A Texas Bankruptcy Court Discusses Application of “Contemporaneous Exchange” Against Insider Guarantors
January 29, 2021, Eastern District of Texas – Debtor, Slamdunk Enterprises,Inc. (“Slamdunk” or the “Debtor”), is a Texas oil and gas service company that Defendant, Larry Mike Tate (“Tate”) owned and operated. Tate was one of two shareholders and owned ninety percent of the Debtor’s outstanding shares of stock. Tate also owned and served as the sole director and officer of another oil and gas company – the Defendant, Miken Oil, Inc. (“Miken”).
Slamdunk was in financial peril and many creditors obtained judgments against it. Slamdunk accumulated huge business losses and owed $1,612,771.07 to Miken. Tate engaged a bankruptcy counsel to prepare for a bankruptcy filing for Slamdunk. Eventually, he decided to delay it and orchestrated a series of transfers involving the respective bank accounts of Miken, Tate, and Slamdunk in December 2016. Tate obtained a loan of $1.550 million in his individual capacity from Miken and transmitted the loan proceeds from the Miken account into his personal bank account. Tate then transferred the entire $1.550 million to the Slamdunk bank account. Tate, then acting as the sole officer of Slamdunk, transferred the $1.550 million from the Slamdunk account to Miken in satisfaction of almost the entire amount of the unsecured indebtedness which was then owed by Slamdunk to Miken (the “Miken Payment”).
Slamdunk then made several payments to other creditors on obligations that had been personally guaranteed by Tate and/or Miken. A few months later, Slamdunk filed for bankruptcy. The Trustee brought adversary proceedings to recover an adjusted amount of $1,462,635.88 from Miken arising from the Miken Payment along with payments made to other creditors under 11 U.S.C. § § 547 and 548 of the Bankruptcy Code.
The Defendants denied that any funds were actually received by Miken. According to the Defendants, no interest in the Debtor’s property was transferred to Miken in December 2016 because those activities constituted what they characterize as a “circular contemporaneous transaction.” The Defendants asserted that it was imperative to view the December 2016 activities as a singular, simultaneous event, and it was improper to ascribe legal significance to the activities as distinct, separate actions. The Defendants contended that, despite the fact that Miken recorded the receipt of payment from the Debtor in its books and records and the application of that payment to an antecedent debt owed by the Debtor to Miken, no money actually changed hands in this circular contemporaneous transaction. Hence, the alleged transfers were not recoverable.
The Court stated that there is nothing inherently illegitimate about an S-corporation exercising its discretion to pay a particular debt, even to an insider creditor – until such actions are performed in advance of a bankruptcy case initiated by that S-corporation. However, in the case at bar, concrete, sequential actions were taken by Tate in various capacities to achieve a specific objective.
The Court found that Tate, as the sole corporate officer for Slamdunk, had already taken considerable actions toward a bankruptcy filing for his company as the December 2016 activities were concocted and then consummated. Slamdunk had already procured a bankruptcy attorney and the drafting of bankruptcy schedules had begun weeks before the December 30 transactions. Thus, the December 30 transactions knowingly took place in the face of a bankruptcy filing thought to be imminent, but which was delayed at Tate’s sole insistence to extract the company’s suspended losses for his personal benefit before initiating that filing.
The Court stated that this is exactly the rationale for the creation of the insider concept in the bankruptcy avoidance arena and that is exactly why the Miken Payment must yield to the principles undergirding the preference concept. The Court concluded that the Trustee successfully demonstrated that there is no genuine dispute as to any material fact about the Miken Payment and issued a summary judgment in favor of the Trustee.
In re Slamdunk Enters., Nos. 17-60566, 18-6006, 2021 Bankr. LEXIS 206 (Bankr. E.D. Tex. Jan. 29, 2021)