Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 93 C 6347--Suzanne B. Conlon, Judge. No. 95 C 366--Marvin E. Aspen, Chief Judge.
Before POSNER, Chief Judge, and CUMMINGS and EASTERBROOK, Circuit Judges.
EASTERBROOK, Circuit Judge.
During the 1980s River Bank America lent more than $7 million to SIG Food Services Associates (SFSA), to finance SFSA's purchase of equipment for a group of Sizzler Family Steakhouses. SFSA leased the equipment to FBN Food Services, Inc., which operated the restaurants. SFSA and FBN had common equity owners: SIG Partners, Quest Equities Corp. (a subsidiary of River Bank), and Anthony Basile. SFSA later borrowed $6.5 million from American National Bank (ANB); River Bank agreed to stand behind ANB in the queue for payment. The business venture was not a success, and for the last six years the equity and debt investors have been fighting for larger shares of the carcass. FBN is being liquidated under Chapter 7 of the Bankruptcy Code. River Bank has filed two appeals: one protests an order that it return $1.4 million as a fraudulent conveyance, and the other complains about a decision by FBN's trustee that FBN owes some $2.4 million to SFSA.
Litigation often accompanies failure in the marketplace. When it became clear that the restaurants were unprofitable, FBN filed suit against Sizzler Restaurants International, the franchisor. Sizzler counterclaimed, and it also initiated an arbitration against Midwest Restaurant Concepts (MRC), an enterprise affiliated with FBN and SFSA, which had promised (but failed) to indemnify Sizzler against losses arising out of transactions with FBN. In September 1990 everyone sat down to parley, and a bargain was reached. Sizzler would dismiss the MRC arbitration (the firm lacked assets to pay any award), and all counterclaims filed in that arbitration also would be dismissed. Sizzler agreed to pay $4,175,000 to resolve the litigation. In exchange, it wanted releases from FBN, SFSA, MRC, and all of those ventures' principals--SIG Partners, Basile, Quest Equities, and River Bank (which controlled Quest). The largest share went to SFSA, which transferred two parcels of real estate to Sizzler. Quest and River Bank refused to sign the agreement unless they received $2.125 million. Rather than see the deal collapse, Basile (who spoke for FBN) and Gerald Kaufman (who spoke for SIG Partners) agreed. Sizzler disbursed $1.8 million to SFSA, $1.5 million to Quest, $625,000 to River Bank, and $250,000 to FBN. Sizzler got the restaurants, the property, and an end to a losing association with FBN. For everyone else, the dance was just beginning.
The allocation of the settlement proceeds to its investors left FBN with neither a business nor significant assets, and it collapsed, stiffing its trade creditors. Bankruptcy proceedings followed. American National Bank, which had not been at the table, learned that the $1.5 million paid to Quest had been credited against River Bank's loan to SFSA. (Actually only $1.4 million had been credited; the rest was apportioned to legal expenses, a step no one questions.) This was more than a little peculiar, on three grounds: first, the money had been paid to Quest (an equity investor in FBN), not to River Bank; second, the litigation against Sizzler had been filed by FBN, not SFSA, so it was unclear how proceeds of the settlement ended up being used to reduce SFSA's debt to River Bank; third, there was the matter of River Bank's subordination agreement. River Bank had promised that ANB would be paid first--but River Bank helped itself to a $1.4 million payment on the loan. Threats of litigation followed, and River Bank agreed to reverse the credit and assign SFSA's notes to ANB, which became SFSA's creditor to the tune of approximately $15 million. Quest then treated the $1.4 million as a return of equity--a problematic transaction, and not only because FBN had no business buying back its equity while creditors were unsatisfied. Back in 1988 River Bank had asked Basile to find some outside capital, and Basile induced World Life & Health Insurance Company to loan $1 million, taking out that much of River Bank's loan. World Life was not willing to make the loan without security, which it got in the form of a guarantee from William Landberg, who wanted compensation for putting his funds at risk. Avrom Waxman, the president of both River Bank and Quest, promised Landberg that in exchange for the guarantee Quest would turn over to Landberg Quest's equity in FBN and SFSA. Waxman promised Basile that if he landed the outside $1 million, Quest would forgive a $100,000 note Basile had signed. So by 1990 Quest may not have been an equity investor. We say "may not" because Waxman denies that he made these promises, and after River Bank pocketed the $1 million Quest refused to sign its equity over to Landberg.
The $100,000 note was part of the initial financing for FBN and SFSA. SIG Partners wanted to hire an experienced manager for the restaurant business and came to terms with Basile, then a partner at Arthur Young & Company. SIG Partners also wanted the venture's managers to be investors, the better to whet their appetite for profits. Basile lacked liquid funds. In exchange for a 25 percent equity interest in SFSA, Basile gave notes for $100,000 apiece to Quest and SIG Partners. SFSA gave Basile a note for $200,000 (on which SFSA has never paid a dime); Quest and SIG Partners reduced their (stated) equity interests in SFSA by $100,000 each. Waxman used the prospect of forgiving Basile's note to Quest as a carrot to get him looking for outside capital. Two years later, Waxman used the $100,000 note again--as a club. Basile was reluctant to approve the payment of $1.5 million from the Sizzler settlement to Quest. Waxman told Basile that, unless he acquiesced, Quest would collect the note despite its earlier forgiveness. Basile knuckled under and signed. Waxman, not one to leave money on the table, then tried to collect the note anyway! Quest filed a diversity action against Basile, who defended on the ground that the debt had been forgiven in 1988. A swearing contest ensued, and the jury believed Basile. See Quest Equities Corp. v. Basile, 1994 U.S. Dist. LEXIS 3877 (N.D. Ill. 1994). Meanwhile, SFSA (together with Basile and Landberg) turned on its former investors and sued Waxman, Quest, River Bank, and several related entities under the Racketeer Influenced and Corrupt Organizations Act (RICO). SFSA described the failure to turn the equity over to Landberg, the extraction of the $1.4 million from the Sizzler settlement, the attempt to collect Basile's note, and some other acts as ingredients in a "pattern of racketeering activity." That suit came to a close when we held that River Bank's acts were at worst a commercial fraud, which did not satisfy the "continuity" component of RICO's pattern requirement. SIG Food Services Associates v. Mann, No. 93-3267 (7th Cir. June 14, 1994) (unpublished order).
A solitary commercial fraud does not lead to liability under RICO, but it may have consequences under other federal statutes, including the Bankruptcy Code. James E. Carmel, the trustee in FBN's liquidation, commenced an adversary proceeding to recover the $1.4 million as a fraudulent conveyance under 11 U.S.C. sec. 548(a). Under this statute,
the trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily--
(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation incurred, indebted; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a ...