In re Dondi Financial Corp., Bankruptcy No. 387-34093 RCM-7
| Decision Date | 28 August 1990 |
| Docket Number | Adv. No. 389-3789.,Bankruptcy No. 387-34093 RCM-7 |
| Citation | 119 BR 106 |
| Parties | In re DONDI FINANCIAL CORPORATION, Debtor. Anthony M. MANCUSO, Trustee, Plaintiff, v. Ray CHAMPION, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Philip I. Palmer, Jr., Dallas, Tex., for plaintiff.
T. Rick Frazier, Dallas, Tex., for defendant.
AMENDED MEMORANDUM OPINION
Following are the Court's findings of fact and conclusions of law under Bankruptcy Rule 7052 with respect to a trial held May 16 and 18, 1990. This is an 11 U.S.C. § 544(b) complaint by Anthony M. Mancuso, Trustee ("Plaintiff"), to recover bonuses and dividends paid by Debtor to Ray Champion ("Defendant"), a shareholder of Debtor owning shares of Class A common stock of Debtor. Plaintiff contends these bonuses and dividends were fraudulent conveyances by Debtor under the Texas Fraudulent Conveyance Act ("TFCA") in existence at the time in question.
Debtor is a corporation formed and existing under the laws of the State of Texas.
Debtor filed a voluntary petition for relief under Title 11 on May 9, 1987.
Plaintiff was appointed as trustee of the Debtor on November 4, 1987.
This adversary proceeding was filed November 3, 1989.
Don R. Dixon ("Dixon") owned control of Debtor during pertinent times herein.
Debtor owned control of Vernon Savings and Loan Association ("Vernon").
At all times since at least August 1, 1985, Debtor, in addition to the property transferred, has had an insufficient amount of assets to pay the claims of its creditors in full; Debtor was insolvent within the meaning of 11 U.S.C. § 101(31) from at least August 1, 1985 forward. During all pertinent times herein, Defendant had no knowledge of Debtor's solvency problems. Such problems were due, in a large part, to fictitious loan transactions, which fictitiousness was not known to Defendant until after he ceased a relationship with the Dondi entities. There was no dispute that Defendant was acting in good faith throughout his dealings with Debtor.
At all times since December 1, 1984, there have been unpaid creditors who still hold unsecured claims. (Proofs of Claim Nos. 73, 74, 75, and 76).
Defendant was employed as an officer and director of various subsidiary entities of Vernon, a full time position with substantial duties and obligations. He was an employee of Dondi Commercial Properties, Inc., which was a subsidiary of Dondi Group, Inc., which was a subsidiary of Vernon.
Defendant's first Dondi-related employer was Dondi Residential Property, then he ran Dondi Properties Corporation. He continued to run this company all the time he was employed by a Dondi entity. He also worked for Dondi Commercial. He then helped with Vernon Service Corporation for one transaction. He thereafter worked for Dondi Group. Except for Vernon Service, all the entities for which he worked were owned by Dondi Group.
Debtor was a holding company and its only holding of value (in hindsight) was its ownership in Vernon, which in turn owned Dondi Group. Debtor was formed under the laws of the State of Texas and controlled by Dixon, who owned more than 51% of its stock at all pertinent times in this case. Debtor, in turn, owned over 96% of the capital stock of Vernon. In summary, Defendant's employment relationship to Debtor was: Defendant was an employee of a subsidiary of Dondi Group, Inc., which was a subsidiary of Vernon, itself a subsidiary of Dondi Financial Corporation. Pictorially, the main arteries of Debtor's business were as follows:
Dondi Financial Corporation ? Vernon Savings and Loan Association ? Dondi Group ? (various additional subsidiaries)
Vernon entered into a supervisory agreement with the Federal Savings and Loan Insurance Corporation on August 16, 1984. A cease and desist order was entered by the Federal Home Loan Bank Board on June 16, 1986.
The salary paid to Defendant was not bogus and the quarterly bonus program was part of the total employment benefits offered by Debtor to key personnel of subsidiaries.
The right to buy stock in the Debtor's future was part of the total employment package for key personnel of subsidiaries; however, the amount of dividends on such stock was not related to employment performance.
Prior to January 1, 1984, Defendant owned 1,628 shares of Debtor, represented by Certificate No. 34.
On or about January 1, 1985, Defendant agreed to purchase an additional 261 shares of common stock of Debtor at a price of $102.50 per share.
Under the terms of the agreement, Defendant was to pay 15% as a cash down payment and finance the 85% balance, with interest only payable quarterly, and the principal payable five years later.
Defendant executed a promissory note in favor of Debtor for $23,737.95, payable in accordance with the above terms. Defendant paid off the $23,737.95 note.
Debtor issued its Stock Certificate No. 83 for 261 shares in the name of the Defendant.
Defendant simultaneously executed a pledge agreement securing the promissory note and placing his 261 shares in pledge.
On June 30, 1985, Defendant executed a proxy on all of his shares in favor of Dixon.
Debtor made the following payment to Defendant on the dates indicated for the purposes stated:
Date Purpose $ Amount
January, 1985 dividend 1,174.50
April, 1985 deferred bonus 440.56
April, 1985 dividend 2,833.50
July, 1985 dividend 2,833.50
July, 1985 deferred compensation 2,730.14
October, 1985 dividend 2,833.50
January, 1985 dividend 2,833.50
January, 1986 deferred compensation 5,490.61
January, 1986 dividend 2,833.50
April, 1986 deferred bonus 6,055.90
April, 1986 dividend 2,833.50
Debtor continued to do business after such transfers. There was no allegation or proof that the Debtor's eventual cessation of doing business resulted in whole or in part from the transfers in question.
In connection with his purchase of the stock in Debtor, Defendant made the following payments to Debtor on the dates indicated:
Date $ Amount
January, 1985 418.92
January, 1985 3,770.13
May, 1985 667.63
July, 1985 667.63
October, 1985 667.63
January, 1986 667.63
April, 1986 667.63
May, 1986 23,855.01
The May, 1986 check for $23,855.01 to Debtor was in full payment of the promissory note and remaining interest.
Debtor stamped the duplicate replacement promissory note as paid and returned it to Defendant, along with the 261 shares.
On June 2, 1986, Defendant wrote a letter to Dixon and others requesting that Debtor repurchase his 1,889 shares, but this was never done.
On December 21, 1987, Defendant filed a priority claim for $95,923.19.
Although the TFCA was replaced, effective September 1, 1987, by the Texas Fraudulent Transfer Act, the TFCA remains effective as to all transfers made before September 1, 1987. Acts 1987, 7th leg., ch. 1004, Section 2.
Section 24.02(a)(1) reads as follows:
Under § 24.02(a)(1), any transfer made is fraudulent if intended to delay or hinder any creditor.
Plaintiff did not prove by sufficient evidence a violation of § 24.02(a)(1) with respect to either the bonuses or dividends.
Defendant pled the statute of limitations, but Plaintiff, as trustee, is given two years after his appointment in which to institute avoidance actions. In re Hansen, 114 B.R. 927 (Bankr.N.D.Ohio 1990). This action was begun within that period. 11 U.S.C. § 546(a). The transactions were outside the range of 11 U.S.C. § 548 since they occurred more than one year prior to the filing of the bankruptcy petition.
Plaintiff has used § 544(b) to assert fraudulent conveyance claims of actual, existing unsecured claims and can do so if these claims were not barred as of the date of filing. In re OPM Leasing, Inc., 40 B.R. 380 (Bankr.S.D.N.Y.1984). The underlying TFCA limitation period then in effect and applicable to a state fraudulent conveyance action was four years. Texas Sand & Shield, 381 S.W.2d 48 (Tex.1964); § 16.051 Tex.Civ. Practice & Remedies Code.
Since four years had not elapsed between January, 1985 (the date of the first transfer complained about), and the filing of the Chapter 11 on May 9, 1987, the Plaintiff's suit filed within two years of his appointment as trustee is timely under § 546(a).
Section 24.03(a) reads as follows:
(a) A transfer by a debtor is void with respect to an existing creditor of the debtor if the transfer is not made for fair consideration, unless, in addition to the property transferred, the debtor has at the time of transfer enough property in this state subject to execution to pay all of his existing debts.
Under § 24.03(a), a transfer is fraudulent if not made for a fair consideration by an insolvent debtor. Burnett v. Chase Oil & Gas, Inc., 700 S.W.2d 737, 743 (Tex.Civ.App.-Tyler 1985); Parker Square State Bank v. Huttash, 484 S.W.2d 429 (Tex.Civ.App.-Ft. Worth 1972, writ ref'd n.r.e.); Pope Photo Records, Inc. v. Malone, 539 S.W.2d 224 (Tex.Civ.App.-Amarillo 1976).
Fair consideration means a reasonably equivalent benefit bestowed to the...
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