Matter of Rego Crescent Corp.
| Decision Date | 19 October 1982 |
| Docket Number | Bankruptcy No. 179-03854,Adv. No. 181-0635. |
| Parties | In the Matter of REGO CRESCENT CORP., Debtor. REGO CRESCENT CORP., debtor-in-possession, by its Unsecured Creditors Committee, Plaintiff, v. Rose TYMON and I. Louis Winokur, as Trustees of the Philip Tymon Trust, and Philip Tymon, individually, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Glass & Howard, P.C. by Amos Alter, New York City, for plaintiff.
I. Louis Winokur, Jamaica, N.Y., for defendants.
This is an adversary proceeding arising under sections 510(c) and 544(b) of the Bankruptcy Reform Act of 1978, (the Code), 11 U.S.C. §§ 510(c) and 544(b), brought by the Unsecured Creditors' Committee (the Committee) of Rego Crescent Corp. (the Debtor or Rego Crescent) seeking to subordinate the claim of the son of the two stockholders of the debtor corporation and the claim of a trust established for his benefit by them. The Committee also seeks to recover the difference between the consideration received and the value of property conveyed from the debtor to the trust on the ground that the transfer was fraudulent.
These are the facts:
An involuntary petition under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 303, was filed against Rego Crescent on December 11, 1979, and it responded by filing its own petition under Chapter 11 on December 19, 1979. (Tr., p. 9) The debtor had been involved in diverse investments in real estate —building, renting, and selling both residential and commercial property. Indeed, one of the two shareholders of the corporation described it as a "real estate department store." (Tr., p. 11)
Rose Tymon (Rose) and the late Edward Tymon (Edward), who died in 1980 after the filing of the bankruptcy petitions referred to above and who, along with Rose, also filed a chapter 11 petition, each owned fifty per cent of the shares of the debtor corporation (Tr., pp. 10-11) and served as its officers and directors, (Tr., p. 17). Although the record does not contain the precise date of Rego Crescent's incorporation, it was formed no later than 1949. (Tr., p. 11) Philip Tymon, (Philip) the only child of the stockholders, was born in 1950, after the corporation was formed. (Id.)
On January 6, 1960, Edward and Rose Tymon established a trust for the benefit of their son, Philip, naming themselves as trustees together with I. Louis Winokur, (Tr., p. 10), who also served as the attorney for Rego Crescent. From June 21, 1968 to December 15, 1980, monies passed from the Philip Tymon Trust (the Trust) to Rego Crescent via checks drawn on the Trust. The corporate records of the debtor reflect an obligation to pay 8½ per cent interest on these monies. (Tr., p. 19) These funds have been characterized as loans, although Rose Tymon claimed that the money should not be thought of so much as loans but as part of an investment program wherein the money would be transferred to Rego Crescent from the Trust for the purchase of land by it which would then be conveyed to the Trust.
In a deposition by Rose Tymon read into the record she stated, (Tr., p. 16) Whatever precise language one chooses to describe these transactions, it is clear to me that these were monies transferred to Rego Crescent with the intention that the principal and interest would be returned to the "lender," either directly or through property. I shall therefore refer to these transactions as loans.
On June 28, 1974, when the Trust had transferred $233,700 to Rego Crescent, it conveyed a parcel of improved real estate located on Woodhaven Boulevard in Queens County, New York, to the Trust. The closing statement indicates that the price for the property was $310,000, which plaintiff has conceded was a fair one. (Tr., p. 20) Consideration for the property came from two sources: the Trust took the property subject to a $97,383.74 mortgage, and the balance of the price, $212,616.26, was paid for by forgiveness of loans which the Trust had made to the debtor. Although the forgiveness of loans was noted neither on the books of Rego Crescent (Plaintiff's Exhibit 4, Tr., p. 50), nor on the initial proof of claim filed by Rose Tymon and I. Louis Winokur, the remaining trustees of the Trust, (Plaintiff's Exhibit 4) it was noted on the records of the Trust and the deed recorded on December 30, 1974 shows that the seller paid transfer taxes of $252.45, (Tr., pp. 59-60) which reflect that the seller considered the sum to have been received. Moreover, in the deposition of Rose Tymon read into evidence she testified, "the trust fund bought the building at 67-33 Woodhaven Boulevard for the money that it had in this account." (Tr., p. 16) For those reasons, I believe that when the Woodhaven Boulevard property was transferred, the parties understood there was to be a setoff of $212,616.26 on Rego Crescent's books.
In an attempt to prove that Rego Crescent was insolvent at the time of the transfer, the Committee put into evidence an unaudited balance sheet of the debtor as of June 30, 1974, two days after the conveyance, that was prepared for the Committee by the accounting firm, Main Hurdman, (Plaintiff's Exhibit 7) The balance sheet shows a capital deficiency of $78,811. Id. Total assets of the corporation are $8,146,731. Id. The major asset of the corporation, its real estate, is reflected on the balance sheet as "Real estate—net $6,996,452." George M. Carras (Carras), a partner in Main Hurdman who supervised the preparation of the balance sheet, (Tr., pp. 41-43) testified that the value of the real estate was computed, in accordance with accepted accounting principles, by taking the actual cost of the property, adding the cost of improvements to the property to the extent that there were any, and deducting from that figure depreciation on the properties. (Tr., p. 44, p. 46) No attempt was made to obtain any appraisal of the market value of the property on that date, (Tr., p. 44) even though, as Carras admitted, there could be a great deal of difference between its actual value and its book value. Id. Indeed, no evidence was proffered showing the individual actual costs of the properties and the dates that they were purchased.
After the building was conveyed to the Trust, the Trust continued to advance monies to the debtor. From October, 1974, to December, 1978, those loans totalled $82,700. In addition, beginning in May, 1967, Philip Tymon individually began making loans to Rego Crescent. These loans continued until December, 1978, at which time Philip Tymon was twenty-eight years old. Philip does not remember where the money for these loans came from in each instance, nor does he have records of these loans having been made, but he does recall that all of the money for the loans came from money he earned working at Rego Forest Country Club, which his father operated, or from gifts from his parents. (Tr., p. 27, p. 29) Philip also recalls that when some of the loans were made his mother had told him the corporation was short of funds; indeed, he stated that in late 1973 and early 1974, when about $175,000 was lent to the corporation, "I recall at that time there was (sic) some difficulties with the business and my mother discussed them with me, but I don't remember the details that well right now." (Tr., p. 34) These loans were at 15 per cent interest and the interest on the loans was compounded each time a new loan was made. (Tr., pp. 31-32) Although the record is clear that the interest of some other creditors who reinvested their money was compounded, (Tr., p. 65) it is not clear whether anyone, aside from Philip, receiving 15 per cent interest also had compounding, (Tr., p. 63) nor is it clear, in fact, whether anyone else received 15 per cent interest. (Tr., p. 52, p. 63) Carras testified that he could not say whether anyone else received that much. (Tr., p. 53) The typical rate of interest, however, was about twelve per cent, according to him. (Tr., p. 53)
Apparently, neither Philip nor the Trust received promissory notes or other evidence of indebtedness for their loans. (Tr., p. 13, p. 28) No interest was ever paid on either Philip's loans or the loans from the Trust after 1970. (Tr., p. 15) The only repayments testified to were the $4,000 returned to the Trust in April of 1973 and the Woodhaven Boulevard property conveyed to the Trust; (Tr., p. 13) apparently, there were no others. (Tr., p. 29) Nevertheless, I have no doubt that the loans were made by both the Trust and by Philip. The main reason for my belief is that both the contemporaneous records of the debtor (Tr., p. 67) and the Trust reflect the loans as having been made. Indeed, George Carras, the witness for the plaintiff who, as stated above, examined the Rego Crescent books to prepare a balance sheet, stated on cross-examination that, with regard to the loans from Philip, "we have no reason to believe that they weren't made." (Tr., p. 67) I think that any factors which may raise suspicions as to the loans not having been made, such as the absence of personal records of Philip of his loans or the absence of any repayments over a period of years, are actually much more indicative of the casual manner in which intra-family financial affairs are oftentimes carried on.
The following are the Committee's contentions:
A. EQUITABLE SUBORDINATION
The Committee first claims that the loans from Philip individually and from the Trust should be subordinated pursuant to 11 U.S.C. § 510(c) (1978). This section provides in pertinent part:
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