Cadle Co. v. Mangan

• Decision Date: 30 September 2004
• Docket Number: No. 3:03cv1359(JBA).,No. 3:03cv1358(JBA).,3:03cv1358(JBA).,3:03cv1359(JBA).
• Citation: 316 B.R. 11
• Parties: The CADLE COMPANY, Appellant v. Bonnie C. MANGAN, Trustee Appellee The Cadle Company, and D.A.N. Venture, A Limited Partnership Appellants v. Bonnie C. Mangan, Trustee, Charles Atwood Flanagan and John C. Flanagan Appellees
• Court: U.S. Bankruptcy Court — District of Connecticut

316 B.R. 11

The CADLE COMPANY, Appellant v. Bonnie C. MANGAN, Trustee Appellee The Cadle Company, and D.A.N. Venture, A Limited Partnership Appellants v. Bonnie C. Mangan, Trustee, Charles Atwood Flanagan and John C. Flanagan Appellees

No. 3:03cv1358(JBA).

No. 3:03cv1359(JBA).

United States Bankruptcy Court, D. Connecticut.

September 30, 2004.

COPYRIGHT MATERIAL OMITTED

Edward C. Taiman, Jr., Sabia & Hartley, LLC Hartford, CT, for Appellants.

Joseph L. Rini, Berchem, Moses & Devlin, P.C., Milford, CT, Douglas S. Skalka, Neubert, Pepe & Monteith, New Haven, CT, for Appellee.

Ruling on Cadle and D.A.N.'s Appeal and Trustee's Cross-Appeal from Decision of Bankruptcy Court

ARTERTON, District Judge.

This appeal is consolidated from two related bankruptcy adversary proceedings. For the reasons discussed below, the bankruptcy court's decisions are affirmed.

I. Background

On February 17, 1999, Charles Flanagan filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code. Flanagan's case was converted from Chapter 11 to Chapter 7, and Bonnie C. Mangan was appointed as trustee of Flanagan's bankruptcy estate.

Mangan brought an adversary proceeding pursuant to 11 U.S.C. § 547 seeking to avoid and recover an alleged preferential transfer made by Flanagan to the appellant, the Cadle Company ("Cadle"), to satisfy a judgment that Cadle had obtained against Flanagan ("Preference Action"). In a decision issued on May 22, 2003, the bankruptcy court ruled in favor of the trustee and avoided the transfer. The bankruptcy court upheld its original decision on reconsideration, in a modified opinion issued on July 3, 2003.

Cadle, along with D.A.N. Joint Venture, another creditor of Flanagan, brought a second adversary proceeding in which they sought imposition of a constructive trust and a declaratory judgment that they possessed superior rights in certain equity securities that were owned by Flanagan prior to his bankruptcy filing ("Constructive Trust Action"). The bankruptcy court denied the requested relief in a May 22, 2003 decision, and upon reconsideration, upheld its original decision without modification.

Both the preference action and the constructive trust action were based on the following undisputed facts. Prior to the filing of the bankruptcy petition, on March 20, 1997, Cadle obtained a judgment against Flanagan in the U.S. District Court, District of Connecticut, in the amount of $90,747.87. Cadle is also in possession of a July 29, 1996 judgment against Flanagan in the amount of $128,217.02, arising out of an action in the Connecticut Superior Court. In a second Superior Court action, D.A.N. obtained a judgment against Flanagan on April 15, 1998 in the amount of $321,546.27. D.A.N. also had an unliquidated claim against Flanagan for $899,620.67.

At the time of these judgments, Flanagan owned 50% equity interests in Thompson & Peck., Inc. and Flanagan/Prymus Insurance Group, Inc., which were valued well in excess of $100,000.00. While Flanagan had been in possession of these stock certificates, in September 1997, he transferred possession of the stock to Socrates Babacus, as security for loans Babacus made to Flanagan in the aggregate amount of $85,000.

In an effort to locate assets with which to satisfy its federal judgment against Flanagan, Cadle subpoenaed Flanagan to appear for an examination of the judgment debtor on March 9, 1998, and to produce, inter alia, "all documents in his custody, possession or control relating to or evidencing any interest which [Flanagan] may hold in Thompson & Peck." Subpoena Duces Tecum of The Cadle Company directed to Charles A. Flanagan, Feb. 18, 1998, The Cadle Company v. Charles A. Flanagan, No. 3:96cv2648 (AVC), United States District Court [Doc. # 4, Ex. 19] at 5. Flanagan appeared for the hearing but failed to produce any documents evidencing his stock assets.

On March 12, 1998, Cadle moved pursuant to Fed.R.Civ.P. 69(a) and Conn. Gen.Stat. § 52-356b for a Turnover Order "commanding the Defendant/Judgment Debtor, Charles A. Flanagan, and/or Thompson & Peck, Inc., to turn over all evidence of Charles A. Flanagan's ownership and/or interest in Thompson & Peck, Inc. and its related entity(ies), including any and all stock certificates in his/its possession, under his/its control and/or available to him/it or in which he had an interest as of the date the Property Execution in this matter was served." Motion for Turnover Order, Mar. 12, 1998, The Cadle Company v. Charles A. Flanagan, No. 3:96cv2648 (AVC), United States District Court [Doc. # 4, Ex. 10]. Cadle's motion was granted in the absence of objection on April 13, 1998. Flanagan subsequently moved for and was granted reconsideration, but the substantive relief he requested was denied by order dated September 23, 1998. After Flanagan failed to comply with the turnover order, he was ordered to show cause why he should not be held in contempt, and a hearing was conducted on November 16, 1998. At the conclusion of the hearing, the court found that Flanagan "has willfully and intentionally not complied with the order as previously entered by the Court," and ordered "him committed to the Bureau of Prisons until such time as he purges himself of the contempt by complying fully with the order." Transcript of Hearing re: Order to Show Cause, Nov. 16, 1998, The Cadle Company v. Charles A. Flanagan, No. 3:96cv2648 (AVC), United States District Court [Doc. # 4, Ex. 15] at 51-52. The court stayed the execution of the order and scheduled a hearing in the next week to review what documents had been produced by that time.

Flanagan's father subsequently loaned Flanagan the sum of $100,222.87 so that Flanagan could fully satisfy the Judgment, delivering a personal check to Flanagan on November 18, 1998. Flanagan gave his stock certificates to his father as collateral for this loan, arranging for Babacus to relinquish possession of the stock certificates and to deliver them to his father's home.

Having received funds sufficient to satisfy the judgment Cadle had obtained against Flanagan, Flanagan's attorney attempted to tender the sum of $99,542.87 to Cadle, but was refused. On November 20, 1998, the funds were deposited into the Registry of the District Court, and Cadle received the payment after the court granted its motion for payment of monies deposited into Court on December 3, 1998.

Meanwhile, efforts to execute on the judgments in the superior court actions were underway. On November 18, 1998, D.A.N. filed its judgment lien with the Connecticut Secretary of State's office in connection with the April 15, 1998 judgment. On November 20, 1998 the Superior Court ordered Flanagan "to immediately turn over all evidence of interest of the Defendant, Charles A. Flanagan, in and to Thompson & Peck, Inc., including all stock certificates and all documents and communications concerning any and all transfers and/or hypothecation of the ownership interest of Charles A. Flanagan at any time during the previous four years, to the Plaintiff as of the date of the property execution." Flanagan's father, John Flanagan, who was at that point in possession of the stock certificates, was served with a property execution on December 1, 1998. John Flanagan did not turn over the stock certificates pursuant to the property execution, obtained an order quashing the subpoena that had been served on him to turn over the stock, and filed motions with the Superior Court to vacate the plaintiff's execution and for determination of interest in the stock, claiming a superior interest in the stock at issue.

In the proceedings before the bankruptcy court, Cadle and D.A.N. argued that had Flanagan complied with the turnover orders issued by the District Court and the Connecticut Superior Court, then Cadle and D.A.N. would have secured their judgments by serving executions upon the sheriff in possession of the stock, thereby causing a lien to attach in an amount equal to the judgment debts, and allowing the stock to be sold for their benefit. Cadle and D.A.N. sought imposition of a constructive trust to restore them to the secured position they would have been in absent Flanagan's misconduct. In the Preference Action, the trustee sought to avoid the $99,542.87 payment that Flanagan made to Cadle as a preferential transfer, which is defined under 11 U.S.C. § 547(b) as "any transfer of an interest of the debtor in property — (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made — (A) on or within 90 days before the date of the filing of the petition; ... and (5) that enables such creditor to receive more than such creditor would receive if (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title ..." 11 U.S.C. § 547 (1999). Cadle did not dispute that Flanagan's payment satisfied the first four statutory provisions. Cadle argued, however, that because a constructive trust would deem Cadle to have constructive possession of the stock certificates and a fully secured lien on the stock more than 90 days prior to Flanagan's filing for bankruptcy, Flanagan's subsequent payment of $99,542.87 to Cadle could not be said to have improved Cadle's position,¹ and the transfer of stock would then be outside the trustee's avoidance powers under 11 U.S.C. § 547.²

The bankruptcy court ruled in favor of the trustee in both the Preference Action and the Constructive Trust Action, finding that Flanagan was not under an obligation to turn over the actual stock certificates, that Cadle's mere possession of the stock certificates would not have perfected its security interest, and that imposition of a constructive trust was not appropriate. The bankruptcy court concluded:

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