In re Bellanca Aircraft Corp., Bankruptcy No. 4-81-959

Citation56 BR 339
Decision Date09 December 1985
Docket NumberBankruptcy No. 4-81-959,Adv. No. 4-81-323.
PartiesIn re BELLANCA AIRCRAFT CORPORATION, Debtor. Edward W. BERGQUIST, Trustee of the Bankrupt Estate of Bellanca Aircraft Corporation, Plaintiff, v. ANDERSON-GREENWOOD AVIATION CORP., a Texas corporation; and Anderson Greenwood & Co., a Texas Corporation, Defendants.
CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota








Jan Stuurmans, Brian Todd, Stuurmans & Kelly, P.A., Minneapolis, Minn., for plaintiff.

Jerry W. Snider, Faegre & Benson, John R. Stoebner, Richard T. Thomson, Lapp, Lazar, Laurie & Smith, Chartered, Minneapolis, Minn., for defendants.


MARGARET A. MAHONEY, Bankruptcy Judge.

The above-entitled action came on for trial on April 15, 1985, on Plaintiff's complaint seeking to avoid certain alleged preferential and postpetition transfers under 11 U.S.C. ?? 547 and 549, and to equitably subordinate Defendants' claims against the bankruptcy estate under 11 U.S.C. ? 510(c)(1). Defendants additionally seek a claim for administrative expenses for certain expenditures occurring postpetition. The parties submitted this matter for my determination based upon the trial record, consisting of five days of testimony, certain factual stipulations, approximately 350 exhibits, and upon the parties' post-trial oral and written arguments. This Court has jurisdiction over and the power to hear and finally determine all issues arising hereunder pursuant to 28 U.S.C. ?? 1334 and 157, and the July 27, 1984, Order of Reference from the United States District Court for the district of Minnesota. This is a core proceeding under 28 U.S.C. ? 157(b)(2)(F).

A. Introduction
1. The Parties

Plaintiff is the bankruptcy trustee for the estate of Bellanca Aircraft Corporation (Bellanca), the Debtor in this matter. Bellanca was incorporated under the laws of the state of Minnesota in 1955 as Northern Aircraft, Inc., and adopted the name Bellanca Aircraft Corporation in 1966. On July 25, 1980, Bellanca filed its voluntary petition under Chapter 11 of the United States Bankruptcy Code. Defendants, Anderson, Greenwood & Co. (AGCO) and Anderson-Greenwood Aviation Corp. (Aviation), are corporations formed under the laws of the state of Texas in 1947 and 1970 respectively. Aviation was created as and remains a wholly-owned subsidiary of AGCO.

Throughout its active existence, Bellanca was chiefly engaged in the business of manufacturing and selling single-engine aircraft and their parts and accessories. Prior to the Defendants' involvement with the corporation in early 1976, Bellanca had concurrently been producing two separate aircraft known as the Viking and the Champion. The Viking line, which was a descendant of the Bellanca Columbia, the second airplane to make a trans-Atlantic crossing, was a low wing aircraft constructed of plywood, fabric, and tubular steel, and was designed principally for business and recreational use. Production of the Viking began in approximately 1964 in Alexandria, Minnesota, and it enjoyed increasingly strong sales until 1974 or 1975, when the fuel crisis, recessionary and interest rate pressures, and approaching obsolescence greatly reduced demand. In 1970, Bellanca added the Champion to its inventory by virtue of the acquisition that year of the Champion Aircraft Co. Produced out of Bellanca's Osceola, Wisconsin, facility, the Champion was a high wing aircraft designed for pleasure and agricultural use. Unlike the Viking, it accounted for a substantial and increasing percentage of Bellanca's overall production and sales.

Defendant AGCO, like Bellanca, shared an interest in aircraft development and production at the time of its formation in 1947. At that time AGCO was formed for the purpose of designing and manufacturing an airplane envisioned by the corporate founders. While five such airplanes were actually produced, supply shortages during the Korean war caused production to cease, and the corporation redirected its efforts toward the manufacturing of instrument and safety relief valves for aeronautical applications. Eventually, AGCO engaged in the manufacture of various valves for use in oil and gas production, the petrochemical, chemical, and refining industries, power generation, pulp and paper production, as well as food, beverage, water, and sewage applications.

While AGCO continued the development and production of valves, its founders persisted in their dream of producing their own airplane. For many years AGCO engaged in the designing of a single-engine aircraft known as the Aries T-250. By the early 1970's it more actively began to pursue the development of the Aries in anticipation of the possibility of receiving a type certificate from the Federal Aviation Administration (FAA) conferring upon the corporation the exclusive right to manufacture and sell the aircraft. On December 30, 1970, Aviation was incorporated by AGCO for the purpose of serving as the corporate repository for the Aries type certificate, as well as for the purpose of manufacturing, designing, developing, and selling the aircraft. On December 12, 1973, AGCO filed its application for the Aries T-250 type certificate, which certificate was then issued on July 28, 1976. While AGCO was the recipient of the type certificate, and no actual transfer of the certificate to Aviation ever occurred, it is clear that AGCO transferred certain rights under the certificate to Aviation. The certificate was in fact recorded in the name of Aviation.

Despite testimony to the effect that Aviation remained inactive up until receipt of the Aries type certificate, and then served as little more than a cost center for future Aries design, development and manufacture, it is evident that at all material times this subsidiary corporation to AGCO maintained a board of directors and officers. Moreover, the evidence indicates that significant engineering, drafting, and production assistance was provided in the name of Aviation during the relevant time period, as well as some manufacturing of parts for the Aries due to particular expertise in either Aviation or AGCO. In conjunction with at least some of these activities, Aviation further maintained its own corporate record book and separate bank accounts. The record also indicates that Aviation possessed contracting capacity independent of AGCO.

Although the evidence clearly demonstrated that a variety of services were rendered in the name of Aviation to Bellanca, it is unclear to what extent these services were actually rendered by persons in the employ of Aviation.1 Testimony at trial established that all such services were provided by persons whose income was paid directly by AGCO. In contrast, it is undisputed that Bellanca was directly billed by Aviation for the receipt of such services from 1978 to early 1980, and, presumably, issued checks in the name of Aviation for those Aviation invoices paid. The record indicates, though, that in the year preceding the commencement of the bankruptcy no such Aviation invoices were paid by Bellanca.

2. Commencement of the Bellanca-AGCO-Aviation Relationship

In anticipation of certification by the FAA of the Aries T-250, Aviation commenced a study to determine the best means of manufacturing and marketing the aircraft, and concluded that it lacked both the necessary facilities and expertise to do so. Moreover, Aviation's parent company AGCO, intending to devote all of its resources and efforts to its successful and growing specialty valve business, wished to limit its further support and involvement in the Aries enterprise. Consequently, Aviation began a search for a partner experienced in manufacturing and marketing airplanes.

In the spring of 1976, discussions occurred between Aviation and Bellanca with respect to engaging Bellanca in the manufacturing and marketing of the Aries T-250. A respected company in the manufacturing and marketing of airplanes, Bellanca was at the time in financial difficulties and in need of a new product. Negotiations continued through much of 1976 until early November of that year when Bellanca and Aviation entered into a series of agreements which provided in part as follows: (1) Aviation would manage Bellanca's operations for six months; (2) a $250,000 loan would be advanced from Aviation to Bellanca; and (3) Aviation would use its best efforts to raise $3 million of capital from private investors for the Aries project. By early 1977, Bellanca had apparently expended much of the original Aviation loan, and it became necessary for Aviation to advance Bellanca an additional $250,000.

On April 11, 1977, with the Aries project lacking the capitalization proposed under the November agreements, a new series of agreements were reached between Bellanca, Aviation, the Alexandria Bank & Trust Co., and the Farmers' Home Administration (FmHA). Pursuant to these agreements, Aviation advanced substantial funds to Bellanca during the course of 1977. Evidenced by two promissory notes, these advances included $1.5 million in loans convertible at Aviation's option into 16,113,000 shares of Bellanca common stock, which upon conversion would have represented 82 percent of the outstanding shares of Bellanca. In connection with the advances, Bellanca shareholders collectively owning 68 percent of Bellanca's stock granted to Aviation the right to vote their shares on all matters, thereby enabling five AGCO or Aviation officials to occupy positions on Bellanca's board of directors. Total loans and advances from Aviation to Bellanca through at least 1977 amounted to $2,422,539.

By 1978, Aviation and Bellanca curtailed efforts to capitalize the Aries project by way of private investment. The decision was made in approximately May, 1978, to fund the project by way of...

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