In re Jeffrey Bigelow Design Group, Inc., Civ. No. B-90-1601
| Decision Date | 13 February 1991 |
| Docket Number | Bankruptcy No. 87-4-3581.,Civ. No. B-90-1601 |
| Citation | 127 BR 580 |
| Parties | In re JEFFREY BIGELOW DESIGN GROUP, INC. John H. HARMAN, Trustee, v. FIRST AMERICAN BANK OF MARYLAND, Ann Donatelli, Louis D. Donatelli, Donatelli and Klein. |
| Court | U.S. District Court — District of Maine |
John H. Harman, Silver Spring, Md., for plaintiff.
Brian F. Kenney, Fairfax, Va., Linda V. Donhauser, Baltimore, Md., Donald Hadley, Bethesda, Md., Linda G. Griffith, Wendy D. Pullano, Rockville, Md., Stanton J. Levinson, Bethesda, Md., for defendants.
Presently pending before the Court is an appeal by the trustee for the estate of the Jeffrey Bigelow Design Group, Inc. ("debtor") from the decision of the United States Bankruptcy Court for the District of Maryland and cross-appeals by appellees First American Bank of Maryland ("First American"), Ann Donatelli, Louis T. Donatelli, and Donatelli and Klein, Inc. ("Donatelli and Klein"). This appeal arises from the trustee's attempt to recover payments made by the debtor to First American as preferential payments under Bankruptcy Code § 547(b) or as fraudulent transfers under § 548(a)(1) or (a)(2).
In September, 1985, Donatelli and Klein acquired 50 percent of the stock of the debtor in exchange for a cash payment and the arrangement of a line of credit with First American. The initial line of credit was $250,000.00 but the parties rolled over that note into increasing amounts until the credit line was for $1,000,000.00. Ann and Louis Donatelli personally guaranteed that credit line. Although Donatelli and Klein was the maker of the note, the debtor received all draws on the credit line and made interest payments directly to First American. In February, 1986, the debtor executed a note for $1,000,000.00 to Donatelli and Klein with substantially the same terms as the note from Donatelli and Klein to First American. Thereafter, each payment the debtor made to First American reduced the debtor's liability on its note to Donatelli and Klein by a like amount.
Donatelli and Klein executed a second note for $125,000.00 for the benefit of the debtor in June, 1987. Ann and Louis Donatelli personally guaranteed that note. Throughout the period of 1986-1987, during most of which the debtor was insolvent, it continued to make payments to First American on the Donatelli and Klein lines of credit. Those payments totalled $109,667.63 for 1987, and the payments in the 90 days prior to the filing of the bankruptcy petition totalled $25,575.16. The debtor filed its petition in bankruptcy under Chapter 7 on December 22, 1987.
The trustee filed a complaint in August, 1988, alleging that payments made by the debtor to First American within 90 days of the bankruptcy petition were preferences under § 547. The trustee amended the complaint in July, 1989, to add defendants and to state a claim to set aside all transfers from the debtor to First American in 1987 as fraudulent transfers under § 548. With the consent of the court, the trustee again amended the complaint in December, 1989, in order to correct certain allegations in the complaint and add claims for payments from the debtor to First American not included previously. The case was tried before the bankruptcy court on January 31 and March 12, 1990. At the close of the evidence, the trustee moved to amend the complaint a third time to include a claim to set aside as insider preferences transfers made between 90 days and one year prior to bankruptcy. The bankruptcy court denied that motion.
The court ultimately ruled that none of the payments at issue were fraudulent transfers under Bankruptcy Code § 548, that the payments made in the 90 days prior to bankruptcy by the debtor to First American were preferences under § 547(b), and that these preferential payments were not made in the ordinary course of business under § 547(c)(2).
On appeal the trustee raises three issues: (1) that the bankruptcy court erred in denying his motion to amend the complaint at the close of the evidence to bring a new claim for preferential payments going back one year under § 547(b)(4)(B); (2) that the bankruptcy court erred in dismissing counts II, III, and IV of the complaint relating to fraudulent transfers under § 548; and (3) that the bankruptcy court's finding that the debtor had received reasonably equivalent value in exchange for the payments at issue under § 548(a)(2)(A) was clearly erroneous.
In the appellees' cross-appeals, they argue that the bankruptcy court erred in ruling that the four payments made in the 90 days before filing were not in the ordinary course of business.
When a bankruptcy court's legal conclusions are challenged, the district court must make an independent determination of the applicable law. In re Tesmetges, 47 B.R. 385, 388 (E.D.N.Y.1984). Otherwise, a bankruptcy court's decision will not be set aside unless there was plain error or abuse of discretion. In re Ken Boatman, Inc., 359 F.Supp. 1062 (W.D.La.1973).
Appellant first asserts that the bankruptcy court erred by denying his motion to amend the complaint at the close of the evidence to include in the preferential payment claim all payments made by the debtor to First American between 90 days and one year before the date of filing of the petition in bankruptcy under § 547(b)(4)(B).
Bankruptcy Rule 7015 incorporates Rule 15 of the Federal Rules of Civil Procedure for amended and supplemental pleadings in adversary bankruptcy proceedings. Rule 15(a) states that, after a responsive pleading is served, a party may amend its pleadings "only by leave of court or by written consent of the adverse party" and "leave shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). However, "leave to amend is not to be granted automatically" and "disposition of a motion to amend is within the sound discretion of the . . . court." Deasy v. Hill, 833 F.2d 38, 40 (4th Cir.1987). Furthermore, the court may deny a motion to amend under Rule 15(a) "where the motion has been unduly delayed and where allowing the amendment would unduly prejudice the non-movant." Id.
The bankruptcy court found the motion to amend was unnecessarily late because the trustee had months prior to trial to make the motion, during which time he knew or should have known of the existence of the insider claim (March 12, 1990, Tr. at 19-20). Furthermore, the court found that the proposed amendment would severely prejudice the defendants' ability to mount a defense at that late point in the proceedings (March 12, 1990, Tr. at 20).
The amendment at issue here was the third amendment sought by the trustee and came at the close of all the evidence. At that time, he attempted to make a new claim to set aside all payments by the debtor between 90 days and one year before the date of filing of the bankruptcy petition as preferential payments to an insider under § 547(b)(4)(B). Although the debtor made the payments directly to First American, which is not an insider, the trustee argued that the payments were avoidable because they benefited Donatelli and Klein, which is an insider. Each payment the debtor made to First American reduced the debt Donatelli and Klein had incurred to First American. The trustee relied upon the holding in Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir.1989), which adopted this theory extending preference recovery and argued that the amendment would cause appellees no prejudice because the evidence of preference payments going back one year duplicated the evidence presented at trial concerning fraudulent transfers.
Appellees contended that they had not anticipated the claim, nor had they prepared a defense on the new claim. They proffered that if they had anticipated the motion to amend, they would have presented additional evidence establishing a § 547(c) "ordinary course of business" defense to each payment made in the one year period, rather than just those payments made in the 90 days before the debtor filed its bankruptcy petition. In addition, defendants made three salient points: courts are split on the validity of the insider preference theory of recovery adopted in Levit; the Fourth Circuit and this Court have not yet recognized such a theory of recovery; and the parties here never briefed this issue during the trial in the bankruptcy court. For all these reasons, defendants argued that permitting the motion to amend at such a late point in the proceedings would prejudice their ability to raise a defense.
Based on the record before it, the Court concludes that the bankruptcy court's findings of undue delay and severe prejudice to defendants under these circumstances were not clearly erroneous. The Court observes that the bankruptcy court recessed for six weeks between the start and finish of the trial, and at no time during that recess did the appellant move to amend the complaint. As noted by the court in Deasy v. Hill, "the burden rests primarily upon the plaintiff to amend his complaint, not upon the defendant to anticipate a new claim." Id. at 41. The Court concludes, therefore, that the bankruptcy judge did not abuse his discretion in denying the trustee's motion to amend.1
Appellant's second issue is that the bankruptcy court erred in dismissing counts II, III, and IV of the complaint which allege that the payments made by the debtor to First American within one year of the filing of the bankruptcy petition were fraudulent transfers under § 548(a)(1).
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