In re Structurlite Plastics Corp.

Decision Date21 November 1995
Docket NumberBankruptcy No. 2-88-01236. Adv. No. 2-90-0127.
Citation193 BR 451
PartiesIn re STRUCTURLITE PLASTICS CORPORATION, Debtor. SPC PLASTICS CORPORATION and Official Unsecured Creditors' Committee of Structurlite Plastics Corporation, Plaintiffs, v. Robert E. GRIFFITH, et al., Defendants.
CourtU.S. Bankruptcy Court — Southern District of Ohio

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James R. Cooper, Morrow, Gordon & Byrd, Newark, OH, for Defendants Robert E. and Helen E. Griffith and Charles D. and Geraldine W. Jones.

Reginald W. Jackson, Vorys, Sater, Seymour and Pease, Columbus, OH, for Debtor.

OPINION AND ORDER ON PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT

BARBARA J. SELLERS, Bankruptcy Judge.

This matter is before the Court on the joint motion of SPC Plastics Corporation, formerly known as Structurlite Plastics Corporation, ("Debtor") and the Official Unsecured Creditors' Committee ("Committee"). The Debtor and the Committee, collectively referred to as the Plaintiffs, seek summary judgment on counts one, two and eleven of their complaint as those counts relate to Robert E. and Helen E. Griffith and Charles D. and Geraldine W. Jones ("Defendants"). The Defendants oppose the motion. The Court heard oral argument on this motion and on the Defendants' cross motion for summary judgment.

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(a) and the General Order of Reference entered in this district. This is a core matter which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(H), (B) & (O).

Standard of Review

Rule 56(c) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Bankruptcy Rule 7056, provides in part:

The judgment shall be rendered forthwith 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 a judgment as a matter of law. . . .

Fed.R.Civ.P. 56(c).

The fact that the parties have filed cross motions for summary judgment does not change the standards upon which courts must evaluate summary judgment motions. Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991). Courts are required to resolve each motion on its own merits drawing all reasonable inferences against that party whose motion is under consideration. Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1391 (Fed.Cir. 1987). Where there remain genuine issues of material fact, summary judgment is not proper for either side.

The counts against the Defendants for which the Plaintiffs seek summary judgment relate to the avoidance of certain transfers alleged to be fraudulent to creditors and the subordination of Defendants' claims against the estate for obligations undertaken in connection with those transfers, but yet unpaid, and any claim arising from this adversary action.

Many of the operative facts set forth below are not contested. Further uncontested facts are also contained in the discussions of the legal issues.

I. Factual Background

The Debtor was incorporated in 1948 and operated for many years as a manufacturer of fiberglass parts for automobile and other industries. In that endeavor the Debtor operated a manufacturing facility in Hebron, Ohio and, until 1982, in Lebanon, Ohio. The Debtor also had a smaller packaging facility in Newark, Ohio. Defendant Robert Griffith was a founder and a 49% shareholder of the Debtor who formerly served as its President and Treasurer. Defendant Charles Jones was also a founder and 49% shareholder who formerly acted as chief executive officer of the Debtor. Another defendant, E. Clark Morrow, has already settled with the Plaintiffs in this adversary. Morrow owned the remaining two percent of the issued outstanding shares of the Debtor.

In June of 1986 a corporation known as GLL was formed for the purpose of purchasing the Debtor's outstanding shares in a leveraged buyout transaction ("LBO"). The owners of GLL are George L. Levy and Laurence M. Luke. Total capital paid into GLL by Levy or Luke at its incorporation on April 22, 1986 was $1,000.00. On that same date the Defendants, Morrow, GLL and the Debtor signed an agreement pursuant to which GLL was to acquire the outstanding shares of the Debtor. The acquisition price was $4,000,000 and the sale closed on June 6, 1986.

At the time the LBO sale closed, The Central Trust Company, now known as Bank One, N.A. ("Bank"), made three loans to the Debtor. One loan ("Mortgage Loan"), in the amount of $1,000,000, was a ten-year term loan at 12% interest for 3 years and at a rate tied to a comparable treasury bill plus four percent for the remainder of the term. Repayment of that note required monthly principal and interest payments of $16,252 and was secured by a mortgage against the Hebron facility.

The second loan ("Equipment Loan"), in the amount of $500,000, was a seven-year term loan at 10-½% interest for the first year and at a rate measured by a comparable treasury bill plus four percent for the remaining six years. Monthly payments for principal and interest were $8,430 and repayment was secured by Debtor's equipment and machinery. All but approximately $33,000 of the Equipment Loan proceeds went to pay off existing loans from Central Trust.

The third loan ("Revolver Loan") provided a revolving line of credit up to $750,000 for a one-year term at an interest rate of prime plus two percent. Repayment, secured by the Debtor's accounts receivable, was to be made monthly. All three loans were cross collateralized.

The $1,000,000 proceeds from the Mortgage Loan went from the Debtor to GLL as an unsecured, unguaranteed loan. GLL then paid out approximately $840,000 of that amount to the Defendants and $16,000-$17,000 to Morrow. Approximately $140,000 went to the broker who had arranged the purchase.

In addition to the $840,000, the Defendants received promissory notes from GLL in an aggregate principal amount of $3,000,000 for the remainder of the purchase price for their shares. These notes, payable over nine years at interest only, required $267,000 each year for two years from June 1, 1987. After that period, principal and interest were payable at $500,000 on June 1, 1989, $600,000 each year from June 1, 1990 through June 1, 1994, and a final payment of $713,000. The Debtor guaranteed GLL's notes to the Defendants and GLL pledged the Debtor's stock it now owned to the Defendants and Morrow to secure repayment of the notes.

GLL's owners, Luke and Levy, prepared financial projections for submission to the Bank to obtain loans for the Debtor in connection with the LBO. Those projections were never met and by the end of 1986, the Debtor's auditors were unable to give it a going concern opinion. On March 8, 1988 the Debtor filed a petition under Chapter 11 of the Bankruptcy Code. The Debtor's schedules at the time of that bankruptcy filing showed assets of $3,000,000 against liabilities of $7,000,000, including $1,166,000 in trade debt.

During the Debtor's bankruptcy, the Hebron plant has been sold for $2,300,000. The Debtor also assumed the lease for the Lebanon facility, exercised a purchase option and sold that facility for $1,181,000.

The Plaintiffs seek to recover the $840,000 paid to the Defendants as a fraudulent transfer under sections 4 and 5 of the Uniform Fraudulent Conveyance Act, in force in Ohio at the time of the Debtor's bankruptcy filing. The Plaintiffs also seek to annul the $3,000,000 guarantee of the Debtor and to subordinate any claims of the Defendants arising from this guarantee and any repayment of the $840,000 to the estate which might result from this adversary action.

II. The Fraudulent Transfer Claims Under Either § 4 or § 5 of the Uniform Fraudulent Conveyance Act (Former Ohio Rev.Code §§ 1336.04 or 1336.05)
A. Fair Consideration

Constructive fraud under either former Ohio Rev.Code § 1336.04 or § 1336.05 requires a plaintiff to show that the conveyance complained of was made without fair consideration. Whether consideration in a transfer alleged to be fraudulent is "fair" must be viewed from the standpoint of the Debtor. Therefore, the fact that a third party received consideration probably is not generally relevant, absent a preexisting business relationship between the Debtor and that party which would result in measurable economic benefit to the Debtor. Cf. Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979, 991-93 (2d Cir.1981).

The series of transactions characterized here as the LBO produced, from the Debtor's viewpoint, merely a change in the identity of its shareholders. The sale was from the Defendants to GLL. The Debtor, however, loaned GLL the funds it needed to close the transaction and guaranteed payment of the remaining price. The issue is what consideration flowed to the Debtor and whether such consideration was "fair" within the meaning of the statute.

The Defendants argue that the Debtor received fair consideration for the $1,000,000 loan to GLL and the $3,000,000 guarantee because the Bank extended loans to the Debtor and the Debtor received new, younger management with capacity to develop its business.

The Court finds that the opportunity to incur debt is not "consideration" for purposes of the UFCA. Murphy v. Meritor Savings Bank (In re O'Day Corp.), 126 B.R. 370, 395 (Bankr.D.Mass.1991); see also Moody v. Security Pacific Business Credit, Inc., 127 B.R. 958, 976 (W.D.Pa.1991), aff'd, 971 F.2d 1056 (3d Cir.1992). The Bank loans cannot serve as fair consideration for the obligations taken on by the Debtor in connection with the LBO.

The Court further finds that new management cannot, as a matter of law, be fair consideration under the facts of this case. Credit Managers Ass'n v. Federal Co., 629 F.Supp. 175, 182 (C.D.Cal.1985); U.S. v. Gleneagles Inv. Co., 565 F.Supp. 556, 576...

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