In re Suburban Motor Freight, Inc.
| Citation | 124 BR 984 |
| Decision Date | 17 January 1991 |
| Docket Number | Bankruptcy No. 2-87-00822,Adv. No. 2-87-0276. |
| Parties | In re SUBURBAN MOTOR FREIGHT, INC., Debtor. Stephen K. YODER, Trustee, Plaintiff, v. T.E.L. LEASING, INC., et al., Defendants. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
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Quintin F. Lindsmith, Bricker & Eckler, Columbus, Ohio, for Stephen K. Yoder, plaintiff/trustee.
Thomas C. Pavlik, William J. Novak, Sindell, Rubenstein, Einbund, Pavlik, Novak & Celebrezze, Cleveland, Ohio, for Shareholder defendants.
Michael J. Fusco, Fusco & Ison, Westerville, Ohio, for T.E.L. Leasing, Inc. and Transp. Equipment Services, Inc.
Edward F. Chuha, Kincaid, Palmer & Randall, Joseph A. Butauski, John C. Nemeth & Associates, Columbus, Ohio, for Samuel B. Randall.
John E. Hoffman, Jr., Arter & Hadden, Columbus, Ohio, for S. Robert Davis.
Thomas A. Kuhn, Columbus, Ohio, pro se.
Charles M. Caldwell, Columbus, Ohio, Asst. U.S. Trustee.
Polly J. Harris, Porter, Wright, Morris & Arthur, Columbus, Ohio, for The Huntington Nat. Bank.
Jennifer T. Mills, Porter, Wright, Morris & Arthur, Columbus, Ohio, for The Huntington Nat. Bank, Escrow Agent.
Reginald W. Jackson, Vorys, Sater, Seymour & Pease, Columbus, Ohio, for BancOhio Nat. Bank.
Robert J. Sidman, Vorys, Sater, Seymour & Pease, Columbus, Ohio, for Buckeye Nominee Co.
Edward F. Chuha, Kincaid, Palmer & Randall, Joseph A. Butauski, John C. Nemeth & Associates, Columbus, Ohio, for Samuel B. Randall.
John E. Hoffman, Jr., Arter & Hadden, Columbus, Ohio, for S. Robert Davis.
Thomas A. Kuhn, Columbus, Ohio, pro se.
This adversary proceeding was commenced on September 28, 1987, by Stephen K. Yoder, the duly-appointed trustee in this Chapter 7 case, against twenty-four defendants, nineteen of whom owned or held shares in Suburban Motor Freight, Inc. and Suburban Distribution Systems, Inc.1 On August 31, 1990, the trustee filed a motion for summary judgment on Count I of his Third Amended Complaint, seeking avoidance of the transfer described therein pursuant to 11 U.S.C. § 548(a)(2). The former shareholders of Suburban Motor Freight, Inc. and Suburban Distribution Systems, Inc. who remain as defendants have opposed the motion and have filed a cross-motion for summary judgment, which the trustee has opposed. An oral hearing on the motions was held on November 1, 1990, after which the Court took the matter under advisement.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this judicial district. This is a core proceeding which the Court is empowered to hear and determine under 28 U.S.C. § 157(b)(1) and (2)(F), (H) and (O).
1. James R. Riley and his brother started a milk delivery business in 1912. By 1916 the business had evolved into a trucking company which operated under the name of Suburban Motor Freight, Inc. ("Suburban"). Riley was Suburban's sole shareholder and president, maintaining these positions until his death in 1981. Upon his death, Riley apparently bequeathed his Suburban shares to a group of individuals, including, but not limited to, various family members.
2. In 1980, Congress enacted the Motor Carrier Act, which, inter alia, deregulated the trucking industry. The market conditions resulting from passage of the Motor Carrier Act forced commercial shippers to discount shipping rates which previously had been set by tariff. The institution of such discounting practices by Suburban was a major factor in the company's inability to operate profitably.
3. Suburban's collective bargaining agreement with its employees worked a further hardship on the company's financial health. By 1982 the shareholders realized that Suburban's bargaining agreement and the existing market conditions rendered it unable to operate at a profit. When this determination was made, Suburban's shareholders authorized the incorporation of Suburban Distribution Systems, Inc. ("SDS") as a holding company for Suburban. At the same time, the shareholders also authorized the incorporation of Advanced Distribution Systems, Inc. ("ADS"), which is a wholly-owned subsidiary of SDS. ADS commenced operations in 1983 as a non-unionized trucking company. Upon SDS' incorporation, Suburban's shareholders became the shareholders of SDS (the "Shareholders"). SDS, as Suburban's parent corporation, became its sole shareholder. The Shareholders anticipated that Suburban, with its unionized workforce, would eventually cease operations and that ADS would flourish.
4. In 1983, Riley's son-in-law, Thomas Losh, was chosen to be Suburban's board chairman and a director; Lawrence LeGrand became Suburban's president.
5. Suburban operated at a loss from 1982 until it filed its bankruptcy petition on February 27, 1987. The financial statements for the year ending December 31, 1983, reflect a net income of $197,636; however, this figure is misleading because $500,000 listed as revenue on such statements was generated from an employee wage-concession program, not from operations.
6. By 1984 Suburban had a negative net worth and had borrowed to its capacity. The financial statements for the year ending December 31, 1984, reflect a loss of $175,840. The loss reflected on Suburban's financial statements again was somewhat misleading inasmuch as the loss was offset by the receipt of approximately $500,000 in revenue from the sale of a shipping terminal in Chicago, Illinois. Actual losses from operations far exceeded $175,840. In the first three months of 1985 Suburban incurred operating losses approximating $400,000.
7. On April 17, 1985, the directors of SDS concluded that, in view of its dire financial straits, Suburban could remain open for business for no more than six months. On June 25, 1985, at a joint meeting of the shareholders and directors of SDS and Suburban, the shareholders unanimously authorized LeGrand to secure a buyer for SDS. The meeting's minutes further reflect the unanimous passage of a motion declaring an asset distribution dividend from Suburban to SDS.
8. Having been authorized by the Shareholders to locate a purchaser for SDS, LeGrand placed an advertisement in selected newspapers soliciting prospective buyers. There were approximately thirty inquiries; however, only two concrete offers materialized. One offer, from an entity known as Maxitron, was rejected because it provided for the assumption of Suburban's liabilities but only a nominal cash payment to the Shareholders. The other offer, submitted by Transportation Equipment Services, Inc. ("TES") through its president, L. Edward Mulcahy, proposed to purchase SDS' corporate shares (the "Shares") for $3,000,000 in cash. The Shareholders agreed to accept TES' offer.
9. On October 9, 1985, the Shareholders adopted a resolution authorizing the execution of the Shares' Purchase Contract (the "Contract"), pursuant to which they would sell the Shares to TES for $3,000,000 in cash. The Contract was signed by the Shareholders and TES on October 14, 1985. The Contract was to be consummated at a closing (the "Closing" or "Closing Date") to occur within forty-five days of the execution date of the Contract.
10. In December, 1985, after several extensions of the Closing Date had passed, the Shareholders filed a lawsuit against TES for its failure to perform under the Contract. In January of 1986, the lawsuit was settled pursuant to an agreement between the Shareholders and TES. The agreement permitted a further extension of the Closing Date upon the payment to the Shareholders of the sum of (i) $100,000, representing the earnest money deposited at the Huntington National Bank ("HNB") by TES at the time the Contract was signed by the parties, and (ii) $150,000 from TES as a prepayment of the purchase price under the Contract. The Shareholders, in turn, lent the entire $250,000 to Suburban for use as desperately needed operating capital.2 The release of the $100,000 earnest-money deposit was effected by Mulcahy's instructions to HNB, the escrow agent designated under the terms of the Contract and the depository in which these funds were maintained.
11. In December, 1985, Suburban commenced preparations for the implementation of an employee stock ownership plan ("ESOP"). In furtherance of the implementation of the ESOP, the Shareholders and SDS' directors, acting without a meeting on December 30, 1985, declared an upstream dividend to SDS consisting of all the real property of Suburban and further directed that the earned surplus account of Suburban be charged for the dividend in the amount of $1,432,751. (It is unclear whether this dividend is the "asset distribution dividend" referred to in paragraph 7 of this Opinion.)
12. TES' principal business in 1986 was the purchase and sale of used trucks and trailers, not the ownership or operation of trucking companies. On some date prior to the Closing, TES determined that it was interested in purchasing Suburban's used trucks and trailers (the "Rolling Stock"), not the Shares in SDS.
13. The Closing was scheduled for March 21, 1986. On March 20, 1986, the day before the Closing, TES assigned its right to purchase the Shares for $750,000 (the "Assignment") to Continental Trucking Services, Inc. ("CTS"), a company formed that day. TES and CTS thereafter advised the Shareholders of the Assignment. CTS offered to purchase the Shares pursuant to the Contract and Assignment by paying the Shareholders $2.1 million in cash and delivering a promissory note ("Note") of $900,000 to them, instead of the $3,000,000 cash purchase price set forth in the Contract. CTS proposed to deposit the Note in the escrow account ("Escrow Account") established under the...
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