In re Dartco, Inc., Bankruptcy No. 3-91-416. Adv. No. 3-93-238.

• Decision Date: 01 July 1996
• Docket Number: Bankruptcy No. 3-91-416. Adv. No. 3-93-238.
• Citation: In re Dartco, Inc., 197 B.R. 860 (Bankr. Minn. 1996)
• Parties: In re DARTCO, INC., d/b/a Stockmen's Truck Stop, Debtor. Molly T. SHIELDS, Trustee of the Estate of Dartco, Inc., d/b/a Stockmen's Truck Stop, Plaintiff, v. Terry DUGGAN, Barbara Rice, Mark R. Leitner, Successor Conservator for Debra J. Rice, and Stockmen's East, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Minnesota

197 B.R. 860 (1996)

In re DARTCO, INC., d/b/a Stockmen's Truck Stop, Debtor Molly T. SHIELDS, Trustee of the Estate of Dartco, Inc., d/b/a Stockmen's Truck Stop, Plaintiff, v. Terry DUGGAN, Barbara Rice, Mark R. Leitner, Successor Conservator for Debra J. Rice, and Stockmen's East, Inc., Defendants.

Bankruptcy No. 3-91-416. Adv. No. 3-93-238.

United States Bankruptcy Court, D. Minnesota, Third Division.

July 1, 1996.

COPYRIGHT MATERIAL OMITTED

Timothy J. Ewald, Molly T. Shields, Minneapolis, MN, for Trustee.

Eric W. Forsberg, Minneapolis, MN, for Defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT ON COUNT IX OF PLAINTIFF'S COMPLAINT

GREGORY F. KISHEL, Bankruptcy Judge.

This adversary proceeding came on before the Court for trial on Count IX of the Plaintiff's amended complaint, which sounds exclusively against Defendant Mark R. Leitner, Successor Conservator for Debra J. Rice. The Plaintiff appeared personally and by Timothy J. Ewald, her attorney. Defendant Leitner appeared by Eric W. Forsberg, his attorney. Upon the evidence adduced at trial and the memoranda and argument submitted by counsel, the Court makes the following pursuant to FED.R.BANKR.P. 7054.

FINDINGS OF FACT

The Debtor is a Minnesota corporation. At all relevant times, it operated the Stockmen's Truck Stop in South St. Paul, Minnesota. The truck stop's business consisted of a retail dealership in petroleum products and an associated restaurant and store. On January 23, 1991, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. It obtained confirmation of a plan of reorganization on July 17, 1992. When the Debtor failed to substantially consummate its plan in a timely fashion, the United States Trustee moved for conversion or dismissal of the case. After finding that one of the Debtor's principals had converted certain post-conversion assets of the Debtor to his own use, the Court converted the case to one under Chapter 7 on January 13, 1993.

The Plaintiff is the Trustee of the Debtor's estate under Chapter 7. At all relevant times, Defendants Terry Duggan and Barbara Rice were the Debtor's principals; Duggan was the Debtor's President and held 96 percent of its outstanding shares, and Barbara Rice managed its truck stop operation and held 4 percent of its outstanding shares.

Debra J. Rice is the daughter of Barbara Rice. In 1984, she suffered grievous injuries that left her incapacitated, unable to manage her estate or to fully care for herself. By an order entered on September 24, 1984, the Probate Division of the Minnesota State District Court for the Second Judicial District, Hennepin County, appointed Barbara Rice as conservator for the person and the estate of Debra Rice.

In 1988, a medical malpractice action brought in Debra Rice's name was concluded by a structured settlement. Under its terms, Debra Rice received an immediate payment of approximately $100,000.00, and became the beneficiary-payee of an annuity providing her with a substantial regular income. As conservator, Barbara Rice began receiving and administering these payments. The payments and their proceeds were essentially the only assets subject to the conservatorship.

After it filed under Chapter 11, the Debtor continued its business as a retail truck stop, selling diesel fuel and other goods and services to the public. A number of its trade vendors, including petroleum wholesalers, continued to supply it "on invoice" — i.e., with grants of very short-term credit.¹ In the late spring of 1992, however, the Debtor began to experience severe cash-flow difficulties.² After several of its checks to trade vendors were dishonored for insufficient funds on deposit, the vendors began demanding payment in full upon delivery, in cash or cashier's check. These terms posed a serious issue for the maintenance of diesel fuel inventory; a filling of the Debtor's storage tanks to capacity only lasted a day to two days in the ordinary course. When current cash on deposit was insufficient to pay for a fill, then, the business faced a real problem.

To cover these cash insufficiencies, Barbara Rice began drawing on the funds she held as conservator for the benefit of her daughter. She made arrangements with the Debtor's petroleum suppliers to order diesel fuel inventory by telephone. After the supplier's driver loaded his tanker, the supplier advised Barbara Rice of the gallonage and the price of the shipment. She then went to Battle Creek Bank, where she maintained accounts for the conservatorship, and negotiated a check off one of the accounts to purchase a cashier's check payable to the supplier. She then returned to the truck stop, delivered the money order to the driver, and took delivery of the load of fuel.

Afterwards, Barbara Rice would issue a check or checks off the Debtor's general business account, payable to Debra Rice, and would deposit them into the conservatorship checking account. In doing so, she intended to "replace the money in the conservatorship account as quickly as she could." The vagaries of the Debtor's cash position often required her to go through an involved series of transactions, both direct and indirect. She often made the repayment by writing and depositing two checks, each in the amount of one-half of the original withdrawal from the conservatorship account.³ From time to time she deposited "repayment checks" from the Debtor in her personal account to ensure that they were honored, before writing a check off that account for deposit into the conservatorship account. The monies that funded the "repayment" checks were derived from the Debtor's sales of petroleum products and from its other ongoing operations.

Between May 11 and June 29, 1992, the Debtor issued twenty-one checks to Debra Rice that were honored after their direct or indirect deposit into the conservatorship account.⁴ The face amount of these checks was $87,550.00. The Debtor's bank honored all of these checks.

Debra Rice remained unaware of these transactions, and of several previous ones with the Debtor that involved conservatorship funds, until sometime in the mid- or late summer of 1992. At that time, Barbara Rice told her that she had no money left with which to make a purchase that she wished. Debra then consulted counsel. He made inquiry and then obtained an order from the Hennepin County District Court to suspend Barbara's status as conservator. On September 28, 1992, that court entered an order accepting Barbara Rice's resignation as conservator, and appointing Defendant Leitner as successor conservator. The true nature and effect of Barbara Rice's transactions with the Debtor with conservatorship funds were not disclosed to the Hennepin County District Court until shortly before she filed her final account in September 1992.

During the pendency of its case under Chapter 11, the Debtor never made a motion to this Court to obtain authority to incur short-term credit from Debra Rice or from Barbara Rice, as her conservator. The Debtor never disclosed the transactions with the conservatorship funds to the Bankruptcy Court in any way. Nor did it ever disclose these transactions in any of its periodic financial reports to the office of the United States Trustee.⁵

On March 3, 1993, prior counsel for Defendant Leitner filed a proof of claim against the Chapter 7 estate. In attachments, he evidenced the basis of the claim as follows:

1. Debts of a total of $148,257.53 in principal and interest, owing under two promissory notes by the Debtor in favor of Barbara Rice, as conservator for Debra Rice, dated November 2, 1988 and December 18, 1990; and

2. an "unsecured priority claim" in the amount of $35,636.27, "representing the differences between the cash advances made to Debtor over the amount returned by the Debtor after the filing of the Chapter 11 petition."

Neither the Plaintiff nor any other party in interest has objected to this claim.

CONCLUSIONS OF LAW

I. Jurisdiction and Authority

This is a core proceeding in bankruptcy.⁶ 28 U.S.C. §§ 157(b)(2)(A), (b)(2)(C), and (b)(2)(O).⁷ As a result, the undersigned has full authority to render decision and to order a final judgment. 28 U.S.C. § 157(b)(1).⁸ Defendant Leitner has no right to a jury trial and the parties' dispute was properly tried to the Court.⁹

II. Plaintiff's Cause of Action

Through this adversary proceeding, the Plaintiff seeks to avoid the transfers of funds that took place when the Debtor's checks to Debra Rice were honored in May and June, 1992, and to obtain a money judgment for their face amount. To do so, she invokes 11 U.S.C. § 549(a).¹⁰ With the avoided transfer then preserved by operation of 11 U.S.C. § 551¹¹ she seeks a judgment pursuant to 11 U.S.C. § 550(a)(1)¹² that would authorize her to recover an amount of money equivalent to the avoided transfers.

In a substantive sense, the elements of § 549(a) are the most straightforward of any of the trustee's avoiding powers under Chapter 5 of the Bankruptcy Code. To prevail, the trustee must demonstrate that,

1. after the commencement of the bankruptcy case in question,

2. property of the estate

3. was transferred, and

4. the transfer was not authorized by the Bankruptcy Court or by a provision of the Bankruptcy Code.

In re Russell, 927 F.2d 413, 417 (8th Cir. 1991); In re Calstar, Inc., 159 B.R. 247, 252 (Bankr.D.Minn.1993); In re Waterfront Cos., Inc., 56 B.R. 31, 33 (Bankr.D.Minn.1985).

III. Issues Presented at Trial

The first element, of course, is beyond dispute; the subject transactions all took place while the Debtor was in Chapter 11. In a limited sense, at least, Defendant Leitner acknowledges the third element, by admitting that the honoring of a total of $87,550.00 in checks made payable to Debra Rice put the subject funds out of the Debtor's control as each check was paid.¹³ His defense, however, frames six different issues, most of which go to elements of § 549(a) other than...