Baker & Getty Financial Services, Inc., In re

• Decision Date: 02 September 1992
• Docket Number: 91-3199,91-3200 and 91-3269,Nos. 91-3195,s. 91-3195
• Citation: 974 F.2d 712
• Parties: 27 Collier Bankr.Cas.2d 1112, Bankr. L. Rep. P 74,813, 20 UCC Rep.Serv.2d 1008 In re BAKER & GETTY FINANCIAL SERVICES, INC., et al., Debtors. FIRST NATIONAL BANK OF BARNESVILLE, Plaintiff-Appellant (91-3200), Plaintiff/Cross-Appellant (91-3199), v. Carl D. RAFOTH, Trustee for Baker & Getty Financial Services, Inc., Baker & Getty Diversified, Inc., Baker & Getty Securities, Inc., Philip Cordek and Suzan Bierman Cordek, Defendants-Appellants (91-3195), Defendants/Cross-Appellants (91-3269).
• Court: U.S. Court of Appeals — Sixth Circuit

Page 712

974 F.2d 712

27 Collier Bankr.Cas.2d 1112, Bankr. L. Rep. P 74,813,

20 UCC Rep.Serv.2d 1008

In re BAKER & GETTY FINANCIAL SERVICES, INC., et al., Debtors.

FIRST NATIONAL BANK OF BARNESVILLE, Plaintiff-Appellant (91-3200), Plaintiff/Cross-Appellant (91-3199), v. Carl D. RAFOTH, Trustee for Baker & Getty Financial

Services, Inc., Baker & Getty Diversified, Inc., Baker &

Getty Securities, Inc., Philip Cordek and Suzan Bierman

Cordek, Defendants-Appellants (91-3195),

Defendants/Cross-Appellants (91-3269).

Nos. 91-3195, 91-3199, 91-3200 and 91-3269.

United States Court of Appeals, Sixth Circuit.

Argued March 20, 1992.

Decided Sept. 2, 1992.

Daniel R. Swetnam (argued and briefed), Stephanie M. Vesper, Schwartz, Kelm, Warren & Rubenstein, Columbus, Ohio, D. Keith Roland, Carl D. Rafoth, Friedman & Rummel Company, Youngstown, Ohio, for plaintiff-appellee cross-appellant.

Robert M. Morrow, Columbus, Ohio (argued and briefed), for defendant-appellant cross-appellee.

Before: KENNEDY and BOGGS, Circuit Judges; and KRUPANSKY, Senior Circuit Judge.

BOGGS, Circuit Judge.

This is a consolidated appeal arising out of an initial bankruptcy case brought by individual creditors against a stock brokerage and financial services firm. The Trustee seeks: a) to recover certain payments received by the First National Bank of Barnesville ("Bank") from the bankrupts; and b) to subordinate the Bank's claim against the bankrupt estates. The district court held that the Trustee could recover the payments made to the bank, but refused to subordinate the Bank's claims to those of other general creditors of the estate. We affirm.

I

Baker & Getty Financial Services, Inc. ("B & G"), a stock brokerage and financial services firm, was formed in August 1985 by Philip Cordek and Steven Medved. ¹ Throughout 1985 and 1986, customers were solicited and the organization grew. In November 1986, it was revealed that Cordek had never purchased securities as ordered by customers and that B & G was engaged in a "Ponzi game," an investment scheme where investors are promised excessive returns on investments and where, typically, initial investors are paid the promised returns to attract additional investors. By November 1986, various investors dealing with B & G had been defrauded of approximately $2.5 to $3 million.

In August 1986, prior to disclosure of the scheme, Cordek and one of B & G's original customers, Byron Rice, decided to invest $1,000,000 in the bond market, purchasing certain bonds on margin. Rice was to obtain the funds and Cordek was to oversee their investment. In early August 1986, Rice, a long-time customer of First National Bank of Barnesville, approached its president, Charles J. Bradfield, about a $1 million loan for the bond purchase.

The Bank initially approved the loan, the largest personal loan in the Bank's history, on August 12, 1986, solely as a loan to Rice and his wife. At this point, Cordek's name was never mentioned to the Bank. However, prior to the closing, Rice asked Cordek to sign his name to the loan note. On August 27, 1986, a loan of $1.1 million was granted by the Bank to Rice and Cordek. ²

The Bank failed to secure the loan properly. It had requested that collateral of approximately $200,000 be provided at the closing but only perfected its interest in this collateral to the extent of approximately $55,000. ³ The promissory note was executed on August 27, 1986 and was due September 11, 1986. However, Cordek informed the Bank throughout the fall of 1986 that the bonds purchased with the loan had not yet been sold, although he later testified that the bonds had been sold at a loss soon after the loan was made and that he had the proceeds deposited in his own personal account. It appears that the Bank's reliance on Cordek's assertions caused its delay in attempting to perfect its security interest. It was not until October 24, 1986 that the Bank received its first payment on the note by taking $30,000 from a B & G account held by the Bank. The Bank took another $15,800 from the account on November 8, 1986. Finally, on November 15, 1986, the Bank received $200,000 that originated from the sale of an airplane owned by a B & G affiliate, making a total of $245,800 the Bank had received from B & G.

In the spring of 1987, Bradfield attempted to have a bond trading house, which held Cordek's personal account to which the proceeds of the bond sale had been transferred, pay the balance of the note. To do this, Bradfield signed a sworn statement, which he conceded was patently false, that the bonds purchased by the loan were to have been pledged as collateral for the loan. The lower courts concluded that this false statement was made in an effort to have the bond trading house accept responsibility on the loan. ⁴

The Bank also sought payment from Rice. In early 1987, Rice paid the Bank $12,378. In September 1987, the Bank entered into a settlement agreement with the Rices, requiring them to pay $145,000 immediately and $80,000 over the next twelve years. The Rices were released from all other liability against the note. Thus, the Bank received less than 25% of the total amount of the note from the Rices.

Meanwhile, on January 22, 1987, three defrauded individuals filed involuntary bankruptcy petitions against B & G. The petitions were not contested and Carl D. Rafoth was appointed trustee on February 18, 1987. On April 28, 1987, Cordek, who was a principal in all the B & G organizations, and his wife were joined as affiliates. On September 8, 1987, upon the motion of petitioning creditors, the bankruptcy court substantively consolidated the estates of B & G with those of Philip and Suzan Cordek, who had earlier been joined as affiliates, but who at that time were not debtors in the case. Matter of Baker & Getty Fin. Serv., Inc., 78 B.R. 139 (Bankr.N.D.Ohio 1987). The Bank, which was a creditor of Philip Cordek individually but not a creditor of B & G, opposed this motion.

The first appeal before us, No. 91-3200, arises because the Trustee filed a complaint for turnover against the Bank on September 1, 1987, alleging that the Bank had received three preferential and fraudulent transfers from B & G totalling $245,800. On March 15, 1989, the bankruptcy court granted summary judgment for the Trustee, holding that all three of the payments that the Bank had gotten from B & G in the fall of 1986 were recoverable by the Trustee both as preferential transfers and as fraudulent transfers, 98 B.R. 300. The Bank appealed to the district court, which affirmed the bankruptcy court's decision in favor of the Trustee regarding preferential transfers on January 14, 1991. The Bank appeals that decision. The Trustee cross-appeals, in No. 91-3269, the district court's failure to review and affirm the bankruptcy court's finding that the Bank did not receive the transfers in good faith.

The second appeal, No. 91-3195, arises from the Bank's filing a proof of claim in the consolidated bankruptcy proceedings for $659,197.53, the principal amount still due on the $1.1 million promissory note issued to Cordek and Rice. The Trustee objected to this claim, arguing that Cordek was only an accommodation party to the promissory note, and thus not liable on it, and that the Bank had unjustifiably impaired the collateral securing the loan. In the alternative, the Trustee sought to have the Bank's claim subordinated to the claims of unsecured creditors, pursuant to 11 U.S.C. § 510(c). In March 1990, the Trustee reported that he had $1,369,930.92 on hand and that the claims of creditors other than the Bank totalled $2,398,523.70. Thus, if the Bank's claim is excluded, unsecured creditors may realize a distribution of 57% of their claims; if the Bank's claim is included, the unsecured creditors' distribution will be reduced to 44% of their claims.

On June 23, 1988, the bankruptcy court held that Cordek was an accommodation maker on the note, but should not thereby be relieved of liability on the note. However, the court also held that, while the Bank's claim should not be disallowed, it should be equitably subordinated to the claims of general unsecured creditors. The Bank appealed to federal district court. On January 10, 1991, the district court affirmed the finding that Cordek was an accommodation maker, but also held that the Trustee had failed to meet its burden of justifying subordinating the Bank's claim. The district court therefore reversed the bankruptcy court's decision subordinating the Bank's claim; the Trustee appeals to this court. The Bank cross-appeals, in No. 91-3199, the finding that Cordek was only an accommodation maker to the note.

II

We first address the issue of the Bank's claim in the consolidated bankruptcy proceedings for the principal amount still due on its promissory note signed by Cordek and Rice, and affirm the district court's conclusion that the Bank's claims should not be subordinated to the claims of general unsecured creditors.

The bankruptcy court, in holding that the Bank's claim should be subordinated, relied heavily on its determination that Cordek was only an accommodation maker to the original note. In contrast to a principal maker of a note, an accommodation maker is one who signs the instrument in any capacity for the purpose of lending his name to another party to it. Ohio Rev.Code § 1303.51(A). The bankruptcy court found that

Cordek was an accommodation maker on the note. At the time the loan was made, the Bank relied upon the security of Rice and the ability of Rice to pay the full amount of the loan, and the Bank's obligation was fully secured by Rice's collateral at that point.

Accommodation status is a question of fact. Ohio Rev.Code § 1303.51(C); Fidelity Title Serv. v. Ball Homes, Inc., 25 Ohio App.3d 52, 54, 495 N.E.2d 964 (1985). Findings of fact entered by the bankruptcy court will not be set aside unless clearly erroneous. See Bankruptcy Rule 8013. A bankruptcy court's...