IN RE NORTHERN MERCHANDISE, INC. 371 F.3d 1056 (2004) CASE BRIEF

IN RE NORTHERN MERCHANDISE, INC.

371 F.3d 1056 (2004)

NATURE OF THE CASE: Frontier Bank (D) appealed a decision of the Ninth Circuit Bankruptcy Appellate Panel that affirmed in part the bankruptcy court's summary judgment in favor of Brown (P), bankruptcy trustee, in P's action alleging that the creditor received a fraudulent transfer from the debtor.

FACTS: Northern (Debtor), a company that sold general merchandise to grocery stores, was incorporated by Paul Weingartner, Gary David, and Paul Benjamin. D loaned $60,000 to the company evidenced by a promissory note in the amount of $60,000, secured by a commercial financing agreement granting D a security interest in Debtor's inventory, chattel paper, accounts, equipment, and general intangibles. The security interest was perfected by the filing of a Uniform Commercial Code financing statement on February 24, 1998. In October 1998, Debtor sought a second loan of $150,000. D refused but agreed to loan $150,000 to Paul Weingartner, Paul Benjamin, and Stephen Comer, Debtor's shareholders, whose credit warranted such a loan. D understood that the Shareholders would, in turn, allow Debtor to utilize the money to fund its business operations. D deposited the proceeds of the October Loan directly into Debtor's checking account. The transaction was documented as a loan to Shareholders, who then turned the funds over to Debtor. The October Loan was evidenced by a promissory note in favor of D executed by Shareholders. The same day, Debtor executed a commercial security agreement granting D a security interest in its inventory, chattel paper, accounts, equipment, and general intangibles. On March 5, 1999, Debtor ceased doing business, with $875,000 in unsecured debt. Debtor had $400,000 worth of inventory. Debtor transferred the $400,000 worth of inventory to a company owned by shareholder Paul Benjamin, for $125,000. On March 19, 1999, Benjamin News Group paid D, not Debtor, the $125,000, which amount was credited to the October Loan. The remaining $25,000 due on the October Loan was paid to D by another company from the proceeds of prior sales of inventory. On March 22, 1999, creditors filed Chapter 7 and a trustee (P) was appointed. Debtor showed assets of $4,116.17 and debts of $875,847.32. P sued D in that the $125,000 transfer was a fraudulent conveyance under § 548(a). The court agreed with P. The BAP affirmed. D appealed.

ISSUE:

RULE OF LAW:

HOLDING AND DECISION:

LEGAL ANALYSIS:

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