In Re Polo Builders Inc.

Decision Date18 August 2010
Docket NumberAdversary No. 06 A 1140.,Bankruptcy No. 04 B 23758.
Citation433 B.R. 700
PartiesIn re POLO BUILDERS, INC., et al., Debtors.David R. Brown, Trustee, Plaintiff,v.Kamil Job; Manco Carpentry Group; Manco Construction, Inc.; and Manco Homes, Inc., Defendants.
CourtU.S. Bankruptcy Court — Northern District of Illinois




Joshua D. Greene, Michael J. Davis, Springer, Brown, Covey, Gaertner & Davis, Wheaton, IL, for Plaintiff.

David P. Lloyd, Grochocinski, Grochocinski & Lloyd, Orland Park, IL, for Defendant.


A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Kamil Job's company, Manco Construction, Inc., did construction work for Polo Builders, Inc., a Chicago area real estate developer, but Polo Builders did not pay all of Manco Construction's bills. In 2004, Polo Builders sold to Job the building in Villa Park, Illinois, that housed its offices, giving him a hefty credit at closing for the amount of the unpaid Manco Construction bills. The next day, Polo Builders filed a chapter 11 bankruptcy case, later converted to chapter 7.

Chapter 7 trustee David Brown subsequently filed an adversary proceeding against Job as well as three construction companies Job owns or used to own. In his complaint, Brown sought to avoid the sale of the property or alternatively to avoid the credit Job received at the closing. The matter is now before the court for ruling following trial.

For the reasons that follow, judgment will be entered in favor of the corporate defendants on all claims in the complaint and in favor of Job on Brown's claim to avoid the sale of the property. Judgment will be entered in Brown's favor, however, on his claim to avoid the credit as a preference. The claim to avoid the credit as a fraudulent transfer will be dismissed as moot.

1. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (E), (F), and (H).

2. Facts

The evidence at trial showed the following.1 From 1999 or 2000 until 2004 when it ceased doing business, Manco Construction, Inc. was engaged in business as a carpentry subcontractor. (Tr. 15-17). Kamil Job was an officer and shareholder of Manco Construction. ( Id. 16; Stip. ¶ 2). Job has since done construction work under the names Manco Homes and Manco Carpentry Group, both corporations of which he is the sole shareholder. (Tr. 18).

Beginning in 2000, Manco Construction began performing carpentry work for Polo Builders as a subcontractor on various construction projects. (Tr. 19-20; Stip. ¶ 1). Manco Construction submitted invoices for its work, but Polo Builders failed to pay all of the invoices. (Tr. 20-21; Stip. ¶ 4). As of March 2004, Polo Builders owed Manco Construction at least $190,000. (Stip. ¶ 5; see Tr. 21; P.Ex. 1).

In 2004, Polo Builders had its offices at 723-725 North Addison Road in Villa Park, Illinois (the “property”). (Tr. 20). The property was improved with a two-story, mixed-use office and apartment building. ( Id. 45-46; P.Ex. 4 at 3). The first floor contained two office and retail units that had been combined into one. (P.Ex. 4 at 3; see D. Ex. 7 at 2). The second floor contained apartments (Tr. 45, P.Ex. 4 at 3), but Polo Builders had converted the apartments into offices (Tr. 45-46). The building had windows on the first floor facing Addison Road ( id. 45; see D. Ex. 7 at 2), and there was a parking area in front between the building and the street itself (Tr. 48, 50-51).

In early 2004, Polo Builders offered to sell the property to Job. ( Id. 21-22). Job was interested in moving his own offices to the site ( id. 22), and on March 16, 2004, Job entered into an agreement with Polo Builders to buy the property ( id. 22-23; Stip. ¶ 6), signing a standard form commercial real estate contract ( see P.Ex. 2). The purchase price shown on the contract was $890,000. ( Id.).

The contract also provided for earnest money of $190,000. ( Id.). The $190,000, however, did not represent a deposit Job paid to Polo Builders, and no money changed hands. (Tr. 24; Stip. ¶ 12). The earnest money figure instead represented the $190,000 that Polo Builders still owed Manco Construction. (Tr. 24). The intention was to give Job a credit of $190,000 against the purchase price, extinguishing Polo Builders' debt. (Stip.¶ 12). 2

Job ran into financing problems, and it was necessary to extend both the financing contingency in the contract and the closing date. (Tr. 25; Stip. ¶ 9). In connection with Job's application for financing, his bank had an appraisal prepared in early June showing the property was worth less than $890,000. (Tr. 25-26; Stip. ¶ 8; see P.Ex. 4). Job accordingly asked Polo Builders to reduce the price (Tr. 29), and Polo Builders agreed, reducing the price to $810,000 (Stip.¶ 10).3

At 5:24 p.m. on June 22, 2004, the sale of the property closed. (Tr. 30-31; Stip ¶ 11; see P.Ex. 7, box “A”). At the closing, Job was given credit for the “earnest money” consisting of the $190,000 Polo Builders owed him. (P.Ex. 7, box “J,” 1. 201, and box “K,” 1. 506). The credit had the effect of reducing the Polo Builders debt to Manco Construction. (Tr. 41-42; see also P.Ex. 11 at 54). A deed transferring the property to Job was prepared ( see P.Ex. 8), but the deed was not recorded until June 30, 2004 (Stip.¶ 17). 4 Apparently in connection with the closing, Job and Polo Builders also entered into a “post-closing possession agreement” under which Job leased back to Polo Builders two small interior offices on the south side of the first floor of the building. (D.Ex.7). The duration of the lease was six months. ( Id.).

Following the closing on June 22, Job went straight to the property and parked his truck, bearing the name “Manco Homes” on the doors, in front of the building. (Tr. 33, 43, 49). Polo Builders personnel were no longer on the premises, but they had left behind desks, file cabinets, files, papers, and other materials-not only in the two offices Polo Builders had leased but upstairs as well. ( Id. 37-38, 45-46; Stip. ¶ 22).5 Job and another person began moving Manco office furniture, equipment, and papers into the building. ( Id. 43-44, 46). The two were there for “several hours.” ( Id. 43).

At seven o'clock the next morning, Job returned to the building with at least five other people. ( Id. 46). They parked two trucks bearing the “Manco” name in front of the building and, Job said, spent the entire day cleaning the building and moving in “the rest of the stuff we had.” ( Id. 46-49). Job and his assistants worked throughout the building, upstairs and downstairs, including the areas that had windows facing Addison Road. ( Id. 46-47).

Shortly before four o'clock that afternoon-not twenty-four hours after the closing on the property-Polo Builders, Hasan Merchant, and Sheri Banoo Merchant filed chapter 11 bankruptcy petitions. (Stip. ¶ 14; Btcy. Dkt. No. 1).6 Another related entity, MG International, LLC, filed a chapter 11 petition six days later, on June 29. (Stip.¶ 15). The jointly administered cases were converted to chapter 7 in August 2004, and David Brown was appointed interim trustee. ( Id. ¶¶ 16, 19).

At all times relevant to this matter-meaning from early 2004, when Polo Builders first sought to sell the property to Job, through the date of the Polo Builders bankruptcy filing on June 23, 2004-Polo Builders was insolvent. (Stip.¶ 23).

In the Polo Builders bankruptcy, Brown testified, creditors have filed $34 million in secured claims, $3 million in priority unsecured claims, and $22 million in general unsecured claims. (Tr. 6-7). The Polo Builders estate, meanwhile, has $150,000 in assets, and the assets of the other estates total roughly $800,000. ( Id. 10). Brown also testified he has three sources of future funds for all the estates: several fraudulent transfer adversary proceedings with a potential recovery of $5 million, an adversary proceeding against Hasan Merchant with a potential recovery of $2.5 million, and this adversary proceeding. ( Id. at 10-11). However, Brown has not objected to any claims, and he is unsure “exactly” how many claims are valid. ( Id. 11).

In 2006, Brown filed this adversary proceeding against Job and the Manco companies. The complaint has three counts, each pled in the alternative. Count I is a claim to avoid the sale of the property using the trustee's “strong arm” power under section 544(a)(3) of the Bankruptcy Code, 11 U.S.C. § 544(a)(3). Count II is a claim to avoid the $190,000 credit Job received at the closing as a preferential transfer under section 547(b) of the Code, 11 U.S.C. § 547(b), and recover the transfer under section 550(a)(1), 11 U.S.C. § 550(a)(1). Count III is a claim to avoid the credit as fraudulent transfer under section 548(b), 11 U.S.C. § 548(b), and recover it under section 550(a)(1).

3. Discussion

Based on the evidence at trial, judgment will be entered for Job on Brown's strong arm claim in Count I. Under section 544(a)(3), Brown occupied the position of a bona fide purchaser as of the petition date, and on that date a bona fide purchaser would have had inquiry notice that Job owned the property. Judgment will be entered for Brown, however, on his preference claim in Count II. The $190,000 credit was a transfer to Job within the 90-day preference period that allowed him to receive more than he would have as a creditor in the case. As to Job, Count III will be dismissed as moot. Judgment will be entered in favor of the remaining defendants on the complaint.7

a. Strong Arm Claim

The evidence failed to establish Brown's superior right to the property as a hypothetical bona fide purchaser under section 544(a)(3). Job's possession of the property on the petition date would have put a bona fide purchaser on inquiry notice that Job held title, even though his deed from...

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