In re Checkmate Stereo & Electronics, Ltd.
| Decision Date | 05 February 1981 |
| Docket Number | Adv. No. 180-0366,Bankruptcy No. 180-02124-21,180-02125-21,180-0367. |
| Citation | 9 BR 585 |
| Parties | In re CHECKMATE STEREO AND ELECTRONICS, LTD., Debtor. John S. PEREIRA, Trustee in Bankruptcy, Plaintiff, v. CHECKMATE COMMUNICATIONS CO., INC. and/or Checkmate Communications, Ltd. and/or Checkmate Stereo & Co., Inc. and/or Checkmate Automotive and Gerald Wren, Jr. and Gerald Wren, Sr., Defendants. In re CHECKMATE MARKETING CO., INC., Debtor. John S. PEREIRA, Trustee in Bankruptcy, Plaintiff, v. CHECKMATE COMMUNICATIONS CO., INC. and/or Checkmate Communications, Ltd. and/or Checkmate Stereo & Co., Inc. and/or Checkmate Automotive and Gerald Wren, Jr. and Gerald Wren, Sr., Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
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Robert P. Herzog, New York City, for trustee.
Ballon, Stoll & Itzler, New York City, for defendants.
These adversary proceedings, which were consolidated for trial, are brought by the trustee in bankruptcy of two related corporations: Checkmate Stereo and Electronics, Ltd. ("Stereo"), and Checkmate Marketing Co., Inc. ("Marketing"). The complaint invokes ?? 541, 544, and 548 of Title 11 of the United States Code.1 The relief sought includes the nullification of various transfers of property to the defendants, a judgment against the defendants for conversion, and the award to the plaintiff of punitive damages, costs, and attorneys' fees.
Defendants are Gerald Roy Wren ("Wren"), identified in the complaint as "Gerald Wren, Jr.," and his father, Gerald Vincent Wren ("Wren, Sr."), identified in the complaint as "Gerald Wren, Sr.," together with various other entities owned and controlled by the two men. Wren, Sr. is claimed to be the sole stockholder of the defendant Checkmate Communications, Ltd. ("Communications, Ltd.") and of the defendant Checkmate Stereo & Co., Inc. ("Stereo & Co., Inc."), of both of which Wren is the president. The defendant Checkmate Automotive is a corporation of which Wren owns 50 percent of the stock. There is no such legal entity as Checkmate Communications Co., Inc. ("Communications Co."). That is either the name of a fictitious company, or an erroneous rendering of the corporate name of Communications, Ltd. Wren was the organizer, the only stockholder, and the sole executive of the two debtor corporations, Stereo and Marketing, now represented by the trustee.
The complaint brought by Stereo sets forth seven causes of action. The first four each allege a fraudulent conveyance to the defendants of assets belonging to the debtors, including a leasehold, inventory, equipment, tools, leasehold improvements, machinery, and goodwill, all of which are asserted to have a value in excess of $200,000. The first cause of action alleges an actual intent to hinder, impede, delay, and defraud creditors; the second, third, and fourth causes of action allege constructive fraud. The defendants, in accepting the transfers, are alleged to have acted with fraudulent intent, and to have conspired to defraud the creditors of the debtors. The Stereo complaint also alleges a cause of action against Wren alone, charging breach of duty by him and a usurpation of corporate opportunity, in his acceptance on April 24, 1980 of an executive employment agreement from a competitor of the debtors' principal supplier. The last cause of action alleges conversion by the defendants of the name and trademark "Checkmate." As relief, the complaint seeks, inter alia, nullification of the various transfers to the defendants, a judgment for conversion of the defendants' property, compensatory damages for breach of Wren's fiduciary duties and conversion of the Checkmate trademark, and punitive damages and attorneys' fees.
The complaint filed on behalf of Marketing parallels that filed by Stereo, except that no usurpation by Wren of corporate opportunity is alleged.
The defendants have entered, in effect, a general denial. As an affirmative defense, they plead failure to state a cause of action and failure to comply with FRCP 9. No rulings were ever sought on these defenses.2
Endorsed on the defendants' answers was a demand for a trial by jury of all issues. Neither the answer, nor the demand, were filed with the Court, however, until subsequent to the expiration of the time within which a jury demand can be filed pursuant to Interim Bankruptcy Rule 9001(c), adopted by the Bankruptcy Court of the Eastern District of New York. As a result, the jury demand was struck on the motion of the trustee. The Court explained its decision in an Opinion rendered on November 25, 1980.3
As is admitted in the pleadings, an involuntary petition in bankruptcy was filed against each of the debtors on April 25, 1980. These petitions resulted in an order for relief on May 15, 1980, entered by consent. On June 5, 1980, the trustee applied for an attachment against certain property then in the possession of various of the defendants. The defendants were directed to show cause why "an order of attachment should not issue pursuant to FRCP Rule 64 made applicable herein by Bankruptcy Rule 764 and New York Civil Practice Law and Rule 6201(3)" against the leases and leasehold interests under which the defendants were occupying premises formerly used by the debtors, and against the fixtures, tools, office furniture, display equipment and inventory transferred by the debtors to the defendants. Sought to be attached also were the bank accounts, accounts receivable, and the commissions payable to Wren under an employment contract.
Evidence was taken on June 11, 12, and 13, 1980 with respect to the relief requested. The trustee called as witnesses the defendant, Wren; a bookkeeper, Mary Smith, employed by various of the defendants; and Melvin Schwam, an employee of the debtors' major creditor, Audiovox Corp. ("Audiovox"). The defendants elected to call no witnesses, but did introduce into the record considerable documentary evidence.
The Court denied the requested attachment on the ground that on the facts presented, this relief was not available as an interim remedy under the statutes relied on by the trustee. However, the Court held that in view of "the substantial evidence already presented that a fraud has been practiced on the debtors' creditors," it believed that the trustee was "entitled to be protected from any further manipulation" of certain assets "to the detriment of the creditors of the debtors." Accordingly, at the conclusion of the hearing, the Court ordered the defendants to refrain from selling, encumbering, or in any manner disposing of the leases, leasehold interests, furniture, tools, and equipment which had formerly belonged to Stereo and to Marketing. It stated its reasons in an Opinion issued July 9, 1980.
The trial of the two complaints commenced on December 2, 1980 and concluded on December 16, 1980. The trial took nine days. The trustee called five witnesses; the defendants, five. Wren was the principal witness for both sides.
The Court permitted the trustee to introduce as part of its case all the testimony and related exhibits of Wren and Schwam at the hearing on preliminary relief, after Schwam was made available at the trial for cross-examination on his testimony. Wren, Sr.'s testimony also came in by way of deposition, since he did not appear at the trial.
At the conclusion of the plaintiff's case on motion of the defendants, the Court dismissed the fifth cause of action in the Stereo complaint against Wren, alleging usurpation of a corporate opportunity, and the causes of action in both complaints claiming conversion of the trademark "Checkmate." In dismissing these causes, the Court stated that such dismissal "does not mean that the evidence or that the allegations contained in those causes of action are not to be deemed material with respect to the other causes of action."
Prior to the adoption of the new Bankruptcy Code, a proceeding to recover a fraudulent conveyance would have required a plenary action either in the state or Federal courts, absent consent by the defendants to a summary proceeding in the bankruptcy court. See Section 67(e) of the old Bankruptcy Act. 28 U.S.C. ?? 1471(b) and (c) now vest jurisdiction in the bankruptcy court of all causes related to cases under Title 11.
A trustee in bankruptcy may seek to void fraudulent transfers under either, or both, 11 U.S.C. ? 544 and 11 U.S.C. ? 548. Transfers made subsequent to the filing of the petition are voidable under 11 U.S.C. ? 549. The liability of the transferee of a voided transfer is covered by 11 U.S.C. ? 550.
Section 548 is the successor to ? 67(d) of the Bankruptcy Act, which, in turn, was derived largely from the Uniform Fraudulent Conveyance Act.4 Only transfers made within one year of the date of the filing of the petition may be challenged under ? 548. Subsection (a) of ? 548 consists of an introduction followed by four substantive paragraphs which replace the substance, respectively, of ?? 4, 5, 6, and 7 of the Uniform Fraudulent Conveyance Act. 4 Collier on Bankruptcy ? 548.021, p. 548-22 (15th ed. 1979). Section 548(a)(1) makes voidable any transfer accomplished with an actual fraudulent intent; the other substantive provisions are concerned with transfers for less than reasonably equivalent value under conditions from which fraud will be predicated in law, despite lack of actual intent to defraud. Unlike the Bankruptcy Act which the Code replaces, the presence or absence of reasonably equivalent value appears to be an objective test, not affected by the subjective good, or bad, faith of the transferee. Compare ? 544(d)(2) with ? 67(d)(1)(e) of the old Bankruptcy Act.
Section 544 of the Code imports state law into the Code. It makes voidable at the suit of the trustee any transfer that a...
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