In re Fulghum Const. Corp.

• Decision Date: 18 September 1981
• Docket Number: No. 81-3040.,81-3040.
• Court: U.S. District Court — Middle District of Tennessee
• Parties: In re FULGHUM CONSTRUCTION CORPORATION.

14 B.R. 293 (1981)

In re FULGHUM CONSTRUCTION CORPORATION.

No. 81-3040.

United States District Court, M.D. Tennessee, Nashville Division.

September 18, 1981.

COPYRIGHT MATERIAL OMITTED

C. Kinian Cosner, Nashville, Tenn., for plaintiff-appellant.

Charles E. Shivel, Jr. and William L. Montague, Lexington, Ky., for defendant First Security National Bank.

John Bailey, III, Nashville, Tenn., for defendant Ranier & Associates.

David Stosberg, Louisville, Ky., for defendant Liberty National Leasing Co.

MEMORANDUM

WISEMAN, District Judge.

This action is an appeal by the bankruptcy trustee from two judgments entered by the United States Bankruptcy Court, In re Fulghum Construction Co., 7 B.R. 629 (Bkrtcy. M.D. Tenn. 1980) and In re Fulghum Construction Co., No. 380-00235, Adv. Proc. No. 380-0081 (Bkrtcy. M.D. Tenn. July 14, 1980), Hon. Russell H. Hippe, Jr., presiding, dismissing the trustee's complaint in the proceeding below. Also involved in this action is an appeal by defendant Ranier & Associates from the dismissal of a counterclaim for damages filed by it against the trustee.

In this appeal the trustee argues that the Bankruptcy Court erred in its conclusions (1) that the trustee had no interest in certain equipment sold by the debtor, Fulghum Construction Company, to one of the defendants, Ranier & Associates; (2) that the corporate entity should not be disregarded and therefore that defendant Ranier & Associates — the sole shareholder of the debtor — should not be held liable for the debtor's debts; and (3) that certain payments made by the debtor to defendant Ranier & Associates were not preferential transfers under section 547(b) of the Bankruptcy Code. Ranier & Associates in turn challenges the conclusion of the Bankruptcy Court that it failed to substantiate its claim for damages that it allegedly suffered because of the trustee's retention of the above-mentioned equipment.

For the reasons stated in this opinion, the appeals of both parties are dismissed and the judgment of the Bankruptcy Court is affirmed in all respects.

Applicable Law

The Bankruptcy Court found that the law of Texas, the state of the debtor's incorporation, was controlling on the issues of whether the corporate veil should be pierced and whether the transfer of the equipment from the debtor to Ranier & Associates was a valid sale. This finding is not disputed, and this Court agrees that Texas law is applicable. See Restatement (Second) of Conflicts § 302 (1971).

Facts

The Bankruptcy Court made the following findings of fact in the proceeding below. Because these findings are not clearly erroneous, they are adopted by this Court and herein repeated. See Rule 810, Rules of Bankruptcy Procedure.

1. The corporation was organized in Houston, Texas, in 1966. It was named Fulghum Engineering & Construction, Inc., for one of its organizers, James T. Fulghum, who served as the corporation\'s president. The name was later changed to Fulghum Construction Corporation.

2. The corporation was authorized to engage in a wide variety of heavy construction activities but at all times material hereto engaged principally in the construction of oil and natural gas pipelines. It was authorized to do business in some thirty states and Canada. At all times material hereto its principal place of business was in the vacinity sic of Nashville, Tennessee.

3. In October 1977, Harry H. Ranier and Neale R. Hall, residents of Kentucky, acquired all of the outstanding shares of stock in the corporation. Although Ranier and Hall became vice-presidents of the corporation, no significant changes in management were made at that time. Mr. Fulghum, who continued to serve as president, testified that it was his understanding that the new owners were going to infuse the corporation with additional capital, because substantial liquid assets were required for such companies to bid successfully on large projects.

4. The corporation lost in excess of $600,000 from its operations during 1977.

5. In the early part of 1978, Ranier formed a general partnership with a certified public accountant, Algin H. Nolan, known as Ranier & Associates. Since July of that year, when Hall transferred all of his stock to Ranier, Ranier & Associates has been the corporation\'s sole shareholder.

6. The shareholder expressed dissatisfaction with the management of the corporation at a meeting in April 1978. On July 15, 1978, Mr. Fulghum and another key member of the management team were discharged. Both the shareholder and the directors adopted resolutions authorizing Nolan

to assume full and complete management and administrative responsibilities of the Corporation with full power to remove and/or replace any and all personnel thereof, to reorganize in any fashion or cease altogether any or all operations of the Corporation, including dissolutionment, as he in his sole discretion may deem necessary, proper, or expedient.

A few days later a new board of directors elected Michael J. Leatherman executive vice-president to assume responsibility for soliciting bids for the corporation and for overseeing the company\'s operations. These were the last significant formal actions taken by the shareholder or the directors of the corporation prior to the filing of the trustee\'s complaint.

7. The first steps taken by Nolan pursuant to the extraordinary powers granted him in the shareholder\'s and directors\' resolutions occurred in September 1978. For the stated purpose of improving both the balance sheet and the liquidity of the corporation, he decided that all of the corporation\'s equipment should be sold to the shareholder and then be leased back to the corporation. The equipment was appraised at $1,137,350. To effect this sale and leaseback, two uncaptioned agreements were executed by the shareholder and the corporation on or about September 20, 1978. One of the agreements recited that the shareholder as buyer had paid to the corporation as seller of the equipment the cash purchase price of $1,137,350. In the other, the shareholder purported to lease the equipment back to the corporation. The sale agreement contained no language of conveyance. Neither the shareholder nor the corporation took any formal steps to consummate the sale. No bill of sale was ever executed, and none of the documents evidencing ownership of the equipment (e.g., files maintained by the corporation on each item of equipment that included the original bill of sale and other pertinent documents) were ever transferred from the corporation to the shareholder. Several items of equipment were covered by certificates of title issued by the state of Tennessee. None of the title certificates were ever transferred to the shareholder. The corporation remained in possession of all of the equipment.

8. Although the so-called sale agreement recited that the corporation received $1,137,350 in cash, that recitation was false. The shareholder obtained a loan in the amount of $950,000 from one of the defendants, Liberty National Leasing Company (a subsidiary of Liberty National Bank), to finance the major portion of the purchase price and initially only paid this sum to the corporation. Coincidental with this transaction, Nolan transferred the corporation\'s principal bank accounts from a Nashville bank to one in Mt. Sterling, Kentucky, where Ranier & Associates had its office. Apparently a check in the amount of $1,137,350 was deposited in one of the corporation\'s newly opened accounts. On the same date, however, a check drawn on that account in the amount of the difference between the Liberty National loan and the purchase price — $185,350 — was deposited in one of the shareholder\'s accounts. These checks apparently were paid on the same date. Thus only $950,000 was actually paid to the corporation in September 1978.

9. Nolan testified at the trial that the $185,350 was withdrawn from the corporation\'s account in order to safeguard it against a possible unauthorized withdrawal. He indicated that Mr. Fulghum had made such a withdrawal some months before. Mr. Fulghum, however, had been dismissed more than two months earlier. The court thus finds that Nolan\'s explanation of the withdrawal was patently false. It is apparent that the shareholder had no intention of paying the full cash purchase price in September 1978 but intended only to advance to the corporation the proceeds of the Liberty National loan.

10. A corporate balance sheet prepared by an accounting firm immediately after the September 1978 transaction reflected a shareholder\'s equity of $170,928.00. Prior to the purported sale, the equipment was carried on the corporation\'s books at the depreciated value of $436,258.00. Thereafter the corporation never represented in its financial records that it continued to own the equipment.

11. While the transaction resulted in an improvement in the corporation\'s balance sheet and liquidity, it was detrimental to the corporation in that it resulted in a significant taxable gain and necessitated the dissipation of a valuable asset — the tax loss carry-forward — to avoid payment of the substantial tax liability that resulted. The real beneficiary appears to have been the shareholder, which was able to depreciate the equipment from the new, stepped-up basis. While the loan proceeds provided the corporation with additional cash, there was no showing why the corporation itself could not have borrowed this amount of money, using the equipment as collateral as the shareholder did.

12. The shareholder granted Liberty National a security interest in the equipment to secure repayment of this loan.

13. According to a detailed analysis prepared by Nolan, a substantial number of financial transactions between the corporation and the shareholder took place between June 1978 and November 1979. It was the shareholder\'s practice to withdraw from the corporation, as well as other corporations it owned, any cash that was not immediately required

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