Missionary Baptist Foundation of America, Matter of

• Decision Date: 26 May 1987
• Docket Number: No. 86-1160,86-1160
• Citation: 16 CBC.2d 1461,818 F.2d 1135
• Parties: 16 Collier Bankr.Cas.2d 1461, Bankr. L. Rep. P 71,853 In the Matter of MISSIONARY BAPTIST FOUNDATION OF AMERICA, et al., Debtor. Robert B. WILSON, Trustee, Plaintiff-Appellee, v. Robert G. HUFFMAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1135

818 F.2d 1135

16 Collier Bankr.Cas.2d 1461, Bankr. L. Rep. P 71,853

In the Matter of MISSIONARY BAPTIST FOUNDATION OF AMERICA et al., Debtor Robert B. WILSON, Trustee, Plaintiff-Appellee, v. Robert G. HUFFMAN, Defendant-Appellant.

No. 86-1160.

United States Court of Appeals Fifth Circuit.

May 26, 1987.

James V. Hoefner, Austin, Tex., for defendant-appellant.

Robert B. Wilson, John C. Sims, Lubbock, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before BROWN, RANDALL and HIGGINBOTHAM, Circuit Judges.

RANDALL, Circuit Judge:

Robert G. Huffman appeals from the district court's affirmance of the bankruptcy court's order subordinating his claim in the amount of $119,005 under 11 U.S.C. Sec. 510(c). We reverse and remand to the bankruptcy court for proceedings consistent with this opinion.

I.

The factual background of this case has been set forth several times and at great length in the opinions rendered heretofore in connection with this case. However, we will restate the facts necessary to an understanding of the issues raised in this, the second appeal to this court.

Land Wall is the president, controller and director of the Missionary Baptist Foundation of America, Inc. ("MBFA" or "debtor"), a religious non-profit corporation. In October of 1980, a petition for reorganization of MBFA and its seven wholly-owned subsidiaries, together considered as one entity, was filed under Chapter 11 of the Bankruptcy Code. The debtor's schedules included two promissory notes which are the subject of this appeal. These notes represent obligations of MBFA to Robert G. Huffman, the appellant in this case.

In 1975, Huffman and Wall established a partnership known as Wall and Huffman ("the partnership" ), and a corporation called West Texas Home Health Care, Inc. ("West Texas Homes" ). West Texas Homes was a nursing home management corporation, fifty percent of which was owned by Huffman and fifty percent of which was owned by Wall. The partnership purchased the Dumas Convalescent Center, a nursing home in Dumas, Texas, borrowing $228,000 from a commercial lender to cover the downpayment and the costs of the necessary improvements. Shortly thereafter, the partnership contracted with West Texas Homes for the operation of the nursing home. Wall handled the financial details while Huffman was involved only in the management of the home.

Early in 1977, Wall individually purchased the Crestview Home in Throckmorton, Texas. Wall entered into a management contract with West Texas Homes for the Crestview home. That contract was identical to the management contract covering the Dumas home. On February 1, 1977, Wall transferred his interest in Crestview to Pampas Enterprises ("Pampas"), a partnership composed of Wall and three of his family members. On the same date, Pampas subleased the property to West Texas Homes.

The Crestview and Dumas homes were sold to MBFA in April of 1977. Under the terms of the package sale, MBFA assumed all indebtedness encumbering the properties and agreed to pay $148,014 for the equity. Huffman and Wall, individually, each received a promissory note in the amount of $74,007, secured by a second lien on the Dumas property. Through this transaction, Huffman shared equally with Wall in the equity in the Crestview home, despite the fact that Huffman apparently lacked a proprietary interest in the property. The security was eventually released by Huffman to enable MBFA to sell the homes.

Contemporaneously with the sale of the Dumas and Crestview homes to MBFA, West Texas Homes assigned its contractual rights in both homes to MBFA, receiving in return two unsecured promissory notes, each in the amount of $88,860. Subsequently, West Texas Homes was purportedly dissolved ¹ and in the distribution of its assets, its shareholders, Huffman and Wall, each received one of the notes. The note, made payable to West Texas Homes, was "transferred" to Huffman via the name of Wall and Huffman's corporation handwritten together with Wall's signature on the back of the note.

Through August of 1980, MBFA made periodic payments to Huffman on the $74,007 and $88,860 notes. ² When the Chapter 11 petition was filed, MBFA's books reflected a balance of $37,170.96 owed to Huffman on the $74,007 note. Although the corporate books did not evidence the $88,860 note, MBFA's representatives acknowledged the existence of a debt in that amount to West Texas Homes. The debtor's schedules reflected an aggregate balance on the two notes in favor of Huffman in the amount of $119,005.

The trustee in bankruptcy, Robert B. Wilson, formally objected to Huffman's claim, contending that MBFA was not indebted to Huffman on the $88,860 note. Additionally, Wilson contended that MBFA was not indebted to Huffman for the $37,170.96 balance because the $74,007 note was invalid as a product of an arrangement by Huffman and Wall designed to improperly extract monies from the debtor MBFA. The bankruptcy court found, inter alia, that Wall's ownership or control of the debtor placed him within the definition of "insider of the debtor," under 11 U.S.C. Sec. 101(25)(B). Recognizing that Huffman's connection with MBFA differed from Wall's connection with MBFA, the bankruptcy court then considered whether Huffman could be characterized as an insider because of his business relationship with Wall and his stock ownership in West Texas Homes.

The bankruptcy court found that MBFA's acquisition of the Dumas and Crestview homes and West Texas Homes' contractual position were effected by Wall on a less than arms-length basis. The court concluded that West Texas Homes was an affiliate of the debtor under 11 U.S.C. Sec. 101(2)(B), and that the conveyance of the $88,860 note to Huffman was an insider transaction. Further, the court determined that the $74,007 indebtedness to Huffman, in his capacity as general partner of a partnership which controlled the debtor, likewise resulted from an insider transaction.

Based on these findings, the bankruptcy court allowed the $119,005 claim but ordered it subordinated, under 11 U.S.C. Sec. 510(c)(1), to those of the general unsecured creditors. The district court affirmed the bankruptcy court in all respects, concluding that there had been sufficient findings to justify the subordination of Huffman's claim under the three-pronged test this court set out in Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 700 (5th Cir.1977): (1) the claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in injury to the creditors or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code. See id. at 700; accord Machinery Rental, Inc. v. Herpel (In re Multiponics, Inc.), 622 F.2d 709, 713 (5th Cir.1980).

On appeal to this court, Huffman contended that the bankruptcy court erred in imputing insider status to him because of MBFA's association with West Texas Homes and the Wall and Huffman partnership. Further, Huffman contended that there were insufficient findings to support the application of the equitable subordination doctrine outlined in Mobile Steel. A panel of this court disagreed with Huffman's first contention and agreed with his second. See Wilson v. Huffman (In re Missionary Baptist Foundation of America, Inc.), 712 F.2d 206 (5th Cir.1983). The panel was persuaded that as to the $88,860 promissory note, Huffman was an insider of an affiliate within the meaning of 11 U.S.C. Sec. 101(2). Further, the court found that by definition, an insider of an affiliate is an insider of the debtor under 11 U.S.C. Sec. 101(25)(E). The panel held that because of the interrelationship of all transactions, the finding of Huffman's insider status with respect to the $88,860 note was dispositive also as to the $74,007 note, inasmuch as the components of Huffman's claim were not sufficiently discrete to warrant separate treatment. Therefore, the panel affirmed the fact-finding that Huffman was an insider. However, because the bankruptcy court, upon its finding that Huffman was an insider, subordinated Huffman's $119,005 claim without assigning specific reasons for the subordination, the panel found itself unable to conclude that the trustee had discharged his burden of proof under Mobile Steel. Thus, the panel found it necessary to remand the case to the bankruptcy court for the entry of findings required for application of this circuit's equitable subordination formula. The panel directed the bankruptcy court, on remand, to set forth its findings and conclusions under the three prongs of the test set out in Mobile Steel.

On remand, the bankruptcy court, after holding a hearing, filed a memorandum opinion and order on February 25, 1985. The court noted that "Huffman was not a director of the corporate debtor, he was not an officer of the corporate debtor, and, at least as far as any period of time relevant to this memorandum is concerned, he was not an employee of the corporate debtor." Missionary Baptist, 48 B.R. at 888. Huffman's statutory relationship as an insider of MBFA represented, in the court's view, Huffman's sole contacts with MBFA and Huffman had not used MBFA as a "mere instrumentality or alter ego." Id. The court found that the trustee presented no evidence of overt acts of misconduct by Huffman. Id. at 888-89. ³

The court went on, then, to inquire into whether Wall, Huffman's partner and the owner with Huffman of all of the capital stock in West Texas Homes, had engaged in inequitable conduct and, if so, whether that conduct could be imputed to Huffman. The court, taking judicial notice of files and records in related proceedings (relying on the general stamp of approval by this court found in its prior opinion in this case, see Missionary Baptist, 712 F.2d at 211), stated that "Wall dealt with...