In re Health Science Products, Inc., Bankruptcy No. 94-03938-BGC-11. Adv. No. 94-00294.

• Decision Date: 23 May 1995
• Docket Number: Bankruptcy No. 94-03938-BGC-11. Adv. No. 94-00294.
• Citation: 183 BR 903
• Parties: In re HEALTH SCIENCE PRODUCTS, INC., Debtor. HEALTH SCIENCE PRODUCTS, INC., Plaintiff, v. Jim TAYLOR and Anne Taylor, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

183 B.R. 903 (1995)

In re HEALTH SCIENCE PRODUCTS, INC., Debtor HEALTH SCIENCE PRODUCTS, INC., Plaintiff, v. Jim TAYLOR and Anne Taylor, Defendants.

Bankruptcy No. 94-03938-BGC-11. Adv. No. 94-00294.

United States Bankruptcy Court, N.D. Alabama, Southern Division.

April 13, 1995.

Order Amending Decision on Motion to Clarify and Amend May 23, 1995.

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Robert Rubin and Timothy Lupinacci, Burr & Forman, Birmingham, AL, for plaintiff-debtor.

Charles Cleveland, Birmingham, AL, for defendants.

MEMORANDUM OPINION ON THE DEBTOR'S COMPLAINT TO AVOID PREFERENTIAL TRANSFER AND ON THE DEFENDANTS' COUNTERCLAIM

BENJAMIN COHEN, Bankruptcy Judge.

This matter came before the Court for trial on the Complaint to Avoid Preferential Transfer filed by the debtor in possession, Health Science Products, Inc. Appearing were Mr. Robert B. Rubin and Mr. Timothy M. Lupinacci, the attorneys for the plaintiff, Mr. Charles Cleveland, the attorney for the Defendants, and Mr. Jim Taylor and Mrs. Anne Taylor, the Defendants. The matter was submitted on testimony, admitted exhibits, the record in the case and the arguments of counsel.

I. FINDINGS OF FACT

Health Science Products, Inc., ("HSP") operates a plant for the manufacture of dental equipment in a building located on the real property which is the subject of the present controversy. In 1985, before the building was erected, Mr. Taylor owned the property in fee simple.¹ With the desire to improve the property, Mr. Taylor transferred it to the Birmingham Industrial Development Board ("BIDB") in return for financing for the construction of the building. As evidence of this transaction a deed from Mr. Taylor to the BIDB was executed on August 14, 1985, and was recorded in the probate office of Jefferson County, Alabama, on that day.

To supply the necessary financing for the construction, the BIDB, pursuant to Ala. Code 1975, § 11-54-81 to § 11-54-101, issued and sold $900,000.00 in industrial development bonds.² The indenture trustee on the bond issue was AmSouth Bank. With that financing the building was constructed and the BIDB leased the now improved property back to Mr. Taylor. The lease began on August 1, 1985, and is to end on December 10, 1998.³ The monthly rental reserved to the BIDB, which simply goes to retire the outstanding bonds, increases monthly. For example, the payment for the month in which this opinion was executed is $5,343, while the payment scheduled for the last month of the lease term is $7,437. At the end of the lease term, or when the bond indebtedness is paid in full, whichever occurs first, Mr. Taylor has the option to purchase the fee simple interest in the property for $1.00. The deed from Mr. Taylor to the BIDB, the trust indenture between AmSouth and the BIDB, and the lease between Mr. Taylor and the BIDB were all filed for record in the probate office of Jefferson County, Alabama, on August 14, 1985.

The desire of Mr. Taylor in this matter was not to occupy the property, but to sublet the property, or to sell his interest in the now improved and more valuable property, for a profit. Toward that end, Mr. Taylor advertised the property for "sale or lease." Def.Ex. 27. Sometime in the spring of 1992, Mr. Jim Wells, the president of HSP, wrote the following letter to Mr. Taylor:

Health Science Products, Inc. (HSP) is very interested in leasing and with an option to acquire your property, an industrial/manufacturing building, located at 1000 11th Court West, Birmingham, Alabama, Arkadelphia Industrial Park.

It is proposed by HSP to lease the above building for a term of three years at the rate of $3,500 (Three Thousand Five Hundred Dollars) per month net and with the option to purchase the building and property after the end of the three year lease on a ten year seller mortgage contract, the purchase price shall be $450,000 (Four Hundred Fifty Thousand Dollars and 00/100) with 6% Interest. Seller agrees that there is a balance payable to AmSouth Bank, N.A. (AmSouth) $452,354.61 at April 10, 1992, and seller may at his option pay off the existing bank mortgage or maintain the existing bank mortgage and HSP shall make payment monthly to the seller and the seller agrees to pay monthly to AmSouth, as per the existing terms of the current loan agreement with AmSouth and IDB—the tax exempt revenue bond. It is understood that the existing interest rate is 90% of the floating AmSouth prime rate currently 5.9584%, subject to change whenever the AmSouth prime interest rate changes. The current monthly payment is $6,611.69. Seller is responsible in full for the payoff of the mortgage to AmSouth Bank, N.A.

Upon payoff of the existing mortgage to AmSouth, title shall be transferred free and clear to Health Science Products, Inc. when sellers purchase option-mortgage contract has been paid in full by HSP.

HSP retains the option to refinance the property and payoff in full sellers mortgage contract at any date and time at its sole discretion without any prepayment penalties.

If this offer of intent is accepted by signature below by May 1, 1992, a formal legal purchase agreement shall be entered into and the property shall be assumed by June 1, 1992.

Def.Ex. 29 (emphasis added).

Over the course of a brief period of time following the letter from Mr. Wells to Mr. Taylor, the two men met and also talked by telephone regarding Mr. Wells' offer. During the course of those discussions, Mr. Wells delivered the following handwritten modification of the offer to Mr. Taylor which read:

                To:         Mr. Jim Taylor
                From:       Mr. Jim Wells
                Re:         Lease with purchase option on industrial
                            building at 1000 11th Court
                            W
                Lease/3yrs: $42,000 year one (1.04 per sq. ft.)
                            $42,000 year two (1.04 per sq. ft.)
                            $42,000 year three (1.04 per sq. ft.)
                            _______
                            $126,000.00 total lease
                

Purchase Option Price principal and interest payments $6000.00 month, 10 year mortgage

                              $450,000.00
                10 year seller-held mortgage contract at 6% interest
                              ___________
                              $576,000.00 + interest
                              $270,000.00   interest based at
                                            6%
                                  over a 10 year
                  mortgage
                              ___________
                              $846,000.00   Total
                

Def.Ex. 4.⁴

Mr. Taylor, in response, delivered a counteroffer to Mr. Wells which read:

                Date:       May 1, 1992
                To:         Mr. Jim Wells
                From:       Jim Taylor
                Re:         Lease with Purchase Option on 1000
                            11th Court West Birmingham, Alabama
                

A. LEASE

1. One to three years effective June 1, 1992

                Year One      $53,207.00 to 6/10/93
                Year Two      58,141.00 to 6/10/94
                Year three    63,355.00 to 6/10/95
                Three Years
                Total Lease
                Payments           $174,703.00
                

2. Triple Net Lease (HSP to be responsible for insurance, maintenance and taxes) B. Purchase Option Price Less Principal Paid During time of lease:

$600,000.00 Seller-held Mortgage Contract at Floating Prime Interest for 10 years.

C. HSP reserves the right to assume and/or refinance the mortgage directly with AmSouth Bank at whatever date and time at HSP\'s option.

If HSP chooses to refinance the property at any time the sales price shall be paid in full, less the principal paid during the period of occupancy since June 1, 1992.

Upon payoff of the existing mortgage to AmSouth Bank or to the seller, title shall be transferred free and clear to HSP, Inc.

If this offer is accepted a formal legal purchase agreement shall be entered into and the property shall be occupied by June 1, 1992.

Def.Ex. 5 (emphasis added).

On May 1, 1992, the parties met for the purpose of finalizing an agreement for HSP's occupation and use of the property. Mr. Taylor and his attorney, Mr. Richard Davis, and Mr. Wells and his attorney, Mr. Donald Harris, attended the meeting. The result of the meeting was memorialized in a document entitled "Purchase Agreement for the Property Located at 1000 11th Court West," which was signed on that date by both Mr. Taylor and Mr. Wells. That document read:

                  Date:     May 1, 1992
                  To:       Jim Wells, President, HSP
                  From:     Jim Taylor, Owner-Seller
                  Re:       13 year Seller Mortgage Contract
                

I. Seller offers purchaser a 13 year seller held mortgage contract, with the first three years no interest and the last ten years at Citibank Floating prime interest rate. The following is the building principal payment schedule during the first three years and the end of each year\'s remaining principal balance due.

                Purchase Price of Building    $600,000
                  Time     Monthly  Yearly    End of Year
                 Period    Payment  Payments   Balance
                Year one    $3,500  $42,000    $558,000
                Year two    $4,200  $50,400    $507,600
                Year three  $4,700  $56,400    $451,200
                

II. Beginning the first month of the fourth year the remaining balance of the unpaid principal owed, or $451,200, is to be amortized over ten years at the Citibank prime interest rate effective June 1, 1995, and the monthly payment for that year will remain constant. The Citibank prime interest rate has historically fluctuated monthly. If the average rate for the year is higher than the rate at the beginning of the year, HSP will pay this interest difference to seller on the first month of the next year. If the average interest rate is lower during the year, this reduced interest will be deducted from the first monthly payment at the beginning of the next year.

At the beginning of each year thereafter (June 1st), the monthly payment will be recomputed at the Citibank prime interest rate and the monthly payment either increased or decreased, appropriately. The following would be the monthly payment for year four at various prime interest rates:

                         Rate    Payment
                         6.5%    $5,124
                         7.5%    $5,356
                         8.5%    $5,594
                         9.5%    $5,838
                

III. A.

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