Bay Plastics, Inc. v. Bt Commercial Corp.

187 B.R. 315 (1995)

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Nature of the Case

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Facts

D, the shareholders of P, sold their stock in a leveraged buyout to Milhous Corporation (Milhous) for $3.5 million in cash plus $1.8 million in deferred payments. Milhous caused its subsidiary Nicole Plastics to form its own subsidiary, BPI Acquisition Corp. (BPI), to take ownership of the P stock. Milhous put no money of its own, or even any money that it borrowed, into this transaction. It caused P to borrow approximately $3.95 million from D and then caused P to direct that $3.5 million of the loan be disbursed to P. P directed that the $3.5 million be paid directly to the selling shareholders in substantial payment for their stock. As security D received a first priority security interest in essentially all of the assets of P. D has received all of the proceeds of P's assets in this bankruptcy case, and nothing is left for unsecured or even for administrative creditors. The selling shareholders knew all the details of the transaction. The selling shareholders and their attorney were experienced in LBOs, and the selling shareholders discussed this feature of the transaction, and their exposure on a fraudulent transfer claim, with their attorney. P did not know about the LBO character of the transaction until a number of months later. The parties to the LBO persuaded Shintech, a vendor, of Milhous' good credit, and induced Shintech to release both its security interest and the guarantees. They did not disclose the LBO character of the transaction, and Shintech did not learn of this until ten months later. Immediately before the transaction P had assets of $6.7 million and liabilities of $5.6 million, and a net equity of $1.1 million. Immediately after the transaction, its balance sheet showed tangible assets of approximately $7 million and liabilities of approximately $9 million. Only the addition of almost $2.26 million in goodwill, which had not appeared on prior balance sheets, and for which no explanation has been provided, permitted the balance sheet to show a modest shareholder equity of $250,000. The trustee for creditors claimed a violation of the state Uniform Fraudulent Transfer Act.