UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
VIRES COAL SALES, INC.
DEBTOR CASE NO. 93-70576
VIRES COAL SALES, INC. PLAINTIFF
VS. ADV. NO. 97-7036
CITIZENS BANK & TRUST
COMPANY OF HAZARD DEFENDANT
This matter came before the Court on the plaintiff=s Motion for Summary Judgment and the defendant=s Response. The plaintiff, as debtor-in-possession, seeks to avoid transfers to the defendant as fraudulent conveyances or conveyances without consideration pursuant to 11 U.S.C. ''548(a)(2) and 544, and KRS 378.010 and 378.020. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(H). For the reasons set out below, this Court grants the plaintiff a Partial Summary Judgment on its Motion.
The plaintiff has alleged that the defendant either required it to make payments, or took funds from the plaintiff=s account, and applied them to debts owed by two other entities, A & S Coal (AA & S@) and D-10 Parts (AD-10"). These entities were owned by principals of the debtor, Darrell Vires and Leo Vires, who is now deceased. A & S was owned 100% by Leo Vires, and D-10 was owned 50% each by Leo Vires and Darrell Vires. Leo Vires had personally guaranteed notes from these entities to the defendant. The debtor was also owned 50% each by these individuals. The plaintiff has set out sixteen instances between January 1, 1992, and April 15, 1993 in which it alleges that these transfers occurred. The plaintiff filed its Chapter 11 petition on December 23, 1993.
The plaintiff had alleged that it should recover transfers totaling $125,440.49. However, of the sixteen transfers claimed by the plaintiff, three have been eliminated from consideration: a check for $1,700.00 payable to Peoples Bank & Trust, a check for $10,000.00 for a cashier=s check for Neace Construction, and a debit ticket for $3,172.57 for funds withdrawn from A & S=s account, for a total of $14,872.57. In addition, only transfers which took place between December 22, 1992, and December 22, 1993 are subject to consideration under 11 U.S.C. '548(a)(2), as its limitation period is one year. The plaintiff, as debtor-in-possession, has the trustee=s Astrong arm@ powers pursuant to 11 U.S.C. '544.
Avoidance of a transfer under'548(b)(2) is accomplished by demonstrating that a transfer of an interest of the debtor in property was made voluntarily or involuntarily, within one year prior to the date of the petition, and the debtor
(2)(A) received less than equivalent value in exchange for such transfer or obligation; and
(B)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(ii) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(iii) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor
The plaintiff contends that the transfers which occurred in the relevant time period are avoidable under this statute, because it received no consideration for the transfer of its funds to pay the debts of A & S and D-10. The plaintiff further contends that the transfers were a substantial factor in its insolvency, left it with unreasonably small capital, and with an inability to pay its creditors.
The defendant has responded that, contrary to the plaintiff=s assertions, it did receive consideration for these transfers by its use of various pieces of equipment belonging to either A & S or D-10 during the periods when these transfers were made. The plaintiff has tendered the affidavit of Darrell Vires, and it indicates that the plaintiff did indeed make use of various items of equipment during the relevant period. The Court is therefore of the opinion that a question of fact remains to be determined concerning whether or not there was consideration for the transfers which occurred on March 23, 1993, and April 23, 1993, and whether the plaintiff received Areasonably equivalent value.@ The plaintiff is therefore not entitled to summary judgment on this issue.
As concerns the transfers which occurred between January 1, 1992, and December 18, 1992, the plaintiff seeks to avoid them pursuant to KRS 378.010 and 378.020, which void fraudulent conveyances and those made for no consideration, respectively. Of these, the transfers which took place between September 30, 1992, and December 18, 1992, still have issues of fact to be determined, as the affidavit of Darrell Vires indicates that the debtor used equipment of A & S and D-10 during this period.
The plaintiff has argued thatAbadges of fraud@ are present which make the transfers fraudulent under KRS 378.010. This Court does not agree. However, the Court believes that KRS 378.020 is applicable here because there does not appear to have been any consideration given for the transfers in question. The Vires affidavit makes clear that the debtor had at least one creditor during this period as required by the statute. There is no evidence that the plaintiff made use of any equipment belonging to A & S or D-10 during this period. The defendant argues that the transfers in question prevented or delayed Leo Vires from having to honor his guarantees, from enforcing his surety rights against A & S and D-10, and further prevented him from paying even more to cover losses of A & S or potential losses of D-10, and that this amounts to the plaintiff=s having received Aconsideration.@
This argument assumes anAidentity of interest@ between Leo Vires and the plaintiff. The defendant has cited In re Alexander Dispos-Haul Systems, 36 B.R. 612, 616 (Bkrtcy.D.Ore. 1983), in support of the proposition that rights of exoneration and indemnification have value. This Court does not disagree with that proposition as a statement of a principle of law. However, in that case, it was the debtor which was surety for payment of an obligation to a secured creditor of the debtor. The debtor was found to have received equitable rights against principals to the obligation in return for its guarantee. Here it is a principal of the debtor who guaranteed debts of other entities to a secured creditor of the debtor.
As set out in In re Royal Crown Bottlers of North Alabama, 23 B.R. 28 (Bkrtcy.N.D.Ala. 1982):
It may be said that, as a general rule, an insolvent debtor receives
A clear distinction from this rule exists, however, if the debtor and the third party are so related or situated that they share an>identity of interest,= because what benefits one will, in such case, benefit the other to some degree. The ultimate question then becomes one of determining the value of this vicarious benefit and testing it by the measure of >reasonably equivalent= for the property transferred by the insolvent debtor.
When the consideration for a transfer passes to the parent corporation of a debtor-subsidiary making the transfer, as in the case here, the benefit may be assumed to be nominal, in the absence of proof of a specific benefit to it. On the other hand, the passing to a subsidiary of the consideration for a transfer by a debtor-parent may be presumed to be substantial, because the subsidiary corporation is an asset of the parent corporation, and what benefits the asset will ordinarily accrue to the benefit of its owner.
At 30. Placing Leo Vires in the position ofAparent@ of the debtor, it is clear under the reasoning set out above that the benefit of any consideration passing to him was Anominal.@ This Court therefore finds that the plaintiff should have summary judgment that the transfers which occurred between January 1, 1992, and August 31, 1992, are void pursuant to KRS 378.020 because they were made for no consideration.
An order in conformity with this opinion will be entered separately.
By the Court -
Taft A. McKinstry, Esq.
Dean A. Langdon, Esq.