Muncrief, In re, s. 88-2434

• Citation: 900 F.2d 1220
• Decision Date: 09 April 1990
• Docket Number: 88-2435,Nos. 88-2434,s. 88-2434
• Parties: 23 Collier Bankr.Cas.2d 427, 20 Bankr.Ct.Dec. 665 In re Lawrence Alfred MUNCRIEF, Debtor (Four Cases). R.J. BROWN, Trustee, Appellee, v. MT. PROSPECT STATE BANK, v. Joe Bob McADAMS, Appellant. R.J. BROWN, Trustee, Appellee, v. Joe Bob McADAMS, Appellant. R.J. BROWN, Trustee, Appellee, v. MT. PROSPECT STATE BANK, Appellant, v. Joe Bob McADAMS. R.J. BROWN, Trustee, Appellee, v. Joe Bob McADAMS.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 1220

900 F.2d 1220

23 Collier Bankr.Cas.2d 427, 20 Bankr.Ct.Dec. 665

In re Lawrence Alfred MUNCRIEF, Debtor (Four Cases).

R.J. BROWN, Trustee, Appellee, v. MT. PROSPECT STATE BANK, v. Joe Bob McADAMS, Appellant.

R.J. BROWN, Trustee, Appellee, v. Joe Bob McADAMS, Appellant.

R.J. BROWN, Trustee, Appellee, v. MT. PROSPECT STATE BANK, Appellant, v. Joe Bob McADAMS.

R.J. BROWN, Trustee, Appellee, v. Joe Bob McADAMS.

Nos. 88-2434, 88-2435.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 12, 1989.

Decided April 9, 1990.

Kenneth W. Cowan, Fort Smith, Ark. and Joan S. Slezak, Chicago, Ill., for appellants.

Richard E. Worsham, Little Rock, Ark., for appellee.

Before FAGG, Circuit Judge, and HEANEY and HENLEY, Senior Circuit Judges.

HENLEY, Senior Circuit Judge.

Joe Bob McAdams and Mt. Prospect State Bank appeal the district court's ¹ reversal of the bankruptcy court's denial of the trustee's petitions to set aside debtor Lawrence Alfred Muncrief's allegedly preferential and fraudulent conveyances of his property. See 11 U.S.C. Secs. 547, 548(a)(2)(A). ² We affirm and remand. Both the bankruptcy court and the district court focused on the issue of whether debtor was insolvent on the date of the challenged transfers.

The record evidence reflects that in 1981 debtor and McAdams formed a partnership to conduct real estate ventures. In early 1983 they formed an umbrella company, the First Southern Financial Group, Inc., to house their business activities. First Southern, whose major activity seemed to be in development of real estate known as the Rivermont Project, was eventually rolled over into the Rivermont Group, Inc., a Tennessee corporation.

On October 27, 1983 McAdams obtained a $50,000.00 line of credit from Mt. Prospect which he used to pay the expenses of Rivermont Group. The line of credit was secured by real estate owned by McAdams, and the account bore the signatures of McAdams and debtor. Later in 1983 Rivermont Group entered into discussions with Gary Gibbs in an effort to establish a joint venture to finance the Rivermont Project. Gibbs eventually formed a Louisiana partnership, Rivermark Partnership, to finance the project, and gave debtor a 32% share of the partnership in exchange for the work and contractual agreements he had already completed on behalf of Rivermont Group.

Rivermont Group and Rivermark Partnership were unable to close their arrangement. On December 14, 1983 McAdams transferred $20,000.00 to Rivermont Group's account at Mt. Prospect. Eventually, Rivermark Partnership (with Gibbs as managing general partner) offered to buy back the 32% share given to debtor. Debtor and McAdams discussed and agreed to accept an $800,000.00 promissory note payable to debtor. On January 26, 1984 debtor received a note for $680,000.00; $120,000.00 having been paid directly to Midland Bank of Memphis by Rivermont Partnership.

On February 10, 1984 debtor pledged the $680,000.00 note to the American Bank & Trust Co., a Louisiana bank, as collateral for a $590,000.00 loan; paid $84,000.00 to McAdams; and transferred approximately $50,000.00 to Mt. Prospect to close out the loan account, and an additional $17,000.00 to cover an overdraft on a Rivermont Group checking account. On March 5, 1984 R.J. Brown, on behalf of Esther Muncrief (debtor's mother) and the First National Bank of Hot Springs, Arkansas, filed a petition for involuntary bankruptcy against debtor. Brown eventually withdrew as attorney for Esther and the bank, and was appointed trustee in the involuntary proceeding. As trustee, he filed adversary proceedings seeking to set aside the $84,000.00 payment to McAdams and the $50,000.00 transfer to Mt. Prospect as preferential, and the $17,000.00 transfer to Mt. Pleasant as fraudulent.

The bankruptcy court consolidated the proceedings and set them for hearing. ³ At the hearing the trustee relied primarily on Joint Exhibit 6, a document reflecting debtor's personal financial state as of October 15, 1983, and showing debtor to be solvent in the amount of $1,970,669.00; and to a lesser degree on Plaintiff's Exhibit 1, an order allowing and disallowing claims; and Joint Exhibit 20, a tender of schedules and statements showing debtor to be solvent in the amount of $16,993.00. The trustee then relied on debtor's testimony to show how debtor's actual financial position as of February 10, 1984 differed from that depicted by the exhibits.

At the close of his case, the trustee moved for judgment and McAdams and Mt. Prospect moved for dismissal on the grounds that the trustee had failed to meet his burden of proving that (1) debtor was insolvent; (2) property transferred was property of the estate; and (3) McAdams and Mt. Prospect received more than they would have received in a Chapter 7 liquidation proceeding.

Regarding the contested transactions at issue, the bankruptcy court found that debtor became liable to Mt. Prospect for $50,000.00 plus interest on October 27, 1983, when he signed a guarantee for the loan taken out by McAdams; and that the debt was completely satisfied on February 10, 1984, within ninety days of the commencement of the Chapter 11 proceeding. The court also found that debtor paid $84,000.00 to McAdams on February 10, 1984, in payment of an antecedent debt; and paid $17,000.00 to Mt. Prospect on an overdrawn bank account balance for which debtor was not liable.

Next, the court focused on the question of whether debtor was insolvent as of the date of these transactions (February 10, 1984). Based on debtor's financial statement, as amended by debtor's testimony, the court adjusted debtor's assets by (1) reducing the cash to $0 (down $83,400.00); the notes receivable to $25,000.00 (down $250,000.00); the automobiles to $27,000.00 (down $18,000.00); the coin collection to $6,500.00 (down $268,500.00); the value of debtor's business ventures, Coldwell Banker/Resort Realty to $413,000.00 (down $209,800.00); and Reader Insurance to $118,000.00 (down $398,500.00); and (2) adding $681,602.00, the balance of the note received from Rivermont Partnership.

The court adjusted debtor's liability by (1) deducting a $160,000.00 mortgage; (2) adding additional liabilities of $156,000.00 (Grand National Bank), $220,000.00 (First National Bank), and $95,000.00 (Gordon Reader); and (3) allowing additional claims totaling $675,660.00, including a $132,907.00 claim made in Esther Muncrief's name.

After subtracting debtor's adjusted liabilities from his adjusted assets, the court concluded that debtor was solvent by $55,900.00. The court also analyzed debtor's financial position using debtor's tender of statements and schedules; after adjusting the statements to reflect debtor's testimony, the court concluded that debtor was solvent by $659,300.00 as of February 10, 1984.

Next, the court noted the only evidence that the creditors received more than they would have under a Chapter 7 liquidation was debtor's opinion that if he had liquidated his property on February 10, 1984, his creditors would not have been paid in full. The court considered this conclusion, alone and unexplained, insufficient to sustain the trustee's burden of proof on the issue.

Finally, as for the $17,000.00 transfer to Mt. Prospect, the court found that debtor was not liable for the amount, but that the trustee's failure to prove debtor's insolvency precluded recovery of this money.

On review the district court concluded that although the bankruptcy court's method of assessing the question of debtor's insolvency was not improper, its findings as to the value of debtor's assets and liabilities were clearly erroneous.

The district court substantially modified the bankruptcy court's evaluations of debtor's assets and liabilities by (1) further decreasing the bankruptcy court's valuation of Coldwell Banker/Resort Realty by $147,119.00; and (2) increasing debtor's liabilities by adding claim # 34 ($159,990.00), and additional debts of $349,682.00 as indicated by debtors Joint Exhibit 1. Accordingly, the district court concluded debtor was insolvent on the date of the transfers by $594,175.00.

The court also rejected McAdams and Mt. Prospect's argument that the transfers were valid because they did not involve debtor's assets, but assets of the Muncrief/McAdams partnership. Finally, the court determined that because debtor pledged the $680,000.00 promissory note from Rivermark Partnership as collateral for the $590,000.00 loan from American Bank, the loan was covered by the "security interest" exception to...