In re Geri Zahn, Inc.
| Decision Date | 19 December 1991 |
| Docket Number | Adv. No. 89-0050-BKC-AJC-A.,Bankruptcy No. 87-04586-BKC-AJC |
| Citation | 135 BR 912 |
| Parties | In re GERI ZAHN, INC. d/b/a Just Clothes, Debtor. Gui L.P. GOVAERT, Trustee, Plaintiff, v. FIRST AMERICAN BANK AND TRUST COMPANY, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Stuart Levin, Miami, Fla., for debtor/plaintiff.
Robert Young, Carlton, Fields, Ward, Emmanuel, Smith & Cutler, Orlando, Fla., for defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON REMAND
THIS CAUSE came before the Court on April 11, 1991 on remand from the United States District Court. The district court remanded the case for a determination and recommendation as to the damages awarded the Trustee (Plaintiff) for the Defendant's First American Bank & Trust Company (FABT) violation of Florida Statutes §§ 674.402 and 673.407 and acts of common law fraud. The facts are as follows:
Barnett Bank loaned Just Clothes Corporation (Debtor) $150,000 consisting of a $100,000 promissory note and a $50,000 revolving line of credit. By offering lower rates, FABT persuaded the Zahns, the principles of the Debtor, to transfer these loans to FABT and, in turn, FABT would loan the Debtor $150,000.
On October 29, 1985, FABT sent a letter to the Zahns delineating the terms of the loan. The total amount of the loan was to be $150,000.00, with $100,000 to be applied as a capital loan to repay Barnett Bank and $50,000 to be used as a revolving line of credit and deposited in the Debtor's account with FABT. FABT proposed to hold as collateral for the loan a $25,000 C.D. in the name of Geri Zahn; a $50,000 C.D. in the name of Nathan Vlock; and a life insurance policy in the name of Jason Zahn, with a cash surrender value of $20,000.
The Zahns agreed to accept FABT's loan on the understanding that the funds from the revolving line of credit would be made available immediately. The Zahns explained they were going on a buying trip for the Debtor in December and needed the funds from the line of credit. Based on that understanding, the Zahns executed the loan papers on November 26, 1985.
Unbeknownst to the Zahns, however, FABT did not fund the line of credit on November 26, 1985. In fact, FABT would not fund the revolving line of credit until January 8, 1986.
Further unbeknownst to the Zahns, the terms of the executed loan papers were far less favorable than the terms represented in the October 29, 1985 letter.
Meanwhile, in December, 1985, the Zahns went to New York on a buying trip and purchased merchandise from several wholesale merchants. They paid with checks drawn on their FABT account. By January, 1986, FABT had dishonored a series of those checks totalling over $50,000.
Approximately one year later, the Debtors filed a petition for relief under Chapter 11 of the Bankruptcy Code. In October, 1988, the case was converted to Chapter 7 and the Plaintiff subsequently commenced this adversary proceeding. Plaintiff's complaint against FABT alleged common law fraud, wrongful dishonor of checks, and interference with an advantageous business relationship.
On July 13, 1989, 109 B.R. 497, this Court entered Findings of Fact and Conclusions of Law as follows:
On July 21, 1989, FABT appealed to the United States District Court. On April 16, 1990, Federal Deposit Insurance Corporation (Defendant), as Receiver for FABT, was substituted as Defendant.
On December 14, 1990, the district court entered an Order and Memorandum Opinion adopting this Court's findings, but remanded the case for further findings on the amount of damages owed Plaintiff, both compensatory and punitive.
Under Florida law, a "payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item." Fla.Stat. § 674.402. Defendant contends that it is not liable to the Debtor because FABT dishonored only 12 checks, of which a maximum of 5 were payable to the sellers of merchandise in New York. Accordingly, Defendant argues FABT's wrongful dishonor was not the proximate cause of the Debtor's bankruptcy. However, this Court does not find "proximate cause" to be the issue here on remand inasmuch as the July 13, 1989 Findings of Facts and Conclusions of Law found that FABT's wrongful dishonor was the proximate cause of the Debtor's bankruptcy and the district court adopted this finding. Moreover, in its remand order, the district court agreed that FABT was responsible for the damages the Debtor incurred when it wrongfully refused to honor the checks presented.
The issue the district court remanded is the exact amount of damages owed Plaintiff given FABT's wrongful dishonor which caused the Debtor's bankruptcy.1 The Plaintiff requests this Court calculate damages by adding up the value of the Debtor's assets at the time of the filing of Debtor's Chapter 11 petition. Plaintiff's expert assessed the value of the Debtor's assets at the time of the Chapter 11 filing as follows:
Inventory $217,000
Accounts Receivables 3,000
Rent Security Deposit 6,100
Furniture, Fixtures, and Improvements 14,000
Cash 13,000
C.D. in name of Nathan Vlock
(collateral for loan) 50,000
C.D. in name of Geri Zahn (collateral
for loan) 25,000
Cash Surrender Value of life
insurance (Jason Zahn) 20,000
TOTAL = $348,100
Defendant argues that the Plaintiff cannot recover damages for the CD's and life insurance policy because these items were assets of Vlock and the Zahns, not assets of the Debtor. This Court disagrees. Mr. Kaufman testified that the applicable accounting doctrine is economic substance over legal form. While the CD's and life insurance policy were not listed as assets on the Debtor's balance sheet, they were for the benefit of the Debtor. They were economically lent to the Debtor so that the Debtor could use them as collateral for the bank loan. Accordingly, this Court finds the CD's and life insurance policy were assets of the Debtor. Therefore, assuming Plaintiff's formula for damages is acceptable, the Plaintiff is entitled to damages in the amount of $348,100.2
One court has upheld the Plaintiff's formula for damages. In Murdaugh Volkswagen v. First Nat'l Bank of So. Carolina, 801 F.2d 719 (4th Cir.1986), a bank's wrongful dishonor of checks forced a car dealership into bankruptcy. The lower court measured damages by adding up the value of the dealership's assets at the time it filed bankruptcy. The United States Court of Appeals for the Fourth Circuit upheld this formula for damages on the grounds that it was "not unreasonable." Murdaugh Volkswagen, 801 F.2d at 727, n. 8.
However, notwithstanding the Fourth Circuit's decision, the formula does have two shortcomings. First, the formula does not factor in the financial status of the Debtor before the wrongful dishonor. For example, the greater the value of the Debtor before the wrongful dishonor, the greater the loss to the Debtor when FABT forced it into bankruptcy, and the greater the award of damages to Plaintiff should be. Second, Plaintiff's formula presumes that since the Debtor lost its assets in the liquidation proceeding, it should collect the value of these assets as damages. Yet, Plaintiff's formula fails to contemplate that the Chapter 7 liquidation benefits the Debtor's estate by decreasing the amount of the creditor's claims which, pursuant to 11 U.S.C. 727(a)(1), are not discharged.
A more accurate formula for damages would compare the value of the Debtor before the wrongful dishonor of checks to the value of the Debtor after the wrongful dishonor of checks, which is effectively the value of the Debtor after bankruptcy. Stated as a formula: Damages = V1 (value of Debtor prior to the wrongful dishonor) minus V2 (value of Debtor after the wrongful dishonor).
Calculating V2 is a relatively simple matter. V2 is typically a negative value, equal to the amount of debt remaining following liquidation of the Debtor's assets. In a Chapter 7 case, creditors seize the Debtor's assets to satisfy the debts the Debtor owes them. Generally, however, the liquidated assets are insufficient to satisfy all of the debts. Therefore, because a corporation's debts are not discharged, all that remains of a corporation following a Chapter 7 is debt.
In the instant case, at the time of the Chapter 7, the Debtor had debts of approximately $308,308.00. The value of the liquidated assets was approximately $8,849.00. Therefore, the value of the Debtor following the Chapter 7 liquidation was ($299,459.00). The creditors owed this amount are likewise victims of the Bank's wrongful conduct.
To calculate V1, the court must rely on financial statements, submitted as Plaintiff's Exhibit J, which reveal the Debtor's assets, liabilities, and earnings as of April 30, 1985. Given the figures in the Plaintiff's exhibit, the best, albeit imperfect, valuation formula for calculating V1 is the "sum of assets" technique. The formula under this technique is:
Value = Current Assets - Current Liabilities + Tangible Assets + Intangible Assets
This formula is based on the assumption that each of these elements can be individually...
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