In re Computer Engineering Associates, Inc., Bankruptcy No. 95-17972-JNF. Adversary No. 97-1599.

CourtUnited States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts
Citation252 BR 253
Docket NumberBankruptcy No. 95-17972-JNF. Adversary No. 97-1599.
PartiesIn re COMPUTER ENGINEERING ASSOCIATES, INC., Debtor. John Desmond, Chapter 7 Trustee, and First Trade Bank, FSB, Plaintiffs, v. State Bank of Long Island, Advanced Testing Technologies, Inc., Eli Levi and Hector Gavilla, Defendants.
Decision Date21 August 2000

252 B.R. 253 (2000)

John Desmond, Chapter 7 Trustee, and First Trade Bank, FSB, Plaintiffs,
State Bank of Long Island, Advanced Testing Technologies, Inc., Eli Levi and Hector Gavilla, Defendants.

Bankruptcy No. 95-17972-JNF. Adversary No. 97-1599.

United States Bankruptcy Court, D. Massachusetts.

August 21, 2000.

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Kenneth A. Martin, Martin & Rylander, P.C., Washington, D.C., for First Trade Bank of L.I

John O. Desmond, Framingham, MA, pro se.

David C. Phalen, Bartlett, Hackett & Feinberg, P.C., Boston, MA, for defendants.


JOAN N. FEENEY, Bankruptcy Judge.


The matter before the Court is the Plaintiffs' Third Amended Complaint against the Defendants, State Bank of Long Island ("SBLI"), Advanced Testing Technologies, Inc. ("ATTI"), Eli Levi ("Levi") and Hector Gavilla ("Gavilla"). The Third Amended Complaint relates to a

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contract between Computer Engineering Associates, Inc. ("CEA" or the "Debtor") and the United States Air Force at Kelly Air Force Base in Texas pursuant to which the Debtor agreed to provide sophisticated testing and engineering services and utilized ATTI as a subcontractor. The Court previously ruled upon SBLI's Motion for Summary Judgment with respect to the Second Amended Complaint filed by the Plaintiffs, John Desmond (the "Chapter 7 Trustee") and First Trade Union Savings Bank ("FTU" or the "Bank") (collectively, the "Plaintiffs"). The Court heard the Motion for Summary Judgment (the "Motion") on April 28, 1998, and, in a decision dated August 5, 1998, granted in part and denied in part SBLI's Motion. The Court granted SBLI summary judgment with respect to Counts II through VIII, denied summary judgment with respect to Count I and ordered the Plaintiffs to file a Third Amended Complaint within 14 days

The Plaintiffs filed a Third Amended Complaint. ATTI, Gavilla and Levi filed a joint Answer in which they asserted eleven affirmative defenses. SBLI also filed an Answer to the Third Amended Complaint (the "Complaint").

The Court conducted a three day trial with respect to the allegations contained in the Plaintiffs' Complaint. The Plaintiffs identified the counts as follows: Count I: 11 U.S.C. § 548; Count II: Conversion; Count III: Turnover; Count IV: Preferential Transfer (ATTI and SBLI); Count V: Insider Preferential Transfer (ATTI, Levi and Gavilla); Count VI: Accounting; Count VII: Breach of Duty of Good Faith and Fair Dealing owed to Trustee (ATTI and SBLI); and Count VIII: Fraud (All Defendants). The Plaintiffs, in their Complaint, indicated that Count VI had been withdrawn. The Plaintiffs did not submit evidence with respect to Count VIII or mention it in their Post-Trial Brief. Thus, the Court finds that Count VIII has been waived. Additionally, in their Post-Trial Brief, the Plaintiffs clarified the allocation of claims as follows:

Plaintiff FTU asserts the following claims: (1) conversion; (2) turnover. Plaintiff John Desmond, Chapter 7 Trustee, asserts the following claims: (1) preference; (2) fraudulent conveyance; (3) insider preference; and (4) breach of good faith and fair dealing.

(Plaintiffs' Post-Trial Brief, p. 25).

The Plaintiffs did not clarify for each count the specific relief, if any, they are seeking against each named defendant, although in their Post-Trial Brief, for example, they suggested that Levi and Gavilla are liable under both 11 U.S.C. § 550 for an alleged fraudulent conveyance and 11 U.S.C. § 547 "to the extent they personally engaged in the transaction by pledging personal assets and guarantees to obtain SBLI's participation. . . ." (Plaintiffs' Post-Trial Brief, p. 41). Similarly, the Plaintiffs did not specify a dollar amount with respect to the relief they request in the various counts of their Complaint.

The Court now makes the following findings of fact and rulings of law in accordance with Fed.R.Bankr.P. 7052.


The Debtor filed a voluntary petition under Chapter 11 on November 24, 1995. It operated as a debtor-in-possession for less than five months. In April of 1996, it voluntarily converted its Chapter 11 case to a case under Chapter 7. On May 1, 1996, John Desmond was appointed Chapter 7 Trustee.

Less than one month after the filing of the Debtor's bankruptcy petition, on December 11, 1995, FTU filed an Emergency Motion for Relief from Automatic Stay. In its Motion, it stated that the following:

The primarily sic collateral of the Bank are accounts and related contracts and contract rights principally with respect to certain bonded and unbonded construction jobs of the Debtor. The Debtor\'s posture with respect to these various jobs is very fragile, and Debtor is subject to being in breach of these jobs
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and thus Bank\'s collateral is in serous sic jeopardy of being severely diminished or lost entirely unless these jobs proceed and are completed in due course.
As demonstrated by Exhibit B (these numbers are approximate as work has continued since they were prepared several weeks ago), even if the jobs which are collateral of the Bank are fully completed as projected given the issues that will undoubtedly arise, there is no equity in this collateral.

(emphasis supplied). On Exhibit B, FTU listed "USAF — Kelly AFB" as a receivable. It indicated that the "backlog amount" was $35,176; that the account receivable as of 10/12/95 was $685,400; that the total estimated cost to complete was $62,812; that accounts payable were $298,380; that there was a negative cash flow associated with the receivable of $27,636; and that "Final Settle" sic was $359,384. The Court scheduled a hearing with respect to the Motion and, on December 20, 1995, granted FTU relief from the automatic stay.

On June 6, 1997, the Trustee filed an Application to Employ Special Counsel, Kenneth Martin ("Attorney Martin") and the law firm of Martin & Rylander. Specifically, the Chapter 7 Trustee sought authority to employ Attorney Martin "to pursue collection of a preference and conversion action against a company that received prepetition funds from the Debtor." The Chapter 7 Trustee stated that he and FTU had "agreed that the net recovery, after payment of attorneys' fees and costs, will be divided between First Trade Union and the estate, with the bankruptcy estate receiving 20% of such net recovery and First Trade Union receiving 80% of such net recovery." The Trustee disclosed that Attorney Martin represented FTU. In the affidavit filed in support of the Application, Attorney Martin did not disclose any connections with the Debtor or its principal, John Solomon.1 After notice and a hearing, the Court authorized the Chapter 7 Trustee to employ Attorney Martin. The Court, however, indicated that it did not believe that the FTU had a security interest in any avoidance power recoveries that the Trustee might obtain pursuant to 11 U.S.C. §§ 547-550 and that it would not determine how the proceeds of any recoveries would be divided among the Bank, Attorney Martin and the estate until such proceeds existed.


A. The Parties

CEA was a corporation organized in Massachusetts. It was in the business of providing hardware and software support for computer systems to government entities and businesses and installing electronic security systems. Its customers included local school districts, state prison agencies, the United States Bureau of Prisons, and the United States Air Force. When it filed its Schedules and Statement of Financial Affairs, CEA's liabilities, which it indicated included secured claims of $2,482,054.71, priority claims of $761,115.44, and unsecured claims of $3,947,529.55, exceeded the value of its assets. It disclosed assets with a total value of $6,294,372.29.3

At the commencement of CEA's bankruptcy case, the value of its assets was vastly overstated. John Solomon ("Solomon"), the chief executive officer of CEA, testified that many of the accounts receivables were not collectible because CEA

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had defaulted on its contractual obligations, had not begun performance, or had determined that the cost of completing punch list items exceeded the value of the retainage due under the contract

The Chapter 7 Trustee, John Desmond, testified that the bankruptcy estate was administratively insolvent. He stated that he had approximately $70,000 in cash on hand, that approximately 232 claims had been filed, and that administrative claims, including priority claims, totaled approximately $462,000. The Chapter 7 Trustee did not include ATTI's administrative claim of $387,000 in this total. He stated that administrative claims totaled approximately $544,000, including ATTI's claim, and that priority claims which may be allowed as Chapter 11 administrative expense claims totaled approximately $306,000. He added that priority wage claims totaled $173,000, of which $49,000 would be allowable by operation of 11 U.S.C. § 503(a)(3), that priority tax claims totaled $669,000, and that unsecured claims, including secured claims for which there is no collateral, totaled approximately $8.3 million.

FTU is among the creditors asserting claims in CEA's bankruptcy case. It is owed, according to the testimony of a bank officer, the following: 1) the principal balance due on its line of credit, as of December 1999, in the amount of $861,170.45; 2) interest on the line of credit, as of December 8, 1999, in the sum of $227,037.53; 3) late charges associated with the line of credit in the amount of $17,600.76; 4) the principal due on the term loan in the amount of $701,080.97; 5) interest on the term loan, as of December 9, 1999, in the amount of $226,508.30; and 6) late charges associated with the term loan in the amount of $13,807.00.4 Solomon and James McCorry ("McCorry"), CEA's chief financial officer, had full authority to enter into...

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