In re Structurlite Plastics Corp.

Decision Date25 August 1998
Docket NumberBAP No. 97-8096,and 97-8114.
Citation224 BR 27
PartiesIn re STRUCTURLITE PLASTICS CORPORATION, Debtor. SPC PLASTICS CORPORATION and Official Unsecured Creditors' Committee of SPC Plastics Corporation, Plaintiffs-Appellees, v. Robert E. GRIFFITH, Charles D. Jones, Helen E. Griffith, Geraldine W. Jones, E. Clark Morrow, John W. Alford, Robert E. Griffith, II, Charles D. Jones, Jr., Larry Cox, William Jones, GLL Industries of Ohio, Inc., George L. Levy, Laurence M. Luke, GL Industries, Inc., Defendants-Appellants.
CourtU.S. Bankruptcy Appellate Panel, Sixth Circuit

James R. Cooper, Morrow, Gordon & Byrd, Newark, OH, argued and on brief, for Appellants.

John E. Hoffman, Jr., Arter & Hadden, Columbus, OH, argued and on brief, for Appellees.

Before: BAXTER, LUNDIN, and STOSBERG, Bankruptcy Appellate Panel Judges.

OPINION

The bankruptcy court granted summary judgment to the Plaintiffs/Appellees in these fraudulent conveyance and equitable subordination actions against the former shareholders in a failed leveraged buyout. We affirm in part, reverse in part, and remand for resolution of disputed facts with respect to the Debtor's insolvency.

I. ISSUES ON APPEAL

A. Whether the Plaintiffs have standing to assert fraudulent conveyance claims against the former shareholders of the Debtor;

B. Whether the Debtor received fair consideration in the leveraged buyout;

C. Whether the leveraged buyout rendered the Debtor insolvent;

D. Whether the "good faith transferee" defense in 11 U.S.C. § 550(b)(1) is available to the former shareholders; and

E. Whether it is appropriate to equitably subordinate the claims of the former shareholders.

II. JURISDICTION AND STANDARD OF REVIEW

The bankruptcy court's order granting summary judgment is final and appealable under 28 U.S.C. § 158(a)(1). Belfance v. Bushey (In re Bushey), 210 B.R. 95, 98 (6th Cir. BAP 1997).

A grant of summary judgment is reviewed de novo. Myers v. IRS (In re Myers), 216 B.R. 402, 403 (6th Cir. BAP 1998); Klingshirn v. United States (In re Klingshirn), 209 B.R. 698, 699 (6th Cir. BAP 1997), aff'd, 147 F.3d 526 (6th Cir.1998) (per curiam). Questions of standing also are reviewed de novo. Ohio Ass'n of Independent Schools v. Goff, 92 F.3d 419, 421 (6th Cir.1996) (citing Greater Cincinnati Coalition for the Homeless v. City of Cincinnati, 56 F.3d 710, 715 (6th Cir.1995)), cert. denied, ___ U.S. ___, 117 S.Ct. 1107, 137 L.Ed.2d 309 (1997). "De novo means that the appellate court determines the law independently of the trial court's determination." Myers, 216 B.R. at 403 (quoting Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857 (6th Cir. BAP 1997)).

III. FACTS

Structurlite Plastics Corporation manufactured fiberglass reinforced products for the automotive and other industries from facilities in Hebron, Lebanon and Newark, Ohio. Since incorporation in 1948, Robert Griffith and Charles Jones (the "former shareholders") each owned 49% of the Debtor.1 On June 6, 1986, the former shareholders sold their interests to GLL Industries of Ohio, Inc. ("GLL"), a company formed to acquire the stock in the Debtor in a leveraged buyout ("LBO"). GLL is owned by George L. Levy ("Levy") and Laurence M. Luke ("Luke").

The purchase price for the stock was $4 million. To consummate the sale, the Debtor borrowed $1 million from Central Trust Company (the "Bank"), secured by a mortgage on the Debtor's Hebron facility. The Debtor loaned those funds to GLL, which used the proceeds to pay the former shareholders $840,000.2 The Debtor's loan to GLL was unsecured. The remainder of the purchase price was evidenced by a promissory note from GLL to the former shareholders. This note was collateralized by a pledge of the Debtor's stock and guaranteed by the Debtor. Luke and Levy gave limited guarantees of GLL's note to the former shareholders. Luke's and Levy's initial investment in GLL was $1,000.

The Bank made two other loans to the Debtor in connection with the LBO. The first was a $500,000 equipment loan, most of which was used to pay off an existing loan. The equipment loan was secured by the Debtor's equipment and machinery. The second was a $750,000 revolving line of credit, secured by the Debtor's accounts receivable. The Bank's loans were cross collateralized.

On March 8, 1988, less than two years after the LBO, the Debtor filed Chapter 11. On June 5, 1990, the Debtor and the Creditors' Committee (the "Plaintiffs") commenced this action to recover the $840,000 payment to the former shareholders as a fraudulent transfer under Ohio Revised Code Annotated § 1336.04 (Anderson 1979 & Supp.1986) (repealed 1990).3 The Plaintiffs sought also to avoid the Debtor's guarantee of GLL's $3 million promissory note and to subordinate any claims of the former shareholders. The bankruptcy court granted the Plaintiffs' motions for summary judgment. The former shareholders appealed.

IV. DISCUSSION

A. Summary Judgment.

Summary judgment in adversary proceedings is governed by Bankruptcy Rule 7056, which incorporates Rule 56 of the Federal Rules of Civil Procedure. FED. R. BANKR. P. 7056.

A court must grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Under this test, the moving part may discharge its burden by "pointing out to the bankruptcy court . . . that there is an absence of evidence to support the nonmoving party\'s case." The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its complaint. "The mere existence of a scintilla of evidence in support of the nonmoving party\'s position will be insufficient; there must be evidence on which the jury could reasonably find for the nonmoving party."

Gibson v. Gibson (In re Gibson), 219 B.R. 195, 198 (6th Cir. BAP 1998) (quoting Hall v. Tollett, 128 F.3d 418, 421-22 (6th Cir.1997) (internal citations omitted)).

"A material fact is one whose resolution will affect the determination of the underlying action." Id. (citing Tennessee Dep't of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir.1996)). An issue is genuine if a rational trier of fact could find in favor of either party on the issue. See Schaffer v. A.O. Smith Harvestore Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996) (citation omitted).

B. Fraudulent Conveyance.

1. The Plaintiffs have standing to bring a fraudulent conveyance action against the former shareholders under 11 U.S.C. § 544(b) and Ohio Revised Code § 1336.04.

Ohio Revised Code § 1336.04 provides:

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.

OHIO REV.CODE ANN. § 1336.04 (Anderson 1979 & Supp.1986) (repealed 1990) (emphasis added). "Creditor" for purposes of this provision is "a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed, or contingent." OHIO REV.CODE ANN. § 1336.01(C) (Anderson 1979 & Supp.1986) (repealed 1990).

The bankruptcy court observed that an action for constructive fraud under Ohio Revised Code § 1336.04 may be brought only by "a creditor which was owed both at the time of the transfer and at the time the action is brought, or, for purposes of a trustee's avoidance powers under section 544(b) of the Bankruptcy Code, when the petition is filed." SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.), 193 B.R. 451, 458 (Bankr.S.D.Ohio 1995). The bankruptcy court held that a trade creditor with the same open account relationship with the debtor at the time of the LBO and at the time of the bankruptcy filing qualified as a creditor under Ohio Revised Code § 1336.04. Id. at 458-59 (citing Official Unsecured Creditors' Committee v. Citicorp N. Am., Inc. (In re Aluminum Mills Corp.), 132 B.R. 869 (Bankr.N.D.Ill.1991)).

It is undisputed that at least two trade creditors with open accounts at the time of the LBO were creditors of the Debtor based on the same open accounts at the time of the bankruptcy filing. Id. at 458. The former shareholders argue that the Plaintiffs lacked standing because these two creditors' debts on the date of the LBO were not based on the same invoices as their debts at the bankruptcy filing.

The BAP rejected this argument in Belfance v. Bushey (In re Bushey), 210 B.R. 95 (6th Cir. BAP 1997). Relying in part on the bankruptcy court decision in this case, the BAP held "in an open account context, the `existing' creditor relationship is not defined by the balance on the account; it is the availability and continuous use of the credit facility that determines whether an appropriate creditor interest is present against which to measure the propriety of a conveyance." Id. at 102. The bankruptcy court correctly determined that the Plaintiffs had standing to pursue an action under Ohio Revised Code § 1336.04.

2. The Debtor did not receive fair consideration in exchange for the $840,000 paid to the former shareholders and the guarantee of GLL's $3 million note to the former shareholders.

One element of a fraudulent conveyance under Ohio Revised Code § 1336.04 is a lack of "fair consideration" flowing to the transferor, here the Debtor. "Fair consideration" is given for property or an obligation under the Ohio Revised Code:

(A) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good
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