In re FBN Food Services, Inc., Bankruptcy No. 91 B 08983
| Citation | 175 BR 671 |
| Decision Date | 06 December 1994 |
| Docket Number | 92 A 0961.,Bankruptcy No. 91 B 08983 |
| Parties | In re FBN FOOD SERVICES, INC., Debtor. James E. CARMEL, Trustee, Plaintiff, v. RIVER BANK AMERICA, a New York Banking Corporation, Quest Realty Corp., a Delaware Corporation and Quest Equities Corp., a New York Corporation, Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
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Vincent J. Syracuse, Ralph A. Siciliano, David A. Pellegrino, John-Patrick Curran, Newman Tannenbaum Helpern Syracuse & Hirschtritt, New York City, and Louis W. Levit, Ross & Hardies, Chicago, IL, for defendants.
John K. Kneafsey, Nisen & Elliott, Chicago, IL, for trustee.
James E. Carmel, Trustee, Carmel, Baker & Marcus, Ltd., Chicago, IL.
The delightful quality of fraud lies in its infinite variety ...1
This matter revolves around the events leading up to and culminating in a two day mediation conference at which Sizzler Restaurants International, Inc. ("Sizzler") paid $4,175,000 to settle litigation between itself, FBN Food Services, Inc. ("FBN") and Midwest Restaurant Concepts, Inc. ("MRC"). Pursuant to the settlement agreement, Sizzler paid $1.4 million to Quest Equities, Inc. ("Quest Equities"), a shareholder of FBN. Quest Equities' parent company, River Bank America ("River Bank"), applied that amount to reduce the debt on a $7.5 million loan that it made to SIG Food Services Associates, L.P. Shortly thereafter, an involuntary Chapter 7 bankruptcy petition was filed against FBN and an order for relief entered. Subsequently, the Trustee filed this fraudulent conveyance action which opened a pandora's box. The Trustee contends that the transfer of money to River Bank was a fraudulent transfer which should be avoided pursuant to Sections 548 and 550 of the Bankruptcy Code.2 After considering the testimony, exhibits admitted into evidence, briefs submitted by the parties, and arguments of counsel, the Court agrees. Accordingly, the $1.4 million fraudulently transferred to River Bank is hereby avoided.3
The relevant facts are as follows.4 In 1986, FBN was formed to act as the operating company for certain Sizzler restaurants. UF ¶ 9(b) FBN was authorized and licensed to operate those restaurants pursuant to certain license agreements. UF ¶ 9(b) The shareholders of FBN were Anthony Basile ("Basile") (25%), Quest Equities (37.5%), and SIG Partners (37.5%).5 UF ¶ 9(b) Quest Equities was in the business of making loans and equity investments, and was a wholly owned subsidiary of River Bank.6 UF ¶ 5 Both Basile, and Gerald Kaufman, one of the partners of SIG Partners, signed personal guarantees of FBN's various obligations to Sizzler. UF ¶ 30, 31 Basile was the president of FBN and was responsible for the operation of the restaurant facilities. Tr. 91 FBN leased the Sizzler restaurants and the furniture, fixtures, and equipment (the so-called "hard assets") for the restaurants from SIG Food Services Associates, L.P. ("SFSA").7 UF ¶ 9(b)
SFSA's financing for the acquisition of real estate and hard assets came from two principal sources. In August 1987, River Bank loaned $7.5 million to SFSA pursuant to a mortgage note ("River Bank Loan"). UF ¶ 17 The River Bank Loan was not secured by any of the assets of FBN or MRC. UF ¶ 18; D.Ex. 13 In addition to the $7.5 million loan, SFSA borrowed $100,000 from Basile who in turn borrowed $100,000 from Quest Equities. Quest Equities' $100,000 loan to Basile was evidenced by a promissory note. UF ¶ 19, 20, 47 In 1988, American National Bank & Trust Company of Chicago ("ANB") loaned $6.5 million to SFSA ("ANB Loan"). Tr. 271-272; P.Ex. 5 In order to obtain that loan, River Bank was required to subordinate the River Bank Loan and any security interests it had to those of ANB via an intercreditor agreement. Tr. 272; P.Ex. 5
Like FBN, Midwest Restaurant Concepts, Inc. was another operating company for Sizzler restaurants. UF ¶ 9(d) MRC was related to FBN and SFSA in that all the companies had common ownership. The shareholders of FBN and MRC, and the main limited partners of SFSA were Anthony Basile, Quest Equities, and SIG Partners.8 UF ¶ 9(b) However, unlike FBN, MRC leased its restaurant facilities and hard assets directly from Sizzler, not from SFSA. UF ¶ 9(d) Sizzler required FBN, Basile, and Kaufman to sign separate guarantees for MRC's obligations under the leases. UF ¶ 28 Further, FBN, Basile, and Kaufman guaranteed payments due to Sizzler from MRC under the license agreements. UF ¶ 28; Tr. 111
In or around April 1989, ANB loaned $4 million to MRC to purchase additional Sizzler franchises. UF ¶ 23 This loan was secured in part by a leasehold mortgage on the restaurant premises leased by MRC from Sizzler. UF ¶ 23 As part of this transaction, at ANB's option, Sizzler was obligated to buy back the MRC assets for ANB's benefit. UF ¶ 26; Tr. 108 In such a case, MRC, FBN, Basile, Kaufman, and others were liable to Sizzler for repayment (hereinafter "Affiliate Agreement"). UF ¶ 26, 28; Tr. 107
Shortly after River Bank loaned $7.5 million to SFSA, SFSA defaulted. River Bank enlisted the help of William Landberg to arrange for $1 million to be loaned to SFSA to paydown the River Bank Loan. Tr. 274 Avrum Waxman ("Waxman"), the president of River Bank and an officer and director of Quest Equities, told Basile that if he assisted Landberg in his attempt to refinance the River Bank Loan, then River Bank would forgive Basile's $100,000 promissory note to Quest Equities. Tr. 274-275
Additionally, in the fall of 1989, River Bank employed Stephen Mann ("Mann") to assist in a restructure of the loan. Tr. 277-278 Between that time and March 1990, a number of attempts were made to refinance the River Bank Loan. Tr. 277-278; 622-628; 1482 Landberg eventually guaranteed the repayment of a $1 million loan made by World Life & Health Insurance Company of Penna to SFSA. Tr. 277-278 In return for this guarantee, Landberg received Quest Equities' interest in SFSA, FBN, and the related entities in October 1990. P.Ex. 49
On another front, a dispute arose between FBN, MRC, and Sizzler, over the license agreements. FBN and MRC filed a complaint against Sizzler in February 1990 in the United States District Court for the Northern District of Illinois (hereinafter referred to as the "FBN Complaint").9 UF ¶ 24 FBN alleged that it was treated differently from other franchises because it was required to pay substantial amounts for advertising contributions which the other franchises were not required to pay. D.Ex. 54 Further, FBN contended that it entered into the Sizzler license agreements as a result of the misrepresentations and fraudulent conduct of Sizzler. D.Ex. 54 FBN claimed damages against Sizzler based on fraud and a breach of covenant of good faith and fair dealing. D.Ex. 54
Sizzler asserted counterclaims against FBN in the FBN Complaint seeking damages based upon FBN's default of its obligations under the license agreements, as well as various other claims. D.Ex. 53 Sizzler also asserted counterclaims against Quest Equities, SFSA, Kaufman, and Basile based on the theory that said parties were "alteregos" of FBN. D.Ex. 53 — ¶ 69 By June 1990, FBN had ceased doing business, closed its restaurants and was insolvent. Tr. 82-83, 290, 532-535; P.Ex. 33A
MRC ceased doing business in the Spring of 1990. Around that time, ANB exercised its option to require Sizzler to buy back the MRC assets. Tr. 541 Sizzler paid ANB approximately $4 million. Tr. 541 In return, Sizzler obtained possession of twelve MRC restaurants, equipment, and leasehold improvements. Tr. 541 On or about April 11, 1990, Sizzler instituted an arbitration proceeding in California against MRC (the "Sizzler Arbitration").10 D.Ex. 56 Sizzler asserted claims against MRC based on the breach of the license agreements, leases, and reimbursement of their claim pursuant to Sizzler's payment to ANB for the purchase of the MRC assets. D.Ex. 56 Sizzler also made claims against FBN, Basile, and Kaufman, based on their guarantees of the MRC license agreements and the MRC leases, and for the amount that Sizzler was required to pay ANB for the purchase of the MRC assets. UF ¶ 26; D.Ex. 56 All of these claims were at issue in the Sizzler Arbitration. Sizzler did not assert any claims against Quest Equities or River Bank in the arbitration. D.Ex. 56
MRC asserted counterclaims in the Sizzler Arbitration.11 D.Ex. 55 By all accounts, MRC had an extremely weak position. Philip Stahl ("Stahl"), River Bank and Quest Equities' attorney, said MRC would get "creamed" in the Arbitration. Tr. 1783-1785 Further, Sizzler was not willing to pay any money to MRC to settle the Sizzler Arbitration. D.Ex. 7-8; Tr. 140, 336-338 The Sizzler Arbitration was scheduled to go to hearing in October 1990. Tr. 101-102
The principal amount of the River Bank Loan was outstanding and unpaid, and interest payments due thereon were substantially in arrears. On September 13, 1990, Stahl met with Waxman, Mann, Nicholas Etten ("Etten"), an attorney representing FBN, MRC, Kaufman, Basile, and the SIG entities, concerning the possibility of River Bank funding the FBN Complaint. Tr. 1810-1825 Mann was concerned that River Bank did not have an agreement to receive the proceeds from the FBN Complaint first, before FBN. Tr. 1818 Further, River Bank was subordinated to ANB's loan of $6.5 million to SFSA, on which SFSA had defaulted. Tr. 334-335
On September 16 and 17, 1990, a mediation conference was held in Chicago in an attempt to resolve all of the pending litigation. Tr. 148; D.Ex. 7-10 The mediator requested that persons with authority to execute a settlement agreement be present at the Settlement Conference. Tr. 149-150 Thomas L. Gregory (...
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