In re Ozark Restaurant Equipment Co., Inc.
| Decision Date | 21 March 1984 |
| Docket Number | Bankruptcy No. FA 82-120,Adv. No. AP 82-882 to AP 82-884. |
| Parties | In re OZARK RESTAURANT EQUIPMENT CO., INC., Debtor. James G. MIXON, Trustee, Plaintiff, v. Bruce ANDERSON, Elmer Dale Yancey, Kenneth Eads, Robert Whiteley and Anderson Cajun's Wharf, Defendants. James G. MIXON, Trustee, Plaintiff, v. ANDERSON CAJUN'S WHARF, Defendant. James G. MIXON, Trustee, Plaintiff, v. HAYDEN McILROY OF McILROY BANK & TRUST; Ed Yancey, Bruce Anderson and Kenneth Eads, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Arkansas |
James G. Mixon, Bentonville, Ark., F.H. Martin, Fayetteville, Ark., for plaintiff.
Raymond H. Smith and Truman H. Smith, Fayetteville, Ark., for defendants Anderson Cajun's Wharf, Bruce Anderson, Robert Whiteley and Elmer Dale Yancey.
William Russell Gibson, Fayetteville, Ark., for defendant McIlroy Bank.
Marshall Dale Evans, Fayetteville, Ark., for defendant Kenneth Eads.
Before the Court are three Adversary Proceedings consolidated for trial. The hearing began on October 14, 1983. After adjournment on that date the balance of the hearing was conducted in Little Rock on November 18, 1983. Hon. James G. Mixon, Trustee, was represented by Hon. F.H. Martin. Hon. Marshall Dale Evans represented Kenneth Eads. Hon. Truman H. Smith and Hon. Raymond C. Smith represented Anderson Cajun's Wharf. The Trustee presented testimony from Carol Brooks, Elmer Dale Yancey, James Tandy, Bruce Anderson, Ron Berry, Kenneth Eads, Robert Whiteley, James G. Mixon, George Kitchens and introduced fifty-two (52) exhibits. Anderson Cajun's Wharf presented the testimony of Bruce Anderson and introduced two (2) exhibits.
The Court has jurisdiction over this dispute pursuant to 28 U.S.C. §§ 1471 and 1481, 11 U.S.C. § 105, and General Order No. 24 of the United States District Court for the Eastern and Western Districts of Arkansas.
The Court, having researched the issues presented and being fully advised in the premises, makes the following findings of fact and conclusions of law.
1. "Anderson-related entities" hereinafter will be taken to mean Anderson Cajun's Wharf in Little Rock, Cajun's Wharf in Nashville, Cajun's Wharf in Knoxville, Gonzales & Gertrude's, Port City Equipment Co., and Port City Seafood Co. Bruce Anderson owned 50% or more of the stock in each of these in 1980.
2. Anderson Cajun's Wharf, Inc. operated Cajun's Wharf restaurants in Little Rock, Nashville, and Knoxville. Bruce Anderson was the Chief executive officer of Anderson Cajun's Wharf, Inc., and Gonzales & Gertrude's. The latter is also a restaurant.
3. Bruce Anderson was a 50% shareholder and director of the debtor, Ozark Restaurant Equipment Co., Inc. Elmer Dale Yancey was also a 50% shareholder, director, and officer of the debtor. Kenneth Eads was a director and president of the debtor.
4. Port City Equipment Co. is a subsidiary of Anderson Cajun's Wharf, Inc., which sold restaurant equipment to other Anderson-related entities.
5. The debtor conducted the same type business as Port City Equipment Co. The debtor also sold its equipment to Anderson-related entities, including Port City Equipment. Port City Equipment, in fact, was the debtor's biggest account.
6. The debtor from the beginning was grossly undercapitalized. At the outset, it had liabilities of $109,000 and capital of $1,000.
7. The debtor never made a true profit and continually throughout its existence showed a negative net worth. Specifically, the debtor's negative net worth grew from a negative $1,400 on December 31, 1980 to a negative $146,000 on September 1, 1982.
8. Although normal profit margins or "markups" would, necessarily, in a profitable business comparable to the debtor's, be 25% to 30%, the debtor sold in volume to Anderson-related entities at 10% to 15% markups. Although the Court heard no evidence on the average markups on sales to non-Anderson-related entities, two individual sales to other customers were made at markups of 29.57% and 10.03%.
9. Bruce Anderson directed the debtor to reduce the markup from 15% to 10% in sales to his entities. Although it is impossible to determine from the evidence exactly when this occurred, from March 1981 until the debtor closed its doors, the markup was 10%.
10. Certain manufacturers, especially Libby Glass, would not sell directly to Port City Equipment. They would sell direct to the debtor, who, in turn, sold to Port City Equipment at cost plus 10%.
11. Bruce Anderson was aware of the debtor's financial condition. He clearly was aware of its status when the company was formed with $1,000 operating capital ($500 of which was contributed by him) and $109,000 in liabilities, most of which consisted of a note to the bank guaranteed by Anderson and Yancey. Subsequently, David Walker apprised Anderson, upon receipt of the income statement from the four months ending December 31, 1980, of the company's negative net worth. Anderson was aware of continuing losses after that time.
12. Robert Whiteley, a business consultant, was hired by Anderson to help the debtor cut costs, check sales, and deal with accounts payable. From the time he joined the debtor in March of 1981, Whiteley communicated the debtor's bleak financial condition to Anderson and Walker.
13. Bruce Anderson ultimately controlled the debtor. The president, Kenneth Eads, ran the debtor's daily operations. David Walker, comptroller for Anderson Cajun's Wharf, Inc., served as liason between Eads and Anderson. For example, if Eads and Robert Whiteley disagreed over a policy, they discussed it with Walker and/or Anderson.
14. In July, 1982 Bruce Anderson closed the debtor and decided to file for relief under the United States Bankruptcy Code.
15. Also in July, 1982 Bruce Anderson selected certain items from the debtor's inventory to be shipped to Port City Equipment. The total value of this equipment was $20,208.39. The debtor was never paid for this transfer.
16. Anderson-related entities purchased equipment from the debtor on credit. Payments for these purchases averaged 77 days after the date of purchase. No interest was charged or collected on these outstanding accounts.
17. Robert Whiteley and Kenneth Eads took out personal loans in order to contribute $5,000 each to the debtor. On at least three different occasions Whiteley and Eads drew money from the debtor to pay themselves back for these $5,000 contributions.
18. The debtor's net worth on the following dates was:
12-31-80 $( 1,400)
4-30-81 ( 14,043)
4-30-82 ( 80,000)
9-01-82 (146,000)
19. The parties stipulated that the debtor made the following payments to McIlroy Bank on the following dates:
9-09-81 $ 4,970.52
10-09-81 2,485.26
11-02-81 2,485.26
12-24-81 2,485.26
1-08-82 2,485.26
2-19-82 2,485.26
4-23-82 2,485.26
5-10-82 2,641.49
20. In sales to Port City Equipment the debtor (a) at times did not bill Port City Equipment; (b) sold to Port City Equipment at a loss; (c) at times utilized a gross markup of 7%; and (d) sometimes used no markup at all.
21. The debtor kept no separate accounts receivable records for the various Anderson-related entities. All sales to Anderson-related entities were entered on the Port City Equipment accounts receivable ledger.
From the above and foregoing findings of fact, the Court makes the following conclusions of law:
1. 11 U.S.C. § 542(b) states: Except as provided in subsection (c) or (d) of this section, an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the Trustee, except to the extent that such debt may be offset under § 553 of this title against a claim against the debtor.
2. Based on this section of the Code, the Court finds Port City Equipment liable in the amount of $20,208.39 for goods shipped to it by the debtor in July, 1982, for which payment was never received by this debtor.
3. Testimony was heard regarding a consignment of equipment from Port City Equipment Co. to the debtor. This testimony was insufficient as to the date of such alleged consignment, the terms thereof, and the value of the consigned items to form the basis of a setoff under § 553. Furthermore, this alleged debt is not listed in the debtor's schedules, Port City Equipment has not filed a proof of claim, nor could Port City Equipment produce documentary evidence at trial substantiating this debt. Defendant's Exhibit 1 purports to represent a list of items consigned. The debtor, however, denies such a consignment. Defendant's Exhibit 1 is not dated. It is addressed to no one in particular. It is not accompanied by a cover letter or memo setting out the terms of the alleged consignment. Furthermore, there is a significant conflict between the value assessed on the Exhibit ($15,000) and the value assessed by Bruce Anderson in his testimony ($10,000-$12,000). Suffice it to say, the Court is not convinced Defendant's Exhibit 1 is what Mr. Anderson claims it to be.
4. 11 U.S.C. § 547(b) states: Except as provided in subsection (c) of this section, the Trustee may avoid any transfer of property of the debtor (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made (B) between 90 days and one year before the date of the filing of the petition, if such creditor, at the time of such transfer (i) was an insider; and (ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer; and that enables such creditor to receive more than such creditor would receive if (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided...
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