Raphael v. Alcott

• Decision Date: 19 December 1958
• Docket Number: Civ. A. No. 283.
• Citation: 169 F. Supp. 691
• Parties: E. J. RAPHAEL, Trustee In Bankruptcy of J. P. Shepherd Lumber Company, Incorporated, Plaintiff, v. Harry M. ALCOTT et al., Defendants.
• Court: U.S. District Court — Northern District of Mississippi

169 F. Supp. 691

E. J. RAPHAEL, Trustee In Bankruptcy of J. P. Shepherd Lumber Company, Incorporated, Plaintiff, v. Harry M. ALCOTT et al., Defendants.

Civ. A. No. 283.

United States District Court N. D. Mississippi, Greenville Division.

December 19, 1958.

R. T. Love, W. C. Keady, Greenville, Miss., for plaintiff, E. J. Raphael, Trustee in Bankruptcy of J. P. Shepherd Lumber Company, Inc.

Philip Mansour, Greenville, Miss., for defendants, Harry W. Alcott and Alcott Company, Inc.

Holland O. Felts, John C. Webb, Greenville, Miss., for defendants, J. P. and Mattyle Shepherd.

CLAYTON, District Judge.

Complaint was filed by the Trustee in Bankruptcy of J. P. Shepherd Lumber Company, Incorporated, bankrupt, as authorized by Section 70, sub. e, of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. e, against Harry W. Alcott and The Alcott Company, Incorporated, and certain other parties whose interests are not now involved. By this action, the Trustee seeks to avoid the transfer of certain assets of the bankrupt corporation and subject such assets to payment of the creditors of the bankrupt.

Pertinent facts as they appear from admissions in the pleadings and otherwise and from the evidence presented on the trial are stated in the opinion.

(1) J. P. Shepherd Lumber Company was incorporated in January, 1955, with authorized capital stock of $20,000 consisting of 200 shares of common stock of a par value of $100 per share. The charter required 10 shares to be subscribed and paid for before the corporation was authorized to commence business. This corporation succeeded to the business previously operated under the same name by J. P. Shepherd and Harry W. Alcott as partners. The charter was amended in September, 1955, to increase the authorized capital stock to $70,000 consisting of 700 shares of common stock of a par value of $100 per share. That year J. P. Shepherd and his wife subscribed and paid for 280 shares and Harry W. Alcott and the members of his family subscribed and paid for 200 shares. Shepherd was President of the corporation and directed its business operations. Alcott was Secretary from the organization of the corporation until at least August 15, 1956, and at all times was spokesman and agent for the other stockholders in his family.

(2) The principal business of this corporation was contracting for the construction of residences and other buildings, but it also sold building materials at retail. In connection with its construction contracts, it executed various performance bonds on which The Fidelity and Casualty Company of New York became surety and some upon which United States Fidelity and Guaranty Company was surety. Financial statements were submitted to these surety companies purporting to show the assets and liabilities of the corporation at different periods. These performance bonds were executed by both surety companies for the corporation at various times on the condition that Shepherd, his wife, and sometimes Alcott execute indemnity agreements to the corporate sureties. Most, if not all, of these financial statements and one issued to The First National Bank of Greenville on June 30, 1955, claimed as corporate assets 3 lots in Woodlawn Addition and 2 lots in Mattingly-Frazier Addition at a total cost to the corporation of $10,892.93.

(3) In September, 1955, the corporation acquired for $28,000 cash a 55 acre tract of land intended for residential development, which was called "Cherokee Gardens". This purchase gave rise to the increase in authorized stock and the increase of invested capital to $48,000. After this purchase, the corporation sold buildings located on this land for a net of $1,278.95, thus leaving the cost of this property at $26,721.05, which was the figure carried on the corporate records as the cost of this property and entered on its tax return for the year 1955.

(4) In computing its operating loss for the fiscal year 1955, ending January 31, 1956, the corporation accounted for real estate owned costing $37,613.98 ($10,892.93 plus $26,721.05) obviously being the lots in Woodlawn Addition, the lots in Mattingly-Frazier Addition and Cherokee Gardens. Its operating statement for that fiscal year showed a deficit of $316.26 charged against paid in capital which was shown at $48,000.

(5) On September 27, 1955, Harry W. Alcott paid $4,000 to J. P. Shepherd Lumber Company, showing thereon that it was in payment for 3 acres of the Cherokee Garden tract on which the Pehl house was located. Both Alcott and Shepherd testified that Alcott was to have this tract as his individual property. However, this claim cannot be reconciled with the aforementioned corporate records with respect to the net cost of the Cherokee Gardens property nor with the various financial statements issued by the corporation. On most, if not all, of these records and statements, the cost of the Cherokee Gardens property was shown as aforementioned. Record title to all of the Cherokee Gardens property remained in the corporation until August 15, 1956, and no deed was executed to Harry W. Alcott, individually, for any part of this property. The weight of the evidence indicates that, after the purchase of this property, it was decided that Alcott would apply this payment toward the purchase of stock.

(6) The corporation's basic books consisted of a cash journal and a general ledger. No accounts payable ledger was kept, but trade and other invoices were loosely kept in a file folder. There was an accounts receivable ledger in which charges to customers were posted irregularly. From time to time, the accounts receivable would be adjusted by the corporation's bookkeeper to reflect estimates of work completed on the various construction jobs. A physical inventory was taken only at the end of the fiscal year which closed with January 31.

(7) During the life of the now bankrupt corporation, Alcott was President and a stockholder of Mill Supplies, Incorporated, another corporation, which sold industrial supplies to customers. He is an intelligent businessman, conversant with inventories, accounts receivable and trade accounts payable. He knows how to read a balance sheet and determine the net worth of a company. Shepherd was a builder, and, apparently, had small business experience other than his efforts to direct the bankrupt's business, which were characterized by poor estimates, poor bidding on contracts, excessive costs in construction and consistent loss of money in the bankrupt's operations.

(8) It is apparent that there was a very substantial operating loss to the corporation from February 1, 1956, to June 30, 1956. The size of that loss would depend, in large measure, upon the value of the merchandise inventory at the latter date. This actual merchandise inventory is not known. The only records available in that regard consist of two slips of paper, located in the working papers of an accountant, upon which figures purporting to be merchandise inventory at June 30, 1956, were written. It is not shown who prepared these two slips of paper, and, hence, it cannot be known whether either of them have any validity or not. Considering the lower figure of slightly more than $8,000 (the figure more in line with the financial history of the bankrupt corporation's operations) the operating loss for the five month period would have been $20,132.95, averaging more than $4,000 per month for that period. Other plain facts also appear. By May, 1956, the corporation's bank loans had increased by $8,000 over the amount owing at January 31, 1956. All bank loans were personally endorsed by Shepherd, and $5,000 thereof was also endorsed by Alcott. By May 16, 1956, Mrs. Shepherd had advanced $7,000 on open loans to the corporation. By June 30, 1956, payments had been made to the corporation by Alcott totaling $10,000 as a part of the transaction afterward mentioned, but in spite of this additional $25,000 made available to the corporation by these loans and by these payments, the corporation was unable to maintain a bank balance. Its overdraft as of June 30, 1956, was $1,369.27. Before that, the month end bank balance had either small credits or overdrafts. Shepherd, actively in charge of the business of the corporation, and Alcott, representing substantial stockholder interests and an officer of the corporation, both knew of this situation or are charged with the knowledge thereof. It may be significant to note that the first payment made by Alcott of $5,000 on May 16 was applied by the corporation in payment of its note in that same amount which was endorsed by Alcott personally.

(9) According to their testimony, Alcott and Shepherd had an informal understanding in about May of 1956, which contemplated that, for certain considerations, the investment real estate of the corporation, carried at a cost of $37,613.98 would be conveyed to The Alcott Company, Incorporated, a corporation organized by Alcott for himself and family for the express purpose of receiving title to this real estate. Alcott was the President and dominant figure in that new enterprise. In their informal discussions, it was assumed that Alcott would surrender to the corporation 200 shares of stock owned by him and the members of his family. Although, as against creditors, outstanding stock is in no sense a real liability of a corporation, it is significant to note that no effort was made to determine the book value, if any, which the 200 shares of Alcott stock in the bankrupt corporation then had. Neither Alcott nor Shepherd requested the corporation bookkeeper to prepare a financial statement showing the then current financial condition of the corporation. No physical inventory was taken by Shepherd or the corporate officers. No effort was made to determine the amount of accounts payable then owing by the corporation. No resolution was adopted by the stockholders and officers of the corporation ratifying or recognizing the informal understanding...