In re Silver Wheel Freightlines, Inc.

• Decision Date: 07 March 1986
• Docket Number: Bankruptcy No. 382-03538-S7,85-0444-S.,Adv. No. 84-0093-S
• Citation: 64 BR 563
• Parties: In re SILVER WHEEL FREIGHTLINES, INC., an Oregon corporation, Debtor. George BROWNING, Jr. and Margene Boothe Browning, Plaintiffs, v. Everette H. WILLIAMS, Trustee for Silver Wheel Freightlines, Inc., an Oregon corporation, Defendant. Everette H. WILLIAMS, Trustee for Silver Wheel Freightlines, Inc., an Oregon corporation, Plaintiff, v. George BROWNING, Jr., Defendant.
• Court: U.S. Bankruptcy Court — District of Oregon

64 B.R. 563 (1986)

In re SILVER WHEEL FREIGHTLINES, INC., an Oregon corporation, Debtor.

George BROWNING, Jr. and Margene Boothe Browning, Plaintiffs, v. Everette H. WILLIAMS, Trustee for Silver Wheel Freightlines, Inc., an Oregon corporation, Defendant.

Everette H. WILLIAMS, Trustee for Silver Wheel Freightlines, Inc., an Oregon corporation, Plaintiff, v. George BROWNING, Jr., Defendant.

Bankruptcy No. 382-03538-S7, Adv. Nos. 84-0093-S, 85-0444-S.

United States Bankruptcy Court, D. Oregon.

March 7, 1986.

Bradley O. Baker, Portland, Or., trustee.

Everette H. Williams and Albert N. Kennedy, Portland, Or., for the Brownings.

FINDINGS OF FACT AND CONCLUSIONS OF LAW GRANTING JUDGMENT TO TRUSTEE AGAINST GEORGE BROWNING, ALLOWING OFFSETS AND ADMINISTRATIVE CLAIM TO MARGENE BROWNING

DONAL D. SULLIVAN, Bankruptcy Judge.

George Browning ("Browning") and his wife (collectively "the Brownings") filed an action against Everette Williams, the chapter 7 trustee ("trustee"), to recover possession of the former freight terminal of Silver Wheel Freightlines, Inc. ("the debtor") and for administrative rent arising from the debtor's use of the terminal during the chapter 11 and chapter 7 operation. Browning was the former president and major shareholder of the debtor who in 1979 withdrew from management, transferred his stock to his brother and George Grill ("Grill"), the chief operating officer, and continued with the debtor as a "consultant". The trustee surrendered the terminal, disputed the rent claim and counterclaimed and cross-claimed for recovery of post-filing rent increases, for recovery of $358,333 in "consulting fees" paid to Browning before chapter 11, and for recovery of a $20,000 pre-petition lease deposit. The trustee, in a separate complaint which the Court consolidated for trial, also sought recovery of $261,430 representing prior indebtedness owed by Browning to the debtor which his brother and Grill also discharged in 1979 when Browning withdrew from ownership and active management of the debtor.

Previously the Court found on summary judgment that the debtor was insolvent at all relevant times but that Oregon's three-year statute of limitation partially barred the trustee from recovery under O.R.S. 57.231 governing corporate directors' liability. This matter is a core proceeding under 28 U.S.C. § 157(b) and as such is susceptible of final determination by this Court.

Plaintiffs should recover administrative rent for the use of the freight terminal during the chapter 11 and chapter 7 operation reduced by sums previously paid in excess of what the Court herein finds as reasonable. The trustee should recover from Browning all compensation paid to him as a "consultant" and those sums which he owed to the debtor which were purportedly discharged by the 1979 agreements. George Browning's recovery may be offset against the trustee's recovery. The trustee should not recover any of the rent payments made by the chapter 11 debtor-in-possession or the $20,000 lease deposit. My reasons follow.

THE POST-FILING RENT AND LEASE DEPOSIT

Silver Wheel Freightlines, Inc. filed chapter 11 on November 4, 1982. The Court converted the case to chapter 7 on July 1, 1983. At the time of filing chapter 11, the debtor leased its main freight terminal in Portland, Oregon from the Brownings pursuant to a lease executed in 1971, amended in 1977, and scheduled to expire on December 31, 1982. Without Court approval, George Grill, then president of Silver Wheel, and the Brownings executed a new two-year lease increasing the lease payments from $3,600 per month to $6,750 per month. Simultaneously, the debtor agreed to forfeit a $20,000 lease deposit made years before in exchange for the Brownings forgiveness of the debtor's lease defaults arising from its failure to maintain the premises. The parties did not dispute that at the time of the new lease the terminal was in severe disrepair and was also a target for at least partial condemnation by the state highway authorities. In the process, the debtor gave up an option under the old lease to acquire the terminal from Browning at a price of $375,000. Browning admitted he subsequently received approximately $600,000 from the state for the terminal. The debtor paid rent under the new lease up until the end of October 1983, and the trustee vacated the terminal in April 1984.

The post-filing lease and settlement agreement are void under 11 U.S.C. § 549(a) because they were post-bankruptcy transactions which were out of the ordinary course of business and which were not authorized either by the Code or the Court. Nevertheless, the Brownings are entitled to the reasonable rental value of the premises for the post-chapter 11 period of occupancy by the debtor-in-possession. Brown v. Danning (In re Frederick Meats), 483 F.2d 951 (9th Cir.1973). In addition, the Brownings have the right to setoff breaches of the lease against the lease deposit. 11 U.S.C. § 553(a).

The rent of $6,750 called for under the post-filing lease was excessive. The Brownings' claim for administrative rent for the unpaid six-month period should be reduced to the extent that payments made by the debtor-in-possession during the first ten months of the lease exceeded the reasonable rental value of the premises. Considering the uncertainty of long-term occupancy arising from the imminent condemnation of at least part of the terminal, the general state of decay, and the testimony of the conflicting appraisers, the post-filing agreement which almost doubled the rent was unjustified and was unreasonable. Relying on available presumptions and the testimony, the reasonable rental of the property under the circumstances should not have exceeded the $3,600 per month plus insurance and taxes called for under the old amended lease. Union Leasing Co. v. Peninsula Gunite, Inc. (In re Peninsula Gunite, Inc.), 24 B.R. 593, 595 (Bankr. 9th Cir.1982).

The debtor-in-possession and the trustee should have paid $89,797 for the post-lease use of the terminal. This figure consists of rent for 16 months, from January 1, 1983 through April of 1984 at $3,600 per month, taxes for the full post-11 period of $29,866, and insurance of $2,331. They actually paid rent of $67,500 for ten months. This leaves combined chapter 11 and chapter 7 unpaid rent of $22,297 of which, on a prorata basis, $8,361.38 would be a chapter 7 administrative expense and $13,935.62 would be a chapter 11 administrative expense. Based upon a lack of other evidence and Oregon's presumption of equal ownership of property jointly owned by spouses, Mrs. Browning should be paid half of the foregoing amounts as an administrative expense. Brazell v. Meyer, 42 Or.App. 179, 600 P.2d 460 (1979); O.R.S. 107.105(f).

The Brownings should not be required to return to the trustee the pre-petition $20,000 lease deposit because they may offset this obligation against the debtor's liability to pay the landlord for its failure to maintain the premises during the life of the lease. Under the testimony, the damage to the premises went beyond ordinary wear and tear but was directly attributable to the debtor's failure to maintain the premises over the years of usage under the lease. This damage is enough to cause the forfeiture of the deposit.

THE FRAUDULENT CONVEYANCE CLAIMS

In 1979 the debtor and its related entities were insolvent in both the balance sheet sense and the equitable sense. Browning, who had been the chief executive officer, a director and major shareholder in the debtor for the prior 15 years, decided at that time to withdraw from the company. To accomplish this, he entered into a series of agreements on March 29, 1979 with his brother, Ben Browning, who was not then a shareholder but was attorney for the company, and Grill, who was then the chief operating officer and the owner of about one-third of the outstanding stock. Under one agreement, the debtor hired Browning as a "consultant" for compensation of $1,250,000 payable monthly over a period of ten years. Absent fraud or other named cause, the agreement required payment of this sum even if Browning died.

Under other related agreements, Browning conveyed his stock to Grill and his brother both of whom, among other things, agreed to discharge and to hold Browning harmless from an existing obligation to repay $194,501.35 to the debtor, which debt Browning acknowledged as owing. In fact, the company cancelled the stock and reissued new stock to Grill and Ben Browning. At the time, all parties acknowledged that the debtor as of November 30, 1978, had a negative net worth of $771,326.65 and had experienced an operating deficit for the preceding year of $214,025.53. Related entities showed proportional deficits. It was understood between George Grill and Ben Browning that each would emerge as 50% owners of the stock.

Ben Browning, as an experienced labor and transportation lawyer, hoped to turn the company around after plaintiff was removed from the company by negotiating an employee stock option program with employees. For various reasons the company did not prosper but did make most of its payments to Browning. These payments totalled $358,333, of which $89,184 was received within one year before the debtor filed chapter 11. According to the chapter 11 schedules, the company still was not paying its bills when due and its negative net worth since 1979 had grown to $3,204,893 during the three and one-half years before filing chapter 11. There are many unpaid priority wage earners and others who supplied goods and services.

The trustee sought recovery from Browning of prior indebtedness and of all sums paid to him as a consultant pursuant to the 1979 agreements under 11 U.S.C. § 544(b) incorporating the then applicable Oregon version of the common law Statute of Elizabeth and, alternatively, for recovery of sums paid within one year before filing under 11 U.S.C. § 548(a), which is the Bankruptcy Code's fraudulent...