In re Fox Bean Co., Inc.

• Decision Date: 26 December 2002
• Docket Number: Bankruptcy No. 00-40881.,Adversary No. 01-6187.
• Citation: 287 B.R. 270
• Parties: In re FOX BEAN CO., INC., Debtor. R. Sam Hopkins, Trustee, Plaintiff, v. D.L. Evans Bank, an Idaho corporation, Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

287 B.R. 270

In re FOX BEAN CO., INC., Debtor R. Sam Hopkins, Trustee, Plaintiff, v. D.L. Evans Bank, an Idaho corporation, Defendant.

Bankruptcy No. 00-40881.

Adversary No. 01-6187.

United States Bankruptcy Court, D. Idaho.

December 26, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

James A. Spinner, Monte Gray, Service, Gasser & Kerl, Pocatello, ID, for Plaintiff.

R.C. Stone, Parsons, Smith & Stone, Burley, ID, for Defendant.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Chief Judge.

I. Introduction.

Fox Bean Company Inc. (hereinafter "Debtor") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on June 1, 2000. On August 1, 2001, the Chapter 7 Trustee R. Sam Hopkins (hereinafter "Plaintiff") commenced this adversary proceeding to recover two transfers of funds made to D.L. Evans Bank (hereinafter "Defendant"). On April 26, 2002, this Court denied Plaintiff's Motion for Summary judgment. Docket Nos. 44 and 45. A trial on the merits was then conducted before the Court on October 10 and 11, 2002, during which both parties offered testimony and other evidence. In addition, the parties filed a written stipulation as to many of the significant facts. Docket No. 52. At the conclusion of the trial, the Court took the issues under advisement. After considering the record, the arguments of the parties, and the law, the Court intends this decision to constitute its findings of fact and conclusion of law in accordance with Fed. R. Bankr.P. 7052.

II. Facts.

From the record, most relevant facts appear largely undisputed. With respect to those issues of fact that remain, the Court has had the opportunity to observe the testimony of the various witnesses, and has given due consideration to those witnesses, and has assigned appropriate weight to all the evidence. As a result of this process, the following appear to be the material facts.

Kelly Fox was engaged in the business of buying, selling, and trading dried pulses, including beans, rice, peas, lentils, and other similar agricultural products in Twin Falls, Idaho. Mr. Fox originally conducted his business as a sole proprietorship under the trade name "Fox Bean Company." In 1998, Mr. Fox filed the appropriate certificate of assumed business name with the Idaho Secretary of State, giving notice of his adoption of his trade name. Defendant's Ex. A.

Mr. Fox opened a checking account with Defendant's local branch to facilitate his business operations. The checking account (hereinafter "Fox account") was opened in September, 1997, in the names of Kelly Fox and his wife, Patricia Fox, doing business as Fox Bean Company. Plaintiff's Ex. 15. In addition, Mr. Fox's tax identification number was supplied to Defendant for use in connection with this account. Stipulated Facts, ¶ 2, Docket No. 52.

Mr. Fox also established a line of credit with Defendant in 1997 in order to fund the operations of Fox Bean Company. Stipulated Facts, ¶ 4, Docket No. 52. This line of credit, memorialized by a promissory note (hereinafter "the Fox note"), was secured by warehouse receipts generated in the business and a deed of trust covering certain nonbusiness real estate owned by the Foxes. Plaintiff's Ex. 19. Mr. Fox negotiated several extensions on the Fox note, eventually agreeing to a maturity date of March 5, 2000. Defendant's Exs. L through P.

In 1998, Mr. Fox incorporated Fox Bean Company, Inc., the Debtor in this matter. Plaintiff's Ex. 4. That same year, Debtor, acting through Mr. Fox, arranged its own revolving line of credit with Defendant. Plaintiff's Ex. 6. This line of credit, also memorialized by a promissory note (hereinafter "the Debtor's note"), was secured by Debtor's business inventory, accounts, and general intangibles. Plaintiff's Ex. 6. Both Mr. and Mrs. Fox personally guaranteed the note, Defendant's Exs. T and U, and executed two deeds of trust on real property they owned personally in order to provide additional collateral. Defendant's Exs. W and Y. As with the Fox note, Debtor, through Mr. Fox, negotiated several extensions on the Debtor's note, the effect of which was to postpone the maturity date until January 15, 2001. Plaintiff's Exs. 7 through 9.

Despite Defendant's suggestions that Mr. Fox simultaneously operated his sole proprietorship and the Debtor-corporation, based upon the evidence and testimony, the Court is persuaded and finds that Mr. Fox intended all of his business operations previously conducted as a sole proprietorship to be taken over and subsumed into the operations of the Debtor-corporation after it was organized. In other words, the Court is convinced that after Debtor was incorporated, Debtor was the only business operation that Mr. Fox maintained. Admittedly, there is evidence in the record that even after Debtor was incorporated, Mr. Fox accepted checks for business receivables made payable to both "Fox Bean Company" and "Fox Bean Company, Inc.," and that the certificate of assumed business name for "Fox Bean Company" remained effective long after the corporation was created. However, the Court attributes this to the fact that Mr. Fox's primary concern and expertise was in trading dried pulses, and not in the intricacies of business management. Consistent with this reality, it appears Mr. Fox never established a corporate bank account for use in Debtor's business operations, but instead continued to use the Fox account as the business account for Debtor, even through the date of the bankruptcy filing. Plaintiff's Ex. 24. The record is clear that while Debtor was in all respects a valid corporation, and a separate legal entity, Mr. and Mrs. Fox, as the officers of Debtor, intentionally conducted all of Debtor's banking activity through the Fox account.

For a time, Debtor's business grew rapidly. Debtor reported $1,174,234.00 in sales for tax purposes in 1999. Plaintiff's Ex. 11. One of Debtor's customer accounts that contributed to this high sales volume was with a company called Intergranos, a business located in Mexico. Debtor apparently sold a large amount of goods to Intergranos on credit, but at some time after the sale, Intergranos expressed a reluctance to pay for those goods. Debtor pursued legal remedies, and Mr. Fox believed as of the end of 1999 that recovery on this account receivable was still likely. This belief was expressed in Debtor's 1999 year-end financial statement which included the Intergranos sales in its assets as an account receivable, albeit with an appropriate notation concerning the possible problems with collection of the account. Defendant's Ex. BB.

Shortly after the issuance of this financial statement, additional facts became known to Mr. Fox regarding the Intergranos account. When the certified public accountant who prepared the financial statement learned these new, discouraging facts about the dim prospects for collection from Intergranos, he was prompted to revise the financial statement to exclude the Intergranos account from the other collectible accounts receivable. Plaintiff's Ex. 13. Because of the size of the Intergranos account, Debtor's revised financial statement, prepared February 2, 2000, shows Debtor's liabilities exceeding its assets by $392,115.00, whereas the original financial statement showed a positive stockholder equity of $17,576.00. Plaintiff's Ex. 13 and Defendant's Ex. BB.

Beyond the financial statements, Debtor's tax returns also document the weakening of Debtor's financial position over time. The Schedule L balance sheet in Debtor's 1999 tax return listed liabilities in excess of assets by $32,720.00 as of the beginning of the year. By year's end, liabilities exceeded assets by $393,114.00. Plaintiff's Ex. 11. The 2000 tax return shows that between January 1, 2000, and June 1, 2000, the date Debtor filed for bankruptcy and terminated business operations, the deficit of liabilities over assets had ballooned to $730,631.00. Plaintiff's Ex. 12.

Two transfers are targeted by Plaintiff in this avoidance action. The first occurred on March 14, 2000. Prior to this date, Mr. Fox had sold real property that he owned personally and deposited the proceeds into the Fox account, commingling these proceeds with other deposits of the corporate accounts receivable. Some time after making the deposit, Mr. Fox authorized Defendant to apply $28,908.82 from the Fox account to pay off the balance due on the Fox note. Defendant did so and released its interest in the collateral securing that note.

Plaintiff also seeks to recover a transfer that occurred on May 24, 2000, about a week prior to Debtor's bankruptcy filing, effected by Defendant via an involuntary offset from the Fox account. During the months and days preceding the offset, Mr. Fox had communicated frequently with the loan officer at the bank who had for several years supervised Debtor's loan accounts about the status of the Intergranos account and Debtor's financial health. According to that loan officer, Mr. Newberry, at the bank's request, Mr. Fox provided Mr. Newberry an updated version of Debtor's financial statement on May 24, 2000. Mr. Newberry noticed that, for the first time, this financial statement listed the Intergranos account under bad debts rather than as a collectible account receivable. The loan officer testified that the information in this updated financial statement led him to conclude that Debtor would be unable to repay Debtor's note. Therefore, Mr. Newberry immediately, and without notice to Mr. Fox, ordered a setoff of $56,500.00 from funds in the Fox account and applied those funds to the outstanding balance on Debtor's note. This offset depleted the Fox account and left Debtor unable to operate.

Debtor filed for bankruptcy relief eight days later on June 1, 2000.

III. Discussion and Disposition of the Issues.

Plaintiff challenges the March 14 transfer to Defendant and the May 24 offset based on different legal theories. According to Plaintiff, the March 14 transfer...