In re Tml, Inc.

Decision Date26 March 2003
Docket NumberAdversary No. 98-88283.,Bankruptcy No. GG 97-00121.
Citation291 B.R. 400
PartiesIn re TML, INC., Debtor. Word Investments, Inc., Plaintiff, v. Thomas A. Bruinsma, Trustee, Defendant.
CourtU.S. Bankruptcy Court — Western District of Michigan

James B. Frakie, Wheeler Upham, Grand Rapids, Michigan, Scott H. Hogan, Tolley, Vandenbosch, Korolewicz & Brengle, P.C., Grand Rapids, Michigan, for Plaintiff Word Investments, Inc.

Jeff A. Moyer, Stenger & Stenger, P.C., Grand Rapids, Michigan, for Thomas A. Bruinsma, Chapter 7 Trustee.


JAMES D. GREGG, Chief Judge.


Who is entitled to the remaining escrowed proceeds from a sale of estate property? Is the Plaintiff's claim to those proceeds defeated by the doctrine of contribution or merger? May the Defendant Trustee recover an asserted fraudulent conveyance for excess rent paid by the Debtor to the Plaintiff?


The court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) and L.R. 83.2(a) (W.D.Mich.). This adversary proceeding is a core proceeding because it involves the allowance or disallowance of claims against the estate, counterclaims by the estate, and seeks an avoidance and recovery of fraudulent conveyances. 28 U.S.C. § 157(b)(2)(B), (C), and (H). This opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052.


Debtor, TML, Inc. ("TML") filed a voluntary petition under chapter 7 of the Bankruptcy Code on January 7, 1997.1 Thomas A. Bruinsma ("Trustee") was appointed as the chapter 7 trustee.

On March 6, 1997, this court entered an Order Granting Trustee's Motion to Hire Auctioneer, Sell Assets and Pay Certain Secured Creditors (the "Sale Order"). Exh. 15; Dkt. No. 51. The Sale Order authorized the Trustee to conduct a public auction to sell various items of TML's personal property. The Sale Order also directed the Trustee to hold at least $45,000 of the sale proceeds in an escrow account to "protect the interests" of TML's principal lender, FMB-First Michigan Bank-Zeeland ("FMB"), with respect to a "certain secured Promissory Note" that had been "executed jointly" by TML and its landlord, Word Investments, Inc. ("Word"). Exh. 15; Dkt. No.51. The funds from the note referred to in the Sale Order had been used by TML to build a loading dock on real property it leased from Word (the "loading dock note").

After the Sale Order, on April 30, 1997, FMB and Word executed an assignment agreement, under which Word paid FMB $44,489.22, the balance owing under the loading dock note at that time. Exh. 22/J.2. In exchange, FMB assigned all of its "right, title, and interest in and to [the $45,000] escrow account" established under the Sale Order to Word.2 Exh. 22/J.2.

On May 18, 1998, Word commenced this adversary proceeding, seeking to establish its right to the funds held in the escrow account. Adversary Proceeding ("AP") Dkt. No. 1. Specifically, Word asserts that it "stepped into the shoes" of FMB when it paid off the balance of the TML/Word note and took an assignment of FMB's position. AP Dkt. No. 1. On July 15, 1998, the Trustee filed his answer to Word's complaint, asserting seven affirmative defenses and eight counterclaims.3 AP Dkt. No. 3. After the Trustee's motion for summary judgment regarding the merger counterclaim was denied,4 and following an apparently unsuccessful attempt by the parties to mediate this dispute,5 the Trustee filed an amended answer and counterclaim on May 5, 2000. AP Dkt. No. 46. The Trustee withdrew all of his previous counterclaims, except for those based upon merger and contribution. The Trustee also added a new counterclaim. He alleged that TML's rent payments to Word for the six years preceding the bankruptcy filing constituted fraudulent conveyances.6

After agreed upon adjournments of trial, resulting mainly from the numerous unsuccessful settlement discussions and scheduling conflicts of the parties' attorneys, the trial finally took place on May 23 and 24, 2002. At the conclusion of the trial, the court gave the parties the opportunity to submit post-trial legal memoranda. Both parties did so. The parties also presented oral closing arguments to the court on June 21, 2002.

A. The Original Leases and Sale of the Leased Premises to Word Investments, Inc.

TML was a trucking company, owned and operated by members of the Bishop family.7 TML conducted its business out of two buildings located on adjacent lots at 345 Pleasant, S.W., and 607 Century, S.W., in Grand Rapids, Michigan (hereinafter "345 Pleasant," "607 Century," or collectively, the "leased premises").

The original lease of 607 Century, dated September 1, 1994, was between Corneluis A. and Betty Ann Bishop, as landlords, and Bishop Motor Express, as tenant. Exh. 3/C.1. This lease called for rent payments at the rate of $60,000 per year ($5,000 per month) plus annual "cost of living" rent increases ("COL increases") in accordance with the Consumer Price Index ("CPI"). Exh. 3/C.1. On December 6, 1985, Bishop Motor Express assigned its tenant's interest to TML.8 Exh. 3/C.1.A. Per this assignment, Bishop Motor Express continued to sublet the lower level of the building located at 607 Century for five years at the rate of $1,000 per month. Exh. 3/C.1.A.

The original lease of 345 Pleasant, dated December 1, 1986, was between Cornelius Bishop as landlord and TML as tenant.9 Exh. 4. The lease had a ten year term and purported to run from January 1, 1987, to December 1, 1997. Exh. 4. Under the lease, TML was to make rent payments to Cornelius Bishop at the rate of $60,000 per year ($5,000 per month). Exh. 4. Like the 607 Century lease, this lease also called for annual COL increases of the base rent amount in accordance with the CPI. Exh. 4.

On January 5, 1988, Bishop Real Estate,10 an entity owned by Cornelius Bishop, sold the leased premises to Word Investments, Inc. for $620,000. Exhs. 1 and 2/C.1.C. Word is a non-profit organization that invests in real estate, securities and notes. It donates the returns from these investments to various religious charities.11 Tr. II at 107. The President of Word, De Graaf, had been a childhood acquaintance of the Bishop family. He testified that he had not been in contact with any members of the Bishop family for the twenty-five to thirty years preceding the sale of the leased premises from Bishop Real Estate to Word. Tr. II at 108. De Graaf characterized the sale as an "arms length" transaction. Tr. II at 109. The leases of 607 Century and 345 Pleasant were assigned to Word as part of the sale transaction.12 Although De Graaf claims that he did not do much analysis regarding the properties'"income stream" prior to the sale, he stated that he considered the leases "profitable." Tr. II at 132, 150.

A letter written to De Graaf by Steve Bishop on behalf of TML, dated August 8 (or 9), 1988, provides insight into the circumstances of the original leases. Exh. Q.17. In the letter, Steve Bishop pleads with De Graaf to consider restructuring the TML leases on terms more favorable to TML. Exh. Q.17. The letter explains that the Bishop brothers, on behalf of TML, entered into the original, "exorbident" [sic] lease with their father, Cornelius, with the understanding that the lease rates included "other fixtures and article" [sic]. Exh. Q.17. The August 1998 letter also states that Cornelius "forced" TML to sign the lease, by telling his sons that it was "owed to him" and that TML would not be able to survive without his continued support. Exh. Q.17. According to the letter, the Bishop brothers signed the lease feeling that they had no other choice and that the lease would, at least, keep the property in their family. Exh. Q.17.

Importantly, De Graaf characterized the leases in a similar manner in a letter to the Grand Rapids' City Assessor's Office dated November 16, 1989. Exh. N.5. De Graaf's letter, which was written at TML's request, explains:

I purchased this property and lease from Cornie Bishop, the founder of TML, the current tenant. Frankly, the lease income bears little relationship to the value of the property for the following reasons:

1. The generous lease was basically a buy out of the business, which was sold to his four sons.

2. The lease and building sale was done quickly to generate cash for a divorce settlement.

3. The income reflects the financial instability of the company as evidenced by the fact that from August to December, 1989 we are receiving only one half rent (see attached letter).

4. A 9,300 sq. ft. addition paid for by the tenant was made to the property costing approximately $193,000.00, in 1998 with no increase in rent ....

I believe the rent value of the property is no more than 650,000 with the new improvements ....

Exh. N.5. (emphasis added).

B. The Loading Dock.

Shortly after Word purchased the leased premises and assumed the leases, Alan Bishop, then president of TML, approached De Graaf to inquire about the possibility of building a large loading dock on the property. Although TML asked Word to finance the proposed loading dock project directly, Word declined to do so. Tr. II at 110-11. Upon the request of TML, however, Word agreed to assist TML in procuring outside financing to fund the project. Tr. II at 111. The written agreement between Word and TML is dated September 14, 1988 (the "loading dock agreement"). Exh. 5/C.2. Under the loading dock agreement, TML was permitted to finance construction of the loading dock in an amount not to exceed $200,000. Exh. 5/C.2, ¶ 2. TML was authorized to secure the repayment of the debt by granting the lender a mortgage on a portion of the leased premises. Exh. 5/C.2, ¶ 2. Although the "costs...

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