In re SI Acquisition, Inc., Bankruptcy No. 1-85-00421

• Decision Date: 10 March 1986
• Docket Number: Bankruptcy No. 1-85-00421,1-85-00578.
• Citation: 58 BR 454
• Parties: In re S I ACQUISITION, INC., Debtor. In re The AIS COMPANY, dba Abel Contract Furniture & Equipment Co., Inc., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

58 B.R. 454 (1986)

In re S I ACQUISITION, INC., Debtor.

In re The AIS COMPANY, dba Abel Contract Furniture & Equipment Co., Inc., Debtor.

Bankruptcy Nos. 1-85-00421, 1-85-00578.

United States Bankruptcy Court, W.D. Texas, Austin Division.

March 10, 1986.

Adrian Overstreet, Kammerman, Overstreet & Hurran, Austin, Tex., for S I Acquisition.

James E. Reaves, Randall & Reaves, Houston, Tex., for Eastway Delivery Service.

MEMORANDUM OPINION

R. GLEN AYERS, Jr., Bankruptcy Judge.

In this Chapter 11 case, the debtor-corporation filed a Motion to Show Cause why a creditor should not be held in contempt, under the In re MortgageAmerica, 714 F.2d 1266 (5th Cir.1983) holding, for serving interrogatories on non-bankruptcy co-defendants in a state court action based on a "piercing the corporate veil" theory. The matter was heard and an Order entered denying the Motion on the basis that because the cause of action was not assertable by the debtor-corporation or a trustee in bankruptcy, it was not property of the estate and was not subject to the automatic stay provision.

FACTS

In December 1984, Eastway Delivery Service, Inc. ("Eastway") and S.I. Stationers & Interiors ("S.I.A.") entered into a contract under which Eastway was to provide a delivery service for S.I.A. By March 1985, S.I.A. was delinquent in paying Eastway as agreed under the contract terms.

After several demands for payment were made, partial payment was made to Eastway. That payment as well as a second payment to Eastway, was made from a bank account owned by Abel Contract Furniture & Equipment Co., Inc., d/b/a Abel Interiors & Stationers ("Abel").

Eastway ultimately filed a state court suit to recover the account balance and damages. The state action named S.I.A. and Abel as defendants, along with two other parties — T.P.O., Inc. and Thomas P. O'Donnell, the registered agent of all three defendant corporations. Eastway sought recovery against Abel, T.P.O., Inc., and O'Donnell on two grounds. It first alleged that S.I.A. and Abel, owned and controlled by T.P.O., Inc., were but "conduits of the parent corporation, T.P.O., . . . used merely as a cloak to conceal fraud, wrongs, and injustice, and to insulate T.P.O., Inc. from legal and financial responsibility for wrongs committed by S.I.A. and other subsidiaries." The alternative pleading set out an alter ego theory, alleging that corporate actions of S.I.A., Abel, and T.P.O., Inc. were, in substance, the personal business actions of Thomas P. O'Donnell.

While that suit was pending, S.I.A. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code on August 22, 1985. Shortly after the bankruptcy filing, Eastway filed a Motion for Severence of Actions in state court requesting that S.I.A. be severed from the non-bankrupt defendants because 11 U.S.C. § 362 would otherwise stay the state court litigation.

Eastway next served interrogatories in the state court action. It served only the non-bankruptcy defendants and not S.I.A.S.I.A. countered with a "Motion to Show Cause," filed in the United States Bankruptcy Court as to why Eastway should not be held in contempt for violation of the automatic stay.

After a hearing on S.I.A.'s motion, the Court took the matter under advisement to consider two issues: (1) whether the state court suit to pierce the corporate veil based on an alter ego theory fell within the aegis of the holding in The American National Bank of Austin v. MortgageAmerica Corporation (In re MortgageAmerica), 714 F.2d 1266 (5th Cir.1983) so as to constitute litigation prohibited by 11 U.S.C. § 362(a); (2) Whether the filing and service of the interrogatories upon the severed co-defendants in a suit in which the Debtor was a party constituted a contumacious violation of the automatic stay. Obviously, the second issue can be reached only if the first is answered in the affirmative.

There are two additional facts, not part of the contempt pleadings, that are relevant to this Memorandum Opinion. On October 25, 1985, Abel filed for relief under Chapter 11, and, in February 1986, the Court substantively consolidated the S.I.A. and Abel bankruptcy cases.

DISCUSSION

S.I.A.'s argument concerning the applicability of the automatic stay rests on a single case, In re MortgageAmerica. A thorough review of that case is, therefore, essential.

1. In Re MortgageAmerica Decision

MortgageAmerica originally began as a state court action in which the American National Bank of Austin obtained a jury verdict for about $200,000.00. The corporate debtor could not satisfy the judgment and was eventually adjudicated following an involuntary petition. The Bank, while pursuing the Debtor, began to pursue Long, sole shareholder of MortgageAmerica. The suit against Long, filed to recover on the judgment rendered against MortgageAmerica, was based upon three causes of action: the "corporate trust fund" doctrine, the "denuding the corporation" theory and the Texas Fraudulent Transfers Act (TEX. BUS. & COM.CODE ANN. §§ 24.02-03 (Vernon 1968)). Each cause of action rested upon allegations that Long had caused the Debtor to transfer Debtors' assets to Long or to third parties for Long's personal benefit, all such transfers being frauds on creditors.

The Debtor, MortgageAmerica, asserted that the protection of the automatic stay extended to the proceedings against Long. The Bank countered, arguing that collection on the judgment from Long personally, rather than from his insolvent company, was not stayed. The Bank reasoned as follows: the three causes of action accrued solely to creditors in their individual capacities and not to the corporation under Texas state law; thus the causes of action were not "property of the estate" under the Bankruptcy Code; therefore, collection efforts were not stayed.

The Fifth Circuit opinion examined each of the asserted causes of action to determine whether each could be considered property of the debtor corporation and thus exercisable only by the trustee. Alternatively, even if not property of the debtor, the Fifth Circuit considered whether assertion of the claims violated the provisions of the automatic stay.

Circuit Judge Randall, in affirming the District Court ruling, held that the causes of action under "corporate trust fund" doctrine and "denuding the corporation" theory remained rights of the debtor corporation and that the debtor corporation maintained a continuing legal or equitable interest in property fraudulently transferred from its assets. Therefore, the Bank's actions affected "property of the estate" and fell within the stay provisions of 11 U.S.C. § 362.

In addressing the "corporation trust fund" doctrine, Judge Randall noted that, historically, the doctrine "was established principally to permit a court of equity to marshal and distribute a corporation's assets upon its insolvency and dissolution in much the same way as would a modern bankruptcy court." In re MortgageAmerica, 714 F.2d at 1269 (citing Wood v. Drummer, 30 F.Cas. 435, 436-37 (C.C.D.Me.1824) (No. 17,944) (Story, Circuit Justice)). In Texas, recognition of the doctrine exists statutorily under the Texas Business Corporation Act. See TEX.BUS.CORP.ACT ANN. arts. 7.05(A), 7.06(A)(3), 7.09 (Vernon 1980 & Supp.1982) (noting relationship of doctrine to dissolution where action is right of corporation which can be brought by creditors and shareholders where moneys recovered are distributed pro-rata first to creditors and then to shareholders following usual priority rules).

Likewise, the "denuding the corporation" theory follows the "corporation trust fund" doctrine under Judge Randall's analysis. See MortgageAmerica, 714 F.2d at 1271; see also Fagan v. La Gloria Oil & Gas Co., 494 S.W.2d 624, 632 (Tex.Civ.App. — Houston 1973, no writ). Personal liability may be imposed under the "denuding" theory upon those in control who use their power for personal rather than corporate benefit.

Since, under either theory, it is the corporation that has been defrauded, the right to sue under such a cause of action vests in the corporation itself and constitutes a "legal or equitable interest" that passes to the estate under 11 U.S.C. § 541. Such an action may be brought only by the trustee, who represents the corporation in bankruptcy, and "who is then charged with prosecuting it for the benefit of all creditors and shareholders." Id. at 1276.¹

The third cause of action asserted by plaintiff-appellant under the Texas Fraudulent Transfers Act required a different analysis by Judge Randall. The court chose not to rely solely on 11 U.S.C. § 544(b) (trustee may exercise power of unsecured creditor to avoid fraudulent transfers of debtor's property if applicable state law confers such a power) but looked to the overall relationship between the policies behind the Bankruptcy Code and various state law causes of action.

Unlike the two previous theories, under Texas law the action is assertable only by the debtor's creditors, but the relief of the successful claimant goes to the transferred property (which continues in the debtor corporation) and entails no remedy via personal liability on those responsible for the transfer. See id. at 1272.

However, one of "the prime bankruptcy policies that pervades virtually every provision of the Code is that of `equality of distribution among creditors,' and, conversely, one of the principal bankruptcy betes noires is `race of diligence' of creditors to dismember the debtor before its assets are exhausted." Id. at 1274 (citations omitted). Accordingly, the Court decided for the purpose of resolving the dispute over the creditor's cause of action stemming from the Texas Fraudulent Transfers Act, that while the Act's remedies are assertable only by the creditor, permitting such a cause of action in state court would violate the intentions of Congress when it enacted the Bankruptcy Code.

We think that when such a debtor is forced into bankruptcy, it

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