Fett Roofing And Sheet Metal Co., Inc., v. Moore

438 F.Supp. 726 (1977)

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Nature of the Case

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Facts

Fett Roofing was owned and run by P, as a sole proprietorship. In 1965, P incorporated his business, transferring to the new corporation assets worth $4,914.85 for which he received 25 shares of stock. The stated capital of the corporation was never increased during the course of the corporation's existence. P was the sole stockholder and also the president of the corporation. The roofing business continued to be run completely by Mr. Fett much as it had been prior to its incorporation. P advanced money to his business as the need arose. Three of these transactions made in 1974, 1975 and 1976 involved the transfer to the corporation of $7,500, $40,000 and $30,000, respectively. P borrowed from the American National Bank made the funds available to his business and took back demand promissory notes. On April 6, 1976, at a time his business had become insolvent, P recorded three deeds of trust intended to secure these notes with the realty, inventory, equipment, and receivables of Fett Roofing and Sheet Metal Co., Inc. The deeds were backdated to indicate the dates on which the money had actually been borrowed. On November 8, 1976, an involuntary petition in bankruptcy was filed. The judge found that the bankrupt was undercapitalized at its inception in 1965, and remained undercapitalized throughout its existence, the three deeds of trust which purport to secure the said notes were all back-dated to create the impression that they were executed contemporaneously with the advance of funds and the giving of the notes; all three were in fact executed and recorded during the first week of April 1976, when the notes were, by their terms, past due, the purpose of the deeds of trust was to delay, hinder, and defraud the creditors of the bankrupt, and to give P a preference over them, P was in sole control of the affairs of the bankrupt, and was its sole stockholder, and P's is interests were at all times identical to and indistinguishable from that of the bankrupt; he was the alter ego of the bankrupt. The judge concluded that the advances made by P to his corporation were actually contributions to capital, not loans and that claims based on them, therefore, should be subordinated to those of all the other creditors of the bankrupt. P appealed.