In Re Reed

Facts

D opened Reed's Men's Wear. D obtained a $150,000 loan from the Texas Bank & Trust Company which was guaranteed by the Small Business Administration (SBA). Three months later, the bank gave D a $50,000 line of credit, and the SBA agreed that the original loan would be subordinated to the line of credit. The store began to lose money in 1978. By February 1979, Reed knew that his business was insolvent. D signed an agreement to turn over management of the store to a consulting firm for the year 1979. D's trade creditors agreed to postpone collection efforts and D promised to resume payments in January 1980. The business continued to fail, and on December 15, 1979, D signed a foreclosure agreement surrendering the store to the bank. Six days later, D filed a voluntary petition for bankruptcy. D operated his store but also traveled extensively as a sales representative for Scully Leather, Inc. (Scully). D worked in Reed's Men's Wear about 75% of the time and traveled for Scully about 25% of the time. Eventually, D divided his time evenly between the store and sales for Scully. By 1979, he worked in the store only 40% of the time and traveled for Scully 60% of the time. In December 1978 and January 1979 Reed set up Reyata Corporation (Reyata), wholly owned by himself, to receive the sales commissions paid by Scully for his services. Reyata in turn paid some of the commissions to Reed as salary. This arrangement allowed the corporation to retain part of Reed's earnings and reduced the tax paid by Reed on his commissions. In 1979, Scully paid Reyata $15,000 in commissions each month, including an advance commission for December, sent at D's request, that would not otherwise have been paid until January 1980. The bankruptcy judge found that Reyata was simply D's alter ego. In a financial statement provided to the bank and to the SBA on April 1, 1979, D valued his gun collection at $20,000 and his antique collection at $3,000. In the four months prior to bankruptcy, Reed augmented each of his collections. He caused Reyata to borrow $11,000, which he used to purchase more antiques. In three separate transactions during October and November, Reed accumulated, at a cost of $22,115, a collection of Krugerrands and Mexican fifty-peso pieces. One month before filing for bankruptcy, Reed purchased, for $15,000, a one-third interest in a business known as Triple BS Corporation. D opened an account at the Bank of the West without the knowledge of his creditors. D deposited the daily receipts from Reed's Men's Wear in this separate account. From this account, in late November D repaid the loan Reyata made to purchase the antiques. D began selling his personal assets in late November. D applied all of the proceeds to reduce the mortgages on his family residence, which was exempt from creditors' claims under Texas law. D raised about $35,000, applying about $30,000 to wipe out a second mortgage home improvement loan and applying the balance of approximately $15,000 to reduce the first mortgage on his home to about $28,000. D also failed to account for the disposition of $19,586.83 in cash during the year preceding filing. The judge held that D had effected transfers designed to convert nonexempt property into exempt property less than two weeks before bankruptcy with the intent to hinder, delay, or defraud creditors. The court held that D failed satisfactorily to explain its loss of the $19,586.83. The bankruptcy judge found that D did not qualify for discharge. The District Court affirmed. D appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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