Opinion
No. 01-84536, Adv. No. 03-8240.
November 17, 2005
OPINION
Before the Court are the separate motions for summary judgment filed by the Defendants CKMS, LLC and Westbay Investments LP (individually referred to as "CKMS" and "WESTBAY" and collectively referred to as "DEFENDANTS") on the Complaint filed by Richard E. Barber, as Chapter 7 Trustee ("TRUSTEE") for the Debtor, Integrated Agri, Inc. ("DEBTOR), for the avoidance of a payment under a remodeling contract as a fraudulent transfer pursuant to Section 548(a)(1) of the Bankruptcy Code.
The DEBTOR, Integrated Agri, Inc., is the holding company for four related debtor/corporations: Westbay Equipment Co., Acquisition No. 1, Inc., Nixon Farm Equipment, Inc., and Power Pro. Incorporated. The DEBTOR and its related corporations were farm equipment dealers in Illinois, Iowa and Missouri and operated their businesses as a single unit.
On July 1, 2001, WESTBAY sold property located at Galesburg, Knox County, Illinois, consisting of a commercial building, to CKMS for $500,000. The agreement for warranty deed called for monthly payments of $4,200 through July 1, 2011, when the unpaid balance was due in full. On that same day, CKMS and the DEBTOR entered into a written lease of the property. The lease provided for a ten-year term starting on July 1, 2001, with monthly payments of $4,200. Paragraph 5 of the lease, governing care and maintenance, preprinted except for one sentence, provides, in part:
5. CARE AND MAINTENANCE. (a) Tenant takes the premises as is, except as herein provided. (b) Landlord shall keep the following in good repair: (roof) (exterior walls) (foundation) (sewer) (plumbing) (heating) (wiring) (air conditioning) (plate glass) (windows and window glass) (parking area) (driveways) (sidewalks) (exterior decorating) (interior decorating) All routine maintenance on real estate facility responsibility of tenant.
(handwritten)
except when the same area occasioned by the misuse or negligence of Tenant, Its agents, employees or invitees. Landlord shall not be liable for failure to make any repairs or replacements unless Landlord fails to do so within a reasonable time after written notice from Tenant. (c) Tenant shall maintain the premises in a reasonable safe, serviceable, clean and presentable condition, and except for the repairs and replacements provided to be made by Landlord in subparagraph (b) above, shall make all repairs, replacements and improvements to the premises, INCLUDING ALL CHANGES, ALTERNATIONS OR ADDITIONS ORDERED BY ANY LAWFULLY CONSTITUTED GOVERNMENT AUTHORITY DIRECTLY RELATED TO TENANTS' USE OF THE PREMISES. Tenant shall make no structural changes or alterations without the prior written consent of Landlord.
On August 6, 2001, the DEBTOR entered into a contract with Johnson Building Systems ("JBS") to perform remodeling work in both the office and the combine shop. The work to be performed in the combine shop included the removal of an existing interior end wall and door, grading and placement of concrete in an area of the existing building, insulation of a portion of the roof area and existing sidewalls, installation of metal wall panels on all walls, improvements to the heating system and electrical work. The work to be performed in the office area included the removal of a door in the break room and removal of walls, doors and the installation of new walls in the central office area. The contract called for the total cost of $103,584 to be paid in three equal installments of $34,628 on October 1, 2001, November 1, 2001 and December 1, 2001. The DEBTOR made the first payment before bankruptcy.
The DEBTOR filed a Chapter 11 petition on October 23, 2001. Three days later, JBS recorded a claim for mechanic's lien in the Knox County Recorder's Office. The case converted to one under Chapter 7 on November 16, 2001. WESTBAY subsequently settled the mechanic's lien claim with JBS for $33,778. On January 28, 2002, CKMS quitclaimed its interest to WESTBAY.
The TRUSTEE brought this adversary proceeding against WESTBAY and CKMS to recover the contract payment as a fraudulent transfer under Section 548(a)(1)(B) of the Bankruptcy Code, alleging that the DEFENDANTS, as owner and landlord, were responsible for the cost of repairs and replacements under the lease. Relying on the doctrine of equitable conversion espoused by Shay v. Penrose, 25 Ill.2d 447, 449, 185 N.E.2d 218, 219-20 (1960), WESTBAY filed a Motion for Summary Judgment, alleging that as holder of only the bare legal title, it did not, nor could it have, contracted for the improvements to the premises. Attached to the motion is the affidavit of Charles Westbay, one of WESTBAY'S owners, alleging that WESTBAY did not enter into a contract with JBS. CKMS also moved for summary judgment, contending that the terms of the lease provided that the DEBTOR was liable for any improvements to the premises. CKMS also contends, without evidentiary support, that a subsequent oral agreement with the DEBTOR modified the lease by providing that the improvements would be contracted for and paid by the DEBTOR.
Under the doctrine of equitable conversion, when the owner of land enters into a valid and enforceable contract for its sale, the owner of the land holds only the legal title and the buyer becomes the equitable owner. As explained by the court in Shay, the doctrine stems from the basic principle that equity regards as done that which ought to be done.
After a hearing on the motions, the Court took the matter under advisement. The TRUSTEE was given an opportunity to file a response to the motions and the DEFENDANTS were given an opportunity to reply. In his response, the TRUSTEE contends that summary judgment is improper because material issues of fact require a trial. Included in the TRUSTEE'S list of disputed factual issues are the terms of the verbal modification of the lease and whether the DEBTOR received reasonably equivalent value from the DEFENDANTS in exchange for the payment to JBS. Emphasizing the short time frame between WESTBAY'S sale of the property to CKMS, CKMS' lease to the DEBTOR, the remodeling contract, the bankruptcy filing and the reconveyance to WESTBAY, the TRUSTEE seems to argue that the payment to JBS is recoverable from WESTBAY because the value of the improvements has ultimately inured to its benefit. The TRUSTEE insinuates that this result may have been contemplated from the get-go. Neither of the DEFENDANTS filed a reply.
Under Rule 56 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, summary judgment is appropriate only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In considering a motion for summary judgment, the court must view permissible inferences in a light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Summary judgment is appropriate only if, taking the record as a whole, the trier of fact could not find for the nonmoving party. Rogers v. City of Chicago, 320 F.3d 748 (7th Cir. 2003). The court's function is not to determine the truth of the allegations but to determine whether there is a genuine issue of material fact. Household Commercial Financial Services, Inc. v. Trump, 863 F.Supp. 735 (N.D.Ill. 1994).
Section 548(a) of the Bankruptcy Code permits a trustee to "avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor" involving actual or constructive fraud. Section 548(a)(1)(B), relied on by the TRUSTEE, provides:
(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
* * *
(B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(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's ability to pay as such debts matured.
In order for a trustee to establish a fraudulent transfer under this provision, the following elements must be established: (a) a transfer of the debtor's property or interest therein; (2) made within one year of the filing of the bankruptcy petition; (3) for which the debtor received less than a reasonably equivalent value in exchange for the transfer, and (4) either (a) the debtor was insolvent when the transfer was made or was rendered insolvent thereby; or (b) the debtor was engaged or about to become engaged in a business or a transaction for which its remaining property represented an unreasonably small capital; or (c) the debtor intended to incur debts beyond its ability to repay them as they matured. Dunham v. Kisak, 192 F.3d 1104 (7th Cir. 1999); In re General Search.com, 322 B.R. 836 (Bankr.N.D.Ill. 2005). The trustee bears the burden of proving those elements by a preponderance of the evidence.
Once a transfer is avoided, the trustee may recover for the benefit of the estate the property transferred or its value, from the actual recipient or the entity for whose benefit the transfer was made, or from subsequent transferees, subject to the protection accorded to mediate or immediate transferees who take for value, in good faith, without knowledge of the voidability of the transfer. 11 U.S.C. § 550. Even though an action to avoid a transfer may, and often is, brought in tandem with an action to recover the property transferred or its value, the court must evaluate the two forms of relief separately. In re Spinnaker Industries, Inc., 328 B.R. 755 (Bankr.S.D.Ohio 2005); In re Pearson Industries, Inc., 178 B.R. 753 (Bankr.C.D.Ill. 1995).
Neither the TRUSTEE nor the DEFENDANTS make the crucial distinction between the avoidance of a transfer and its recovery. In order to prevail in this adversary proceeding, the TRUSTEE must establish that the transfer to JBS is avoidable and that recovery may be had against WESTBAY and CKMS as the entities for whose benefit the transfer was made. It is only if the DEBTOR'S payment to JBS is avoidable under Section 548 that it may be recoverable from either or both WESTBAY and CKMS under Section 550. The arguments made by the parties must be analyzed in this framework. Because avoidance is a necessary prerequisite to recovery, the Court will address it first.
The theory of the TRUSTEE'S complaint for avoidance of the payment made by the DEBTOR to JBS is that CKMS, not the DEBTOR, was liable under the lease for the improvements and that a fraudulent transfer took place when the DEBTOR used its funds to pay the debt owed JBS by CKMS. As a general rule, a fraudulent transfer takes place when the debtor pays the debt of another, when the debtor itself is not obligated on the debt. In re Fox Bean Co., Inc., 287 B.R. 270 (Bankr.D.Idaho 2002); Biggs v. U.S. Nat. Bank of Omaha, 11 B.R. 524 (D.Neb. 1980). Under the lease, CKMS, as landlord, was responsible for certain repairs including roof, heating, wiring and exterior and interior decorating. The DEBTOR, as lessee, was responsible for all repairs and replacements not provided by the landlord, as well as for all improvement to the premises. Though the contract with JBS sets forth in detail the work to be performed, the parties apparently dispute into which category the work contracted for falls. Were the premises out of repair or was the contract entered into to meet the specific needs of the DEBTOR? Was it a combination of the two? In addition, CKMS claims that the lease was modified by an oral agreement between the parties. Based on the limited record before the Court, it appears that the DEBTOR and CKMS had a separate agreement with respect to the JBS improvements that was not intended to be covered in the lease. Thus, questions of fact exist as to whether CKMS was responsible for the work contracted for under the lease and whether the DEBTOR and CKMS subsequently agreed that the DEBTOR would be liable for that work.
However, the lease does not dictate the DEBTOR'S liability to JBS. The remodeling agreement, on its face, is a contract between JBS and the DEBTOR. Ordinarily, a party that executes a contract in its own name is liable for its performance. If the DEBTOR was liable to JBS, the payment in question, serving to discharge a contract obligation, was not fraudulent. In re Applied Theory Corp., 323 B.R. 838, 842, (Bankr.S.D.N.Y. 2005) (antecedent debt satisfies requirement of fair consideration and reasonably equivalent value so that payment of existing liability is not fraudulent). Despite the fact that the DEBTOR entered into the JBS contract apparently on its own behalf, under principles of agency, a party to a contract acting merely as an agent for another may avoid personal liability. One who makes a contract with another as agent for a disclosed principal does not become personally liable under the contract. Restatement (Second) of Agency § 320 (1958); Gateway Erectors Division of Imoco-Gateway Corp. v. Lutheran General Hospital, 102 Ill.App.3d 300, 303, 430 N.E.2d 20, 58 Ill.Dec. 78 (Ill.App. 1 Dist. 1981). Unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to the contract. Restatement (Second) of Agency § 320 (1958). An agent purporting to act upon his own account, but in fact making a contract on account of an undisclosed principal, is a party to the contract. Restatement (Second) of Agency § 322 (1958); Kelrick v. Koplin, 73 Ill.App.2d 63, 70, 219 N.E.2d 758, 762 (Ill.App. 1 Dist. 1966).
The agreement is in the form of a proposal addressed to the DEBTOR and accepted by the signature of Michael Maulsby on behalf of the DEBTOR.
The TRUSTEE, pointing to the short time frame between the sale, the lease and the contract with JBS, calls into question whether the DEBTOR, in contracting with JBS, was acting on its own behalf or on behalf of WESTBAY and/or CKMS. In addition, JBS, in its claim for mechanic's lien, asserts that the DEBTOR may have been acting on behalf of the owner, WESTBAY. But would proof of agency be excluded by the parol evidence rule?
As a general rule, Illinois courts hold that parol evidence of an agency is not admissible by a party seeking to escape liability on a contract that he signed in his individual capacity. World Ins. Co. v. Smith, 28 Ill.App.3d 1022, 329 N.E.2d 518 (Ill.App. 1 Dist. 1975); Kelrick v. Koplin, supra. Under the Restatement, in order for parol evidence to be excluded, it must appear unambiguously in an integrated contract that the agent is a party. Restatement (Second) of Agency § 323(1) (1958).
The threshold question for the application of the parol evidence rule is whether a writing is integrated. Eichengreen v. Rollins, Inc., 325 Ill.App.3d 517, 524, 757 N.E.2d 952, 259 Ill.Dec. 89 (Ill.App 1 Dist. 2001). In cases not governed by the Uniform Commercial Code, whether a writing is an integration is a legal question to be determined by the trial judge based solely on what is contained within the four corners of the document. JB Steel Contractors, Inc. v. C. Iber Sons, Inc., 162 Ill.2d 265, 642 N.E.2d 1215, 205 Ill.Dec. 98 (1994). To determine the integration question, the two relevant concerns are whether the writing is the final expression of the agreement and whether it is complete. Id.
It has been held that a contractor's proposal that simply outlined the work to be performed was not a final or complete agreement for purposes of the parol evidence rule. Oldenburg v. Hagemann, 207 Ill.App.3d 315, 326, 565 N.E.2d 1021, 152 Ill.Dec. 339 (Ill.App. 2 Dist. 1991). Similarly, the JBS agreement is a proposal that outlines the work to be performed, the price and the payment schedule. It is in letter format on JBS' letterhead. It is not in the form of a formal contract document, contains none of the terms typically found in contracts and does not contain an integration clause.
Absent are such basic terms as when the work will commence and when it is to be completed.
Based on the four corners of the JBS proposal, this Court determines that it is not an integration. Thus, parol evidence that the DEBTOR executed the agreement as a mere agent will not be excluded. Accordingly, whether the DEBTOR was liable to JBS is a material question of fact that cannot be resolved at this juncture. If the DEBTOR is determined not to be personally liable to JBS because it was acting merely as an agent for WESTBAY and/or CKMS, then the payment by the DEBTOR to JBS is likely a fraudulent transfer.
If the DEBTOR is liable to JBS, it is difficult to see how the payment could have been fraudulent. The TRUSTEE'S contention that the DEBTOR did not receive reasonably equivalent value from the DEFENDANTS for its payment to JBS, is off point. The issue is whether the DEBTOR received reasonably equivalent value from JBS. If the DEBTOR was liable to pay JBS, that issue is foreclosed. In re Applied Theory Corp., supra. This assumes, of course, that the payment of $34,628 was, in fact, the first installment under the remodeling agreement due JBS on October 1, 2001.
WESTBAY'S contention that it is entitled to summary judgment as a matter of law because, based on the doctrine of equitable conversion, it could have no liability under the contract with JBS is not persuasive given the open question of fact as to whether the DEBTOR signed the JBS proposal as an agent for WESTBAY and/or CKMS. However unlikely, it is possible that the DEBTOR was acting with actual authority from WESTBAY to contract with JBS for the improvements and that JBS knew that WESTBAY was the principal. Here, again, the focus is on identifying the party or parties liable to JBS under the remodeling agreement. If the transfer is avoidable because the DEBTOR was an agent, the Court must then address whether the TRUSTEE can recover from WESTBAY and/or CKMS as an "entity for whose benefit such transfer was made." For the foregoing reasons, the Motions for Summary Judgment filed by WESTBAY and CKMS will be denied. This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.