South Falls Corporation v. Rochelle

• Decision Date: 19 March 1964
• Docket Number: No. 20785.,20785.
• Citation: 329 F.2d 611
• Parties: SOUTH FALLS CORPORATION, Appellant, v. William J. ROCHELLE, Jr., Trustee in Bankruptcy for Giant Stores of Longview, Inc., Bankrupt, et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

329 F.2d 611 (1964)

SOUTH FALLS CORPORATION, Appellant, v. William J. ROCHELLE, Jr., Trustee in Bankruptcy for Giant Stores of Longview, Inc., Bankrupt, et al., Appellees.

No. 20785.

United States Court of Appeals Fifth Circuit.

March 19, 1964.

Charles Marcus, Robert N. Benson, Dallas, Tex., for appellant; Mary Neal Sisk, Dallas, Tex., on the brief.

William Madden Hill, Ungerman, Hill, Ungerman & Angrist, Dallas, Tex., for appellee, William J. Rochelle, trustee in bankruptcy of estate of Giant Stores of Longview, Inc.

Philip I. Palmer, Jr., Palmer & Palmer, Dallas, Tex., for appellee, James W. Dugger.

Before BROWN, MOORE^* and GEWIN, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

The sole significant legal question in this case¹ is whether the Referee in a summary proceeding correctly required the turnover of money received from the bankrupt estate by the Transferee-Respondents after bankruptcy. We, as did the District Court, affirm this action. Likewise, we, as did the District Court, hold that the inability to identify the precise dollars thus received is no obstacle to a turnover order directed to Transferees whose remaining assets are sufficient in amount to permit reimbursment. Our discussion of the factual setup is greatly simplified because no attack is here made on the Referee's findings of fact. We are bound by them, and they portray a picture of discriminate application of funds to the advantage of insiders.

The involuntary petitions in bankruptcy were filed on October 31, 1962.² The Bankrupts are two corporations, Giant Longview and Giant Wichita Falls,³ who operated as a discount store in these Texas cities. The Transferee-Respondent is South Falls Corporation, a closely-held corporation whose owners and moving figures were Cash, Peterson and Morris. South Falls — primarily engaged in the business of buying and selling real estate, promoting shopping centers, and the like — while nominally the builder, owner and lessor of the store premises, had heavy financial interests in the two Giants which gave it a status transcending that of a mere landlord. The promoters of the stores were the two Zimmermans who were to manage and operate the stores. Their contribution was to be management with South Falls putting up nearly all of the money. South Falls had a 25% stock interest for which it paid $50,000 plus a debenture loan of $100,000 for each store. Besides its interest as a landlord, South Falls therefore had an immediate investment of $300,000 riding on the success of the enterprise. The stores opened in September 1961. The Zimmermans, as contemplated in the arrangement, took over the complete management and operation, most of which was conducted from Indiana. Though Peterson and Cash were Directors, they made no effort to influence the Zimmerman management. Things did not go well, and by May 1962 each store had incurred losses in excess of $100,000. The situation continued to deteriorate. Creditors of one kind and another were clamoring for payment. Of the creditors, some of the most persistent and, so far as this record is concerned, most successful, were companies operating leased departments. Two of them figure heavily in later incidents. Lesal, a Texas subsidiary of Morse Shoes, operated a shoe department as did Di-Deb in another line for Marrud. Though the record does not contain the leases and only vague information was given about them through interested witnesses whom the Referee discredited, it is South Falls' contention that under the arrangement, the Giant Store was to remit periodically the gross sales of such leased departments received through Giant cash registers. As to many, this was not done. By August this indebtedness was both past due and large, and on August 20 promissory notes were issued by the respective Giants to these department lessees.⁴ By September 12 things were hopeless, hopeless that is for the South Falls interest. On that date — following what must have been intense conferences, negotiations, and intense bargaining among the entrepreneurs in their reflex to nature's first law of preservation of self-interest — a sweeping and decisive "settlement" was made between the Zimmermans and South Falls. The interests of the participants were paramount, pressing, and thought to be of considerable financial significance to each. South Falls was a landlord with buildings under long term lease to defunct lessees. Worse, by one of today's fascinating arrangements involving sale and lease back of these two buildings to Eastern interests, South Falls had now become a lessee obligated under a lease and surety bond for the payment of $6500 per month to its new owner-lessor. Also, in the initial trade with the Zimmermans, a number of stores were to be constructed and leased, and two of the properties, one in Beaumont, Texas, the other Fort Wayne, Indiana, were apparently nearing completion and represented valuable leaseholds. And all the while the investment and risk were in the hands of corporations in which it had only a minority 25% interest controlled by owner-management (75%) which had so far been singularly unsuccessful. This made it important for South Falls to build up an enticing image for the stores so as to be able to sell its corporate stock.

But the tugs of self-interest did not end with South Falls or its leading lights, Cash, Peterson or Morris. The Zimmermans were quite aware that in their failure, they still had much which South Falls wanted. One thing was the 75% stock ownership in Giant Longview and Giant Wichita Falls. The other, and probably more important, was the power to exploit the leasehold value of the new properties in Beaumont, Texas and Fort Wayne, Indiana. But these forces did not stop there. The Zimmermans, in turn, were under heavy pressure from department lessees, especially Morse Shoes (Lesal) and Marrud (Di-Deb). It is perfectly obvious that these lessees were making dire threats, apparently in terms of wrongful appropriation of what the trade loosely refers to as "trust funds" representing sales through the stores' cash registers. This was important to the Zimmermans as they were merchants, presumably of good standing, in other communities and planned further expansion. It was essential to their future business welfare to "purchase" the good will of these substantial "creditors" who, at that time were anything but happy. Thus the screws turned.

The result was one big trade. The Zimmermans agreed to sell their stock in Giant Longview and Giant Wichita Falls to South Falls (or its designee) in return for notes in the total amount of $50,000 and relinquishment of all rights to the Beaumont and Fort Wayne leaseholds. South Falls, on its part, in addition to the promissory notes for the stock also agreed to guarantee the full payment of specified creditors and particularly the amounts due Lesal and Di-Deb (note 4, supra). The guaranty was to be complemented by an indemnity to the Zimmermans, the effect of which was to impose the full and ultimate impact of these debts on South Falls. All of this was faithfully carried out.

Now tall in the saddle, South Falls, as it properly could, took over with dispatch. Existing local bank accounts were closed, new ones opened with nominees of South Falls alone authorized to draw checks. But not stopping there, South Falls caused to be organized a further entity, Giant Trading Corporation, all of the stock of which was subscribed for by minor functionaries of South Falls' staff, each of whom, though garbed in high sounding corporate titles, had absolutely no authority to do anything save carry out the directions of South Falls through its owner-director spokesman Cash and perhaps occasionally Peterson. In the meantime, on October 3 South Falls sent a letter to all creditors. One important part of this letter stated that any goods shipped to the two stores subsequent to September 25, 1962, would be paid for by South Falls.

It is the handling of funds by and through Giant Trading Corporation that is the heart of this present appeal. Its bank account was opened about October 10 by a deposit of $50,000 represented by two checks of Giant Longview and Giant Wichita Falls. Between that date and November 21, when the account was closed with the advent of receivers in the reorganization proceeding (see note 2, supra), these transfers aggregated approximately $214,000.⁵ Of this amount, the sum of $100,000 represented transfers from the Bankrupt Giants after the date of bankruptcy.⁶ On October 18, Giant Trading paid South Falls $40,000, the check bearing the word "loan" but testimony of Cash and others described it as an installment payment on the debentures owed to South Falls. On October 25, Giant Trading paid South Falls $15,000 for rent for the two stores for the month of November, although the rent was not then yet due. Between October 11 and October 31, the date of bankruptcy, Giant Trading at the direction of South Falls also paid out approximately $47,033.52 to creditors (other than South Falls), but of this sum $39,878.97 went to the "guaranteed" creditors, such as Morse Shoes and Marrud. These pre-bankruptcy deposits and disbursements are not immediately involved, but in the light of the Referee's findings both as to payments to South Falls⁷ and to favored creditors⁸ which are not here attacked, they are relevant in assaying the legally indefensible nature of the post-bankruptcy receipts and disbursements.

Completely indifferent to the commencement of the bankruptcy proceedings, South Falls through Giant Trading continued these activities without change. On November 20, rent was paid for both stores for December, although it was not yet due. And between November 8 and November 19, Giant Trading paid out $27,359.21 to creditors, but carefully confined to those creditors (and no others) as to whom South Falls had direct liability as a guarantor.⁹

On the basis of these facts and findings, the Referee...