In re Fabricators, Inc.
| Decision Date | 16 November 1987 |
| Docket Number | Adv. No. 850833.,Bankruptcy No. 8507445SC |
| Citation | 109 BR 186 |
| Parties | In re FABRICATORS, INC. FABRICATORS, INC., Plaintiff, v. TECHNICAL FABRICATORS, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Mississippi |
Hugh D. Keating, Gulfport, Miss., for trustee.
Richard Scruggs, Pascagoula, Miss., for debtor.
Irvin Grodsky, Mobile, Ala., for defendant.
A complaint was filed on behalf of the debtor, Fabricators, Inc., against Technical Fabricators, Inc., requesting subordination of the claims of Technical Fabricators, Inc. and transfer of its liens to the estate pursuant to 11 U.S.C. § 510(c). After considering the record and the evidence presented, and reviewing the memoranda submitted by counsel and the principles of subordination from applicable case law, the Court finds that the claims of Technical Fabricators, Inc. not already relegated to the class of general unsecured creditors, should be subordinated to the status of general unsecured creditors, and the liens of Technical Fabricators, Inc., should be transferred to the estate.
This adversary proceeding has been in litigation for two and a half years. After completion of the Chapter 11 debtor's case-in-chief, there was a substitution of counsel for the defendant, conversion to a Chapter 7 with the appointment of a trustee whose rights to proceed with the suit succeeded that of the debtor. There was also a change in the bench. The record is voluminous.
The basic issue in this proceeding is whether Technical Fabricators, Inc., by its conduct, caused injury to or gained an unfair advantage over the creditors of Fabricators, Inc., in a manner prohibited by law. The Court is of the opinion that it did.
The Plaintiff, Fabricators, Inc. (hereinafter "Fabricators") was a Mississippi corporation engaged in the steel fabrication business. Prior to Fabricators filing its petition for relief under Chapter 11 of the Bankruptcy Code on April 8, 1985, it had two facilities. One was located on Orchard Road, Pascagoula, Mississippi, and the other was located on Eighth Street in Biloxi, Mississippi. Prior to January, 1985, Fabricators' common stock was owned by Thedore J. Millette, Thomas S. Millette, William G. Millette, and James Avinger. Each individual owned 25% of the stock.
Technical Fabricators, Inc., (hereinafter "TFI"), the Defendant, is an Alabama corporation, with its principal place of business in Mobile, Alabama. TFI was actively engaged in the fabrication business under its current management from 1971 through the first quarter of 1984. Its principal place of business was at Building 16, Brookley Industrial Complex, Mobile, Alabama. TFI's sole stockholder, director, President, and Chief Executive Officer during all periods of time relevant to this proceeding was Marcus Wayne Williams (hereinafter "Williams"). Prior to the events giving rise to this adversary proceeding, Fabricators and TFI had no business connection with one another.
During the months prior to February 1, 1985, Fabricators had been actively engaged in business, soliciting and obtaining new contracts and operating its production facilities at capacity. As of February 1, 1985, Fabricators had numerous contracts for the fabrication of steel for different customers, but it was experiencing difficulties in the timely performance and completion of its contractual obligations. One of Fabricators' major problems was a severe shortage in available cash to pay suppliers and employees while fabrication was being completed, but before the customer was liable for payment. In addition to this cash flow problem, Fabricators had insufficient physical capacity and equipment in its two plants and insufficient management capability to complete all of the work it had under contract.
By early 1985, Fabricators and its individual stockholders had completely exhausted their lines of institutional and trade credit. Fabricators' financial condition had deteriorated to such an extent by the end of January, 1985, that the company had insufficient funds for its $40,000 weekly payroll.
In late December, 1984, or early January, 1985, James C. Avinger (hereinafter "Avinger"), the President of Fabricators, contacted Williams, who was the President and sole shareholder of TFI, concerning a possible merger, joint venture, or outright sale of Fabricators to TFI. Avinger had worked for Williams and TFI in past years in the steel fabrication business. Williams had been generally familiar with Fabricators from his 15 years experience in the fabricating business, and from his acquaintance with Avinger and other key Fabricators' employees who had previously worked for Williams at TFI.
Prior to the end of the first quarter of 1984, TFI had enjoyed financial success in the steel fabrication business. After the first quarter of 1984, TFI voluntarily ceased new production due to a decision by its management to refrain from seeking new business as a result of the general downturn in the steel fabrication industry. However, after April, 1984, TFI retained its large production facility equipped with modern, high-technology equipment, subject to payment of its monthly rent to Teledyne Continental, its note secured by its equipment to Chase Commercial Corporation (hereinafter "Chase"), utilities and miscellaneous other expenses.
Following the initial inquiry by Avinger, discussions and negotiations were held between Williams in behalf of TFI and Avinger, Tom Millette, Bill Millette and Ted Millette of Fabricators concerning the problems being encountered by Fabricators. In each of these discussions, Avinger and Tom Millette described Fabricators' financial problem as a "cash crunch" problem.
Avinger provided Williams with a hand written cash flow projection that showed a profit margin on Fabricators' contracts in process of approximately $2 million. Avinger told Williams that Fabricators had good prospects for acquiring approximately $9 million in further contracts. Fabricators' directors had, in addition, caused a booklet of information concerning Fabricators to be prepared prior to the end of January, 1985, which described the structure of Fabricators and provided an itemized listing of all assets of Fabricators and its affiliates.
Williams was advised by Avinger and the Millettes that Fabricators' credit lines were "jammed"; that bank credit was exhausted; that Fabricators could not meet its payroll and payroll tax obligations; and that Fabricators' plant was inadequate for the timely performance of the contracts in process.
Williams was also told that the accounting records of Fabricators had not been posted currently, but that when financial statements were prepared, they would show Fabricators as having a positive net worth as of November 30, 1984 and would reflect that Fabricators had a net profit from operations for the months of December, 1984, and January, 1985, of at least $100,000.00; that the value of the equipment and inventory owned by Fabricators was approximately $3.5 million; and that the sum of $173,000.00 would pay all existing trade payables exclusive of any amounts owed to companies owned by the shareholders.
No current Fabricators' financial statements were available to either Fabricators or TFI because of problems resulting from the computerization of Fabricators' books. Williams was not shown, and did not request, Fabricators' most recent tax return. Fabricators' last federal income tax return was for the period ending November 30, 1983, and reflected a loss of $612,000 and retained earnings of . For at least two years pre-petition, Fabricators had lost substantial money from its operations.
After reviewing the projections provided to him by Fabricators, Williams confirmed that Fabricators' plant capacity was inadequate to perform timely the contracts that it had booked or begun.
In late January, 1985, Williams and the shareholders of Fabricators came to an agreement for TFI to purchase all of the shares of Fabricators. In exchange, the shareholders of Fabricators were to receive a total of twenty-five percent (25%) of the shares in TFI. The stock exchange agreement was reduced to writing by TFI's attorney, and signed by the parties in his offices in Mobile on February 2, 1985. The agreement provided that TFI's obligation to close the sale was conditioned upon TFI's review of the books and records of Fabricators and TFI's approval of the financial condition of Fabricators within thirty (30) days of the execution of the agreement.
Incident to the stock exchange agreement, TFI agreed to lend Fabricators up to $500,000 to finance the completion of the contracts in process. It was also agreed that Williams would assume immediate control of the operations of Fabricators, and that certain of Fabricators' contracts would be moved to TFI's plant in Mobile. During the negotiations, Williams suggested that Fabricators seek "asset-based" financing including accounts receivable financing in order to meet its short term cash needs. Williams concluded that Fabricators would have "collapsed like a house of cards" had TFI not commenced advancing money in early February, 1985.
On February 4, 1985, to secure TFI advances to Fabricators, Fabricators gave TFI a security interest in, among other property, its machinery, equipment, accounts receivable and contracts in process. Fabricators had numerous unpaid creditors at this time.
In order to give TFI a first lien on the equipment, Fabricators obtained a release of an existing lien from Merchants and Marine Bank.
A financing statement identifying Fabricators as the Debtor and TFI as the creditor and further describing the collateral was filed with the Chancery Clerk in Jackson County, Mississippi on February 19, 1985, Chancery Clerk of Harrison County, Mississippi on February 19, 1985, and the Secretary of State of Mississippi on February 18, 1985.
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