Crumpton v. Stephens (In re Northlake Foods Inc.), M.D. Fla., No. 8:11-cv-02648-VMC, 9/27/12
A dividend received by a shareholder of a bankrupt Subchapter S Georgia corporation was not a fraudulent transfer according to a Sept. 27 holding by the U.S. District Court for the Middle District of Florida (Crumpton v. Stephens (In re Northlake Foods Inc.), M.D. Fla., No. 8:11-cv-02648-VMC, 9/27/12).
Judge Virginia M. Hernandez Covington found that the debtor had received reasonably equivalent value for the dividend in the form of tax advantages. The court also found that Georgia law does not provide for a cause of action against shareholders who receive an illegal dividend.
In 2006, Richard Stephens, a Northlake shareholder, was issued a dividend in the amount of $94,429, which represented Stephens's share of Northlake's taxable income. Northlake's directors unanimously adopted a resolution authorizing the dividend.
Stephens moved for a judgment on the pleadings and the bankruptcy court subsequently granted his motion and dismissed Crumpton's complaint without prejudice. Crumpton was given leave to file an amended complaint. On March 2, 2011, Crumpton filed his amended complaint alleging a cause of action for recovery of an illegal dividend under Georgia law. However, Stephens also moved to dismiss this complaint and the bankruptcy court again granted his motion.
Crumpton appealed both of the bankruptcy court's dismissals to the district court.
According to the bankruptcy court, the reasonably equivalent value the debtor received was the satisfaction of an antecedent debt, which is recognized as value by both the Bankruptcy Code and Georgia law. The bankruptcy court found that the dividend issued to Stephens was in satisfaction of the debt owed to him pursuant to the shareholders agreement. The bankruptcy court further found that the debtor had received reasonably equivalent value for the transfer “by virtue of the [d]ebtor's Subchapter S election for federal income tax purposes.”
“Because the [d]ebtor would have had to pay incomes taxes itself had it not elected Subchapter S status, the [c]ourt cannot say that either it or its creditors were made worse off by the [d]ebtor's reimbursement to its shareholders for their portion of the income taxes paid,” the court said. Accordingly, the court upheld the dismissal of the fraudulent transfer claim based on the reasonably equivalent value received by virtue of the Subchapter S status. The court said it therefore need not address the bankruptcy court's additional finding that the transfer satisfied an antecedent debt.
The court said that in his appeal, Crumpton failed to “provide any statute or case law which would provide a basis for [him] to bring a claim directly against a shareholder to recover illegal dividends.” Instead, the court said Crumpton's argument “confusingly intertwine[d]” this issue with his fraudulent transfer claim in a way that not only failed to support the illegal dividend claim, but also “was not presented to or considered by the [b]ankruptcy [c]ourt, and thus, is not appropriate for consideration on appeal.”
Therefore, the court also upheld the dismissal of the amended complaint.
By Stephanie M. Acree
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