In re Bowers-Siemon Chemicals Co.
| Decision Date | 30 April 1992 |
| Docket Number | 89 A 1005.,Bankruptcy No. 89 B 13574 |
| Citation | 139 BR 436 |
| Parties | In re BOWERS-SIEMON CHEMICALS COMPANY, Debtor. BOWERS-SIEMON CHEMICALS COMPANY, Plaintiff, v. H.L. BLACHFORD, LTD., et al., Defendants. Earl A. BOWERS and Martha L. Bowers, Plaintiffs, v. H.L. BLACHFORD, LTD., Blachford Enterprises, Inc., Blachford Investments, Inc., Metcalf Investment Company, Inc., Walter B. Metcalf III, and Leroy J. Cook, a/k/a Jack Cook, Cross-Defendants and Third-Party Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Max Chill, Steve Radtke, Chill, Chill & Radtke, P.C., Chicago, Ill., for Bowers-Siemon.
Robert Downing, Erica Landsberg, Sidley & Austin, Chicago, Ill., for Earl and Martha Bowers.
This matter is before the Court on the motion for summary judgment of Bowers-Siemon Chemicals Company, debtor and plaintiff, ("BSCC"), on its claims of fraudulent conveyance under § 548(a)(2)(a) — (B)(ii) of the Bankruptcy Code and under Ill.Rev. Stat. ch. 59, ¶ 4, avoidable preference under § 547 and common law trust fund doctrine, against Earl and Martha Bowers (the "Bowers"), and the Bowers cross motion for summary judgment or motion to dismiss the common law trust fund claim. Now therefore, for the reasons set forth herein, BSCC's motion for summary judgment on its claims of fraudulent conveyance under § 548(a)(2) and Ill.Rev.Stat. ch. 59, ¶ 4 and under the trust fund doctrine are denied, BSCC's motion for summary judgment on its claims of an avoidable preference under § 547 is granted and the Bowers' cross motion for summary judgment is granted.
BSCC is a Delaware corporation authorized to do business in Illinois. BSCC operates under the assumed name, Metcalf Industries, Inc. ("MII") which it adopted on January 22, 1987. BSCC also operates a separate division under the name Armstrong Sheave and Equipment Division ("Armstrong").
On August 5, 1985, the Bowers sold their shares in BSCC to Metcalf Investment Company, Inc. ("MIC") for $840,454 pursuant to a Stock Purchase Agreement.1 The 190,641 shares transferred pursuant to the Stock Purchase Agreement constituted 53.58% of the outstanding shares of BSCC. MIC paid $440,454 in cash and executed an installment promissory note for the remaining $400,000 (the "Note").2 The Note was secured by a pledge of the BSCC stock, pursuant to a Stock Pledge Agreement entered into between MIC, the Bowers, and Union National Bank of Joliet as escrowee. BSCC was not a party to the Stock Purchase Agreement, the Note or the Pledge Agreement.
BSCC and Earl Bower entered into a Consulting Agreement in connection with the Stock Purchase Agreement. Under the Consulting Agreement, Earl Bower agreed to act as consultant from April 16, 1985 to April 15, 1990.3 Earl Bower also agreed not to compete with BSCC during the term of the agreement and for three years thereafter. In return for his services Earl Bower would be paid $475,000 in ten installments plus benefits including, life and health insurance and auto expenses. The Consulting Agreement was also secured by the Stock Pledge Agreement, but MIC was not a party to the Consulting Agreement.
After the Bowers sold their stock they were not involved in the management or financial operations of BSCC, nor did they have access to financial information on BSCC. Earl Bower did, however, render significant services to BSCC over the next few years.
Following the stock transfer, Cook became the President of BSCC. Cook began expanding BSCC's business and entered into two asset acquisitions shortly after taking control of BSCC. On December 23, 1985, BSCC purchased assets and real estate located in Frankfort, Illinois from Diamond Shamrock Chemicals Corporation for $925,000 plus the value of the inventory. BSCC paid $750,000 in cash and executed a promissory note for the balance. Diamond Shamrock took a mortgage in the real estate as security for the promissory note.
On approximately June 6, 1986, BSCC closed on the purchase of another line of business from Flo-Lube, Inc. The total purchase price for this acquisition was $430,000 plus the value of the inventory and was paid for with $150,000 in cash and a promissory note for the balance. Flo-Lube took a second position security interest in the assets located in Frankfort, Illinois as security for the promissory note. Both of these acquisitions were financed by NBD. BSCC granted NBD a first security interest in all of the assets acquired as security for its loan.
In early to mid-1988, BSCC began experiencing financial difficulties. Due to arrearages to suppliers, some of BSCC's suppliers refused to make shipments unless they were paid. As a result BSCC was having difficulty filling orders.
In September of 1988, BSCC restructured its loan with NBD and executed a Collateral Note for $733,425.56. The Collateral Note was due and payable on October 22, 1988. On October 22, 1988, BSCC was unable to make the payment due on the Collateral Note. Consequently, BSCC and NBD again commenced negotiations to restructure BSCC's debt. After becoming concerned that BSCC would not be able to obtain financing to continue doing business, certain employees of BSCC contacted officers of H.L. Blachford, Ltd., a Canadian corporation, ("Blachford"), to see if they would be interested in acquiring BSCC. Blachford expressed interest in such an acquisition and in February 1989 negotiations began between BSCC and Blachford.
On February 6, 1989, at a meeting in Detroit, Michigan, NBD orally declared a default and made a demand for payment of all amounts BSCC owed NBD. On February 9, 1989, NBD confirmed the declaration of default in a letter to BSCC. NBD agreed to give BSCC until May 6, 1989 to obtain alternative financing. NBD also sent a copy of the February 9, 1989 letter to Earl Bower.
On March 8, 1989, NBD sent another letter to BSCC, setting forth additional defaults and reiterating the extension of time to May 6, 1989. A copy of this letter was also sent to Earl Bower.
During March, the negotiations between Blachford and BSCC continued. On March 22 and 28, 1989, Blachford sent letters to Metcalf, Cook and MIC offering to purchase their stock in BSCC. On March 31, 1989 Blachford sent a letter of intent to purchase the BSCC stock. The letter of intent was executed by Metcalf and Cook.
On March 30, 1989, Blachford incorporated Blachford Enterprises, Inc. ("BEI") under the laws of the State of Michigan. BEI was formed in connection with the proposed acquisition of BSCC.
On March 31, 1989, BSCC, MIC and BEI entered into a Management Agreement (the "Management Agreement"). The Management Agreement gave BEI joint management control over BSCC's day-today operations. The Management Agreement was amended on May 5, 1989 (the "Amended Agreement"). The Amended Agreement granted BEI exclusive access to BSCC's buildings and equipment and required BEI's written consent of all contracts.
Through its involvement in BSCC's management, BEI was able to examine BSCC's books and records and ascertain BSCC's financial condition. During April of 1989, BEI generated lists of BSCC's accounts receivables and a list of BSCC's major supplier-creditors.4 After BEI reviewed the books and records of BSCC, BEI no longer desired to purchase the stock in BSCC. Instead the parties agreed that the transaction would be changed to a purchase of all of BSCC's assets, except the Armstrong assets.
On April 7, 1989, NBD sent another letter to BSCC indicating that it would no longer extend credit to BSCC due to the existing defaults. Also during April, BEI, Blachford, NBD, MIC and BSCC entered into a Standstill Agreement, under which NBD agreed to allow BEI to operate BSCC and NBD would subordinate its interest in BSCC's inventory, material and new receivables to Blachford. During this time BEI and/or Blachford were advancing funds to BSCC for continued operations. Blachford was also collecting BSCC's accounts receivables and paying the amounts collected to NBD to reduce BSCC's debt.
On April 18, 1989, BSCC received a letter from John D. Born, indicating that participants in the BSCC Employee Stock Option Plan ("ESOP") were prepared to block the proposed sale to Blachford unless their interests were addressed.5
On April 21, 1989, the Bowers declared a default under the Pledge Agreement based upon BSCC's defaults in its obligations to NBD, and MIC's and BSCC's failure to pay amounts due the Bowers. In this letter the Bowers also demanded that the escrow agent turn over the BSCC stock which it held in escrow. The escrowee complied with this request and the Bowers received possession of the stock. On May 2, 1989 the Bowers' attorney sent a letter to Blachford's attorneys, informing them that the Bowers would not consent to a sale of BSCC.
In a May 4, 1989 letter, the Bowers claimed the following amounts were due: $300,000.00 plus interest at 10% since August 5, 1988 under the Stock Purchase Agreement/Note; $233,333.32 in consulting fees, medical insurance at $2442.00 per year, life insurance at $4,025.00 per year, accidental death coverage at $550.00 per year, automobile expenses at $460.00 per month, auto insurance at $600.00 per year, unreimbursed expenses of $7805.51, miscellaneous expenses of $1000.00 per year and unreimbursed legal fees incurred in connection with the stock sale of $6293.85, under the Consulting Agreement.6 The Bowers attorney maintained that the Bowers would not consent to the sale of BSCC's assets unless they were paid.
As a result of the default in the Pledge Agreement MIC could not sell the BSCC stock or vote the stock in favor of an asset sale. BSCC was also unable to obtain alternative financing to pay NBD, the ESOP Defendants or the Bowers.
Negotiations ensued between Robert Downing, attorney for the Bowers and Michael Hansen, attorney for BSCC/MIC. There were also discussions between Hansen and Robert...
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