Ozark Restaurant Equipment Co., Inc., In re

• Citation: 850 F.2d 342
• Decision Date: 17 June 1988
• Docket Number: No. 87-2309,87-2309
• Parties: 19 Collier Bankr.Cas.2d 35, 17 Bankr.Ct.Dec. 1321, Bankr. L. Rep. P 72,344 In re OZARK RESTAURANT EQUIPMENT CO. INC. Jill R. JACOWAY, Trustee, Appellee, v. Bruce ANDERSON, Elmer Dale Yancey, Kenneth Eads, Robert Whiteley, and Anderson Cajun's Wharf, Appellants. Jill R. JACOWAY, Trustee, Appellee, v. ANDERSON CAJUN'S WHARF, Appellant. Jill R. JACOWAY, Trustee, Appellee, v. Hayden McILROY of McIlroy Bank and Trust, Ed Yancey, Bruce Anderson, Kenneth Eads, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 342

850 F.2d 342

19 Collier Bankr.Cas.2d 35, 17 Bankr.Ct.Dec. 1321,

Bankr. L. Rep. P 72,344

In re OZARK RESTAURANT EQUIPMENT CO. INC.

Jill R. JACOWAY, Trustee, Appellee, v. Bruce ANDERSON, Elmer Dale Yancey, Kenneth Eads, Robert

Whiteley, and Anderson Cajun's Wharf, Appellants.

Jill R. JACOWAY, Trustee, Appellee, v. ANDERSON CAJUN'S WHARF, Appellant.

Jill R. JACOWAY, Trustee, Appellee, v. Hayden McILROY of McIlroy Bank and Trust, Ed Yancey, Bruce

Anderson, Kenneth Eads, Appellants.

No. 87-2309.

United States Court of Appeals Eighth Circuit.

Submitted April 15, 1988.

Decided June 17, 1988.

Raymond C. Smith, Fayetteville, Ark., for appellants.

Robert L. Gross, Fayetteville, Ark., for appellee.

Before McMILLIAN, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and BOWMAN, Circuit Judge.

FLOYD R. GIBSON, Senior Circuit Judge.

This is an appeal from the judgment of the United States District Court for the Western District of Arkansas affirming the bankruptcy court in this Chapter 7 Bankruptcy case. For the reasons stated below we affirm in part and reverse and remand in part.

I. BACKGROUND

In 1980 Bruce Anderson and Elmer Dale Yancey bought Ozark Restaurant Equipment Company. Each owned fifty percent of the stock and held positions as directors. Kenneth Eads also served as a director and as president and was largely responsible for the daily operations of Ozark.

Anderson, Yancey, and Eads also owned stock in Anderson Cajun's Wharf. Anderson was the majority stockholder and chief operating officer and Yancey served as a director. Anderson Cajun's Wharf had a subsidiary named Port City Equipment Company which sold restaurant equipment. Other related entities included Cajun's Wharf in Nashville, Cajun's Wharf in Knoxville, Port City Seafood Company, and Gonzales & Gertrude's. Anderson was the majority stockholder in each of these corporations.

From the beginning, Ozark was grossly undercapitalized with capital of $1,000 and liabilities of $109,000. Its fortunes never improved and on August 24, 1982 Ozark filed for relief under Chapter 7 of the Bankruptcy Code. In October 1982 the Chapter 7 trustee filed three adversary proceedings in the bankruptcy court. The first proceeding was an alter ego action brought by the trustee on behalf of all creditors against Anderson, Yancey, Eads, Anderson Cajun's Wharf, and Robert Whiteley, a business consultant hired by Anderson to help with Ozark's finances. In the second proceeding the trustee sought to recover an unpaid debt in the amount of $20,208 from Port City Equipment Company. In the third proceeding the trustee sought to recover certain payments made by Ozark on a loan it had with McIlroy Bank and Trust.

The trustee prevailed on all three claims. In re Ozark Restaurant Equipment Co., 41 B.R. 476 (Bankr.W.D.Ark.1984). The decision on the alter ego claim was reversed by the district court, In re Ozark Restaurant Equipment Co., 61 B.R. 750 (W.D.Ark.1986), and the judgment of the district court was affirmed by a panel of this court. In re Ozark Restaurant Equipment Co., 816 F.2d 1222 (8th Cir.), cert. denied, --- U.S. ----, 108 S.Ct. 147, 98 L.Ed.2d 102 (1987). That issue is no longer relevant to this appeal.

The district court also found that although the trustee has no standing to bring his own alter ego action, he does have power to avoid preferences and fraudulent transfers and therefore, remanded the case back to the bankruptcy court. 61 B.R. at 757.

On remand a hearing was held in which the trustee sought to void certain transactions. Evidence was produced showing that Ozark sold supplies to Anderson Cajun's Wharf and other related entities within a year before the filing of the petition at a markup of only seven percent. Expert testimony was introduced showing that Ozark could not function without a markup of twenty-five to thirty percent. Also, in two sales to nonrelated entities the markups were 29.57 percent and 80.03 percent. The bankruptcy court, 74 B.R. 139, held that Ozark had not received a reasonably equivalent value for the supplies and allowed the trustee to recover from the transferees an additional twenty-three percent markup.

Finally, the bankruptcy court held that the individual defendants are personally liable for the transfers made to the related entities because they are so intertwined with the related entities that the transfers must be regarded as having been made for their benefit.

An appeal was taken to the district court, 77 B.R. 686, and the piecemeal litigation was finally reviewed in its entirety. The district court held that the transfers to the related entities were not for reasonably equivalent value, that the payments to McIlroy Bank & Trust were preferences, and that the defendants should be held individually liable.

II. DISCUSSION

A. Reasonably Equivalent Value

Section 548 of the Bankruptcy Code provides, in pertinent part:

(a) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor--

(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.

11 U.S.C. Sec. 548 (1982).

Whether a transfer is made for a reasonably equivalent value is a question of fact, In re Roco Corp., 701 F.2d 978, 981-82 (1st Cir.1983), which we will reverse only if clearly erroneous. Appellants argue that the district court erred in affirming the bankruptcy court's finding that sales of goods at under a thirty percent markup constituted less than reasonably equivalent value. We agree.

After reviewing all the facts and circumstances in this case we believe the courts below placed undue emphasis on some evidence and overlooked other evidence. For example, the bankruptcy court focused on testimony that a thirty percent markup was essential to the debtor's survival. This analysis is improper. The concept of reasonably equivalent value is a means of determining if the debtor received a fair exchange in the market place for the goods transferred. Considering all the factors bearing on the sale, did the debtor receive fair market value for the property. Although the bankruptcy court recognized this principle it did not allow it to control.

Reasonably equivalent value should not be wholly dependent upon the viability of the debtor. For example, suppose two debtors file bankruptcy petitions on the same day. Debtor A is a highly efficient wholesaler capable of making a reasonable profit with a ten percent markup. Debtor B, however, is not nearly as efficient and requires a thirty percent markup in order to survive. If both A and B sell the same product in the same marketplace, it would make little sense for the reasonably equivalent value of the products to be so different. Reasonably equivalent value depends on the market conditions faced by a willing seller and a willing buyer and not on the financial demands of the seller. Of course, in this case we are confronted with sales arranged by insiders, and thus give close scrutiny to the value obtained. It does appear, however, that the totality of the circumstances was not fairly considered in this case.

We also believe that the bankruptcy court placed too little emphasis on the fact that sales to the related entities resulted in no freight charges, service warranties, or sales commissions, and that volume discounts and factory rebates were often available. Each factor reduces the overall cost to the debtor on a given sale and thus reduces the consideration necessary to constitute reasonably equivalent value.

After carefully reviewing the record we believe that the bankruptcy court clearly erred when it required a thirty percent markup. Aside from the testimony about the markup necessary for the debtor to survive, evidence of only two sales to nonrelated entities was produced....