Stoumbos v. Kilimnik, s. 91-35524

Citation988 F.2d 949
Decision Date09 March 1993
Docket NumberNos. 91-35524,91-35525,s. 91-35524
PartiesBankr. L. Rep. P 75,183, 20 UCC Rep.Serv.2d 333 Zachary STOUMBOS, Trustee, as successor to Dale V. Whitesides, Trustee, Plaintiff-Appellant-Cross-Appellee, v. Walter KILIMNIK, an individual, AAM Aerospace & Corrosion International, Inc., a Washington corporation, d/b/a Aerospace & Corrosion International, Inc., et al., Defendants-Appellees- Cross-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Joseph E. Shickich, Jr., Riddell, Williams, Bullitt & Walkinshaw, Seattle, WA, for plaintiff-appellant-cross-appellee.

William S. Weinstein, Weinstein, Fischer & Riley, Seattle, WA, for defendants-appellees-cross-appellants.

Appeal from the United States District Court for the Western District of Washington.

Before WRIGHT, FLETCHER and CANBY, Circuit Judges.

FLETCHER, Circuit Judge:

The trustee for debtor American Alloy Metals ("AAM") appeals the district court's affirmance of the bankruptcy court's decision in an adversary proceeding brought by the trustee against Walter Kilimnik, former president of AAM. The decision in most respects favored Kilimnik. Kilimnik cross appeals that portion of the judgment that disfavored him. We reverse in most respects and remand.

FACTS

Walter Kilimnik founded AAM in 1965. He moved the company from California to Vancouver, Washington in 1980.

In 1982, Kilimnik, AAM's president and sole shareholder, sold the assets of AAM to a corporation owned by Peter Suriano, AAM's general manager. The transaction was structured as a leveraged buy-out. Kilimnik changed the name of AAM to WNK Enterprises, Inc. ("WNK"), while Suriano set up a new corporation called AAM. The new AAM purchased the assets of WNK. Suriano and AAM arranged to pay the purchase price as follows: Suriano made a down payment of $50,000, (the new) AAM assumed $385,000 of WNK's trade payables, and Suriano and AAM executed a promissory note in favor of Kilimnik for $3.95 million. The nature of the collateral securing the balance of the purchase price is one of the key issues. On May 1, 1982, the parties executed an agreement for the sale of the assets of WNK ("Purchase Agreement") to AAM and Suriano. After the sale, however, Kilimnik was president of AAM, and Suriano was general manager, positions each had held in the first AAM.

Kilimnik was to receive periodic payments on the note, but payments ceased almost immediately. No payments were made between September 1982 and August 1985 (when a preferential payment was made to Kilimnik).

In the spring of 1985, Suriano and Kilimnik apparently had a falling out. After negotiation, Suriano agreed to leave the corporation. As part of the settlement, he gave Kilimnik an irrevocable proxy to vote all his stock in the corporation. AAM paid Suriano an amount roughly equivalent to his 1982 down payment, and Suriano was released from personal liability on the promissory note.

Kilimnik was in sole control of AAM as president and holder of an irrevocable proxy to vote the shares. Apparently, under his direction, AAM's business began to improve. However, it had some problems with slow pay to its trade creditors, and Kilimnik found it necessary to reassure some of them. In early July 1985, Kilimnik had a heart attack, and was hospitalized for about two weeks. At the end of July, Kilimnik leased a small office in a location a short distance from AAM.

In August 1985, AAM made a $75,000 payment on the note to Kilimnik, and also redeemed $2,000 of preferred stock he held.

                On August 29, 1985, Kilimnik gave AAM notice of his intention to declare default on the note on September 9, 1985.   On September 13, 1985, Kilimnik filed suit in the Washington state court to enforce his security interest.   During this period, AAM placed unusually large orders with several of its suppliers.   The bankruptcy court found substantial payments were also made to creditors at this time, although creditors continued to press AAM for payment and even threatened legal action
                

In September 1985, Kilimnik incorporated AAM Aerospace and Corrosion International, Inc. ("Aerospace"). 1 Kilimnik began a transition of AAM's business to Aerospace. Aerospace took over AAM's facilities, and all AAM's employees became Aerospace employees. AAM's phone lines were moved to the small office that had been rented in July. A temporary employee was hired to answer the phone; she would take messages from AAM customers and deliver them to what was now Aerospace. Aerospace would then take the customer orders.

On September 30, 1985, Kilimnik informed AAM of his resignation as president and chairman of the board of directors, effective October 1, 1985. On October 1, a special meeting of AAM shareholders was held. A resolution was adopted directing AAM to waive its rights in its inventory, equipment and receivables and surrender them to Kilimnik, in exchange for Kilimnik's agreement to forego a deficiency judgment against AAM. AAM's assets were then turned over to Kilimnik. On October 2, 1985, Kilimnik withdrew $104,600 from an AAM deposit account.

On October 11, 1985, an involuntary chapter 7 petition was filed against AAM by certain of its creditors. In January 1986, the bankruptcy court approved the appointment of Joseph E. Shickich, Jr. as special counsel to the trustee for AAM; Shickich was employed for the purpose of bringing an adversary action against Kilimnik. In February 1986, the trustee instituted the proceeding against Kilimnik, seeking, among other things, to recover the value of AAM's assets surrendered to Kilimnik, to subject Kilimnik's claim to equitable subordination, and to impose successor liability on Aerospace.

The parties filed cross-motions for summary judgment on the issue of Kilimnik's security interest in AAM's assets. In May 1987, the bankruptcy court granted summary judgment in favor of Kilimnik.

In September 1988, the remaining issues were tried. The bankruptcy court found that the August 1985 payments to Kilimnik were preferential, but dismissed the trustee's remaining claims. The trustee appealed to the district court, which, without discussion, affirmed the bankruptcy court's decision in its entirety in September 1990. The trustee now appeals, and Kilimnik cross-appeals.

I

The trustee seeks recovery of the equipment, inventory and accounts receivable seized by Kilimnik in foreclosure of his claim. The trustee also seeks to recover the $104,631.79 that Kilimnik caused the debtor to withdraw from its Liquid Assets Management Account ("LAMA") and pay to himself on October 2, 1985, and the value of several motor vehicles Kilimnik transferred to himself.

On the parties' cross-motions for summary judgment, the bankruptcy court held that, at the time he foreclosed, Kilimnik had a valid, perfected security interest "in all inventories, deferred charges, machinery, equipment, automobiles, office furniture and equipment and accounts receivable" of AAM. Later, after trial, the court held that the LAMA was also subject to Kilimnik's security interest, because "the LAMA account was related to the Debtor's accounts receivable and such receivables were subject to the Kilimnik's [sic] security Interpretation of a contract is an issue of law reviewed de novo. Taylor-Edwards Warehouse v. Burlington Northern, 715 F.2d 1330, 1333 (9th Cir.1983) (applying Washington law). "Under Washington law, the role of the court in a contract action 'is to ascertain the parties' intentions and give effect to their intentions.' " Id. at 1334 (quoting In re estate of Hollingsworth, 88 Wash.2d 322, 560 P.2d 348, 350-51 (1977)). Extrinsic evidence is admissible as to the entire circumstances under which the contract was made as an aid in ascertaining the parties' intent. Berg v. Hudesman, 115 Wash.2d 657, 801 P.2d 222, 229 (1990).

                interest."   The trustee appeals these rulings
                

Three paragraphs of the purchase agreement are relevant. Paragraph 1 describes the property sold. Paragraph 8 is captioned "Security Agreement and Collateral" and provides, in relevant part:

To the extent Buyer creates accounts receivable from sales made subsequent to closing date, Buyer agrees to allow the accounts receivable as collateral for the payments which are due or to become due under the terms of the promissory note delivered to Seller as part of the purchase price. Buyer also allows his stock certificate in American Alloy Metals, Inc. to be given as collateral for the note. Buyer and Seller agree to the terms of the Working Capital Financial Agreement attached hereto and made a part hereof, designated as Exhibit "H".

Paragraph 25, captioned "UCC-1 For Sale," provides for the buyer to "execute a Form UCC-1 and to initial such additional sheets as may be required to describe the items of personal property being purchased hereunder."

In reaching its decision that Kilimnik had a security interest in AAM's equipment and inventory, the bankruptcy court relied only on the plain language of the Purchase Agreement: "[T]he purchase and sale agreement, when read as a whole, contains a security agreement that described adequately the collateral that is the subject of this dispute." The bankruptcy court reasoned that paragraph 25 indicated that the seller was to retain a security interest in the property transferred, while paragraph 8 provided for additional collateral for the credit extended. On appeal, the trustee apparently does not contest that Kilimnik had a security interest in the equipment and inventory transferred at the time of the purchase agreement.

Nonetheless, a reading of the Purchase Agreement alone does not support a holding that Kilimnik had a secured interest in equipment and inventory acquired after May 1, 1982. Indeed, the bankruptcy court does not explicitly discuss this issue in its memorandum decision, although in its order it provides that Kilimnik had "a valid security interest in all" equipment, inventory...

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