In re Martin
| Decision Date | 24 September 1992 |
| Docket Number | Bankruptcy No. 89 B 9796,Adv. No. 90 A 1003,91 A 418. |
| Citation | 145 BR 933 |
| Parties | In re William MARTIN, Sr., Debtor. BAY STATE MILLING COMPANY, a Minnesota corporation, Plaintiff, v. William MARTIN, Sr., Defendant. BAY STATE MILLING COMPANY, a Minnesota corporation, for the use and benefit of the estate of William Martin, Sr., Plaintiff, v. William Martin Jr., Diana June Franchi, and Betty Lou Doty, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Bernard M. Kaplan, Ruben Kaplan & Rosen, Skokie, Ill., for William Martin Sr., William Martin Jr., Diana June Franchi, and Betty Lou Doty.
Karen Moore, Office of the U.S. Trustee, Chicago, Ill.
Paul M. Bauch, David Cleary, Bell Boyd & Lloyd, Chicago, Ill., for Bay State Milling Co.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This matter comes before the Court on the consolidated trial of two Adversary complaints filed by plaintiff Bay State Milling Company ("Bay State"). In Adversary Complaint No. 90 A 1003, Bay State seeks to bar discharge of debtor William Martin, Sr. ("Martin") under 11 U.S.C. § 727, based on a series of alleged concealments of assets (Counts I, II, and V), failure to maintain adequate records (Count IV), and failure to adequately explain a diminution of his assets prior to bankruptcy (Count VI). By judgment order entered May 18, 1992, the Court entered judgment in favor of debtor on Counts I, II, IV, and V, and deferred judgment on Count VI following additional relevant evidence to be heard in the trial on Adversary Case No. 91 A 418. Bay State Milling Co. v. Martin, 141 B.R. 986 (Bankr.N.D.Ill.1992). Count III was dismissed by order of Court on November 25, 1991.
In Adversary Complaint No. 91 A 418, Bay State seeks to set aside gift transfers of 15% of the outstanding shares of common stock in Country Maid Bakery, Inc. ("Country Maid") from debtor to his children, defendants William Martin, Jr., Diana June Franchi, and Betty Lou Doty, as fraudulent conveyances under 11 U.S.C. § 544(b) and Illinois fraudulent conveyance law.
A consolidated trial on both Adversary No. 91 A 418 and Count VI of Adversary No. 90 A 1003 was held before the Court on August 17, 19, 20, 21, 24, 26 and 27, 1992. Having considered the evidence, arguments of counsel, and all submissions in the record, the Court now makes and enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. Country Maid is an Illinois corporation in the business of producing and selling baked goods both at the wholesale and retail level through its stores in Arlington Heights, Buffalo Grove, Glenview, Highland Park, Northbrook, and Northfield (all northern suburbs of Chicago). It also operates a restaurant in Northbrook known as "Country Maid Cafe-ette".
2. In 1972 or 1973, debtor and his wife June Martin purchased Country Maid. From that time until June 1, 1985, debtor held 60% of the outstanding shares in this corporation and his wife held the remaining 40%.
3. National Flour Company ("National Flour") was formed in 1963. It is an Illinois corporation in the business of wholesale flour distribution. Until January 1983, National Flour had two divisions — one in Wilmette, Illinois and the other in Milwaukee, Wisconsin. Martin owned 100% of the outstanding shares of National Flour.
4. In 1980, Mr. Philip Sylvester was hired as a salesman for National Flour's Milwaukee division. In 1982, he began to negotiate with Martin to acquire an ownership interest in National Flour. As a result of these negotiations, a new corporation known as National Flour of Wisconsin ("Wisconsin") was formed in January 1983. Wisconsin acquired the assets and assumed the liabilities of National Flour's Milwaukee division, while National Flour continued to own and operate the Wilmette division. Sylvester and Martin each owned 50% of the outstanding shares of Wisconsin. Sylvester contributed $60,000 as consideration for his shares.
5. The parties dispute who controlled the operations of Wisconsin after its formation, but this point is not relevant in this case. Both parties were officers of the company, and as such they both incurred liability for unpaid withholding taxes as "responsible persons" under 26 U.S.C. § 6672(a).
6. Bay State is a flour miller and a wholesale distributor of flour and milled grain products. Bay State sold flour and milled grain products to both National Flour and Wisconsin. These products were generally delivered on credit, and, in 1967, Martin executed a guarantee that made him personally liable for National Flour's debt to Bay State. Bay State Ex. 1.
7. In 1983, a similar guarantee was executed by Martin making him personally liable for Wisconsin's debt to Bay State. This guarantee contained the same language, but it also had a clause that stated, "The day either partner/owner is no longer financially involved with Wisconsin, and with due notice to Bay State, said party is no longer a guarantor." Bay State Ex. 2.
8. North Dakota Mill and Elevator Association ("North Dakota") also supplied flour to National Flour and Wisconsin on credit. In 1979, Martin executed a guarantee of National Flour's obligations to North Dakota. No similar guarantee was executed for any liability of Wisconsin to North Dakota.
9. In February 1985, Martin sold his 50% stock interest in Wisconsin to Sylvester in return for $40,000 and a promise to pay $60,000 at a later date. At the time of the sale, Wisconsin owed several hundreds of thousands of dollars to Bay State.
10. Within a few months after the sale of shares in February of 1985, Wisconsin defaulted on its obligations to Bay State. When Wisconsin defaulted, Bay State called upon Martin to honor his personal guarantee and pay what Wisconsin owed it.
11. The foregoing events gave rise to litigation between Martin, Sylvester, Wisconsin, and Bay State. After the stock sale, Bay State's demands to be paid resulted in a suit being filed by it against Martin, Sylvester, and Wisconsin in the U.S. District Court for the Eastern District of Wisconsin. Also, following the stock sale, Sylvester claimed to have been defrauded by Martin because of misrepresentations made about the financial condition of Wisconsin. Wisconsin also made a claim against Martin for conversion of certain assets to Martin's personal use. These claims resulted in cross-claims being filed against Martin in the district court case.
12. The claims against Martin were litigated before a jury. In 1988, judgment was entered against Martin in the amounts of $447,528.36 on the complaint of Bay State for flour sales guaranteed by Martin; $50,000 in compensatory damages on the cross-claim of Sylvester for fraud; and $25,998.28 on the cross-claim of Wisconsin for conversion. See Bay State Milling Co. v. National Flour Co. of Wisconsin, et al., Judgment Order, 85 C 1242 (E.D.Wisc. Aug. 17, 1988), Bay State Ex. 8. The jury also awarded Sylvester $70,025.79 in punitive damages based on the fraud claim. This judgment was affirmed on appeal to the Seventh Circuit Court of Appeals.1
13. There is some controversy as to whether Martin concealed his sale of Wisconsin shares from Bay State. The existence of concealment is relevant to the fraud-in-fact charge here because it sheds light on Martin's state of mind at the time of the alleged fraudulent conveyance. Martin testified that he would not have concealed the stock sale because he believed that notice to Bay State of the stock sale would relieve him of liability under the terms of the personal guarantee. (See Finding No. 7). However, this issue does not need to be decided here because the jury in the district court case determined that Martin did intend to conceal the stock sale.
14. The evidence in this case warrants that finding. A likely and plausible reason for Martin's act of concealment appears when one looks at his guarantee of Wisconsin's debts. The guarantee is read to mean that, if either of the guarantors were to sell his interest in Wisconsin, then he would be relieved only of liability for future flour purchases. There is no reason to believe from the language quoted above ( No. 7) that the parties intended the selling guarantor be relieved of liability for prior extensions of credit. That is how the District Court jury and the Seventh Circuit opinion interpreted the guarantee, see Bay State, 916 F.2d at 1226, and that is how this Court interprets it.
15. Thus, as Martin sold his stock, he remained liable for Wisconsin's prior debt. At the same time, without his continuing guarantee, Wisconsin was no longer as credit-worthy as before. Therefore, he knew that, if the stock sale were revealed, Bay State would likely stop supplying flour to Wisconsin and collect the debt still owing. To collect that Wisconsin debt, it could enforce the guarantee. This means that he knew Bay State would likely move to enforce Martin's guarantee soon after it discovered Martin's sale of his stock in Wisconsin. Therefore, Martin had a motive to conceal the sale of share in order to avoid Bay State's enforcement of the guarantee.
16. Martin knew that the stock sale placed Sylvester and Wisconsin in economic jeopardy, and he attempted to conceal his sale of Wisconsin stock from Bay State to defer his guarantee of debt to Bay State. The potential claims of Bay State, Sylvester, and Wisconsin against him were all known by Martin prior to June 1, 1985. Although the district court lawsuit was not filed until the fall of 1985, the existence and size of these prospective claims were abundantly clear to Martin as of June 1, 1985.
17. During the Christmas season of 1984, Martin discussed transferring some of his shares in Country Maid to his three children, William Martin, Jr., Diana June Franchi, and Betty Lou Doty. The children testified that Martin had been telling them for several...
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