P.A., Columbus, Ohio, for The First National Bank of Barnesville.
Carl D. Rafoth, Youngstown, Ohio, trustee.
Dwight A. Packard, Cincinnati, Ohio, for Suzan Cordek.
ORDER ON CREDITORS' MOTION FOR SUBSTANTIVE CONSOLIDATION
This cause came on for consideration upon the Motion of the Petitioning Creditors for substantive consolidation of the estates of PHILIP CORDEK and SUZAN BIERMAN CORDEK with the estates of the Corporate Debtors. Upon review, the Court determines that substantive consolidation is appropriate in this case.
There are three Corporate Debtors involved in this case. BAKER & GETTY FINANCIAL SERVICES, INC., ("BGFS") was formed August, 1985 to effect transactions in securities and to operate as a broker dealer. In fact, BGFS held itself out as a fully licensed broker dealer and a member of the Securities Investment Protection Corporation, although it apparently never became fully licensed. The second Debtor implicated in this case is BAKER & GETTY DIVERSIFIED, INC. ("BGD"). This entity was formed in December, 1985 to locate and develop real estate investment opportunities for customers of the brokerage firm and to loan funds to BGFS. BAKER & GETTY SECURITIES, INC., ("BGS") was formed in June, 1986 to replace both BGFS and BGD. BGS subsequently filed an application to become a licensed broker dealer in August, 1986, but its application was later withdrawn. Nevertheless, it held itself out as a licensed broker dealer.
PHILIP CORDEK was a director of the three corporations and was the sole signatory on the corporations' various bank accounts. In November, 1986, he admitted that he had undertaken activities as part of a plan to defraud investors. The deception appears to be a classic Ponzi scheme whereby investors were told that CORDEK's uncle in New York had large blocks of stock available for sale at a discount. The investors were told that the stock would be immediately sold at a profit and that they would quickly realize a handsome return on their principal investment. However, instead of purchasing the stock with the investor's money, the funds were used to pay off previous investors. By November 1, 1986, investors appear to have been defrauded of an estimated 3.5 million dollars.
There were five bank accounts which were used by CORDEK for business and personal matters. Three of the accounts were opened in the name of "BAKER & GETTY DIVERSIFIED". Two of the accounts were personal accounts of CORDEK. On numerous occasions, corporate funds were used for personal matters. For example, corporate funds were used by CORDEK to: (1) purchase automobiles; (2) repay his educational loans; (3) purchase a boat which was eventually titled in his wife's name; (4) buy furniture, jewelry and other personalty; (5) pay for a home located near Cleveland, Ohio, and improvements to that home; and (6) pay for hotel rooms for guests attending his wedding. Conversely, personal funds were used to satisfy corporate obligations. See Petitioning Creditors Exhibits 8C, 8D, 8I, 12A, 2G, 12I, 12J, 12M-120, and 12Q. CORDEK testified at a hearing on this Motion that the bank accounts were used interchangeably.
In August, 1986, Mr. Byron Rice, who was a regular business customer of the Bank, approached the FIRST NATIONAL BANK OF BARNESVILLE to obtain a loan. He represented to Mr. Charles Bradfield, President of the Bank, that the purpose of the loan was to permit him and CORDEK to purchase various investments which would be sold a short time later. The proceeds of the sale would then be applied to the loan balance. In his testimony, Bradfield admitted that while he was aware that CORDEK was associated with the BAKER & GETTY corporate entities, he considered his dealings with CORDEK to be personal in nature. However, Bradfield also testified that the Bank did not rely upon CORDEK's creditworthiness nor upon his assets in approving the loan. The Bank was satisfied with the pledge of Rice's assets as security for the loan because of the long relationship which the Bank had enjoyed with Rice. In spite of this fact, Bradfield stated that Rice had insisted that CORDEK be a signatory to the note. Thus, in August 1986, CORDEK and Rice obtained a loan from the Bank in the amount of 1.1 million dollars, which was used to purchase various securities. The securities were sold within days and the proceeds transferred to CORDEK's account. No part of the proceeds was ever used in repayment of the loan.
On January 17, 1987, involuntary Petitions were filed against the three BAKER & GETTY corporate entities. The Petitions were not contested, and Orders for Relief were entered on February 18, 1987. On May 26, 1987, the Court entered an Order substantively consolidating the estates of the three corporate debtors. The Order was entered without objection by any party in interest.
On April 9, 1987, the Petitioning Creditors filed a Motion seeking to join PHILIP CORDEK and SUZAN BIERMAN CORDEK as affiliates in this action. Once again, the Motion was not opposed by any party in interest, and an Order joining them as affiliates was entered on April 28, 1987.
On May 22, 1987, the instant Motion for substantive consolidation was filed. The relief sought is not opposed by PHILIP and SUZAN CORDEK. In fact, the only party opposing the Motion is the Bank. The Bank claims that if the Motion is sustained, the Bank will be severely prejudiced because the payments received in partial satisfaction of the loan (approximately Two Hundred Thousand & 00/100 Dollars ($200,000.00)) and the perfection of security interests in certain of CORDEK's property might be deemed to be within the 90-day preference period established by 11 U.S.C. Sec. 547, since these transactions took place within 90 days of the involuntary filings against the corporate entities.
Substantive consolidation is the merger of separate entities into one action so that the assets and...
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