In re Dakota Country Store Foods, Inc.
| Decision Date | 11 December 1989 |
| Docket Number | Adv. No. 87-4007.,Bankruptcy No. 486-00672 |
| Parties | In re DAKOTA COUNTRY STORE FOODS, INC., a South Dakota corporation, Debtor. A. Thomas POKELA, Trustee, Plaintiff, v. RED OWL STORES, INC., a Delaware corporation; Wickes Companies, Inc., a Delaware corporation; and WCI Financial Corp., a Delaware corporation, Defendants. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of South Dakota |
Steven W. Sanford, Cadwell, Sanford & Deibert, Sioux Falls, S.D., for plaintiff.
John C. Quaintance, Quaintance and Johnson, Sioux Falls, S.D., David L. Graven (David L. Graven, Larry M. Wertheim and Bonnie Wilkins, on brief), Holmes and Graven, Minneapolis, Minn., for defendant Red Owl Stores, Inc.
Stuart L. Tiede, Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, S.D., for defendants Wickes Companies, Inc., and WCI Financial Corp.
Patrick T. Dougherty, Dougherty and Dougherty, Sioux Falls, S.D., for Kenneth E. Wagenman.
Chapter 7 Trustee A. Thomas Pokela (Trustee) filed an adversary complaint seeking adjudication of whether: the repossession of a grocery store by Red Owl Stores, Inc. (Red Owl), and the other named defendants is an 11 U.S.C. § 547(b) preference (hereinafter the 11 U.S.C. is omitted where a section to 11 U.S.C. is referenced); defendants' security interests are voidable pursuant to Section 544; transfers to Red Owl defrauded creditors, as less than reasonably equivalent value was received; transfers Red Owl ordered while controlling debtor constitute an abuse of power to the detriment of other creditors; and whether Red Owl's conduct warrants equitable subordination and punitive damages. Red Owl argues: the grocery store is not part of the debtor's estate, Dakota Country Store Foods, Inc. (Corporation); the repossession gave Red Owl no more than it would receive in a Chapter 7; Red Owl is the constructive owner having an equitable lien; and Red Owl was the first perfected security interest. The Court holds: (1) the Corporation acquired the grocery store; (2) Red Owl's security interest was not perfected prior to the repossession; (3) the repossession is a Section 547(b) preference; and (4) equitable subordination, but not punitive damages, is appropriate.
The plaintiff Trustee and defendant Red Owl agree that the instant matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(F) and 157(b)(2)(K). This Court has jurisdiction over the parties and subject matter of this action under 28 U.S.C. § 1334. This memorandum constitutes findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52 and Bankr.R. 7052. Red Owl's Sioux Falls, South Dakota, store sale weaves the tale of a grocer's Paradise Lost.
Red Owl, a Delaware corporation, headquartered in Hopkins, Minnesota, maintains over four hundred supermarkets in a six-state region. Red Owl's trademark trade names include Red Owl, Country Store, and Wise Buy. Each trademark maintains a uniquely targeted marketing plan. Red Owl distributes its products either in grocery stores Red Owl owns or through independent retailers. Wickes Companies, Inc. (Wickes), or WCI Financial Corp. (WCI) occasionally provide Red Owl's financing. Red Owl's top management, Patrick Shulke, Charles Bidwell, and Curt Stephan, purchased Red Owl from Wickes on April 17, 1986. This Court granted summary judgment dismissing with prejudice the complaint against Wickes and WCI on April 4, 1988.
To increase profit, Red Owl's management, in 1982, schemed to sell some of Red Owl's own stores to independent retailers who would be responsible for the stores and purchase much of their inventory needs through Red Owl. This is essentially the same management which bought out Red Owl in 1986. About ninety stores were involved in the sale; the least profitable stores were sold off first. The divestiture program included a Red Owl-owned retail grocery store in Sioux Falls, South Dakota (grocery store or Sioux Falls store), which lost an average of $31,000 a month from January, 1984, through June of 1985. In the Spring of 1985, Red Owl put the unprofitable Sioux Falls store on the market.
Red Owl's Fargo, North Dakota, Division Manager, William Anderson (Anderson), informed Kenneth E. Wagenman (Wagenman) of Milbank, South Dakota, during April or May, 1985, that the Sioux Falls store was available. Anderson supplied Wagenman's Red Owl franchise in Milbank with Red Owl products and supplied the Sioux Falls store, also. Wagenman operated his Milbank store as a sole proprietor.
Wagenman led a team to buy the Sioux Falls independent retailer with cash contributions from Joseph G. Hoseck (Hoseck), Gary L. Jensen (Jensen), and Wagenman himself. Red Owl encouraged the Sioux Falls store sale through creative financing, fostering an atmosphere of enthusiastic support initially, and providing the buyer with optimistic profit/loss projections. Wagenman, Hoseck, and Jensen entered the sale transaction intent on putting the Sioux Falls store in the black and finding financial paradise. Anderson suggested the Sioux Falls store be operated as a corporation. Anderson's advice was followed.
Late in June, 1985, Wagenman, Jensen, and Hoseck, none of whom were involved in corporate organization prior to the Corporation, employed an attorney from Milbank, South Dakota, and a certified public accountant to expedite creation of the Corporation. Corporate formation was hastened because Red Owl accelerated the date the buyer took possession of the store from July 13 to June 30, 1985. The race to incorporate and consummate the sale caused a $40,000 capital contribution to be sent to Red Owl without first going through the Corporation, and, yet, stock certificates were issued.
The State of South Dakota issued the Corporation's Certificate of Incorporation on June 28, 1985. Wagenman, Jensen, and Hoseck (together as Directors) served as the Corporation's first Board of Directors. Wagenman was President, Hoseck was Vice President, and Jensen was Secretary and Treasurer. The Corporation operated without the benefit of counsel except for corporate formation and conducting a minutes meeting on July 25, 1985. Anderson learned of the Corporation since at least July or August, 1985, from a conversation with the Directors.
The paper trail reducing the sale transaction to writing occurred from June 25, 1985, through July 10, 1985. Documents executed in this contemporaneous time frame concern the sale and financing of the grocery store. Red Owl prepared all documents, and most, if not all of them were executed in South Dakota. The Directors, without the benefit of counsel, signed all sale memoranda without corporate designations after their signatures.
The Security Agreement, Sublease, and Agreement to Purchase were the initial documents signed. They were dated June 25, 1985, three days before the Certificate of Incorporation was issued by the Secretary of State but two days before the takeover date. The Security Agreement, Sublease, and Agreement to Purchase referred to the buyer as Wagenman, Hoseck, and Jensen. These documents designate the seller as Red Owl Stores, Inc., and are signed by El Teske, Vice President of Red Owl, and the three individuals. The Agreement to Purchase required Red Owl's prior written consent to assign any obligations.
On or before June 27, 1985, Vern Schok, a Red Owl employee charged with seeing the sale through to completion, filled out a questionnaire listing the buying entity to operate the Sioux Falls store as a corporation. The pertinent question specifically asked, "store will be operated as a," and gives three choices, of which "corporation" was selected. The questionnaire listed the store name as "Dakota Country Store Foods" and the owner as Wagenman. Distribution of the questionnaire included Red Owl's top management and all of Red Owl's departments. Information on the questionnaire served as operational data base information directing Red Owl's computer to handle the Corporation's account properly. The questionnaire informed Red Owl that the buyer was the Corporation, as evidenced by Red Owl designating the Corporation as the grocery store's operator on applications sent to: the Unemployment Insurance Division of South Dakota; the South Dakota Sales and Use Tax Division; and the Internal Revenue Service (I.R.S.).
Critical sale documents were executed on or about June 30, 1985. An Independent Retailer Agreement, Guaranty of Independent Retailer Agreement, Equipment Lease Agreement, and Promotional Allowance Red Owl Independent Retailer Agreement dealt with the heart of the sale, resulting in the transfer of physical control, the keys, on June 30, 1985. The Independent Retailer Agreement designates the seller as "Red Owl Stores, Inc.," and the buyer as "Dakota Country Store Foods." Red Owl is consistently declared a Delaware corporation, but the Red Owl-prepared documents fail to denote what type entity the buyer, Dakota Country Store Foods, is. The Independent Retailer Agreement's signature line did not expressly reference Red Owl, but, rather, was signed by "Vern Schok District Manager" and "El Teske Vice President Company." The Directors signed without title after their names. A Director, questioning Schok why the signature lines on the memoranda were in the manner presented, was told that is the way they came down from Red Owl. Director Wagenman testified he never intended to personally own any of the assets sold by Red Owl. An attached Red Owl-prepared personal guarantee was not executed by the Directors. Red Owl never prepared a bill of sale nor did it ever comply with bulk sales requirements.
Shoestring financing of the store's assets, worth about $670,000, required only $40,000 cash down. Sale values included such things as $147,000 equipment and $243,215 original inventory. Five thousand dollars earnest money accompanied the June 25, 1985, document execution. Red Owl...
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