In re Omni Mechanical Contractors, Inc.

• Decision Date: 25 April 1990
• Docket Number: Bankruptcy No. 1-87-01179,Adv. No. 1-89-0194.
• Citation: 114 BR 518
• Parties: In re OMNI MECHANICAL CONTRACTORS, INC., Debtor. Scott N. BROWN Jr., Trustee, Plaintiff, v. Joel C. RILEY and Power Management, Inc., d/b/a Steam Sales, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

114 B.R. 518 (1990)

In re OMNI MECHANICAL CONTRACTORS, INC., Debtor Scott N. BROWN Jr., Trustee, Plaintiff, v. Joel C. RILEY and Power Management, Inc., d/b/a Steam Sales, Defendants.

Bankruptcy No. 1-87-01179, Adv. No. 1-89-0194.

United States Bankruptcy Court, E.D. Tennessee.

April 25, 1990.

COPYRIGHT MATERIAL OMITTED

Richard P. Jahn, Jr., Chattanooga, Tenn., for plaintiff-trustee.

Thomas E. Ray, Chattanooga, Tenn. and David F. Harrod, Athens, Tenn., for defendants.

MEMORANDUM

JOHN C. COOK, Bankruptcy Judge.

This case is before the court upon the trustee's complaint to recover moneys from defendants Joel C. Riley and Power Management, Inc. under several theories predicated upon bankruptcy and state law. Having considered the evidence introduced at the trial, and having further considered the briefs filed by counsel, the court now submits its findings of fact and conclusions of law pursuant to Bankr.R. 7052.

The debtor, Omni Mechanical Contractors, Inc. (herein "Omni"), was a mechanical contracting firm formed in May 1984. Omni was incorporated as a Tennessee corporation, and the three original directors and shareholders were Riley, chairman of the board and president; J.R. Jones, secretary-treasurer; and Richard Spears, vice president. Riley and Jones were issued 200 shares of Omni stock and contributed $20,000 each. Spears was issued 50 shares, although it is unclear whether Spears made a capital contribution. Up until January 1986, the day-to-day operations of Omni were conducted either by Riley or Spears or both.

On January 13, 1986, Riley and Jones sold their 200 shares of stock back to Omni. Jones tendered his resignation from Omni's board of directors at that time. On January 14, 1986, Mike McCullough, a project supervisor for Omni, and Spears became major shareholders of Omni, each holding 225 shares. Riley was given back 50 shares for a nominal consideration to remain as a director of Omni with McCullough and Spears.

During the first few months of 1986, Omni's financial condition rapidly deteriorated. Omni was unable to collect several large receivables and it began experiencing cash flow shortages. From February through May of 1986, Omni paid out $722,957, but only had receipts of $458,137. On May 22, 1987, Omni filed a petition for relief under the provisions of chapter 11 of the Bankruptcy Code. On January 4, 1989, Omni's case was converted to one under chapter 7. The chapter 7 trustee subsequently initiated this adversary proceeding against the defendants alleging a number of claims for which the trustee seeks recovery. Those claims are set out below and generally seek from the defendants the following:

1. $8,800 from Riley for alleged misappropriation of corporate funds on or about April 4, 1985;

2. $2,625 from Riley for alleged misappropriation of corporate funds on October 8, 1985;

3. $18,000 from Riley for the transfer of a Mercedes to Riley which constituted an alleged preferential transfer or a fraudulent conveyance;

4. $38,000 plus profit from Riley for a shop building constructed by Omni for Riley in Riceville, Tennessee, which constituted an alleged fraudulent conveyance;

5. $9000 from Riley for the transfer of a 1985 Ford F-250 truck to Riley which constituted an alleged preference;

6. $16,000 from Riley for the transfer of a 1979 International tractor to Riley and Bob Harris which constituted an alleged preference;

7. At least $190,000 from Riley and Power Management for lost profits payable to Omni for constructing the Power Management steam plant because of Riley's alleged improper self-dealing;

8. $38,904.05 from Riley for unauthorized and undeserved salary withdrawals in January of 1985 and 1986.

The facts pertinent to each of the trustee's claims will be discussed separately. As a preliminary matter, since many of the trustee's claims hinge on Omni's insolvency as of January 1986, the court will address Omni's financial condition during that time period.

Omni's Financial Condition

A substantial amount of evidence was introduced by the trustee in an attempt to show Omni was insolvent at the time or became insolvent as a result of transfers of Omni assets to Riley. According to the trustee's theory, Omni was insolvent at least from January 1986 forward.

Insolvency is defined in the Bankruptcy Code at 11 U.S.C.A. § 101(31) as follows:

(31) "insolvent" means —

(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity\'s debts is greater than all of such entity\'s property, at a fair valuation, exclusive of —

(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity\'s creditors; and

(ii) property that may be exempted from property of the estate under section 522 of this title.

11 U.S.C.A. § 101(31)(A) (West Supp.1989). The Bankruptcy Code utilizes a balance-sheet analysis in determining insolvency of a debtor. In evaluating the debtor's assets and liabilities, the court is required to attribute a "fair valuation" to the debtor's property. A fair valuation, which is not synonymous with liquidation value, "has been interpreted to mean the amount which can be realized from the assets within a reasonable time." Foley v. Briden (In re Arrowhead Gardens, Inc.), 32 B.R. 296, 299 (Bankr.D.Mass.1983), aff'd, 776 F.2d 379 (1st Cir.1985). For the court to make a fair valuation of the debtor's property, it may be appropriate to reduce or eliminate the value of assets which cannot be made available for payment of debts within a reasonable time. The value of accounts receivable may be discounted for uncollectible and disputed debts. Id.; see Constructora Maza v. Banco de Ponce, 616 F.2d 573 (1st Cir.1980); DuVoisin v. Anderson (In re Southern Indus. Banking Corp.), 71 B.R. 351 (Bankr.E.D.Tenn.1987) (Bare, J.).

The beginning point for determining Omni's financial condition in January 1986 is an audit report prepared by Mordt, Davis & Co. showing Omni's condition as of January 31, 1986. The assets and liabilities of Omni at that time, were shown by the auditor as follows:

                CURRENT ASSETS
                  Cash                                                      $218,315
                  Receivables —
                    Progress billings on contracts (Note A-1)                474,806
                    Unbilled revenues on contracts (Note A-1)
                  Prepaid expenses                                             3,427
                                                                            ________
                      TOTAL CURRENT ASSETS                                   696,548
                                                                            ________
                NOTE RECEIVABLE — STOCKHOLDER (Note C)                        47,750
                                                                            ________
                PROPERTY AND EQUIPMENT (Notes A-2 and B),                     94,814
                  Less accumulated depreciation                              -26,298
                                                                            ________
                                                                              68,516
                                                                            ________
                RECEIVABLE FROM COMPLETED CONTRACT (Note D)                  308,036
                  Less payable to former stockholders (Note D)               308,036
                                                                            ________
                                                                            $812,814
                                                                            ========
                CURRENT LIABILITIES
                  Trade accounts payable                                    $476,598
                  Accrued expenses                                            50,320
                  Advance billings on contracts (Note A-1)                    64,831
                  Income taxes (Note A-3)                                     56,775
                  Current portion of long-term debt                           14,846
                                                                            ________
                TOTAL CURRENT LIABILITIES                                   $663,370
                                                                            ========
                

The evidence presented at trial indicates some adjustments are necessary to make the audited financial statement properly reflect Omni's true financial condition.

A. Assets

1. Cash

The parties agree Omni had cash in the amount of $218,315 as shown by the auditor.

2. Receivables

a. Union Boiler Receivable: Included within the accounts receivable figure of $474,806 was a receivable from a job Omni performed for Union Boiler at a TVA steam plant in Gallatin, Tennessee. The Union Boiler receivable was listed by the auditor at $125,000. Because Omni incurred additional costs in performing this contract, which costs were borne by Omni and owed to Union Boiler or a subsidiary of Union Boiler, the receivable was subject to a setoff. On August 1, 1987, during Omni's chapter 11 case, Omni credited Union Boiler for certain claims in the net amount of $109,129.59. In 1989, the chapter 7 trustee ultimately collected $36,000 plus interest from the Union Boiler receivable.

The court finds that no funds from the Union Boiler account were received and available for creditors within a reasonable time after January 1986. Therefore, the $125,000 Union Boiler receivable will be deducted from Omni's accounts receivable.

b. Riceville Shop Receivable: The trustee also seeks to adjust receivables by adding $30,000 for a payment made by Riley on March 3, 1986. Riley's $30,000 payment was for construction of the shop building on his property in Riceville, Tennessee. Apparently, the auditor was unaware that this receivable was due from Riley as Omni's costs for the construction were not properly listed under the correct job number (Job No. 86-004). The court will add $30,000 to accounts receivable representing Riley's debt to Omni.

c. Power Management Receivable: The defendants acknowledge in their adjusted balance sheet $8,000 should be deducted from the receivable listed for the Power Management job. However, Gena Cavett, Omni's bookkeeper,...