In re Crabtree
| Decision Date | 23 March 1984 |
| Docket Number | Bankruptcy No. 3-83-01116. |
| Citation | 39 BR 718 |
| Parties | In re David A. CRABTREE, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Cadwalader, Wickersham & Taft, Murray Drabkin, Mark C. Ellenberg, Washington, D.C., Walker & Walker, P.C., John A. Walker, Jr., Mary C. Walker, Knoxville, Tenn., for trustee Norwood.
Zusmann, Small, Stamps & White, S.J. Zusmann, Jr., Atlanta, Ga., Ritchie, Chadwell & Eldridge, P.C., Robert W. Ritchie, Wilson S. Ritchie, P.C., Wilson S. Ritchie, Knoxville, Tenn., for debtor Crabtree.
Morton, Lewis, King & Krieg, Mary M. Farmer, Knoxville, Tenn., for Federal Deposit Ins. Corp.
Heiskell, Donaldson, Bearman, Adams, Williams & Kirsch, Craig J. Donelson, Knoxville, Tenn., for First Tennessee Bank.
ORDER GRANTING APPLICATION OF CREDITORS TO AMEND INVOLUNTARY PETITION UNDER CHAPTER 7 (WEST KNOXVILLE INVESTMENT COMPANY, INC.)
This matter came on for hearing on February 24, 1984, upon the Application of Creditors to Amend Involuntary Petition under Chapter 7 (West Knoxville Investment Company, Inc.); upon the Objection and Response to Application of Creditors to Amend Involuntary Petition under Chapter 7 and Request for Hearing of Debtor, David A. Crabtree; upon the testimony in open court of Francis W. Norwood, Trustee, Michael F. Stalls of First Tennessee Bank, Knoxville, and J. David Lewis of the Federal Deposit Insurance Corporation; upon the statements and arguments of counsel for the creditors, counsel for Francis W. Norwood, Trustee, and counsel for debtor, David A. Crabtree; and upon the entire record in this cause, from all of which the court makes the following Findings of Fact and Conclusions of Law.
(1) This hearing was held pursuant to notice by publication in accord with this court's order of January 30, 1984. Notice by publication was given, as evidenced by the affidavit of publication (Exhibit No. 5).
(2) No creditor filed an objection to the application or request for a hearing, and no creditor appeared at the hearing to object to the relief sought in the application.
(3) West Knoxville Investment Company, Inc., is the alter ego and instrumentality of debtor, David A. Crabtree, because:
(a) Crabtree has owned 100% of the shares of West Knoxville Investment Company, Inc., since it was incorporated in 1976, and he has been its president and in total control of the corporation since its inception;
(b) Crabtree and West Knoxville Investment Company, Inc., formerly shared the same business address (Suite 2136, Plaza Tower, 800 South Gay Street, Knoxville Tennessee 37929);
(c) Crabtree has provided his personal guaranty for debts of West Knoxville Investment Company, Inc. He gave his undated continuing guaranty for the payment of any indebtedness incurred by West Knoxville Investment Company, Inc., to United American Bank in Knoxville, the predecessor in interest to First Tennessee Bank, Knoxville, up to an amount of $5,000,000.00 (Collective Exhibit No. 11); Crabtree also gave his continuing guaranty to City and County Bank of Knox County for the payment of any indebtedness incurred by "West Knox Investment" up to the sum of $3,000,000.00 (Collective Exhibit No. 23); and he further gave his continuing guaranty, in an unlimited amount, for the payment of any indebtedness incurred by West Knoxville Investment Company, Inc. to United American Bank of Nashville (Collective Exhibit No. 23);
(d) The proceeds from loans made to West Knoxville Investment Company, Inc. by United American Bank in Knoxville, the predecessor in interest to First Tennessee Bank, Knoxville, were used to pay obligations of Crabtree at United American Bank in Knoxville (Exhibit Nos. 7, 9, and 10);
(e) The proceeds from loans made to West Knoxville Investment Company, Inc. were deposited directly into the bank account of Crabtree (Collective Exhibit Nos. 24 and 25);
(f) Corporate forms and formalities usually observed by an independent corporation were not observed by West Knoxville Investment Company, Inc. For example, since September, 1982, there have been no entries in the corporate minute books (Exhibit No. 1);
(g) Crabtree used West Knoxville Investment Company, Inc. as a nominee to obtain loans from financial institutions which either employed him or in which he had an ownership interest;
(h) West Knoxville Investment Company, Inc., was not independently credit worthy and could not have obtained such loans but for its relationship to Crabtree and his connections with the lending institutions; and;
(i) To the extent that creditors of Crabtree and West Knoxville Investment Company, Inc. can be determined, it appears that almost all, if not all, of the creditors of West Knoxville Investment Company, Inc. are creditors of Crabtree.
(4) Because Crabtree is no longer directing or funding its operations, West Knoxville Investment Company, Inc. presently is unable to pay its debts as they become due. Numerous lawsuits have been filed recently against West Knoxville Investment Company, Inc. (Exhibit Nos. 2, 3 and 4).
(5) The affairs of Crabtree and West Knoxville Investment Company, Inc., are so intermingled and entwined that their separate assets and liabilities cannot be ascertained, and any attempt to separate their financial affairs would consume substantial assets of the estate with no considerable likelihood that such an exercise would be successful. This is especially true with regard to the use of West Knoxville Investment Company, Inc. to borrow proceeds to pay obligations of Crabtree. In the absence of books and records for Crabtree and West Knoxville Investment Company, Inc., it is not possible to determine whether West Knoxville Investment Co., Inc. and the debtor, David A. Crabtree, acted at arms' length.
(6) Because the affairs of Crabtree and West Knoxville Investment Company, Inc. are so intermingled and entwined, and due to Crabtree's refusal to provide complete books and records for both himself and West Knoxville Investment Company, Inc., no trustee could accurately prepare a statement of financial affairs and schedules or administer West Knoxville Investment Company, Inc. as a separate entity and estate.
(7) Crabtree has generally denied but not otherwise controverted either the petitioning creditors' allegations or the proof adduced at the hearing; instead he has invoked his constitutional privilege against self-incrimination. (See Debtor's Objection and Response filed February 21, 1984.)
This court has jurisdiction to grant leave to amend the involuntary petition nunc pro tunc to July 14, 1983, to show that the debtor, David A. Crabtree, is also known as and doing business as West Knoxville Investment Company, Inc. The amended petition does not add a second debtor to this case, but rather reflects the reality that West Knoxville Investment Company, Inc. is simply Crabtree's alter ego and an instrumentality used by him to conduct his financial affairs.
The court can permit inclusion of West Knoxville Investment Company, Inc. in the caption of the petition pursuant to a motion by creditors. Debtor claims that the proper procedure for piercing the corporate veil and adding West Knoxville Investment Company, Inc. is for creditors to first file an involuntary petition against West Knoxville and then move to consolidate the cases. Although debtor's suggested procedure is acceptable, it is not the exclusive means by which creditors of a debtor can add alter egos to the petition. See In re 1438 Meridian Place, N.W., Inc., 15 B.R. 89 (Bkrtcy.D.D.C.1981); In re Auto-Train Corp., No. 80-00391 (Bankr.D. D.C. November 21, 1980) (). In Auto-Train, after a contested hearing, the court granted the trustee's motion to amend the petition nunc pro tunc to include a corporation that was the debtor's alter ego. In Meridian, creditors of a single corporate debtor in possession successfully sought to amend the caption of the voluntary debtor's petition by adding the names of two individuals and seven additional corporations.
The court in Meridian rejected the debtor's argument that the creditors should have filed involuntary petitions against the two individuals and the other corporations. It was not necessary for the creditors to prove that they could bring successful involuntary petitions against the parties they sought to add. Indeed, the court specifically stated that the creditors of 1438 Meridian could not have so brought successful involuntary petitions because they were creditors only of 1438 Meridian, not of the two individuals or seven other corporations. Meridian, 15 B.R. at 95. The Meridian court based its decision permitting amendment on the creditors' "right to bring additional parties before the Court where it is alleged that such parties are, in fact, the alter ego of the debtor." Meridian, 15 B.R. at 96.
Similarly, the creditors of David A. Crabtree are entitled to bring West Knoxville into this case simply because it is his alter ego and instrumentality.1 Further, its assets are properly part of his estate.
Furthermore, no apparent or demonstrative prejudice results to the debtor or creditors by virtue of allowing the creditors to amend the caption in this proceeding rather than requiring them to file a new, separate petition against West Knoxville Investment Company, Inc. As stated in In re Miller, 262 F.Supp. 298 (E.D.Ill.1967):
The Court fails to see any merit in the bankrupt\'s contention that the additional acts of bankruptcy set forth in the amendment could only be raised by the filing of a Creditors\' Petition in an entirely new bankruptcy proceeding. If the bankrupt has any defenses . . ., he can raise them as well in the existing bankruptcy proceeding as he could have in any bankruptcy proceeding that the creditors would have been compelled to file if the Referee had not...
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