In re American Eagle Coatings, Inc.

• Decision Date: 11 October 2006
• Docket Number: Adversary No. 05-4111.,Bankruptcy No. 04-41881.
• Parties: In re AMERICAN EAGLE COATINGS, INC., Debtor. Robert Pummill Chapter 7 Trustee, Plaintiff, v. John F. McGivern, et al., Defendants.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Missouri

Page 656

353 B.R. 656

In re AMERICAN EAGLE COATINGS, INC., Debtor.

Robert Pummill Chapter 7 Trustee, Plaintiff, v. John F. McGivern, et al., Defendants.

Bankruptcy No. 04-41881.

Adversary No. 05-4111.

United States Bankruptcy Court, W.D. Missouri.

October 11, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

George J. Thomas, Phillips and Thomas LLC, Prairie Village, KS, for Debtor.

MEMORANDUM OPINION

DENNIS R. DOW, Bankruptcy Judge.

This adversary comes before the Court on the Motion for Summary Judgment filed by Robert Pummill, Chapter 7 Trustee ("Trustee"), against John F. McGivern, et al. ("Defendants"), on Counts I, IV, V and VI and a Motion for Summary Judgment filed by Defendants against Plaintiff on Counts I,, II, III, IV, V, VI and VII. The Plaintiff informed the Court at the hearing that he was dropping Counts II and VII and the parties have since filed a stipulated dismissal of those counts. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (F), (H) and (0) over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a) and (b)(1). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, the Court denies Plaintiff's Motion for Summary Judgment on Counts I, IV, V and VI, denies Defendants' motion for summary judgment on Counts I, III, IV, and V, and grants Defendants' motion for summary judgment on Count VI.

I. STANDARD FOR SUMMARY JUDGMENT

Federal Rule of Bankruptcy Procedure 7056(c), applying Federal Rule of Civil Procedure 56(c), provides that summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Fed. R. Bankr.P. 7056; Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The party moving for summary judgment has the initial burden of proving that there is no genuine issue as to any material fact. Adickes v. S.H. Kress & Co., 398 U.S. 144, 161, 90 S.Ct. 1598, 25 L.Ed.2d 142 (1970). Once the moving party has met this initial burden of proof, the non-moving party must set forth specific facts sufficient to raise a genuine issue for trial, and may not rest on its pleadings or mere assertions of disputed facts to defeat motion. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "A `genuine issue' in the context of a motion for summary judgment is not simply a `metaphysical doubt as to the material facts.'" Id. Rather, "a genuine issue exists when the evidence is such that a reasonable fact finder could find for the non-movant." Buscaglia v. United States, 25 F.3d 530, 534 (7th Cir.1994). When reviewing the record for summary judgement, the court is required to draw all reasonable inferences in favor of the non-movant; however, the court is "not required to draw every conceivable inference from the record-only those inferences that are reasonable." Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 238 (7th Cir. 1991).

II. PROCEDURAL BACKGROUND

On March 31, 2004, Debtor filed a petition in bankruptcy under Chapter 7. On June 3, 2005, Trustee filed a complaint against Defendants seeking recovery under seven separate claims: Count I: Recovery for payments made under a participation agreement between debtor and certain defendants; Count II: recovery for payments made under equipment leases; Count III: recovery for the value of improvements allegedly made by debtor to real property it leased from Defendant McGivern Trust; Count IV: recovery for payments made by debtor to certain of the Defendants pursuant to a stock purchase agreement; Count V: recovery for the value of the real property leased by Debtor under the theory that the lease was a disguised financing arrangement; Count VI: recovery for payments made by debtor to certain of the Defendants that were allegedly preferential payments to insiders within one year of the bankruptcy filing; and Count VII: recovery for the value of accounts receivables that were purchased from debtor under a factoring agreement.

On July 11, 2005, Defendants filed an answer to the complaint and made a demand for jury trial. Following discovery, on March 17, 2006, Trustee filed a motion for summary judgment on Counts I, IV, V and VI. On the same date, Defendants filed a motion for summary judgment as to all seven counts. On April 5, 2006, Defendants filed suggestions in opposition to Trustee's motion for summary judgment. Also on April 5, Trustee filed a responses to Defendants' statement of uncontroverted facts and motion for summary judgment and a reply brief in support of Plaintiff's motion for summary judgment. On May 9, 2006, the Court held a hearing on the motions for summary judgment. At the hearing, the parties stated that the Trustee's and Defendants' motions for summary judgment on Counts I, IV, V and VI and Defendants' motion for summary judgment on Count III were at issue and that Plaintiff was dropping Counts II and VII. On October 11, 2006, the parties filed a stipulated dismissal of Counts II and VII.

III. FACTUAL BACKGROUND

Debtor, American Eagle Coatings, was formed on August 11, 1998, as a corporation dealing in the application of industrial and commercial coatings. The president of Debtor was Peter Brisbois. The shareholders of Debtor at the time of organization were Brisbois and defendant McGivern, Inc. Each contributed $25,000 and obtained 50% of the shares of the company. All organization documents have been submitted as exhibits. On the same date as formation, the shareholders entered into a Shareholders Agreement in which McGivern, Inc. was appointed voting trustee for both shareholders. The parties also entered into Stock Option Agreements and Sale Option Agreements. Also on that date, Debtor entered into an Operating Agreement. The operating Agreement provided that Debtor would pay McGivern, Inc. 11.5% of the price of all contracts entered into as participation fees.

Subsequently, McGivern, Inc. transferred its shares to Jack McGivern and John McGivern in equal amounts. On September 6, 2002, Debtor purchased the shares of Jack and John McGivern for an amount that is disputed by the parties and the parties entered into Stock Purchase Agreements. Debtor did pay to the McGiverns $500,000 at the time of the sale and entered into buy-out notes to pay to each the balance in the amount of $147,275.59. Thereafter, Debtor recorded the shares as treasury stock..

In July 2000, Brisbois entered into a contract for the purchase of property in Peculiar Missouri (the "Main Street Property"). Thereafter, Debtor assigned its rights in the property to the McGivern Trust, which ultimately purchased the property for $250,000. Debtor then leased the property from McGivern Trust. The lease was what is commonly described as a triple net lease. Debtor was responsible for the costs of all taxes, insurance and maintenance of the property. Debtor was also responsible for the costs of any improvements to the property. Debtor claims to have expended approximately $125,000 in improvements to the property. The parties also entered into a Purchase Option agreement in which Debtor had the option, at the 7, 10, 15 or 20 year anniversaries of the lease, to purchase the property for a price determined by a formula set forth in the document. Debtor made rental payments to McGivern Trust from August 2000 through January 2004.

On March 31, 2004, Debtor filed a Chapter 7 petition in bankruptcy. On that same date, McGivern Trust sold the Main Street Property for $300,000. The property was then re-sold for $350,000.

IV. DISCUSSION AND ANALYSES

A. Recovery of Participation Fees

In Count I of the complaint, Plaintiff seeks recovery from Defendants John and Jack McGivern for amounts paid pursuant to the Participation Agreement on three legal theories. Plaintiff contends that the amounts paid pursuant to the Participation Agreement after September 6, 2002 are avoidable as constructively fraudulent transfers pursuant to Mo.Rev.Stat § 428.029.1 upon which Plaintiff may rely pursuant to § 544(b) of the Bankruptcy Code. Secondly, Plaintiff contends that the authorization and payment of such fees given the financial circumstances of the Debtor at the time constituted a breach of fiduciary duty for which the Defendants are responsible. Finally, Plaintiff also contends that participation fees paid, including those paid prior to September 6, 2002 were paid pursuant to a contract of adhesion that was unconscionable.

1. Fraudulent Transfer

Plaintiff does not contend that the transfers were actually fraudulent, but that they are avoidable on the grounds of constructive fraud. In order to recover on that theory, Plaintiff is required to demonstrate that the company was insolvent at the time the transfers occurred or rendered insolvent by such transfers and that the company did not receive reasonably equivalent value in exchange for the transfers. The Court finds that the Plaintiff has failed to demonstrate that there is no genuine issue as to either of these material facts and accordingly will deny Plaintiff's motion for summary judgment as to this claim. Conversely, neither does the Court believe that the Defendants have demonstrated that the company was solvent or that it received reasonably equivalent value in exchange for the transfers and will similarly deny Defendants' motion for summary judgment on this claim.

In order to obtain summary judgment on the fraudulent transfer claim, Plaintiff must demonstrate that there is no genuine issue as to material fact and that he is entitled to judgment as a matter of law finding that the Debtor was insolvent during the period that the participation fees...