In re Martin

• Decision Date: 18 May 1992
• Docket Number: Bankruptcy No. 89 B 9796,Adv. No. 90 A 1003.
• Citation: 141 BR 986
• Parties: In re William MARTIN, Sr., Debtor. BAY STATE MILLING COMPANY, a Minnesota corporation, Plaintiff, v. William MARTIN, Sr., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

141 B.R. 986 (1992)

In re William MARTIN, Sr., Debtor BAY STATE MILLING COMPANY, a Minnesota corporation, Plaintiff, v. William MARTIN, Sr., Defendant.

Bankruptcy No. 89 B 9796, Adv. No. 90 A 1003.

United States Bankruptcy Court, N.D. Illinois, E.D.

May 18, 1992.

COPYRIGHT MATERIAL OMITTED

Paul M. Bauch, David D. Cleary, Bell, Boyd & Lloyd, Chicago, Ill., for plaintiff.

Bernard M. Kaplan, Ruben, Kaplan & Rosen, Skokie, Ill., for defendant.

Michael S. Polsky, Trebon & Polsky, Milwaukee, Wis.

Karen Moore, Office of the U.S. Trustee, Chicago, Ill.

Douglas Lipke, Rudnick & Wolfe, Chicago, Ill.

Catherine Steege, David Neff, Jenner & Block, Chicago, Ill.

David A. Kallick, Leanne M. Swenson, Hurley & Kallick, Ltd., Deerfield, Ill., for LaSalle Bank Northbrook.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary case is related to the bankruptcy proceeding filed by the debtor William Martin Sr. ("Martin"). It was originally filed on June 13, 1989, under Chapter 11 of the Bankruptcy Code, but later converted to a proceeding under Chapter 7. The plaintiff Bay State Milling Company ("plaintiff" or "Bay State") filed this Adversary case to bar Martin's discharge pursuant to 11 U.S.C. § 727. Originally filed in seven counts, Counts III and VII were dismissed prior to trial on plaintiff's motion.

For reasons set forth below, judgment is by separate Order entered in favor of defendant on Counts I, II, IV and V, and judgment deferred on Count VI pending trial of another related Adversary case and the evidence to be heard in that trial.

These are the counts that went to trial:

Count I — 11 U.S.C. § 727(a)(2)(B): Asserted Transfer and Concealment of Loan Repayments that are Property of the Estate

Martin's wife, June Martin, allegedly received monthly repayments of a loan previously made to Country Maid, in which Martin has at least a 50% interest (the "Loan"). Such proceeds from the repayment of the Loan are asserted to have been property of the estate. Martin is said to have transferred his interest in such loan proceeds to his wife and attempted to conceal the transfer by having Country Maid make payments solely to his wife after he filed in bankruptcy.

Bay State accuses Martin of hiding such transfers and payments and engaging in such concealment with intent to hinder, delay, or defraud creditors of his estate and the Trustee.

Martin denies that he transferred to his wife his interest in the Loan proceeds due from Country Maid, or that any payments made to his wife by Country Maid were made with intent to hinder, delay, or defraud creditors of his estate and the Trustee.

Count II — 11 U.S.C. § 727(a)(2)(B): Asserted Transfer and Concealment of Assets of National Flour Company of Illinois

Martin owns 100% of the outstanding shares of National Flour Company of Illinois ("National Flour"). After commencement of his bankruptcy case, Martin assertedly caused the transfer of essentially all National Flour assets to Central Baking Supply, which now operates essentially the same business as National Flour and now services many of National Flour's clients. Central Baking Supply, which is owned by Martin's son, assertedly paid inadequate consideration for the assets allegedly transferred.

Plaintiff contends that this transaction increased the amount of claims against the estate by transferring assets that could have satisfied creditor claims against National Flour upon which Martin was a guarantor. Martin is accused of making such transfers and engaging in such concealment with the intent to hinder, delay, or defraud creditors of his estate and the Trustee.

Martin denied that he caused the transfer of National Flour assets to Central Baking Supply without adequate consideration, or that any transfer was made with intent to hinder, delay, or defraud creditors of his estate and the Trustee.

Count IV — 11 U.S.C. § 727(a)(3): Asserted Failure to Maintain Adequate Records

This Court appointed an Examiner to investigate Martin's financial affairs. The Examiner's report revealed many weaknesses in Martin's records and accounts. Based upon the Examiner's conclusions, this Court converted the case to a Chapter 7 liquidation case and appointed a trustee. In light of the Examiner's findings and conclusions, it is alleged that Martin knowingly and fraudulently concealed, destroyed, mutilated, falsified, or failed to keep or preserve adequate recorded information, including books, documents, records, and papers, from which Martin's financial condition or business transactions might be ascertained.

Martin disputes and denies these charges.

Count V — 11 U.S.C. § 727(a)(4)(D): Asserted Concealment of Records from the Examiner and Trustee

Throughout the course of this case, Martin has asserted that his financial records and accounts are complete. The Examiner's report concluded that Martin failed to keep or preserve adequate recorded information from which his financial condition or business conditions might be ascertained. Consequently, if Martin's assertion of complete records is true, plaintiff argues that Martin must have knowingly and fraudulently withheld from the Trustee and Examiner books, documents, records, and papers relating to Martin's property or financial affairs.

Martin disputes and denies these charges.

Count VI — 11 U.S.C. § 727(a)(5): Asserted Failure to Explain Diminution of Estate Assets

Martin asserts that the estate is without assets except for stock in Country Maid and National Flour. Martin also asserts that he was solvent and able to pay Bay State the amount indebted at the time of Martin's transfer of stock to his children in June of 1985. Financial statements prepared by Martin in 1987 also reflect a substantial net worth. The Trustee and the Examiner have requested that Martin explain the current deficiency of his assets to meet his current liabilities. Martin is said to have failed to explain satisfactorily any loss of assets or deficiency of assets to meet Martin's liabilities.

Martin disputes and denies these charges.

Following trial before the bench, the Court now makes and enters the following Findings of Fact and Conclusions of Law:

FINDINGS OF FACT

1. Martin is an individual who owns 100% of the outstanding shares of National Flour Company of Illinois ("National Flour"), an Illinois corporation. Until October of 1989, National Flour was engaged in the business of wholesale flour distribution. National Flour filed an antitrust suit against Bay State in the United States District Court for the Northern District of Illinois, Eastern Division, which alleges price discrimination in violation of the Clayton Act 15 U.S.C. § 15(a).

2. When his related bankruptcy case was converted to one under Chapter 7, Martin owned 45% of the outstanding shares of Country Maid Bakery, Inc. ("Country Maid"). His wife has owned 40% of the outstanding shares of Country Maid since the inception of that corporation. Until June 1, 1985, Martin owned 60% of the outstanding shares of Country Maid. Country Maid is a closely held family business engaged in wholesale and retail baked goods production, distribution, and sale.

3. Martin formerly owned 50% of the outstanding shares of National Flour Company of Wisconsin ("Wisconsin"), a Wisconsin corporation. Philip Sylvester ("Sylvester") owned the remaining 50% of said stock. Wisconsin was engaged in the business of wholesale flour distribution. On or about February 1, 1985, Martin sold his interest in Wisconsin to Sylvester. Martin and his wife each also own a 50% interest in a parcel of improved commercial real estate property located in Milwaukee, Wisconsin (the "Warehouse"), and a 50% interest in a loan receivable from Country Maid (the "Loan" referred to in Count I).

4. Bay State is a flour miller and a wholesale distributor of flour and milled grain products. On March 14, 1967, Martin and his wife executed a guarantee of National Flour's obligations to Bay State. On August 10, 1983, Martin and Sylvester executed a guarantee of Wisconsin's obligations to Bay State.

5. After Martin's execution of the Wisconsin guarantee, Bay State shipped goods to Wisconsin on open account. On or about June 1, 1985, Wisconsin owed to Bay State in excess of $400,000 on account. Wisconsin defaulted on its obligations to pay Bay State, and Bay State made demand upon Martin for payment of Wisconsin's account. Martin did not honor his guarantee, asserting that on account of his sale of his interests in Wisconsin he was no longer liable on the Wisconsin guarantee.

6. On June 1, 1985, Martin executed an instrument of gift, transferring to each of his three children 5% of the outstanding shares of stock of Country Maid owned by him, thereby reducing his stock ownership in Country Maid to 45%.

7. In August of 1985, Bay State filed a civil action in the United States District Court for the Eastern District of Wisconsin seeking, inter alia, judgment against Wisconsin and against Martin and Sylvester on their Wisconsin guarantee. Bay State Milling Company v. National Flour Company of Wisconsin, Inc., et al., 85-C-1242, 1989 WL 205819 (E.D.Wis.). In this same civil action, Martin's co-defendants, Sylvester and Wisconsin, filed cross-claims against Martin for fraud and conversion.

8. The District Court entered partial summary judgment in favor of Bay State with respect to Martin's liability on the Wisconsin guarantee. The District Court conducted a jury trial to determine the amount of Bay State's damages, and to determine Sylvester's and Wisconsin's claims against Martin. The jury returned the verdict in favor of Bay State, liquidating its claims against Martin, and in favor of Sylvester and Wisconsin on their cross-claims against Martin.

9. On August 17, 1988, the District Court entered judgment pursuant to the jury verdict in favor of Bay State in the amount of $447,528.36; in favor of Sylvester in the amount of $50,000.00 in...