In re JR Deans Co., Inc., Bankruptcy No. 97-08095-W. Adversary No. 99-80231-W.

CourtUnited States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
Writing for the CourtJOHN E. WAITES
Citation249 BR 121
PartiesIn re J.R. DEANS COMPANY, INC. Debtor. Kevin Campbell, Trustee, Plaintiff, v. William Deans, Hope Deans, Hope Real Estate, Ltd., & First Federal of Charleston Defendants.
Docket NumberBankruptcy No. 97-08095-W. Adversary No. 99-80231-W.
Decision Date21 March 2000

249 B.R. 121 (2000)

In re J.R. DEANS COMPANY, INC. Debtor.
Kevin Campbell, Trustee, Plaintiff,
v.
William Deans, Hope Deans, Hope Real Estate, Ltd., & First Federal of Charleston Defendants.

Bankruptcy No. 97-08095-W. Adversary No. 99-80231-W.

United States Bankruptcy Court, D. South Carolina.

March 21, 2000.


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Amy Campbell Kelly, Mt. Pleasant, SC, for Kevin Campbell, Trustee

Charles S. Bernstein, Charleston, SC, for William Deans, Hope Deans and Hope Real Estate, Ltd.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

THIS MATTER comes before the Court upon the Motion for Partial Summary Judgment by Defendants William Deans and Hope Deans and Defendant Hope Real Estate, Ltd., filed with the Court on December 9, 1999; and Hope Real Estate Second Motion for Partial Summary Judgment filed with the Court on December 13, 1999 (collectively the "Motions"). Defendants move for summary judgment pursuant to Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings under the Bankruptcy Code by Bankruptcy Rule 7056. Plaintiff filed a Memorandum in Opposition to Motions for Summary Judgment on December 23, 1999, taking the position that the Motions must be denied as there are genuine issues of material fact. Based upon the pleadings and the evidence presented at the hearing on the Motions, the Court makes the following Findings of Fact and Conclusions of Law pursuant to Rule 52 of the Federal Rules of Civil Procedure, made applicable by Rule 7052 of the Federal Rules of Bankruptcy Procedure.1

FINDINGS OF FACT

1. J.R. Deans Company, Inc. ("Debtor") filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code on September 24, 1997. On or about March 2, 1998, the case was converted to a Chapter 7.

2. Debtor, a corporation organized under the laws of South Carolina and engaging in the sale of industrial equipment and supplies, on a wholesale and retail basis, was started in 1961 by James Robert Deans, the father of Defendant William Deans.

3. In 1979, Debtor acquired ownership of the real estate on which the business is located and which is the subject of this adversary proceeding.

4. When James Robert Deans passed away, ownership of Debtor was divided among members of the Deans family and T.E. Pedersen, one of the original shareholders.

5. Subsequently, William Deans and his wife, Hope Deans, obtained 100% ownership interest in Debtor, and William Deans became Debtor's Chief Operating Officer.

6. One of Debtor's main customer was the Charleston Naval Shipyard. With the announcement of the imminent closing of the shipyard, the decision was made to change the direction of Debtor's business and to bring in new management to assist with the undergoing changes.

7. In the latter part of 1994, a decision was made to hire Emory Ware as Chief Operating Officer of Debtor. As a part of the negotiations leading up to the employment of Mr. Ware, it was determined that he would obtain an equity position in Debtor through an acquisition of stock shares. However, Mr. Ware was to have no ownership interest in Debtor's real estate.

8. The preliminary plan to pursue the goals related to the employment of Mr. Ware was to form a new corporation and to transfer all of Debtor's assets, including

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the wholesale and retail supply business, to a newly formed corporation. Debtor's real estate would remain in Debtor's title while the "spin-off" company would continue Debtor's business. At the time the negotiations and plans for the "spin-off" were in progress, all parties were aware that Debtor had been named as a Defendant in over one hundred law suits in the 1970s and 1980s brought by persons who claimed to have been injured by asbestos contained in products sold by Debtor. Upon making the preliminary plans to create a new entity, concerns arose as to whether the proposed new entity would be able to obtain new liability insurance that would cover any new asbestos claims that might arise. Due to those concerns and for other reasons, the decision was made to transfer the real property to the new entity, leaving the remaining assets with Debtor and allowing Debtor to retain its liability insurance coverage against any asbestos litigation then in existence or which might have arisen in the future.2

9. A tax-free "spin-off" occurred and resulted in the formation of Hope Real Estate Limited ("HRE").

10. Defendants William and Hope Deans became the owners and principal officers of HRE.

11. By deed dated January 4, 1995 and recorded January 24, 1995, Debtor transferred its interest in the real estate to HRE.

12. The deed provides that the transfer of real estate from Debtor to HRE was "in consideration of the . . . premises and the sum of three ($3.00) dollars . . ." and further provides that the conveyance was "subject to an existing mortgage in favor of First Federal Savings and Loan Association of Charleston, Inc. ("First Federal") securing mortgaged indebtedness of approximately One Million One Hundred Six Thousand Sixty-One Dollars ($1,106,061.00) of the Grantor."

13. First Federal did not provide Debtor with a written release of its liability under the existing loan referenced in the deed; however, on or about April 19, 1995, the real estate was refinanced by HRE, and any liability of Debtor on the property was extinguished by the refinance.

14. Following the transfers, William Deans acted as principal officer of both Debtor and HRE.

15. At the time of the transfer of the property from Debtor to HRE, several

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asbestos lawsuits had been filed, naming Debtor as a defendant. Prior to the filing of Debtor's bankruptcy case, none of the asbestos litigation had resulted in a judgment against Debtor, nor had any settlement been made with any claimant which included any contribution by Debtor. Since the filing of the bankruptcy, more asbestos lawsuits have been filed naming Debtor as a defendant in the case; however, as of the date of the hearing on the Motions, no Proofs of Claim had been filed against the bankruptcy estate by any of the asbestos claimants despite the fact that they had notice of the bankruptcy filing

16. The Trustee presented two Proofs of Claim, claims number 35 and 82, asserting that they represented debts incurred prior to the transfer of real estate which is the subject of this proceeding. The Proofs of Claim were filed by Halstead Industries, Inc. ("Halstead") and Mountain West d/b/a Office Depot Creditor ("Office Depot") and were in the amount of $7,960.48 and $266.72 respectively. Debtor's Credit Application in connection with Halstead's claim shows the date of the Application as May 23, 1988; and the Trustee claims that the creditor supplied materials to Debtor from that date forward. However, Halstead's Proof of Claim shows that its debt was incurred on August 2, 1996. This assertion is further supported by two invoices from Halstead to Debtor bearing invoice dates of 05/21/96 and 06/18/96. As for the Office Depot claim in the amount of $266.72, the Proof of Claim shows that the debt was incurred on February 1, 1994.

17. In his affidavit of December 22, 1999, Harvey P. Jeffers, an appraiser of commercial property with Integra Fitzhugh Stout and Associates, LLC; states that, based on his review of the corporate documents, prior appraisals and lease information, as well as his physical review, the real property transferred by Debtor to HRE had a value of at least $1.6 million as of the date of the conveyance. The valuation was derived by utilizing the market approach.

18. For the fiscal year ending April 30, 1993, Debtor's net operating income was $22,584.00. For the fiscal year ending April 30, 1994, Debtor's net operating income was $26,331.00. For the fiscal year ending April 30, 1995, Debtor suffered net operating losses of $34,890.00; however, its assets exceeded the total liabilities. In fact, the assets at that time were approximately $1,779,124 while the total debt was $1,211.649.00. For the fiscal year ending April 30, 1996, Debtor's net operating loss was $143,903.00. However, once again, the total assets of Debtor exceeded the total liabilities; while the total assets amounted to $2,565,304, the total liabilities of Debtor were $2,159,732. No evidence was presented indicating whether Debtor was solvent after April 30, 1996.

19. By conveying the subject real estate to HRE, Debtor became a tenant of HRE, and it made rental payments to HRE.

20. Debtor made the following payments to HRE within the one year preceding the filing of the bankruptcy petition:

DATE OF PAYMENT AMOUNT PAID3
                 12/31/96 $16,129.00
                 03/11/97 $ 5,000.00
                 05/23/97 $ 5,000.00
                 06/30/97 $44,375.00
                

21. The Trustee filed a Complaint on July 14, 1999 alleging six Causes of Action against Defendants. In the First Cause of Action, asserted against HRE and William and Hope Deans, the Trustee has alleged that the transfer of real estate from Debtor to HRE was a transfer in actual fraud of creditors under S.C.CODE ANN. § 27-23-10 and 11 U.S.C. § 544.4 In the Second

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Cause of Action, asserted against HRE and William and Hope Deans, the Trustee has alleged that the transfer of real estate from Debtor to HRE constitutes a constructively fraudulent transfer, in violation of § 27-23-10 and § 544. The remaining causes of action are only asserted against HRE. In the Third Cause of Action, the Trustee has asserted that the payments of Debtor toward the rent of the business facility constitute preferential transfers pursuant to § 547. In the Fourth Cause of Action, the Trustee has asserted that the payments toward the accumulated rent constitute a fraudulent conveyance pursuant to § 548. In the Fifth Cause of Action, the Trustee has asserted that the rent payments made during the year before the bankruptcy filing to HRE are in violation of the...

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