William A. Howison v. Milo Enterprises, Inc. (In re The Freaky Bean Coffee Company)

BAP No. EP 12-082
The BAP REVERSED the bankruptcy court’s judgment under Counts I and II, REMANDED for the entry of a judgment against the Trustee on those counts, VACATED the bankruptcy court's judgment under Count III and with respect to Count IV, the BAP REMANDED for proceedings consistent with the opinion. ISSUE: Whether the three (3) subject transfers, which were checks payable to Milo Enterprises, Inc. constituted preferences which were voidable under § 547. HOLDING: No RATIONALE: A review of the record in this case does not reveal any exercise of ownership or control by Freaky Bean over the funds which were the subject of Transfer Nos. 1, 2, and 3. No checks were made payable to Freaky Bean. No funds were deposited in a Freaky Bean bank account. The monies came from sources that were indisputably not Freaky Bean assets. The settlement funds for each transfer were paid by Walsh and Heyl. True, Stratton was the president of Freaky Bean. But he was also the president of MRC, and MRC was the primary obligor. And true, the ultimate goal of the Stratton plan, as set forth in the Stipulation, was to effect a “reboot” of Freaky Bean, and, not surprisingly, Walsh and Heyl were shareholders of Freaky Bean. But surmising that because the Walsh and Heyl funds were intended to benefit Freaky Bean, they were actually the property of Freaky Bean when paid to Milo inappropriately conflates two separate elements of the § 547(b) analysis: that the funds must be an interest of the debtor in property and that the transfer must be for the benefit of the debtor. The latter is obvious from the admitted facts and the testimony of the witnesses. The former has little support in the record.
Procedural context:
The Trustee filed a Complaint against Milo Enterprises Inc. alleging payments to it were voidable preferences. Milo filed an Answer with Affirmative Defenses, including the defense that no transfer of any debtor assets occurred. The Freaky Bean Company was the Chapter 7 Debtor. The Trustee and Milo filed Motions for Summary Judgment. Milo argued that the settlement payments were not property of the estate because Freaky Bean never had an interest in them for purposes of §§ 547(b) and 550; (2) even if the settlement payments were property of the estate, they were nonetheless earmarked for payment to Milo and, therefore, were not recoverable by the Trustee; and (3) the Trustee’s state law cause of action set forth in Count IV was not viable because Milo was never an insider of MRC and, in any event, Milo provided new value to MRC, in the form of the “release of over $700,000 in (at least partially) secured debt.” The Bankruptcy Court denied the Motions for Summary Judgment finding that issues of material fact remained in dispute.
The Freaky Bean Coffee Company (“Freaky Bean”) was a Maine corporation that formerly operated two retail coffeehouses, as well as a coffee roastery, in Maine. Jonathan R. Stratton (“Stratton”) served as Freaky Bean’s president and a director. During the same period, LBC, LLC, operating under the trade name Maine Roasters Coffee (“Maine Roasters”), operated five retail coffee establishments at various locations in Maine and roasted and ground coffee for a number of wholesale accounts. On November 30, 2007, Freaky Bean and Maine Roasters entered into an agreement whereby Freaky Bean, through an affiliate, would purchase the Maine Roasters name, retail stores in Yarmouth and Falmouth, as well as substantially all of its equipment and personal property. To facilitate the purchase, Freaky Bean created a subsidiary named MRC Holdings, LLC (“MRC”) to acquire the purchased assets and hold them separate and distinct from Freaky Bean. As part of the consideration for the purchase of Maine Roasters, MRC assumed liability for two promissory notes given by Maine Roasters on November 9, 2007, each in the principal amount of $319,000.00, to Milo and Razel Dazel, LLC, respectively. And as security for MRC’s obligations to Milo and Razel, MRC granted them a first priority security interest in all of its assets, including those purchased from Maine Roasters. Additionally, Freaky Bean unconditionally guaranteed all of the obligations of MRC to Milo and Razel arising out of the purchase transaction. Also pursuant to the purchase agreement, MRC issued 100,000 membership units, of which 92,000 units (Class A) were distributed to Freaky Bean and 8,000 units (Class B) were distributed equally to Milo and Razel. Pursuant to the MRC operating agreement, the company was to be operated by a Board of Managers. Stratton was appointed as president of MRC and one of the two Class A Managers; Randy Male (“Male”), Milo’s president, was appointed as the sole Class B Manager. Operational decisions were to be made by majority vote of the managers, with the exception of certain actions over which either Class would have veto power. Finally, as part of the sale transaction, Male was named an “honorary” board member of Freaky Bean. In practice, however, Male did not become involved in the day-to-day operations of MRC. He never voted on any issues surrounding its operations or signed any resolutions or other paperwork authorizing MRC actions. And he was repeatedly put off when he requested Board of Managers meetings. Following the purchase of the Maine Roasters assets, Freaky Bean and MRC experienced significant financial problems. Soon after the closing, MRC became delinquent on its payments to Milo and Razel. On November 19, 2008, Milo and Razel declared MRC and Freaky Bean to be in default of their respective obligations on the notes and guaranty and made demand for payment in full. And shortly thereafter, they exercised their rights as a secured party and repossessed substantially all of their MRC collateral, virtually all of which had been the Maine Roasters assets sold by them to MRC. Attempting still to save its business, Freaky Bean required a cash infusion both to resolve its obligations under its guaranty to Milo and Razel and to other accounts payable, and to provide the working capital necessary to restructure a smaller, more profitable Freaky Bean. On December 3, 2008, Stratton, on behalf of MRC (as its president and manager) and Freaky Bean (together, the “Stratton Parties”), and Male, on behalf of Milo and Razel, entered into a Settlement Agreement, Waiver of Debtor’s Rights and Release of Secured Party (the “Settlement Agreement”). The Settlement Agreement validated the repossession by Milo and Razel of the MRC assets and further provided that Milo and Razel would release the Stratton Parties from any remaining deficiency balance upon payment by MRC of: (a) $10,101.92 to Milo, representing payments due under its note for September, October, and November 2008; (b) $8,081.92 to Razel, representing payments due under its note for October and November 2008; (c) $8,585.88, representing amounts due certain creditors of Maine Roasters which obligations MRC had assumed in November 2007; and (d) $100,000 to Razel and Milo representing a partial (and now final) payment on the notes held by them. Thus, in addition to the turnover of its assets to Milo and Razel, MRC was required to make payments to Milo and Razel totaling an additional $126,769.72. Of these payments, a total of $110,101.92 (items (a) and (d) above) was paid to Milo, and represents the payments that are the subject of this dispute. Stratton was unable to obtain a loan from local banks to fund the downsizing effort and to provide working capital for Freaky Bean. He therefore turned to two of the existing Freaky Bean shareholders, James Walsh and Barb Heyl, for assistance. Stratton’s plan was that Walsh, Heyl, and several others (all Freaky Bean shareholders) would form a new Maine corporation known as BeanCo. Then, Walsh and Heyl would each loan BeanCo $125,000.00, for a total of $250,000.00. Finally, BeanCo would make the $250,000 from Walsh and Heyl available to Freaky Bean pursuant to a Line of Credit Agreement between BeanCo and Freaky Bean. The foregoing loan structure was evidenced by contemporaneous promissory notes from BeanCo to Walsh and Heyl for $125,000.00 each and a $250,000.00 Line of Credit Promissory Note from Freaky Bean to BeanCo. Additionally, BeanCo executed security agreements in favor of Walsh and Heyl, pledging its assets as collateral. Whether that plan was brilliant or flawed became moot, however, because the various parties became impatient and failed to act in accordance with the plan. Instead of waiting for BeanCo to be formed, have Walsh and Heyl write checks to BeanCo, and then have BeanCo write checks to various payees, Stratton simply instructed Walsh and Heyl to write checks to the parties he designated or obtained bank checks for that purpose. Accordingly, (1) On November 26, 2008, Walsh provided a Bank of America check to Stratton in theamount of $60,000.00, representing a portion of his share of the loan proceeds. Walsh gave this check to Stratton with the “Pay to the Order of” line blank. Stratton filled in his own name and deposited the check in another Bank of America account (not belonging to Freaky Bean) on the same day and then caused Bank of America to issue a cashier’s check in the amount of $25,000.00 payable to Milo (“Transfer No. 1”). (2) On December 3, 2008, Stratton met Walsh at a Bank of America branch and transferred the remainder of Walsh’s share of the loan proceeds ($65,000.00) from Walsh’s Bank of America account to another Bank of America account designated by Stratton (not belonging to Freaky Bean). Stratton then caused Bank of America to issue a cashier’s check in the amount of $25,000.00 payable to Milo (“Transfer No. 2”). (3) On December 4, 2009, Heyl caused her bank to issue a cashier’s check in the amount of $60,101.92 payable to Milo (“Transfer No. 3”).
Appeal from the USBC-Maine (Honorable James B. Haines, Jr.) before US BAP for 1st Circuit, Judges Boroff, Deasy and Tester.

ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!

About us in numbers

3355 in the system

3233 Summarized

2 Being Processed