In re Galbreath

• Court: U.S. Bankruptcy Court — Southern District of Georgia
• Writing for the Court: Lamar W. Davis, Jr.
• Citation: In re Galbreath, 286 B.R. 185 (Bankr. S.D. Ga. 2002)
• Decision Date: 14 March 2002
• Docket Number: Bankruptcy No. 99-60517.,Adversary No. 00-6017.
• Parties: In the Matter of John Douglas GALBREATH, Debtor. James B. Wessinger, III, Trustee, Plaintiff, v. Joel Spivey, Ronnie Spivey, Douglas Asphalt Company, Jean S. Galbreath, Richard A. Edwards, and Alicia G. Edwards, Defendants.

286 B.R. 185

In the Matter of John Douglas GALBREATH, Debtor James B. Wessinger, III, Trustee, Plaintiff, v. Joel Spivey, Ronnie Spivey, Douglas Asphalt Company, Jean S. Galbreath, Richard A. Edwards, and Alicia G. Edwards, Defendants.

Bankruptcy No. 99-60517.

Adversary No. 00-6017.

United States Bankruptcy Court, S.D. Georgia, Savannah Division.

March 14, 2002.

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W. Brooks Stillwell, III, William E. Dillard, III, Savannah, GA, for Debtor.

Kathleen Horne, Savannah, GA, Melinda Marbes, Atlanta, GA, for Defendant/Respondent.

MEMORANDUM AND ORDER

LAMAR W. DAVIS, Jr., Bankruptcy Judge.

Debtor John Douglas Galbreath's ("Galbreath") involuntary Chapter 7 case was filed on June 28, 1999, by three creditors¹ of Galbreath. On that same date, these creditors also filed a Chapter 7 case against Galbreath Clearing and Grading, Inc. ("GCG"), a closely held corporation of which Galbreath was the sole shareholder. Neither Galbreath nor GCG contested the filings, and James B. Wessinger ("Trustee") was appointed as the Chapter 7 Trustee for both cases. On July 26, 1999, the Court entered an Order for Relief adjudicating Galbreath bankrupt.

Trustee seeks to set aside a promissory note executed by Galbreath on August 20, 1998 ("the 1998 Note") in the principal amount of $1.5 million in favor of Defendant Douglas Asphalt Company ("DAC"). Trustee also seeks to set aside security deeds granted by Galbreath ("the Property Transfers") pledging his interests in real estate located on Hutchinson Island, Georgia, a twenty-five acre tract in Chatham County, Georgia, and a farm in Bulloch County, Georgia, (collectively, "the Three Parcels") as collateral for the 1998 Note. Both transactions occurred within one year of the Order for Relief. Trustee seeks to set aside both the 1998 Note and the Property Transfers as constructively fraudulent pursuant to 11 U.S.C. § 548,² which provides generally that a trustee may avoid any transfer or obligation made or incurred within one year of the petition date if the debtor "received less than a reasonably equivalent value in exchange for such transfer or obligation and ... was insolvent ... or became insolvent as a result of such transfer or obligation." § 548(a)(1)(B).

Trustee contends that prior to August 20, 1998, Galbreath was solvent and not personally obligated to DAC. He asserts that when Galbreath signed the 1998 Note and executed the Property Transfers, he did not receive reasonably equivalent value in that he received no new money in any amount from Defendant on that date and that he personally had no pre-existing obligation to Defendant in any amount. Trustee also asserts that incurring the obligation rendered Galbreath insolvent and that Galbreath remained insolvent through November 24, 1998, the date on which the Property Transfers were perfected.

DAC contends, however, that the 1998 Note served simply to memorialize Galbreath's pre-existing obligation to DAC, which arose by virtue of monetary advances made by DAC to GCG prior to the one-year period preceding the filing, repayment for which Galbreath allegedly obligated himself, orally. DAC further contends that trustee failed to establish Galbreath's insolvency and failed to prove that the received less than reasonably equivalent value in the transactions.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(H), in which the Court has jurisdiction pursuant to 28 U.S.C. § 151 and the standing order of the District Court for the Southern District of Georgia pursuant to § 157(a). After trial on January 4 and 5, 2002, and the consideration of applicable authorities, I make the following Findings of Fact and Conclusions of Law, in accordance with Federal Rule of Bankruptcy Procedure 7052.

FINDINGS OF FACT

The parties entered into a lengthy stipulation of material facts which are not in dispute which are incorporated herein by reference (hereinafter referred to as "Stip. ____").

a. The Writings

In February and July of 1995 DAC as contractor hired GCG as subcontractor on two projects: Highway 341 in Glynn County, Georgia, and the Pooler Bypass in Chatham County, Georgia. (Ex. P-64, P-65). The Debtor, John Douglas Galbreath, was not a personal signatory to either contract, but his wholly owned corporation, GCG, was the subcontractor obligated to perform. Each contract provided in paragraph 19 that the contractor, DAC, may, at its option, pay outstanding and unpaid bills of GCG and deduct any such amounts advanced from future contract payments which became payable to GCG. Paragraph 41 of each contract contained a "merger clause" providing that no modification of the contract would be valid except in written form consented to by both parties. No written modification of either contract has been produced.

Pursuant to the terms of DAC's contract for the road construction projects with the Georgia Department of Transportation ("DOT"), DAC was obligated to ensure that all bills incurred by DAC's subcontractors were paid in full. The contract provided that if DAC's subcontractors failed to pay, DAC was obligated to do so. (Tr. 72-73). Beginning on February 23, 1996, and continuing through November 30, 1998, DAC made a series of payments and advances to or for the benefit of GCG pursuant to the authority contained in the subcontracts and those advances are shown on DAC's general ledger (Stip. 16, 17). From the date of the first advance on February 23, 1996, DAC advanced over $8 million to GCG and applied credits of over $6 million, leaving a balance due on the advances on November 30, 1998, of $2,078,103.50 (Stip. 23, 22). Galbreath personally received none of the advances; rather, all were made to or for the benefit of GCG (Stip. 24, 25).

On April 12, 1996, Galbreath and his company (denominated as "Galbreath, Inc.," but stipulated by the parties to have been a trade name for GCG) executed a promissory note payable to DAC in the amount of $290,250.00 ("the 1996 Note") (Ex. P-7). That note contained no provision for future advances. Instead, it provided a schedule of payments which would retire the note by July 31, 1996. The note specifically provided that DAC "shall withhold" a total of $290,250.00 from "all payments" otherwise due to GCG arising out of GCG's performance of the Pooler Bypass and Highway 341 subcontracts. DAC received payments totaling $295,000.00 from those projects on May 14 and May 29, 1996 (Ex. P-20; D-17). In fact, between April 12, 1996, and July 31, 1996, DAC applied total credits against its advances to GCG of $640,000.00 (Stip. 29). Following the execution of the $290,000.00 note, DAC acknowledges that it set off $640,000.00 in money received from the Georgia DOT on the two subcontracts in question against the outstanding obligations of GCG prior to July 31, 1996, as evidenced in Exhibit P-20. DAC's general ledger, however, shows that additional advances were made between April 12 and July 1996. On the general ledger, DAC did not differentiate between the note balance of $290,250.00 and other advances which were made pursuant to the DOT subcontract. As a result, the general ledger shows that the total debt was not paid in full but was reduced to approximately $81,466.86 as of December 31, 1996 (Ex. P-20).³

Spivey testified that DAC's intent was for the $290,000.00 note to work similar to a line of credit, providing written evidence of Galbreath and GCG's indebtedness as to future advances. However, as previously noted, the note itself provided for no future advances, provided for a fixed repayment schedule, and provided that the source of repayment would be from funds otherwise payable to GCG on its subcontract with DAC.

The $290,000 note was secured by a mortgage on the Debtor's 76.53 acre parcel in Chatham County and a Conditional Assignment of his 25.61 acre borrow pit in Chatham County (Stip. 30). DAC later executed a quit claim deed to Galbreath reconveying the 76 acre tract. The deed recited that the "purpose of the deed was to cancel a [prior] deed to secure debt" and that "the debt for which said deed has been given has been paid in full." (Stip. 31).

DAC's willingness to make these substantial advances to GCG was driven by multiple motivations. First, DAC needed to get the work completed, and it became a choice of keeping GCG in business through the making of advances, or taking over the job directly, or finding a new subcontractor. Second, DAC trusted Galbreath's ability to turn the company's fortunes around and pay off all the obligations when better weather made it foreseeable that Galbreath could return to profitability. Finally, it was to DAC's benefit to make the advances in order to satisfy DAC's obligations to the Georgia DOT to insure timely payment of all bills. Spivey acknowledged that he never made additional advances conditional on the execution of the August 1998 Note and the property transfers and that he never "threatened" to shut GCG down if Galbreath failed to personally guarantee the debt. (Tr.89-90).

Because of inclement weather, GCG was unable to generate sufficient revenue to prevent the amount of net advances it owed DAC from increasing substantially in size during calendar year 1997 and the early part of 1998. By no later than April 1998 the net amount owed DAC from GCG was over $1.3 million (Ex. P-20). At this point, apparently as a result of discussions between Joel Spivey and Galbreath, an agreement was reached for the execution of a formal promissory note to evidence this indebtedness of GCG to DAC and to collateralize the obligation with unencumbered assets or assets in which there was some equity. Galbreath agreed to execute the note, both personally and as president of GCG, and to convey property which he owned personally as collateral security. Although documents were drafted and circulated, the written instrument was not executed until August 1998 after another creditor, The...