Jeffrey Bigelow Design Group, Inc., In re

• Decision Date: 13 February 1992
• Docket Number: No. 91-1508,91-1508
• Citation: 956 F.2d 479
• Parties: 26 Collier Bankr.Cas.2d 967, 22 Fed.R.Serv.3d 371, Bankr. L. Rep. P 74,478 In re JEFFREY BIGELOW DESIGN GROUP, INCORPORATED, Debtor. John H. HARMAN, Trustee, Plaintiff-Appellant, v. FIRST AMERICAN BANK OF MARYLAND; Ann Donatelli; Louis D. Donatelli; Donatelli & Klein, Incorporated; Jeffrey Bigelow, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 479

956 F.2d 479

26 Collier Bankr.Cas.2d 967, 22 Fed.R.Serv.3d 371,

Bankr. L. Rep. P 74,478

In re JEFFREY BIGELOW DESIGN GROUP, INCORPORATED, Debtor.

John H. HARMAN, Trustee, Plaintiff-Appellant, v. FIRST AMERICAN BANK OF MARYLAND; Ann Donatelli; Louis D.

Donatelli; Donatelli & Klein, Incorporated;

Jeffrey Bigelow, Defendants-Appellees.

No. 91-1508.

United States Court of Appeals,

Fourth Circuit.

Argued Oct. 29, 1991.

Decided Feb. 13, 1992.

John H. Harman, Coggins & Harman, P.A., Silver Spring, Md., argued for plaintiff-appellant.

Brian F. Kenney, Miles & Stockbridge, Fairfax, Va., Mark Lyman Corrallo, Conroy, Ballman & Demeron, Chartered, Gaithersburg, Md., argued (Donald H. Hadley, Hadley & House, and Stanton J. Levinson, Bethesda, Md., on brief), for defendants-appellees.

Before RUSSELL, Circuit Judge, CHAPMAN, Senior Circuit Judge, and WARD, Senior District Judge for the Middle District of North Carolina, sitting by designation.

OPINION

CHAPMAN, Senior Circuit Judge:

Plaintiff/appellant John Harman, the bankruptcy trustee, filed a complaint in the bankruptcy case of Jeffrey Bigelow Design Group, Inc., the debtor, in the Bankruptcy Court for the District of Maryland, seeking to recover alleged fraudulent transfers or voidable preferences paid by the debtor to First American Bank of Maryland ("First American"). At the close of evidence, the trustee moved to amend his complaint a third time, but this was denied. The bankruptcy court held that the payments were not fraudulent transfers but were voidable preferences. On appeal, the District Court for the District of Maryland affirmed in part and reversed in part, holding that the payments were neither fraudulent transfers nor voidable preferences and that the bankruptcy court did not abuse its discretion in refusing to amend the complaint. 127 B.R. 580. We affirm the decision of the district court.

I.

In September 1985, Donatelli & Klein, Inc., ("Donatelli & Klein") acquired 50% of the stock of the debtor in exchange for a cash payment and the arrangement with First American of a line of credit for the benefit of the debtor. This line of credit was personally guaranteed by Ann and Louis Donatelli. The line of credit was originally for $250,000, but was rolled over numerous times and eventually reached $1,000,000. Although Donatelli & Klein was the maker of the line of credit, only the debtor received the draws and all payments were made directly from the debtor to First American. Subsequently, in February 1986, the debtor executed a note for $1,000,000 to Donatelli & Klein with substantially the same terms as the line of credit between First American and Donatelli & Klein. As the debtor directly repaid First American, its liability on the note to Donatelli & Klein likewise decreased. In June 1987, Donatelli & Klein executed another note to First American personally guaranteed by Ann and Louis Donatelli for the benefit of the debtor. Throughout 1986 and 1987, the debtor drew upon the lines of credit and sent the payments directly to First American.

Technically, a tripartite relationship exists, where Donatelli & Klein is a creditor of the debtor and First American is a creditor of Donatelli & Klein. The debtor, in making its payments, in effect skips its true creditor and sends the money to First American, to whom it has no direct obligation.

The debtor filed its petition in bankruptcy under Chapter 7 on December 22, 1987. In August 1988, the trustee filed a complaint seeking to recover payments from the debtor to First American as voidable preferences. First American then joined Donatelli & Klein, Ann Donatelli, and Louis Donatelli as parties and seeks indemnification. The trustee amended the complaint twice, first to add defendants and to state a claim for recovery of the payments as fraudulent transfers, and second to correct certain allegations and to add other payments by the debtor to First American. The bankruptcy court heard the arguments on January 31 and March 12, 1990. At the close of evidence, the trustee sought again to amend his complaint to provide for preferences to insiders between ninety days and one year of bankruptcy. The court denied the request and held that the payments were not fraudulent transfers, but were voidable preferences. On appeal, the district court upheld the denial of the request to amend and the finding that the payments were not fraudulent transfers, but reversed the finding that the payments were voidable preferences.

II.

This case presents four distinct issues: (1) whether the bankruptcy court abused its discretion in denying the request to amend the complaint; (2) whether the payments from the debtor to First American were actual fraudulent transfers under section 548(a)(1) of the Bankruptcy Code; (3) whether the payments from the debtor to First American were constructive fraudulent transfers under section 548(a)(2) of the Bankruptcy Code; and (4) whether the payments from the debtor to First American were voidable preferences.

The standards of review for these issues are as follows. "Disposition of a motion to amend is within the sound discretion of the [trial] court" and requires a finding of an abuse of discretion for reversal. Deasy v. Hill, 833 F.2d 38, 40 (4th Cir.1987), cert. denied, 485 U.S. 977, 108 S.Ct. 1271, 99 L.Ed.2d 483 (1988). For a finding of fraudulent intent in an actual fraudulent transfer, a reviewing court must apply a clearly erroneous standard. First Eastern Bank v. Jacobs (In re Jacobs ), 60 B.R. 811 (M.D.Pa.1985), aff'd without opinion, 802 F.2d 446 (3d Cir.1986). In reviewing a decision concerning reasonably equivalent value for fraudulent transfers, the courts are split as to whether the appellate court should apply a clearly erroneous or de novo standard. See Cooper v. Ashley Communications, Inc. (In re Morris Communications NC, Inc.), 914 F.2d 458, 467 (4th Cir.1990) (acknowledging disagreement among the courts). We decline to adopt one of the standards, because we find under either standard that the district court did not err. While courts disagree on the standard of review for decisions involving the ordinary course of business exception to voidable preferences, the Fourth Circuit has adopted the clearly erroneous standard. See Morrison v. Champion Credit Corp. (In re Barefoot ), 952 F.2d 795, 801 (4th Cir.1991). Compare Fidelity Sav. & Invest. Co. v. New Hope Baptist, 880 F.2d 1172, 1174 (10th Cir.1989) (de novo standard applied), with Braniff Airways, Inc. v. Midwest Corp., 873 F.2d 805, 806 (5th Cir.1989) (clearly erroneous standard applied).

A. Motion to Amend the Complaint

The trustee argues that the court abused its discretion by not granting the motion to amend. Bankruptcy Rule 7015 governs amendments to pleadings and states that "Rule 15 F.R.Civ.P. applies in adversary cases." ¹ Rule 15 provides:

(a) Amendments. A party may amend the party's pleading once as a matter of course.... Otherwise a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.

(b) Amendments to Conform to the Evidence. When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice the party in maintaining the party's action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.

A motion to amend should be denied only "where the motion has been unduly delayed and where allowing the amendment would unduly prejudice the non-movant." Deasy, 833 F.2d at 40.

The trustee blames First American for the first amendment. The trustee argues that First American's discovery responses, which were "many months late" and returned just prior to trial, introduced new defendants that had to be added. We note, however, that the trustee also included the fraudulent transfer count in the first amendment. The second amendment added the words "owed by the Debtor" to the voidable preference count and included more payments which the trustee claims had only recently come to light.

At the close of evidence, the trustee moved to amend his complaint a third time to extend the preference period from ninety days prior to bankruptcy to one year because of the existence of insiders. The trustee argues that the motion was not unduly delayed and that granting the motion would not unduly prejudice other parties. The trustee points out that the trial had already focussed on the one year period prior to bankruptcy through arguments respecting the fraudulent transfer section which examines the same one-year period. Furthermore, evidence at the trial indicated that some of the defendants were insiders. Hence, the trustee argues that no further evidence would be needed to establish the existence of voidable preferences during the year before bankruptcy. We find no abuse of discretion.

Although the trustee discusses numerous cases involving Rule 15, most of the cases are distinguishable. In most of the cited cases, the trial court had granted the motion to amend, an action which "shall be freely given." Fed.R.Civ.P. 15. Only two of the cited cases raise the issue whether the trial court abused its discretion in denying the motion...