Transystems, Inc., Matter of, 76-2524

• Decision Date: 24 March 1978
• Docket Number: No. 76-2524,76-2524
• Citation: 569 F.2d 1364
• Parties: In the Matter of TRANSYSTEMS, INC., Bankrupt. FRUEHAUF CORPORATION, Appellant, v. Phillip REVITZ, Trustee in Bankruptcy, Transystems, Inc., Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1364

569 F.2d 1364

In the Matter of TRANSYSTEMS, INC., Bankrupt.

FRUEHAUF CORPORATION, Appellant, v. Phillip REVITZ, Trustee in Bankruptcy, Transystems, Inc., Bankrupt, Appellee.

No. 76-2524.

United States Court of Appeals, Fifth Circuit.

March 24, 1978.

John L. Zavertnik, Bayard E. Heath, Miami, Fla., for appellant.

R. Benjamine Reid, Carl H. Hoffman, Miami, Fla., for appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before COLEMAN and FAY, Circuit Judges, and KING, ^* District Judge.

JAMES LAWRENCE KING, District Judge:

On this appeal, appellant Fruehauf challenges the District Court's determination that the funds advanced to a corporation prior to the time of its bankruptcy were a contribution to capital of the bankrupt corporation rather than a loan. In addition appellant challenges the district court's conclusion as to the creation of a security interest in the collateral underlying that advance. The court finds that the district court was correct in its conclusions on both issues.

While the background of this matter is complex, it is essential to an understanding of the decision of this court. Because of its integral quality, it is recounted in detail.

The bankrupt, Transystems, Inc., was organized in 1960. In February of 1969, Aero, Inc. acquired Transystems. At this time, an agreement was reached providing for a plan of reorganization. This agreement was preceded by a resolution of Aero's Board of Directors to authorize the purchase of up to $400,000 additional stock in Transystems in order to infuse substantial capital funds into its sagging corporate structure. $240,000 of this resolved amount actually was provided.

This initial infusion of funds was not sufficient. Finding that Transystems was not heading toward a financial recovery, Aero agreed to the further advance of funds. Specifically, in August of 1970, Aero advanced $385,000 to the eventually bankrupt company. This advance was engendered by Aero's recognition that its subsidiary, Transystems, still was suffering financially. Its profits were not nearly as high as originally represented by Transystems.

This advance, which is at the center of this appeal, was structured as a loan agreement. It was payable on a demand basis with interest at fifteen percent per annum on the outstanding balance. Each advance toward the $385,000 figure was to be evidenced by a promissory note, secured in part by a chattel mortgage on all operating rights of the bankrupt and a chattel mortgage on all encumbered trucks, trailers, cars and other equipment of Transystems. Pursuant to this agreement, Transystems executed three promissory notes for a total of $385,000. Transystems pledged all of its remaining unpledged assets as security. A financing statement was filed by Aero on August 26, 1970 with the Secretary of State of Florida. Aero then obtained a loan, collateralized by guaranties and other assets supplied by Aero, from the Bank of North America.

The $385,000 advanced was required by Transystems to allay the mounting pressures of back taxes and past due claims of creditors. However, Transystems' obligation to one creditor, Fruehauf Corporation the appellant herein could not be satisfied fully by this advance.

Fruehauf had leased and sold trailers to Transystems, thereby becoming one of its major creditors. In September of 1970, having defaulted on some of these lease payments, Transystems entered into an agreement with Fruehauf whereby the date of payment was extended by the appellant in exchange for Aero's guaranty, as parent corporation, of Transystems' performance. This guaranty was secured by the collateral pledged to Aero by Transystems under the August 1970 loan agreement.

In essence, Aero pledged collateral that Transystems had pledged to Aero earlier that year.

Despite this arrangement, Transystems' condition continued to deteriorate, culminating in the filing of a voluntary Chapter Eleven petition in March of 1971. At this juncture, Fruehauf, the creditor, demanded payment from Aero pursuant to the September 1970 guaranty. Transystems was indebted to Fruehauf for over $200,000.

Aero, suffering from its own financial maladies, decided that it could not fulfill its obligation as guarantor. In May of 1971, Aero and Fruehauf entered into an agreement wherein Fruehauf promised not to sue Aero on the guaranty and Aero agreed to assign to Fruehauf the collateral taken by Aero from Transystems under the August 1970 loan agreement.

The Bankruptcy Judge rejected Transystems' voluntary application in bankruptcy. On October 18, 1971, Transystems was adjudicated bankrupt.

On February 8, 1973, in the course of the bankruptcy proceeding, the Referee denied Fruehauf's claim to those assets of the bankrupt embodied in the assignment by Aero to Fruehauf in May of 1971. The Bankruptcy Judge concluded that the $385,000 advanced by Aero to Transystems the collateral for which was eventually assigned to Fruehauf in May of 1971 represented a contribution to Transystems' capital rather than a loan. This decision was critical to the priority Fruehauf would attain in Transystems' bankruptcy proceeding.

Fruehauf subsequently sought review of this determination in the United States District Court for the Southern District of Florida. On December 13, 1973, that court decided that the Bankruptcy Judge had utilized an incorrect standard in arriving at his determination of the "status" of the $385,000 advance. Judge Eaton found that this bankruptcy case was governed by Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). ¹ Therefore, state law, not federal, was the proper criterion for judging the status of the $385,000 advance. The case was remanded with instructions to decide the pivotal status of the advance within the context of state law principles.

Fruehauf filed a Notice of Appeal in the Fifth Circuit which this court dismissed on August 24, 1974 because it was not ripe for appeal. 499 F.2d 416 (5th Cir. 1974). The case was remanded to the Bankruptcy Court to be decided pursuant to the instructions of the District Court in its order of December 13.

On remand, the Bankruptcy Court held that the advance in question was a capital contribution even under state law. Further, the Bankruptcy Court held that Aero the party that made the advance in exchange for the collateral which served as the foundation for its subsequent guaranty to Fruehauf had not created nor perfected a security interest in that collateral.

Finding that a determination of the status of the monetary advance was a question of fact, the District Court reviewed the Bankruptcy Judge's ruling thereon under the "clearly erroneous" rule. The Bankruptcy Judge's findings were affirmed.

After its petition for rehearing was denied by the District Court, Fruehauf filed this appeal.

Appellant raises three issues on this appeal:

(i) whether the District Court erred in choosing to utilize the "clearly erroneous" standard in reviewing the Bankruptcy Judge's determination as to the status of the advance in question?

(ii) whether the advance of $385,000 made by Aero to Transystems in August of 1970 the collateral attendant thereto being integral to Aero's May 1971 agreement with Fruehauf was a valid loan or contribution to capital?

(iii) whether a security interest was created and perfected in the materials mentioned in the August 1970 loan agreement?

1. THE CLEARLY ERRONEOUS STANDARD WAS THE CORRECT CRITERION FOR REVIEW OF THE BANKRUPTCY JUDGE'S FINDINGS:

The District Court utilized the correct criterion in assessing the Bankruptcy Court's determination of the status of Aero's advance to Transystems.

Rule 810 of the Bankruptcy Rules of Procedure requires the District Court to accept a Referee's findings of fact "unless they are clearly erroneous. . . ." Thus, it remains for this court to determine whether conclusions relating to the advance in question involved findings of law or findings of fact. If findings of fact were involved, then Rule 810 mandates the utilization of the "clearly erroneous" standard.

A. State Law Focusses on Intent as the Prime Determinant of the Status of the Advance:

The District Court and Bankruptcy Court were bound to apply state law in the resolution of the substantive issues before them. While there is very little state law on the issue of the loan/capital dichotomy, one case Pierce v. Scott, 142 Fla. 581, 195 So. 160 (1940) is of great significance. It has received thorough scrutiny by both parties to this appeal.

A careful reading of Pierce reveals that in proceeding to a determination of the status of the stockholder's advance in that case, the court primarily focussed on the intent of the party that made the advance. This inquiry required the court to engage in an evaluation of the facts of the transaction itself that is, the manner in which the advance was made and the circumstances surrounding it. The standards elucidated by that court as criteria to be utilized in the determination of the status of an advance substantiate this court's belief that a factual inquiry was at the center of the Pierce court's efforts:

a stockholder or any other person connected with the management of corporate affairs can create the relationship of creditor and debtor as between himself and the corporation by making advances from his own personal resources to the corporation, where such advances are made for the benefit of the corporation and its stockholders and creditors, and where the transaction itself is entirely free of any fraud and bad faith, and where the person so making the advancement to the corporation obtains no advantage to himself over the other stockholders and creditors of the corporation.

Pierce, 195 So. at 161.

The Pierce decision proffers three categories of findings of fact that should guide a Bankruptcy Court in its determination of the status of a stockholder's advance. However, these...