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RUSSELL v. TECCE

May 12, 1978

EDWARD E. RUSSELL, Trustee in the Matter of Omega Auto Systems, Inc.
v.
FREDERICK C. TECCE and FREDERICK D. TECCE



The opinion of the court was delivered by: BRODERICK

 BRODERICK, J.

 Plaintiff, Edward E. Russell, as trustee in bankruptcy for Omega Auto Systems, Inc. (Omega), initiated this action to declare void as fraudulent pursuant to § 67d of the Bankruptcy Act, 11 U.S.C. § 107 (d), a transfer of property by Omega to the defendants, Frederick C. Tecce and Frederick D. Tecce. A trial before the Court, sitting without a jury was held on April 14, 1978. The parties filed proposed findings of fact and conclusions of law, and the matter is now ready for decision. For the reasons hereinafter set forth, the Court will enter judgment for the defendants, Frederick C. Tecce and Frederick D. Tecce, and against the plaintiff, Edward E. Russell, as trustee in bankruptcy.

 The transfer attacked in this case was made pursuant to an agreement executed on December 22, 1975, nine months prior to Omega's filing a voluntary petition in bankruptcy. Under the provisions of the agreement, Omega assigned to Frederick C. Tecce and Frederick D. Tecce all its right, title and interest in a legal action captioned " Omega Auto Systems, Inc. v. Westinghouse et al, case no. 75-2170 civ. je, pending in the United States District Court for the Southern District of Florida." In the agreement, Omega also agreed to arrange that Mr. and Mrs. Frederick C. Tecce would be released as personal guarantors of Omega's indebtedness to General Motors Acceptance Corporation (GMAC) and the Philadelphia National Bank (PNB). In addition, the agreement provided that Frederick C. Tecce and Frederick D. Tecce would release Omega's indebtedness to them, and that Frederick C. Tecce would surrender all of his Omega stock. The trustee contends that the transfer was fraudulent on the ground that Omega did not receive a fair consideration. It is agreed by the parties that the legal action has been settled for $50,000. The issue being presented to the Court is whether the transfer was fraudulent. The Court's finding on this issue will determine whether the Tecces or the trustee are entitled to the $50,000.

 The plaintiff presented two witnesses in order to establish his claim that the assignment of the legal action should be declared void. His first witness was Mr. Happe. Mr. Happe testified that Omega lost $25,000 in its first year of business, but only $1,000 in its second. He stated that the money lost in the first year had been due to anticipated starting-up expenses, and that at the end of the second year, Omega's future looked good. In early 1974, Mr. Tecce agreed to purchase 50% of the Omega stock and provide financial help to expand the business outside the Philadelphia area. Soon after, Omega purchased an Econo-Car franchise to operate in Washington, D.C., and borrowed $100,000 from Mr. Tecce's father, Frederick D. Tecce. Omega gave Frederick D. Tecce a note payable on September 11, 1975 for $100,000 plus interest "at the Philadelphia prime rate". Although Omega's business was initially good in Washington, it deteriorated rapidly and by the end of the year, Omega had lost $150,000. The Tecces loaned Omega an additional $160,000. Despite this infusion of cash, the financial position of Omega did not improve. GMAC and PNB became increasingly concerned about Omega's indebtedness to them. Omega owed PNB about $162,000 and GMAC about $507,000. It was testified that an understanding was reached between Omega and GMAC and PNB (who were the other principal creditors of Omega) that in order for Omega to continue in business, it would be necessary for the Tecces to cancel the Omega indebtedness and give up the ownership of their stock in Omega. This understanding between Omega, GMAC and PNB gave rise to the agreement of December 22, 1975, pursuant to which the lawsuit was assigned to the Tecces, and the Tecces forgave Omega's indebtedness in the amount of $260,000 and surrendered their stock in Omega. After the agreement was executed, Omega continued to operate for the next nine months.

 Plaintiff's other witness was Mr. Deetz, Omega's accountant, who testified that Omega was insolvent within the meaning of § 67d(1)(d) of the Bankruptcy Act on December 22, 1975, the day on which the assignment of the lawsuit was made to the Tecces.

 Section 67d(2)(a) of the Bankruptcy Act, 11 U.S.C. § 107 (d)(2)(a), provides as follows:

 
(2) Every transfer made and every obligation incurred by a debtor within one year prior to the filing of a petition initiating a proceeding under this Act by or against him is fraudulent (a) as to creditors existing at the time of such transfer or obligation, if made or incurred without fair consideration by a debtor who is or will be thereby rendered insolvent, without regard to his actual intent . . ..

 Thus, four elements must be present for a transfer to be fraudulent under § 67d(2)(a) of the Act: (1) the transfer must be made within one year of the initiation of the bankruptcy proceedings; (2) creditors of the debtor must exist at the time of the transfer; (3) the debtor must be insolvent at the time of the transfer; and (4) there must be an absence of fair consideration for the transfer. Bullard v. Aluminum Company of America, 468 F.2d 11, 13 (7th Cir. 1972); Klein v. Tabatchnick, 418 F. Supp. 1368, 1371 (S.D.N.Y. 1976); In re Ferris, 415 F. Supp. 33, 39 (W.D.Okla. 1976); Inland Security Co., Inc. v. Estate of Kirshner, 382 F. Supp. 338, 342 (W.D.Mo. 1974). The burden is on the plaintiff to prove the facts necessary to support his contentions. Cohen v. Sutherland, 257 F.2d 737, 740 (2d Cir. 1958).

 The only issue remaining for the Court to decide in this case is whether there was "fair consideration" for the assignment by Omega of all right, title and interest in the lawsuit to the Tecces. Section 67d(1)(e) of the Bankruptcy Act defines "fair consideration" as follows:

 
Consideration given for the property or obligation of a debtor is "fair" (1) when, in good faith, in exchange and as a fair equivalent therefor, property is transferred or an antecedent debt is satisfied, or (2) when such property or obligation is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared with the value of the property or obligation contained.

 The cases dealing with the above quoted definition of fair consideration have uniformly held that the consideration given for the property of a debtor (bankrupt) must be a "fair equivalent" and the transferee must have acted in good faith. Misty Management Corporation v. Lockwood, 539 F.2d 1205, 1212 (9th Cir. 1976); Cohen v. Sutherland, 257 F.2d 737, 742 (2d Cir. 1958); Bullard, 468 F.2d at 13; Inland Security, 382 F. Supp. at 347. Furthermore, the cases are also uniform in holding that whether fair consideration has passed in any given ...


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