Reese v. Akai America Ltd., 76-2212-Civ.-WMH.
| Decision Date | 30 March 1982 |
| Docket Number | No. 76-2212-Civ.-WMH.,76-2212-Civ.-WMH. |
| Citation | 19 BR 83 |
| Parties | Melvin REESE, as Trustee, etc., Plaintiff, v. AKAI AMERICA LIMITED, etc., et al., Defendants. |
| Court | U.S. District Court — Southern District of Florida |
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Scott L. Baena, Stroock, Stroock & Lavan, Miami, Fla., for BSR-USA and Graybar Electric.
Hugo L. Black, Kelly, Black, Black & Earle, P.A., Miami, Fla., for third-party defendant First Nat'l Bank of Chicago.
James E. Glass, Rosenberg, Rosenberg, Reisman & Glass, Miami, Fla., for General Electric Co.
Robert B. Gosline, Shumaker, Loop & Kendrick, Toledo, Ohio, for Main Line, Inc.
Eugene C. Holloway, Batavia, N.Y., for GTE Products, Inc.
Lawrence R. Metsch, Paul, Landy, Beiley & Harper, Miami, Fla., for Emerson, RCA, Seacoast and GTE Products, Inc.
Melvin Reese, Miami, Fla., trustee/plaintiff.
Martin L. Sandler, Broad & Cassel, Miami, Fla., for Cain & Bultman.
Wakefield, Hewitt & Webster, Miami, Fla., for Melvin Reese.
On January 21, 1976, the following affiliated corporations filed petitions with the United States Bankruptcy Court for the Southern District of Florida ("Bankruptcy Court") seeking relief under Chapter XI of the Bankruptcy Act of 1898: Kennedy and Cohen, Inc., a Florida corporation; Kennedy and Cohen of Georgia, Inc., a Georgia corporation; Kennedy and Cohen of Ohio, Inc., an Ohio corporation; Kennedy and Cohen of Texas, Inc., a Texas corporation; Southern Factors of Texas, Inc., a Texas corporation; and World Associates, Inc., a Florida corporation. The preceding companies (hereinafter "the bankrupts" or "Kennedy and Cohen") were adjudicated bankrupts on March 5, 1976, the date on which Melvin Reese was designated Trustee in Bankruptcy for each. On May 15, 1976, in connection with the declared bankruptcy of the above-described corporations, the Bankruptcy Court appointed Special Counsel on behalf of the Trustee for the purpose of instituting fraudulent conveyance and voidable preference actions pursuant to appropriate sections of the Bankruptcy Act. Approximately seven months later, the aforementioned counsel filed the instant action with Melvin Reese in his representative capacity as Trustee as plaintiff.
Of 25 original defendants in this cause, nine remained at the conclusion of a bench trial which began in December of 1980. Those nine, collectively referred to at trial as "the vendors," were: BSR-USA, Limited ("BSR"); Cain & Bultman, Inc.; Emerson Electric Company ("Emerson"); GTE Products Corporation ("GTE"); General Electric Company ("GE"); Graybar Electric Company ("Graybar"); Main Line, Inc.; RCA Distributing Corporation ("RCA"); and Seacoast Appliance Distributors, Inc. ("Seacoast"). A tenth trial defendant, The First National Bank of Chicago ("FNBC"), became a party to the action following appointment by the Bankruptcy Court of additional Special Counsel on September 17, 1980, said counsel having been named on behalf of Trustee Melvin Reese for the express purpose of proceeding against FNBC pursuant to § 60(b) of the Bankruptcy Act, 11 U.S.C. § 96(b). As issues which uniquely pertain to FNBC are dispositive of this case regarding that defendant, the Court's resolution of the Trustee's suit against FNBC will be set forth separately in this opinion following discussion with respect to the other nine defendants.
Although a variety of allegations appeared in plaintiff's several complaints filed between 1976 and 1978, the trial which eventually commenced at the close of 1980 was addressed solely to the issue of voidable preferences under § 60 of the Bankruptcy Act.* Under § 60(a) of that Act, a preferential transfer (that is, the favoritism of a certain creditor) consists of a debtor:
Each of the foregoing elements must be established before a preference can be found to exist. However, in order for a bankruptcy trustee to prevail in a suit brought to avoid a preference, thereby causing the return of the value of a transfer to a debtor's estate, the Bankruptcy Act further provides that a preferential transfer may not be deemed null and void without proof of an additional element, to-wit: that the creditor receiving or to be benefited by the preference had reasonable cause to believe that the debtor was insolvent. See § 60(b). As to all of the required elements, a trustee seeking to avoid a transfer bears the burden of proving each by a preponderance of the evidence. Significantly, a debtor's intent or motive in making a preferential transfer is not controlling in determining whether such a transfer is voidable, for judicial consideration of a transferor's moral turpitude is not required by § 60(b).
Kennedy and Cohen, Inc. and its affiliates operated as retail merchants of appliances. Located in various geographic areas, Kennedy and Cohen of Georgia, Kennedy and Cohen of Ohio, Kennedy and Cohen of Texas and World Associates were controlled by the Florida-headquartered "parent," Kennedy and Cohen, Inc., a Florida corporation. As the funds and assets of the four satellite companies were commingled with that of the parent, and as the business activities of the geographically-distinct entities were dominated by the Florida corporation, the affiliates may be fairly described as instrumentalities of the parent concern, Kennedy and Cohen, Inc. Notably, the officers and directors of all of the aforementioned companies were essentially identical, with the exception of World Associates and Kennedy and Cohen of Ohio.
A similar identity of officers and directors was characteristic of Southern Factors of Texas, Inc., the financing arm for the entire Kennedy and Cohen complex. Indeed, Southern Factors was formed and existed for the sole purpose of financing purchases of merchandise for resale by the Kennedy and Cohen companies. In brief, Southern Factors obtained products from suppliers such as the defendant vendors at a cost reflecting a "finance discount," subsequently transferring those goods to other facets of the Kennedy and Cohen organization unaccompanied by the price reduction. This "factoring" arrangement, as it is known, was not uncommon in the appliance industry during the Kennedy and Cohen era.
In 1974 Kennedy and Cohen embarked upon an expansion program and in June of that year obtained a loan in excess of twenty million dollars from The First National Bank of Chicago. The borrowed funds were acquired for the purpose of financing Kennedy and Cohen inventory. The relevant loan agreement provided in pertinent part that FNBC would receive a security interest in all Kennedy and Cohen inventory, as well as in all proceeds from the sale of that inventory, as collateral for the Kennedy and Cohen indebtedness. Further provisions of the loan agreement required that the level of borrowing by Kennedy and Cohen was not to surpass 90% of the value of eligible collateral, security which was primarily composed of inventory and accounts receivable. Additionally, Kennedy and Cohen was to maintain a minimum net worth of three million dollars.
An economic downturn began in the United States in the second quarter of 1974, a financial circumstance which coincided with the Kennedy and Cohen expansion. A brief reflection of the apparent impact of this recessionary trend upon the parties to this cause is evident in a General Electric monthly report which indicated that sales of GE products to Kennedy and Cohen in the first two months of 1975 had fallen 58% in sales volume as compared with the first two months of 1974. More dramatically, Kennedy and Cohen's net earnings for the last three quarters of 1974 were $31,000, in marked contrast to the $987,000 earned in a similar period in 1973. While detailed analysis of the causes and effects of such declines is unnecessary here, several events which occurred in 1974 and 1975 have particular significance.
First, in mid-1974, General Electric Credit Corporation ("GECC"), the major consumer credit organization upon which typical Kennedy and Cohen customers were dependent for the financing of appliance purchases, raised its rejection rate for credit applications by an extraordinary 300% — 400%. While the extent of the impact of this increase upon possible purchasers is not known, the potential pool of Kennedy and Cohen customers was undoubtedly drained by GECC's action. Additionally, on April 1, 1975, Kennedy and Cohen acquired World Associates, a former franchisee which had financial losses approximating $2,841,000 for the year ending March 31, 1975. Finally, a joint venture with Levitz Corporation proved to be an unprofitable operation for Kennedy and Cohen during the period in question.
Most of the foregoing adverse factors — the recessionary trend, the GECC action, and the Levitz operation — as well as a general inventory imbalance with respect to Kennedy and Cohen brand merchandise, were mentioned in a form letter which Kennedy and Cohen sent to its major suppliers in June of 1975. Although the letter contained an optimistic forecast regarding Kennedy and Cohen's future, it is beyond dispute that many of Kennedy and Cohen's problems were openly on the table by the early summer of 1975. When, a brief six months later, Kennedy and Cohen filed bankruptcy petitions on January 21, 1976, those problems translated into several thousand unpaid creditors and debts exceeding twenty million dollars. Despite the enormity of this financial disaster, however, the accounts which Kennedy and Cohen maintained with the...
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