In re Martin
| Decision Date | 26 April 1990 |
| Docket Number | Bankruptcy No. 89 B 09796. |
| Citation | 113 BR 949 |
| Parties | In re William MARTIN, Sr., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
Bernard M. Kaplan, Ruben, Kaplan & Rosen, Skokie, Ill., for debtor.
Paul M. Bauch, Bell, Boyd & Lloyd, Chicago, Ill., for Bay State Milling Co.
David Neff, Jenner & Block, Chicago, Ill., for official creditors committee.
David A. Kallick, Hurley & Kallick, Ltd., Deerfield, Ill., for LaSalle Bank Northbrook.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This cause is before the Court upon motion of Bay State Milling Company ("Bay State"), a creditor of William Martin, Sr. ("Debtor"), for an order dismissing Debtor's case under Chapter 11 of the Bankruptcy Code, or alternatively converting it to a case under Chapter 7. The Court having considered the motion, and the record of these proceedings, heard the testimony of the witnesses, examined the documents received in evidence and otherwise being fully advised does hereby make and enter the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. Debtor is an individual. He owns 100% of the outstanding shares of National Flour Company of Illinois ("NF-Illinois"), an Illinois corporation. Until October of 1989, NF-Illinois was engaged in the business of wholesale flour distribution. The NF-Illinois stock held by Debtor has very little, if any, value.
2. Debtor also owns approximately 45% of the outstanding shares of Country Maid Bakery Company ("Country Maid"), an Illinois corporation. The remainder of the Country Maid stock is owned by Debtor's wife, June Martin (40%), and Debtor's three children (5% each). Country Maid is engaged in distribution and sale of wholesale and retail baked goods. Country Maid's principal retail store and bakery is located in Northbrook, Illinois. It also operates retail bakeries and coffee shop outlets in four suburban community areas. Country Maid employs approximately 90 employees.
3. Debtor is President of Country Maid. He attends Country Maid's Northbrook bakery almost every day. However, his participation in day-to-day management of the bakery itself is limited and performed on an ad hoc basis. He does perform certain functions traditionally associated with higher level management, including negotiating of leases and union contracts, and arranging financing for Country Maid. He also supervises Country Maid's satellite stores and is actively involved in solving serious personnel problems and any significant difficulties with Country Maid's suppliers.
4. NF-Illinois and Country Maid each maintain separate books and records and file separate income tax returns as corporations.
5. Debtor formerly owned 50% of the outstanding shares of National Flour Company of Wisconsin ("NF-Wisconsin"), a Wisconsin corporation. The remaining 50% of the NF-Wisconsin stock was owned by Phillip Sylvester ("Sylvester"). NF-Wisconsin was engaged in the business of wholesale flour distribution. On February 1, 1985, Debtor sold his 50% interest in NF-Wisconsin to Sylvester.
6. Bay State is a flour miller and a wholesale distributor of flour and milled grain products. On March 14, 1967, Debtor and his wife executed a guarantee of NF-Illinois obligations to Bay State. On August 10, 1983, Debtor and Sylvester executed a guarantee of NF-Wisconsin's obligations to Bay State.
7. After Debtor's execution of the NF-Wisconsin guarantee, Bay State shipped goods to NF-Wisconsin on open account. As of February 1, 1985 and also as of June 1, 1985, NF-Wisconsin owed Bay State approximately $400,000 on account. NF-Wisconsin defaulted on its obligations to Bay State and Bay State made demand upon Debtor for payment of NF-Wisconsin's account under Debtor's August 10, 1983 personal guarantee. Debtor refused this demand. He asserted that on account of the sale of his interest in NF-Wisconsin on February 1, 1985, he was no longer liable on the NF-Wisconsin guarantee.
8. Prior to June 1, 1985 Debtor owned 60% of the outstanding shares of Country Maid. On that day, he transferred, in the aggregate, 15% of the outstanding shares of stock of Country Maid as gifts to his children. The gifts were the result of discussions between Debtor and Lawrence Goldstein, the certified public accountant employed by Country Maid, and were motivated by Debtor's estate planning needs. During the Christmas season in 1984, Debtor told his three children, Betty Lou Doty, William W. Martin, Jr., and Diana June Franchi, that he was giving each of them a gift of 250 shares (5% to each of the total issued stock) of Country Maid stock. However, the instrument of conveyance was not executed until June 1, 1985. Shortly thereafter Debtor met with each of his three children individually and handed each a stock certificate for 250 shares in Country Maid made out in their name. Each child returned the stock certificate to Debtor so that it could be stored for safe keeping with other Country Maid corporate records. However, these stock certificates were not signed by Debtor or Debtor's wife in their capacity as corporate officers. Although as early as 1984 Debtor was under some pressure from Bay State to reduce outstanding balances, at the time of these gifts Debtor had not yet been sued by Bay State on the guarantee. Further, he believed he had been released from his personal guarantee of the NF-Wisconsin obligations to Bay State by the sale of his stock interest in that corporation.
9. Two months after the stock was conveyed, in August of 1985, Bay State filed a civil action in the United States District Court for the Eastern District of Wisconsin seeking, judgment against Debtor on the NF-Wisconsin guarantee. In this same civil action, Debtor's co-defendants, Sylvester and NF-Wisconsin, filed cross-claims against Debtor for fraud and conversion.
10. The District Court entered partial summary judgment in favor of Bay State with respect to Debtor's liability on the NF-Wisconsin guarantee. The District Court conducted a jury trial to determine the amount of Bay State's damages, and to determine Sylvester and NF-Wisconsin's claims against Debtor. The jury returned a verdict in favor of Bay State liquidating its claims against Debtor and in favor of Sylvester and NF-Wisconsin on their cross-claims against Debtor. 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. The basis of liability to Bay State was in part Debtor's failure to give written notice to Bay State of his revocation of the NF-Wisconsin guarantee. Accordingly, the guarantee was still enforceable. Bay State Milling Co. v. National Flour Co. of Wisconsin, Inc., et al., No. 85-C-1242 (E.D. Wis. August 17, 1988) (judgment order). The District Court also entered judgment in favor of Sylvester in the amount of $50,000 in compensatory damages and $70,025.79 in punitive damages, finding that Debtor "made an untrue representation of fact, knowing it was untrue, or recklessly without caring whether it was untrue and with the intent to deceive and induce Sylvester to act upon it"; and in favor of NF-Wisconsin in the amount of $25,998.28 for conversion of property owned by NF-Wisconsin. Id. Debtor filed a timely notice of appeal from the judgment, and this appeal is now pending in the United States Court of Appeals for the Seventh Circuit: Martin v. Bay State Milling Company, et al., No. 89 1336.
11. On April 25, 1989, Bay State filed a Verified Petition for Registration of Foreign Judgment in the Circuit Court in and for Cook County, Illinois: Bay State Milling Company v. Martin, No. 89 L 5461 (Ill.Cir.Ct.). On May 9, 1989, Bay State delivered a certified copy of the judgment to the Sheriff of Cook County, Illinois. On May 11, 1989, Bay State initiated a Citation to Discover Assets proceeding in connection with the registration proceeding. The Petition and Citation were served upon Debtor on May 14, 1989. Bay State recorded the Verified Petition and the Judgment with the recorder of deeds of McHenry County, Illinois on May 25, 1989.
12. Debtor filed his voluntary petition for relief under Chapter 11 of the Code on June 13, 1989.
13. On July 6, 1989 Debtor executed a "Statement of Financial Affairs for Debtor Not Engaged in Business". In this statement, Debtor represented that his occupation is serving as the President of both NF-Illinois and Country Maid, but that he had not received a salary from either corporation during the previous two calendar years. Bay State Ex. # 11. At trial Debtor stated he has never been paid a salary from either Country Maid or NF-Illinois. Debtor has also represented that his current income is from social security ($557/mo.) and approximately $1,000 to $1,200 per month drawn from Country Maid which Debtor characterizes as a "repayment of advances" previously made by him and his wife to the corporation. Debtor's Schedule of Current Income and Current Expenditures, Bay State Ex. # 13.
14. As of August 4, 1989, NF-Illinois owed Bay State in excess of $42,000.00 on account. NF-Illinois defaulted on its obligations to Bay State and Bay State made demand upon Debtor for payment of NF-Illinois account. Debtor did not pay it.
15. Bay State filed this motion for an order dismissing or converting this Chapter 11 proceeding on September 7, 1989. At a status hearing on October 13, 1989, the Court entered an order requiring Debtor to file a plan and disclosure statement containing certain information set forth in the order. The Court also required Debtor to file debtor-in-possession operating reports for the months of June-September, 1988.
16. Debtor submitted a Plan of Reorganization (the "Plan") and Debtor's Disclosure Statement in Support of Plan Arrangement (the "Disclosure Statement"), both dated November 1, 1989. These documents in general provide that Debtor will pay his unsecured creditors 25% of the...
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