FOR THE NORTHERN DISTRICT OF CALIFORNIA
MUSKIN, INC., No. 1-90-01332
OFFICIAL UNSECURED CREDITORS'
v. A.P. No. 92-1017
SECURITY PACIFIC BUSINESS
CREDIT, INC., and JACKSON
NATIONAL LIFE INSURANCE
Memorandum of Decision
Debtor Muskin, Inc., is a wholly owned subsidiary of U.S. Leisure, Inc., which is itself in
bankruptcy. Before 1982, Muskin and its sister subsidiaries were divisions of U.S. Leisure;
around 1982, they were made separate corporations. Before the sale of its assets in bankruptcy,
Muskin was a manufacturer of above-ground swimming pools.
In 1984, U.S. Leisure established a line of credit with the predecessor interest of defendant
Security Pacific Business Credit, Inc. The line of credit was secured by the inventory and
receivables of U.S. Leisure and all its subsidiaries. Each subsidiary was jointly and severally
liable for the entire debt.
In early July, 1988, the credit line was restructured, and a portion of the entire
pre-restructuring debt was assigned to Muskin on the basis of its assets. Muskin also remained
a guarantor of the entire debt. Thereafter, the business of the other subsidiaries suffered large
losses resulting in the bankruptcy of all of them even though Muskin itself remained viable and
profitable. In the last few months before bankruptcy, Security Pacific advanced $10.3 million
through Muskin to the other subsidiaries, so that there are now no unsecured assets remaining
in the Muskin estate to pay its unsecured creditors.
By this adversary proceeding, the Muskin Creditors' Committee seeks to have the court
avoid the debt restructuring as a fraudulent transfer, so that all of the Muskin estate funds will
not go to the secured defendants but may be used to pay Muskin's unsecured debt. Muskin had
been sold, with the proceeds held pending the outcome of this adversary proceeding. U.S.
Leisure and its other subsidiaries are no longer in business and their assets are insufficient to
pay Security Pacific and defendant Jackson National Life Insurance, which became a
participant in the loan at the time of the restructuring.
Since the restructuring took place more than two years before bankruptcy, and none of
Muskin's debts as of the bankruptcy filing appear to relate back to the date of the restructuring,
the Committee attacks the transaction under California Civil Code section 3439.04, which
makes a transfer fraudulent as to future creditors if made with intent to defraud or made without
receiving a reasonably equivalent value if the assets remaining after the transfer were
unreasonably small in relation to the debtor's business. It also attacks advances made just
before bankruptcy under section 548 of the Bankruptcy Code.
The court finds that neither defendants had any intent to defraud anyone, nor did U.S.
Leisure or Muskin. The court does not find, as urged by the Creditors' Committee, that in 1988
defendants knew U.S. Leisure was likely to go under and were trying to improve their position
in the face of anticipated liquidation. In fact, Jackson's participation was brand new, and made
with the full expectation that it was entering into a profitable arrangement.
II. Date of the Transfer
There are three possible dates which the court might find for the transfer which the
Committee seeks to avoid as fraudulent. The first date is in 1984, when Muskin first pledged
its assets to secure the joint debt of all the affiliates. The second is in 1988, when the debt was
restructured. The third is just before bankruptcy, when Security Pacific advanced large sums
to the other subsidiaries through Muskin.
If the transfer was in 1984, then it is not avoidable because the statute of limitations has
expired. If it was in 1988, the transfer is avoidable pursuant to California Civil Code section
3439.04 if Muskin did not receive reasonably equivalent value and was rendered insolvent by
it. If it was just before bankruptcy, section 548 of the Bankruptcy Code applies.
The court believes that the proper ruling is that the transfer took place in 1984. As of that
date, unsecured creditors were put on open notice that Muskin's assets were pledged to Security
Pacific for the debts of Muskin and its affiliates. Nothing of substance happened in 1988 to
alter that fact. Both Civil Code section 3439.06(a)(2) and Bankruptcy Code section 548(d)(1)
provide that a transfer is made when the interest in the collateral is perfected.
The Committee cites Rubin v. Manufacturers Hanover Trust Co.
, 661 F.2d 979 (2nd
Cir.1981), for the proposition that the transfers took place either in 1988 or in the months just
before bankruptcy when Security Pacific advanced funds to the other affiliates through Muskin.
However, the court in Rubin
indicated that where there had been a series of modifications to
the security agreement the last modification should be deemed the date of transfer to the extent
that new collateral was given
. 661 F.2d at 990. Here, Muskin gave no new collateral in 1988.
Moreover, the court in Rubin
avoided the question of when a transfer is deemed made if a
debtor grants a security interest in its assets to guarantee the obligations of an affiliate. See
Carl, "Fraudulent Transfer Attacks on Guaranties in Bankruptcy," 60 Am.Bankr.L.J. 109,
III. Reasonably Equivalent Value
Assuming for the sake of argument that the transfer is deemed to have occurred in 1988, the
next issue becomes whether Muskin received reasonably equivalent value for the pledge of its
assets. Under a traditional view of the law, a transfer is not fraudulent just because the
consideration passed to a third party instead of the debtor. Williams v. Twin City Company
251 F.2d 678, 681 (9th Cir.1958). No fraudulent conveyance is found when a debtor borrows
for the benefit of its owners, even if the lender is fully aware of the purpose of the loan. See
Jones v. National City Bank of Rome
, 722 F.2d 659 (11th Cir.1984). However, the Committee
as requiring the court to focus much more closely on the economic effect of the
transaction on the individual affiliate rather than the effect on the affiliated entities as a whole.
Without deciding that Rubin
is the law in this circuit, the court finds that is not applicable
in situations where the affiliates were so closely related that they constituted a single economic
unit. The court finds itself in substantial agreement with Telefest, Inc. v. Vu-Tv, Inc.
F.Supp. 1368 (D.N.J.1984), which takes a position somewhere between Rubin
, the court held that the finding of a fraudulent conveyance is not justified where a
subsidiary has participated in a joint financing arrangement with its parent company if the
parent and the subsidiary were for practical purposes a single economic unit. In refusing to find
a fraudulent transfer, the court quoted with approval passages from two law review articles:
Where there are indicia of a bona fide financing arrangement, not designed as a shield
creditors, the lack of perceptible "direct" benefit to
a subsidiary guaranteeing the loan of its parent should
not be viewed as tantamount to a lack of "fair considera-
tion" under the UFCA. . . .
Because Parent and Subsidiary are part of a single
economic unit, it is both logical and desirable that
Parent be able to borrow based on the value of of its
subsidiaries' property and assets and that lenders be able
to enjoy the full amount of protection which the borrower
can make available.
591 F.Supp. at 1379. See also In re Miami General Hospital, Inc.
, 124 B.R. 383
(Bankr.S.D.Fla.1991). As in Telefest
, Muskin and its parent were in essence part of one single
economic unit, and shared common officers, interests and goals. In fact, Muskin had been just
a division of U.S. Leisure just a few years before. The court agrees with Telefest
authorities it cited that there is no fraudulent transfer under these circumstances.
Assuming that the transfer is deemed to have occurred in 1988, and assuming that the
"single economic unit" doctrine does not apply and the court must look solely at Muskin in
determining whether there was reasonably equivalent value for the transfer, the Committee can
prevail only if it proved that Muskin was rendered insolvent by the 1988 restructuring. The
Committee has not met its burden of proof on this issue.
Even under the Committee analysis, Muskin was solvent after the 1988 transaction unless
a significant liability is attributed to the guarantee. With perfect hindsight, the Committee's
expert attributed a large amount to this guarantee on the basis that it was clearly foreseeable that
Muskin would be called upon to bail out the other affiliates. While this is very true with the
benefit of hindsight, the Committee has not convinced the court that as of 1988 there was a
significant liability which should have been attributed to the guarantee for solvency purposes.
The court finds from the evidence presented that Muskin was solvent immediately after the
1988 restructuring, even taking into account its exposure under its guarantee.
V. Policy and Equity
On an equitable basis, the court does not believe it is appropriate to apply fraudulent
conveyance law to undo Security Pacific's lien. Where there is no evidence of fraud and the
transaction was done openly, so that all subsequent creditors had the opportunity to learn of
Muskin's debt structure before extending credit, asking Security Pacific and Jackson National
to underwrite the creditors' losses is not just. See Kupetz v. Wolf
, 845 F.2d 842, 847-50 (9th
While policy matters are generally beyond the concern of trial courts, the court cannot help
noting that the interests of unsecured creditors generally are probably better served by allowing
affiliated entities liberal access to financing than by allowing the bankruptcy courts to play
Robin Hood after a failure. The essential basis of all secured transactions is that unsecured
creditors are not justified in looking to a debtor's assets for payment if those assets are publicly
pledged to a secured creditor. As long as there was a legitimate business reason for the
transaction, the courts should not be eager to set it aside as fraudulent.
Needless to say, there is no basis for subordinating defendants' claims. The court's finding
of good faith on the part of the lenders defeats this claim. Where all of the creditors' claims
arose after the guarantee and pledge were made public, it would be a windfall for them to be
given priority over the secured creditors.
For the foregoing reasons, the Committee shall take nothing by its complaint. Defendants
shall recover their reasonable attorneys' fees and costs of suit, which may be recovered from
their collateral to the extent possible; any excess shall be allowable as a general unsecured
This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a)
and FRBP 7052. Counsel for Security Pacific shall submit an appropriate form of judgment.
Dated: November 26, 1992 _______________________