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In re Clark Supply Co.

January 18, 1949


Author: Kerner

Before KERNER and SPARKS, Circuit Judges, and LINDLEY, District Judge.

KERNER, Circuit Judge.

The Todd Building Corporation appeals from an order of the District Court confirming an order of the Referee in Bankruptcy directing it to turn over all property in its possession to the trustee in bankruptcy of the Clark Supply Company, Inc. The order amends title to the bankruptcy proceedings to include the Todd Corporation, orders creditors of Todd to file their claims with the referee, and orders E. H. Clark and B. E. Clark as individuals and as officers of Todd to file schedules of the assets and liabilities of Todd.

The Clark Supply Company, Inc., was adjudicated a bankrupt, and Albert C. Heller was appointed and qualified to act as receiver, and thereafter he was elected as trustee. On May 13, 1947, Heller filed his petition against Clark Climate Control Company, Buda Sales and Service, Inc., and Todd Building Corporation, referred to hereinafter respectively as Control Company, Buda, and Todd, and also against E. H. Clark and B. E. Clark, as officers of those corporations and as individuals, in which he alleged that the Supply Company was one of several commingled and affiliated corporations having the same stockholders and officers; that the assets of the Supply Company had been transferred without consideration to its affiliates, Todd, Control Company, and Buda; and that their affairs were little more than corporate pockets for it. The petition prayed for a restraining order and injunction against the corporate respondents, and against E. H. Clark and B. E. Clark individually, from transferring any assets derived from the bankrupt. The referee issued a restraining order and directed Control Company, Buda, Todd, and E. H. Clark and B. E. Clark, individually and as officers of the corporate respondents, to show cause why the injunction should not be granted. Due service of that order was made upon all respondents. The corporate respondents appeared, but E. H. Clark and B. E. Clark made no appearance in these proceedings. On its voluntary petition Buda was adjudicated bankrupt on June 25, 1947. It was thereafter represented in these proceedings by its duly elected trustee. Todd moved to dissolve the restraining order for lack of jurisdiction, which was denied, and affidavits of traverse to the petition were filed.

While the trial under the order to show cause was limited to injunctive relief, it was understood by all parties, and was so stated by the referee at the outset, that the issue in question was whether the assets of Todd were to be considered, treated and dealt with as the assets of the bankrupt and marshalled by the trustee for the benefit of the creditors of the bankrupt estate. Hearings were had on the issue, before Becker, Referee, which culminated in findings of ultimate facts and conclusions of law by the referee, and which in substance are as follows:

E. H. Clark and B. E. Clark up to December 31, 1945, did business as partners under the name of Clark Supply Company, at which time the partnership was incorporated pursuant to the laws of Wisconsin under the name of Clark Supply Company, Inc. The partnership had several divisions. Among them were Clark Manufacturing Company, E. H. Clark and Associates, Buda Sales & Service, Inc., and Clark Electric Service.Each of these divisions carried on activities which were distinct in character. There were many products and services required in several divisions which were furnished by the others. Each came into being through the promotion, development and financial assistance of the partnership. No segregation was made of the assets or income of these divisions. One set of books was maintained, and all expenses and liabilities incurred were obligations of the partnership.

In August, 1945, the partnership acquired property at 1326-36 West Clybourn Street, Milwaukee, with the expenditure of partnership funds of $44,844.86 and by the assumption of an outstanding mortgage of $46,000. It also acquired land at 233 East Keefe Avenue, Milwaukee, for $15,000.These two parcels were carried on the books of the partnership at a cost value of $59,844.86.

At the beginning of the year 1945 the investment account of the partners with the partnership stood at the sum of $179,466.18. During that year the partners personally withdrew from the partnership $293.346.52, which was more than twice the net earnings of the partnership during that year. This left the partnership with no working capital.The partners did not contemplate closing or terminating any part of their business operations.

These withdrawals from the partnership were made by the Clarks as part of a plan. The general details and objectives of this plan were to terminate the partnership as a medium for the operation of the enterprises; to end the partners' personal liability to the then existing creditors of the partnership; and to form a number of corporations to be fully owned by them and their families and dominated and controlled by them with no other assets than those derived from the partnership. Some of these contemplated corporations were to assume and pay all of the obligations and debts of the partnership and were to carry on the potentially losing divisions of the partnership with little or no working capital. Other contemplated corporations were to receive the valuable property of the partnership at cost of the physical property and were to continue the potentially profitable divisions of the partnership, thereby placing such property, contracts, franchises and profitable business beyond the reach of creditors of the partnership and those who would become creditors of the corporate successors of the partnership while such corporate successors carried out the assigned task of paying the debts of the partnership and served as a credit facility of the favored corporate entities, all of which was to be done with the ultimate objective of preserving diverted assets for the benefit of the Clarks and their families.

In the latter part of 1945 the formulation of the plan had progressed to a point where paid consultants were retained to put the plan into operation. On October 13, 1945, in furtherance of the plan, the Clarks created Todd. They then removed from the assets of the partnership the Clybourn Street property, transferring it to Todd and taking from that corporation therefor its capital stock of $30,000 and its note in the sum of $14,844.86, all of which they issued to themselves, personally. They further removed from the assets of the partnership the Keefe Avenue property and transferred it to Todd, and took from that corporation therefor its note for $15,000 which they likewise issued to themselves.

These notes of Todd totalling $29,844.86, together with stock in Todd in the amount of $12,000, together with other assets of a stated value of $17,031.69, the Clarks placed among the assets of the partnership in substitution for the real estate so removed. The exact amount employed in entering this transaction upon the books of the partnership was a charge to their drawing accounts upon transfer of the real estate, and a credit to their drawing accounts upon the substitution of assets. The stated dollar value of these substituted assets was not the equivalent of the cost of the real estate, but it was such cost less the book depreciation of $958.31.

While Todd has a charter authorizing a capital of $100,000, the Clarks subscribed for only $50,000 therefor and took credit upon Todd's corporate books for $30,000 by reason of the transfers of the real estate. They took the stock in their names, except qualifying shares which they took in the names of their wives, and one share which was issued in the name of Todd Clark, infant son of B. E. Clark. The partnership real estate was the only asset obtained by Todd. Neither E. H. nor B. E. Clark, or members of their families, invested therein any funds or anything of value. Thereafter the Clarks caused entries to be made upon the books of Todd in the form of credits against their stock liability balance of $20,000. This at best was their appraisal of the worth of their services rendered to Todd in the months that followed. No change in stock ownership of Todd has been noted upon the books of that corporation except the transfer of $12,000 of shares to the partnership as above noted.

In December, 1945, the Clarks caused three new corporations to be formed. One of them was the bankrupt, which was chartered on December 19, 1945, with an authorized capital of $250,000 - 500 shares at $500 each. The partnership, after the exhausting withdrawals of the partners during the latter part of 1945, on the day of the formation of the bankrupt, had assets (including the notes and stock of Todd) valued by the partners on the books of the partnership at the sum of $1,613,723.90 and had debts and liabilities in the amount of $1,613,629.17, or net assets of $94.73.

It was part of the original plan of the Clarks to place a value of $350,000 upon these assets of the partnership which were represented by the book value of $94.73, and to transfer such assets less $100,000 for fully paid shares of the bankrupt in the amount of $250,000. This portion of the plan was abandoned, and instead the Clarks subscribed for $125,000 in stock of the bankrupt which they took in their names, except nominal shares which they took in the names of their wives. No cash or other asset of value was given or transferred by the Clarks for these 250 shares of the bankrupt, ...

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