In re Hudson, Bankruptcy No. 1-81-02312
| Decision Date | 06 April 1983 |
| Docket Number | Adv. No. 1-81-0824.,Bankruptcy No. 1-81-02312,1-81-01053 |
| Parties | In re George C. HUDSON, Jr., Debtor. In re HUDSON PRINTING & LITHOGRAPHING COMPANY, INC., Debtor. C. Kenneth STILL, Trustee, Plaintiff, v. George C. HUDSON, Jr., Defendant. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee |
Scott N. Brown, Jr., Chattanooga, Tenn., for plaintiff.
Arthur C. Grisham, Jr., Chattanooga, Tenn., for defendant.
George C. Hudson, Jr., (Hudson) had been a stockholder, officer, director, and employee of Hudson Printing Company but sold his interest and quit working there before it filed bankruptcy on June 5, 1981. At the time of bankruptcy, the debtor's books showed that it owed Hudson about $20,000, but he owed it about $100,000.
The bankruptcy trustee for the printing company filed an involuntary bankruptcy petition against Hudson on November 17, 1981. The trustee alleged that Hudson owes the company the $80,000 debt shown by the company's books and $4,500, as the value of a car alleged to have been fraudulently transferred from the printing company to Hudson.
Hudson contested the petition on the ground that he does not owe either of the debts alleged by the trustee.
The court held two hearings on the contested involuntary petition and the complaint for recovery of the alleged fraudulent transfer. This memorandum will deal with the involuntary petition and the complaint.
The statute that controls who can file an involuntary petition speaks of holders of "claims" against the debtor, rather than creditors of the debtor. 11 U.S.C. § 303(b). There must be a certain number of petitioning claimholders, and their claims must total a certain amount. Furthermore, a claim does not qualify if it is "contingent as to liability."
If there are fewer than twelve holders of claims against the debtor, the statute allows an involuntary petition to be filed by one claimholder whose claims total at least $5,000. At the trial, Hudson's attorney conceded that there were fewer than twelve holders of claims against Hudson. The first question, then, is whether the trustee has "claims not contingent as to liability" that total at least $5,000.
Claim is broadly defined in Bankruptcy Code § 101(4).
Claim means . . . right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. . . .
The definition clearly does not require an undisputable right to payment. The courts have taken the approach that a disputed right to payment is a claim unless it is clearly barred by some defense and the alleged debtor raises the defense. On the other hand, "where the issues concerning defenses to a claim . . . are not clear and require adjudication of either substantial factual or legal questions, the creditor should be recognized as qualified to join in the bringing of an involuntary bankruptcy petition." In re All Media Properties, Inc., 5 B.R. 126, 134, 6 B.C.D. 586, 588, 2 C.B.C.2d 449, 457 (Bkrtcy.S.D.Tex.1980). See also Matter of Covey, 650 F.2d 877, 11 B.R. 101, 7 B.C.D. 1069, 4 C.B.C.2d 719 (7th Cir.1981).
This approach largely omits the question of how definite a claim must be in order to be considered a "claim". Perhaps a claim, such as some tort claims, that will require much litigation to determine whether the alleged debtor is actually liable should not be usable as the basis for an involuntary bankruptcy. However, it may be easier to deal with this problem as part of determining whether the alleged debtor is generally paying his debts as they become due. Matter of Covey, cited above. In any event, the trustee's $80,000 claim is not so indefinite that it should be excluded.
The next question is whether Hudson raised any defense that clearly bars all or part of the $80,000 claim. Hudson raised the statute of limitations as a defense. The relevant statute of limitations is either Tennessee Code Annotated § 28-3-109 or § 28-3-110. Section 28-3-109 provides a six-year limitations period. Section 28-3-110 provides a ten-year limitations period. The $100,000 account deficit on which the trustee bases his $80,000 claim accrued over a period of years, apparently beginning about 1958, though the records introduced into evidence do not go back that far. Nevertheless, it appears that more than $5,000 of the deficit was incurred within six years of the filing of the involuntary petition against Hudson. P.Ex. 6. Whichever statute of limitations applies, it does not bar enough of the trustee's claim to leave him with less than a $5,000 claim.
Since there were fewer than twelve holders of claims against Hudson, the trustee's claim based on the printing company's books is enough by itself to satisfy the statutory requirements as to the number of claimholders and the amount and character of their claims. There remains the requirement of proof that Hudson was not generally paying his debts as they became due.
The question necessarily arises whether a disputed claim can be counted in determining whether Hudson was generally paying his debts as they became due. Debt is defined as "liability on a claim," thus assuming that disputes have been decided against the alleged debtor to the extent of the debt. 11 U.S.C. § 101(11). This definition cannot be strictly followed in determining whether an alleged debtor was generally paying his debts as they became due, since the court often could not rule on the involuntary petition without deciding all disputes as to claims on which the debtor was not making payments. The statutes were intended to simplify the process compared to the former statutes, which usually required proof that the debtor had committed an "act of bankruptcy" and was insolvent in the sense of liabilities exceeding assets. 11 U.S.C. §§ 1(19) & 21 (1976); H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 321-324 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. 34 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787. Matter of Covey, cited above, contains an extensive discussion of the problem. The recommended approach is not to delve deeply into the questions raised if substantial litigation will be required to decide whether the claim is a debt.
At the trial of this matter, however, the court allowed the parties to put on substantial proof on the question of Hudson's liability for the amount of the account receivable shown by the printing company's books. Having allowed the proof, the court will decide the question of Hudson's liability.
Payments to officers of the company were recorded in its books in various accounts according to what the payments were for. The company also maintained accounts for unclassified payments to the company's officers, including Hudson. Though these "draw" accounts were variously identified, they worked as follows. A payment to the officer was recorded in the draw account as a debit. The total accumulated debit was periodically reduced by crediting the account with salary due the officer or other debts due from the company to the officer. A debit balance at the end of the accounting year was a debt due (account receivable) from the officer to the company. The balance sheets for several years reflect a large amount of accounts receivable from officers. P.Exh. 1. There was an accounting change in 1977 that apparently resulted in converting the debit balance in Hudson's miscellaneous draw account and subsequent unclassified draws to an account receivable on the company's books. This is the account receivable on which the trustee's claim is based.
Hudson did not dispute that the books show the account receivable. He argued that the payments or withdrawals that went to make up the account should have been recorded as salary paid to him or advances to pay business expenses. The evidence can be summarized as follows.
The printing company was a family owned business. Hudson and his father and mother were stockholders and on the board of directors. Hudson's father owned a controlling share of the stock and ran the company. Hudson worked in sales and production. When Hudson's father died in 1977, Hudson acquired almost all the stock of the company and operated the business until 1980, when he sold the stock to Thomas Ganoe and his wife.
Hudson's mother testified about the actions of the board of directors. The board did not agree to lend Hudson the money. The board also did not require Hudson to sign any document admitting that he owed the account receivable. Mrs. Hudson did not contemplate that Hudson would repay any amounts paid to him in excess of salary and reimbursable expenses. She testified that the salary paid to Hudson was not enough for him to live on.
Hudson testified that some entries to the draw account were for company expenses, particularly payments to Joy's Flowers, Country Pride Foods, Wilson and Company, the Kiwanis Club, and the telephone company. He testified that school tuition payments for his sons should have been recorded as salary. Hudson also testified that he told the company's bookkeepers to take out taxes on all amounts paid to him and put them on his account, apparently his salary account since taxes were to be withheld.
When Hudson sold his interest to the Ganoes, they agreed that Hudson would serve as a consultant to the business for a fee of $1,000 per month that would be applied toward reducing the account receivable. The account receivable was reduced by eight credits for the $1,000 monthly fee. Hudson and Ganoe both testified that Hudson never actually admitted owing a debt to the company for the account receivable. Hudson did sign a written contract in which he acknowledged that he owed the debt, but the contract was drawn up by Ganoe's attorney and Hudson was not represented by an attorney.
Hudson's tax returns show that he did not report as income all amounts that he...
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