In re Fett Roofing & Sheet Metal Co. - 438 F. Supp. 726 (E.D. Va. 1977)

Rule:

A Bankruptcy Judge's findings of fact will be accepted unless "clearly erroneous." Bankruptcy Rule 810.

Facts:

Fett Roofing and Sheet Metal Co., Inc., was owned and run prior to 1965 by Plaintiff herein, Donald M. Fett, Sr., as a sole proprietorship. During 1965, Mr. Fett incorporated his 25 shares of stock. The stated capital of the corporation was never increased during the course of the corporation's existence. Mr. Fett was the sole stockholder and also the president of the corporation. The roofing business continued to be run completely by Mr. Fett much as it had been prior to its incorporation. In short, Fett Roofing was a classic "one-man" corporation. Over the years, Plaintiff advanced money to his business as the need arose. Three of these transactions made in 1974, 1975, and 1976 involved the transfer to the corporation of $7,500, $40,000, and $30,000, respectively. In each instance Plaintiff borrowed from the American National Bank, made the funds available to his business and took back demand promissory notes. On April 6, 1976, at a time his business had become insolvent, Plaintiff recorded three deeds of trust intended to secure these notes with the realty, inventory, equipment and receivables of Fett Roofing and Sheet Metal Co., Inc. The deeds were backdated to indicate the dates on which the money had actually been borrowed. On November 8, 1976, an involuntary petition in bankruptcy was filed. The Bankruptcy Judge concluded that the advances made by Mr. Fett to his corporation were actually contributions to capital, not loans, and that claims based on them therefore should be subordinated to those of all the other creditors of the bankrupt. The Judge further found that even if the transfers had been bona fide loans, the deeds of trust intended to secure them would have been null and void as having been given with actual intent to delay, hinder and defraud creditors in violation of § 67d(2)(d) of the Bankruptcy Act, 11 U.S.C. § 107(d)(2)(d). In addition, the Judge determined that such loans were given in fraud of creditors [**5]  under state law and therefore were voidable under § 70(e) of the Bankruptcy Act, 11 U.S.C. § 110(e).

Issue:

Did the Bankruptcy Judge err in determining that Mr. Fett’s transfers of money to his corporation were capital contributions and not loans?

Answer:

No

Conclusion:

The Court concluded that the Bankruptcy Judge was correct in his determination that Mr. Fett’s transfers of money to his corporation were capital contributions and not loans. The Court noted that a Bankruptcy Judge's findings of fact will be accepted unless "clearly erroneous." In examining the entire record, the opinion and order of the Judge and the briefs and oral argument of the parties, the Court is satisfied that substantial evidence supports the findings of fact of the Bankruptcy Judge and as they are not clearly in error, they will not be disturbed. In re Madelaine, 164 F.2d 419, 420 (2d Cir. 1947). Although the advances contested here were made well after the corporation was created, there is evidence in the record that Plaintiff had "loaned" the bankrupt money over the years and that the transfers here in issue were only the latest in a series of contributions made necessary by the corporation's grossly inadequate capitalization. Since these three transactions were "part of a plan of permanent personal financing," the fact that they did not occur at the outset of corporate existence is not crucial and the claims based on them are properly subordinated to those of other creditors. Since the transfers made by Plaintiff to the bankrupt were, in contemplation of law, capital contributions the deeds of trust purporting to secure these advances were properly set aside since there was in fact "no debt to be secured." The Court accepted the Bankruptcy Judge's findings of fact pertaining to the nature of the advances made by Mr. Fett and the nature of the corporation as Mr. Fett’s alter ego, as supported by substantial evidence and not clearly erroneous. Further, the Court found ample support in the facts and in the relevant authorities for treating Mr. Fett’s advances to the bankrupt as contributions to capital and not as loans.