In re CIS Corp.
| Citation | 195 BR 251 |
| Decision Date | 02 May 1996 |
| Docket Number | Bankruptcy No. 89-B-10073 (PBA) to 89-B-10084 (PBA). Adv. No. 90-6011A. |
| Parties | In re CIS CORPORATION, Continental Information Systems Corporation, et al., Debtors. James P. HASSETT, as Trustee of Continental Information Systems Corporation, et al., Plaintiffs, v. Harry E. GOETZMANN, Jr., Defendant. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
Langan Grossman Kinney Dwyer & Reitz, P.C. by Richard D. Grossman, Susan Johns, East Syracuse, NY, for Harry E. Goetzmann, Jr.
Wilmer, Cutler & Pickering by Stephen Black, Ross Albert, Washington, DC, for Chapter 11 Trustee.
This adversary proceeding was commenced by James P. Hassett as Chapter 11 trustee (the "Trustee") of CIS Corporation and its related subsidiaries and affiliates ("CIS" or "Debtors") to recover pre-petition payments of $364,791 made to or for the benefit of Harry E. Goetzmann, Jr., the founder and former president of the Debtor, just 2 weeks before he caused Chapter 11 petitions to be filed by the Debtors in January 1989. The payments were in satisfaction of the balance of a $888,279 bonus declared due to Goetzmann in May 1988 based on the Debtors' stated earnings for the year ended December 1987. The Trustee alleged that the payments were preferential transfers that could be recovered pursuant to Bankruptcy Code § 547(b). Goetzmann admitted that the Trustee could satisfy all the elements of Code § 547(b) with the exception of the greater percentage test. However, Goetzmann contended that the payments were made in the ordinary course of business and thus under Code § 547(c) could not be recovered.
Following a trial and based upon the court's findings of fact and law which follow, this court grants judgment in favor of the Trustee.
1. On January 13, 1989 (the "Filing Date"), the Debtors filed voluntary petitions in this Court under Chapter 11 of the Bankruptcy Code. The Debtors continued in the management and operation of their businesses and properties as debtors-in-possession for a number of months. In early fall of 1989, the Creditors' Committee sought the appointment of a Chapter 11 trustee on the grounds of a number of acts of alleged misconduct and/or mismanagement by the debtors-in-possession. Shortly thereafter when the Debtors determined not to oppose the appointment, this Court ordered the appointment of a Chapter 11 trustee. James P. Hassett was appointed Chapter 11 trustee (the "Trustee") in late October 1989.
2. On the Filing Date, the Defendant Harry E. Goetzmann, Jr. ("Goetzmann" or the "Defendant"), who had founded CIS in 1968, was Chief Executive Officer of CIS.
3. On or about December 30, 1988, CIS made a $364,781 payment (the "Payment") to or for the benefit of Goetzmann. By letter dated March 22, 1990, the Trustee demanded that Goetzmann repay the $364,781 as well as certain additional transfers made by CIS to Goetzmann and to federal and state tax authorities on his behalf.
4. On June 11, 1990, the Trustee filed his Complaint in this adversary proceeding seeking to recover the $364,781 Payment as a preferential transfer as well as certain additional transfers.
5. At a hearing on July 26, 1991, this Court granted the Trustee's motion for partial summary judgment, ruling that the Payment was a voidable preference and overruling Goetzmann's defenses. The Court memorialized its ruling in a written Order dated September 13, 1991 (the "September 13 Order").
6. Goetzmann appealed from the September 13 Order. In a Memorandum-Decision and Order dated December 22, 1992, the United States District Court for the Southern District of New York (David N. Edelstein, U.S.D.J.) vacated the September 13 Order and remanded the case to this Court for trial.1
7. At a hearing on January 8, 1993, this Court struck Goetzmann's jury trial demand and set a trial date of February 25, 1993. Upon the consent of the parties, on January 27, 1993, this Court entered an Order providing that the trial would encompass the Trustee's claims under Code § 547 as to the Payment. These matters were tried before this Court on February 25 and 26, 1993 (the "Trial").
8. At all relevant times before October 24, 1989, Goetzmann was the Chairman and Chief Executive Officer of CIS.
9. The CIS fiscal year 1988 ended on February 29, 1988. Under the terms of his fiscal 1988 compensation agreement with CIS, Goetzmann was entitled to receive a bonus amounting to three percent of CIS' net pretax profit.
10. Goetzmann became eligible to receive full payment of his fiscal 1988 bonus of $882,279 on or shortly after May 6, 1988.
11. Later in May 1988, at Goetzmann's request, CIS paid Goetzmann advances totalling $517,498 against his fiscal 1988 bonus: one advance for $500,000 on May 9, 1988 and another advance for $17,498 on May 23, 1988. CIS did not deduct or withhold any amount from these advances for payment of federal or state income taxes because at Goetzmann's request CIS treated the advances as loans.
12. Under applicable federal and state law, an employer is obligated to deduct and withhold income taxes from wages as and when paid, including wages constructively paid. Treas.Reg. § 31.3402(a)-1(b); 20 NYCRR 160.1(b) (current version at 20 NYCRR 171.1(b) (1992)). In 1988, it was CIS' ordinary course of business to withhold income tax payments from wage payments, including bonus payments, to employees in accordance with applicable federal and state law.
13. Sometime prior to December 20, 1988, on at least one occasion, Goetzmann made a verbal request for the balance of his bonus to Thomas Prinzing ("Prinzing"), the Chief Financial Officer of CIS. Prinzing did not issue a check based on Goetzmann's verbal request.
14. On or about December 20, 1988, Goetzmann sent a memorandum (the "December 20th Memorandum") to Prinzing requesting payment of his fiscal 1988 bonus of $882,279. In the December 20th Memorandum, Goetzmann noted the previous advances of $500,000 and $17,498, and stated that the gross balance due him was $364,781. As to the balance, Goetzmann's memorandum directed CIS to deduct and withhold $241,000 for taxes: $193,000 (21.9 percent of Goetzmann's $882,279 fiscal 1988 bonus) for federal taxes and $48,000 (5.4 percent of Goetzmann's fiscal 1988 bonus) for state taxes.
15. On or about December 30, 1988, in accordance with the December 20th Memorandum, CIS paid (1) $123,781 to Goetzmann; (2) $193,000 to the federal taxing authorities and (3) $48,000 to the state taxing authorities.
16. Goetzmann admitted in his Answer to the Complaint that he knew that CIS was insolvent at the time he received the Payment.
17. The Trustee testified at Trial that he undertook several valuation studies of CIS as of the Filing Date through 1992. These studies included reviewing accounts receivable billing, liabilities, isolating assets to which CIS had clear title, and reviewing major re-marketing agreements. He also testified that he reviewed possible settlements of pending litigation against CIS, including a $150 million claim asserted against CIS by the Internal Revenue Service ("IRS").
18. The Trustee concluded that based on his studies, the unsecured creditors would not receive 100 cents on the dollar in a liquidation of CIS under Chapter 7 of the Code either at the Filing Date or at the time of Trial.
19. From July 1988 through the end of November 1988, the price of CIS stock on the New York Stock Exchange declined by approximately 65 percent. Goetzmann, by his own admission, was contemporaneously aware of the magnitude of this decline.
20. On August 22, 1988 CIS consulted Levin & Weintraub & Crames (the "Levin Firm") as bankruptcy counsel.
21. The discussion of CIS' declining financial circumstances dominated the meetings of CIS' Board of Directors and of the Executive Committee of CIS' Board of Directors during the period from September through December 1988. Goetzmann attended and presided at all these meetings.
22. At a meeting on September 28, 1988, Goetzmann and the Board of Directors were informed that CIS was likely to incur a substantial third quarter loss. CIS' outside general counsel, Daniel Bergstein, advised that if CIS was not able to consummate a pending deal with its principal lender Prudential Capital Investments ("Pru-Cap") "the evaluation and posturing relative to an insolvency workout on a worst case basis has been addressed."
23. In the fall of 1988, CIS retained Drexel Burnham Lambert ("Drexel") to assist CIS in acquiring new capital.
24. At a special meeting of the Board of Directors on November 16, 1988, Goetzmann and the Board were informed that third quarter projections would probably not meet the terms set forth in CIS' loan agreement with Pru-Cap. At the same meeting Thomas Prinzing, CIS' Chief Financial Officer, circulated future cash flow projections from November 1988 through February 1989 showing a possible negative cash flow of $28 million and financing needs of an additional $70 million.
25. At a presentation to senior management, including Goetzmann, at CIS' headquarters on or about November 29, 1988, Drexel reported that CIS could not raise additional capital and that CIS should consider soliciting buyers for its business segments.
26. By the end of November 1988, the Levin Firm posted attorney Andrew Kress at CIS' headquarters in Syracuse to review issues related to a potential bankruptcy filing. In December 1988 Goetzmann periodically asked Kress about the Levin Firm's progress towards completion of the 12 bankruptcy petitions that the Debtors would ultimately file on January 13, 1989.
27. At a special meeting of the Executive Committee of the Board of Directors on December 2, 1988, Goetzmann presided over a discussion...
To continue reading
Request your trial
-
In re 599 Consumer Electronics, Inc.
... ... The 599 store, located at 599 Lexington Avenue in Manhattan, opened in 1987 and closed in 1992. (Tr. at 76-77) ... Appellants are 12 suppliers that sold goods to all four companies: Canon U.S.A., Inc., Diplomat Merchandise Corp., Gamla Enterprises N.A., Inc., International Dictating & Telephone Equipment, Inc. ("IDTE"), J & B Trading Company, Minolta Corporation, Olympus Corporation, Pentax Corporation, Pro Mark Distributors, Inc., Ricoh Corporation, Superior Merchandise Electronics Co. ("SME"), and Thomson Consumer ... ...