Memorandum of Decision Re: Fraudulent Transfer (Alleged)

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re PARTRIDGE KNOLLS, INC.,                                       No. 1-87-01619      Debtor. ________________________/ PARTRIDGE KNOLLS, INC.,      Plaintiff,    v.                                                                                   A.P. No. 1-87-0186                                                                                          A.P. No. 1-88-0051 CONTINENTAL SAVINGS OF AMERICA,      Defendant. ________________________/
Memorandum of Decision
     Debtor Partridge Knolls, Inc., is a corporation wholly owned by John Novak, a real estate developer. The corporation was formed to develop a residential project in Novato, California.      In the fall of 1984, the debtor contracted to purchase the real property to be developed for $3.7 million. Through an intermediary, the debtor obtained a loan commitment of $8.5 million for acquisition and construction from defendant Continental Savings of America. A senior official at Continental apparently agreed to allow the debtor to recover its $600,000.00 down payment from the loan proceeds by authorizing a payment of $370,000.00 to an alter ego of Novak and allowing the debtor to pad contractor billings for the rest. It appears that this official may have received a kickback from Novak of $170,000.00.      Just before the loan was to fund, Continental informed Novak that the $600,000.00 down payment which Continental thought the debtor was putting into the project was not enough. Novak agreed to give a deed of trust to a parcel of his real property as additional collateral, and on December 31, 1984, the first $3.5 million was funded.      In August, 1985, bank examiners discovered the $370,000.00 payment to Novak. Continental called in Novak and demanded that he return it or give additional security as if it was just learning of the matter for the first time, although there is evidence that knowledge of the payment had extended to the highest officers of Continental. Novak refused, charges and countercharges were made, and a lawsuit followed in which Continental accused Novak of fraud and Novak accused Continental of acting in bad faith. A few days after the lawsuit was filed, on October 30, 1985, the debtor filed the first of its two Chapter 11 petitions.      In late 1985, the parties negotiated a full settlement of their disputes. The settlement gave Novak approximately seven months to find a buyer for the project, after which Continental was entitled to have delivered and recorded a deed in lieu of foreclosure placed with an escrow holder. Continental agreed to pay the project creditors, release the additional security it obtained from Novak, release all claims against Novak and his corporations, and pay Novak $380,000.00. The agreement provided that the Chapter 11 proceedings would be dismissed, and they in fact were dismissed on December 20, 1985.      The project was not sold and the deed in lieu was recorded on October 3, 1986. On September 10, 1987, the debtor commenced these Chapter 11 proceedings. By the instant action, it seeks to avoid the transfer of the project pursuant to section 548(a) of the Bankruptcy Code.      The Court has previously ruled that the transfer took place within one year before the date of the filing. The issue now before the Court is whether the debtor received a reasonably equivalent value for the transfer as required for recovery pursuant to section 548(a)(2)(A).      Although the parties hotly dispute the value of the property on the date of the transfer and the amount of the indebtedness forgiven by Continental on that date, the Court finds from a review of all the evidence before it that the property was worth $7,034,000.00 and that Continental forgave principal and interest due on the loan at that time in the amount of $6,479,000.00.      Based on the above finding, the debtor would argue that it is entitled to a judgment in excess of $500,000.00. However, the Court finds that under the facts and circumstances of the case the debtor received reasonably equivalent value and is therefore entitled to no further recovery on its complaints.      Ordinarily, transfers which benefit third parties are not made for fair value insofar as the debtor is concerned. Matter of Christian and Porter Aluminum Co. (9th Cir.1978) 584 F.2d 326, 337. However, transfers to third parties may be considered as fair value to the debtor where the debtor is the alter ego of the transferee or there is an identity of interest between the debtor and the transferee. Williams v. Twin City Company (9th Cir. 1958) 251 F.2d 678, 681; Rubin v. Manufacturers Hanover Trust Co. (2nd Cir. 1981) 661 F.2d 979, 991; In re Royal Crown Bottlers of North Alabama (Bkrtcy.N.D.Ala.1982) 23 B.R. 28, 32. As the court in Rubin noted, the test is whether the creditors of the debtor's estate have been harmed by the transfer.      Of the $880,000.00 in unsecured debt scheduled by the debtor, at least $784,000.00 resulted from claims originally made only against Novak and his wife personally. The largest debt, a judgment in favor of First National Bank of Marin for $466,000.00, resulted from a suit brought only against Novak and his wife; Novak stipulated to a judgment which included Partridge Knolls, Inc. as a judgment debtor as an inducement to the bank to reach a stipulation. The second largest debt, for $318,000.00, is based on a personal note of the Novaks. In addition the debtor's business counsel, who has a claims for $60,000.00, made it clear from the way he phrased his statements that Novak is his client, notwithstanding that his bills may be a charge against the debtor. All of these creditors benefitted just as much from transfers to the Novaks as they did from transfers to the debtor. In addition, the holder of a large scheduled priority tax claim has stipulated that the claim is against the Novaks personally and not the debtor. From these facts, the court has no difficulty in finding that Novak considered the debtor his alter ego, even to the extent of allowing it to stipulate to a judgment on his personal debt. The Court concludes that all of the consideration paid by Continental as part of the settlement should be considered in determining if the debtor got fair value.      While the Court understands that a separate project owned by another Novak corporation was involved in the settlement,the Court cannot ignore the fact that through the settlement Novak obtained both the reconveyance of the property he put up to satisfy Continental's concerns about his commitment to Partridge Knolls project and $380,000.00 in cash. Since the reconveyed property was put up in lieu of several hundred thousand dollars demanded by Continental, and since the debtor has offered no evidence to the contrary, the Court finds that Novak received enough value on account of Partidge Knolls to offset the difference between the market value of the project and the debt owed on it.      Even if the additional consideration given to Novak is not attributed to the debtor, it would not be entitled to prevail on the facts as found by the Court. "Reasonable equivalent value" as used in section 548(a)(2)(A) does not necessarily mean appraised value as that value is determined in an arm's-length transaction, but rather should be value as determined in light of all of the circumstances. 4 Collier on Bankruptcy (15th Ed.), p. 548-108; In re Robinson (Bkrtcy.N.D.Ill.1987) 80 B.R. 455, 460; In re Smith (Bkrtcy.W.D.N.C.1982) 24 B.R. 19, 23. The Court may take the fact that a transfer was made as part of a good faith settlement of a dispute into account in determining if there was reasonably equivalent value. Mayors v. C.I.R. (9th Cir.1986) 785 F.2d 757, 761; In re Sorlucco (Bkrtcy.D.N.H.1986) 68 B.R. 748, 753; In re Ward (Bkrtcy.D.S.D.1984) 36 B.R. 794, 799. In light of all the circumstances, the Court finds that the debtor received reasonable equivalent value even disregarding the consideration which flowed to Novak.      The debtor asserts that the giving of the deed in lieu of foreclosure was a disguised mortgage, and asserts this as an independent ground for relief. While it was probably not wise for Continental to use this method of obtaining title to the project, it is clear and the Court finds that the fair market value of the property does not exceed the amount the debtor would be deemed to owe if the indebtedness still existed, together with thecost of improvements made by Continental and reasonable costs of sale. Accordingly, the legal dispute as to whether there was a disguised mortgage is moot.      For the foregoing reasons, the debtor shall take nothing by its complaints. Counsel for Continental shall submit an appropriate form of judgment. Pursuant to FRCP 52(a) and Bankruptcy Rule 7052, this memorandum constitutes the Court's findings and conclusions.
Dated: July 28, 1988                                                                              _____________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy