Unpublished Dispositionin Re General Highway Express, Inc., Debtor.fruehauf Corporation, Plaintiff-appellee, v. General Highway Express, Inc., Defendant-appellant, 893 F.2d 1334 (6th Cir. 1990)

General Highway Express, along with its immediate parent, GHE Enterprises, and its ultimate parent, 4440, filed for chapter 11 bankruptcy on January 21, 1983. This case arises out of the efforts of the Fruehauf Corporation to protect its security interests in the assets of General Highway Express. General Highway Express argues that the security interests should be voided because they were created by fraudulent conveyances. The bankruptcy court held that the transactions in issue were not fraudulent conveyances and the district court affirmed its decision. We affirm the decision of the district court.

On appeal, the facts are not disputed. The transactions in issue stemmed from the attempts of James Pedler, Jr. to build a widespread and diversified trucking empire. Pedler was the president and principal shareholder of 4440, the ultimate parent of General Highway Express, until he died in October 1982.

The first transaction concerns Pedler's restructuring of a $600,000 loan from Fruehauf that he used to purchase General Highway Express on February 15, 1982 through GHE Enterprises, a subsidiary of 4440. The $600,000 loan was to come due on June 25, 1982. As in most leveraged transactions, the newly bought company, General Highway Express, guaranteed the loan.

In order to restructure this $600,000 loan, Cheryl Wirtz, secretary of General Highway Express, met with Fruehauf on May 10, 1982 at the Centran Bank of Ohio. They had planned to restructure the loan as follows:

1. 4440 would cash a certificate of deposit for $500,000 with which to pay Fruehauf.

2. 4440 would issue a check to Fruehauf for $123,233.33, which together with the above $500,000, would satisfy in full the balance due of the $600,000 loan.

3. Fruehauf would release a secondary security interest in a different $500,000 certificate of deposit belonging to 4440.

4. Fruehauf would surrender the promissory note underlying the $600,000 loan, releasing General Highway Express from its guaranty, and from its security interest in General Highway Express's accounts receivable.

5. Fruehauf would loan General Highway Express $400,000 payable in 120 days, subject to a note making General Highway Express liable and to obtaining a security interest in General Highway Express's trailers under a collateral plede agreement.

6. General Highway Express would simultaneously transfer the $400,000, first to GHE Enterprises, and then to 4440.

The restructuring took place as planned, except that, upon arriving at the Centran Bank, Wirtz learned that 4440's certificate of deposit could not be cashed for another 11 days without a substantial penalty. Wirtz consulted Pedler, and they agreed to draw the $500,000 from a line of credit that General Highway Express had established at the Centran Bank. 4440 pledged its certificate of deposit to General Highway Express as security for this short-term loan by General Highway Express to 4440.

After the restructuring, General Highway Express was no longer liable on the $600,000 loan either as guarantor or as owner of the security. In exchange, General Highway Express was the direct debtor on a loan for $400,000. Because of the last minute change in plans, General Highway Express also was liable for the $500,000 draw on its line of credit with Centran Bank, but 4440 had secured this draw with its certificate of deposit.

This security later evaporated when Pedler used the same certificate of deposit to secure a different transaction. As a result, when the Pedler companies went bankrupt, General Highway Express was left liable for the $500,000 credit extension, as well as the originally intended $400,000.

The second transaction involves the lease of semi-trailers to General Highway Express by another Pedler company, Convoy. Convoy had entered into two agreements with Fruehauf during October 1981 to purchase a total of 42 semi-trailers under an installment plan. Convoy had operated at a loss since its inception and it had ceased doing business in January 1982. By April 1982, Convoy had become delinquent in its obligations to Fruehauf. Pedler, who was a director, officer, and shareholder of Convoy, decided to close Convoy and move its business into General Highway Express.

On April 1, 1982, Convoy leased the 42 trailers to General Highway Express for two years at a monthly sum of $14,000, which was greater than Convoy's installment payments to Fruehauf. On April 20, 1982, Convoy assigned its lease to Fruehauf. In January, 1983, General Highway Express, which was bankrupt by that time, cancelled the lease. Fruehauf repossessed the 42 trailers between April and June 1983, and purchased them for $3,800 each in July 1983.

The third transaction arises out of Pedler's attempt to expand into the black oil hauling business. In August 1982, Pedler persuaded James Frasure to leave his 19 year career at Coastal Tank Lines in order to help Pedler start a black oil hauling business within a subsidiary of General Highway Express, General Tank Lines. To provide equipment for the venture, Pedler had General Highway Express buy nine tank semi-trailers from Terra/100 Corporation, another Pedler-controlled company. General Highway Express paid for the trailers by assuming the remaining debt on each truck, approximately $30,000 for each of five trailers and $20,000 for each of the remaining four. Pedler also lined up customers. Despite these efforts, the new venture withered when Pedler died in October 1982.

General Highway Express contends that each of these three transactions was a fraudulent conveyance designed to protect Fruehauf's loans to Pedler companies at the expense of other creditors. Fruehauf argues that it had no control over the actions taken by Pedler and his companies, and that the transactions were all valid.

General Highway Express has two alternative ways to show that these transactions should be voided as fraudulent conveyances under the Bankruptcy Code. 11 U.S.C. § 548(a). First, under section 548(a) (2), the trustee may void a transfer of property if:

1. General Highway Express's interest in property was transferred within one year of the filing for bankruptcy (the parties agree that this factor was met in each transaction);

2. General Highway Express received less than its reasonably equivalent value in the transfer; and

3. General Highway either was insolvent or severely undercapitalized on the date of the transfer or was rendered insolvent or undercapitalized as a result of the transfer.

Second, under section 548(a) (1), the trustee may void the transfer if Fruehauf had actual intent to hinder, delay or defraud creditors.

General Highway Express presents two arguments as to why the first transaction, the May 10, 1983 restructuring, was a fraudulent conveyance. General Highway Express argues that it did not receive the reasonably equivalent value in the restructuring. General Highway Express asserts that after the restructuring it was directly liable for $900,000--$400,000 for its loan from Fruehauf and $500,000 for the extension of credit by Centran Bank--and that before the restructuring it was only indirectly liable for $600,000. Such a statement, if true, would support a finding that General Highway Express did not receive reasonably equivalent value. But, as a practical matter, General Highway Express was only liable for $400,000 after the restructuring because the $500,000 credit extension was completely covered by 4440's certificate of deposit. Only later did Pedler use the certificate of deposit as security in a different transaction. Fruehauf had no idea that Pedler would use the certificate of deposit in a separate transaction and it had no interest in allowing him to do so. The district court did not err in determining that the removal of $600,000 in guarantor liability was reasonably equivalent value for the assumption of $400,000 in direct debt.

General Highway Express also argues that its guaranty of and security interest pledged to the previous $600,000 loan cannot be consideration because it was voidable. No determination has been made as to whether the previous $600,000 loan was voidable, but we need not reach this question. Even if the $600,000 loan was voidable, it may still be consideration because a voidable transfer is not void under the Bankruptcy Code. 11 U.S.C. § 544(b). As noted in 4 Collier on Bankruptcy, Sec. 544.03, p. 544-15 (15 ed. 1989) (emphasis original), quoting In re Mullen, 101 F. 413 (D. Mass. 1900):

[S]ection 544(b) does not purport to ipso facto tender void any transactions between the debtor and others; it creates merely a power of avoidance, that may be exercised as the trustee and the bankruptcy court sees [sic] fit.... It is a provision "which states that the trustee may avoid certain transfers of the debtor as a creditor might avoid them, thus plainly implying that, against the trustee as against the creditor, the transferee's title is not void, but voidable--voidable at law as well as in equity, but still only voidable."

Until the obligations under a transfer actually are voided, they still are binding. See General Kontrolar Co. v. Allen, 124 F.2d 123, 127 (6th Cir. 1941). Because such obligations are still binding, the release from them may serve as reasonably equivalent value. Otherwise, any transaction conceivably could be attacked later if it were based on consideration of the release of a voidable obligation. Such attacks would resemble a party in a settled lawsuit refusing to pay its part of the settlement on the ground that it would have won the suit if it had gone to trial. To hold that a voidable obligation cannot serve as reasonably equivalent value would engender protacted litigation in many cases on long-finished transactions that had been replaced by newer transactions. Thus, the release of General Highway Express's obligations under the $600,000 loan may serve as reasonably equivalent value in the May 10, 1982 transaction.

This holding will not insulate parties from legal action if they attempt to replace a voidable transaction with a new transaction merely to prevent the bankruptcy court from voiding the transaction. The trustee or creditor could still challenge such a transaction under 11 U.S.C. § 548(a) (1) because it would be an attempt to hinder or defraud the legitimate creditors.

In regard to the second transaction, the Convoy transfer, General Highway Express again argues that it did not receive reasonably equivalent value. As support, General Highway Express notes that its lease price was greater than both the remaining amount due on the original sale price of the trailers and the final price the trailers brought in a distress sale. In determining whether a party received reasonably equivalent value, the relevant value of goods is their value at the time of the transaction. 4 Collier on Bankruptcy p 548.09, p. 548-112 (15th ed. 1989). It makes no sense to base a finding of no equivalent value on the price in a repossession sale a year later. Not only have the goods depreciated, they often sell much less than their real worth. In regard to the original sale price, even General Highway Express's witness testified that lease payments were often greater than the purchase price payments on trailers in the trucking industry.

General Highway Express also argues that it received no actual benefit from the transaction because it did not need the trucks. The bankruptcy court found that General Highway Express did need the trucks to fulfill Pedler's plan of expansion of the trucking companies. These plans should not be discounted merely because Pedler's untimely death cut short steps to bring them to fulfillment. We affirm the district court's holding that General Highway Express received reasonably equivalent value in the Convoy Transfeer.

In regard to the third transaction, the Terra/100 Corporation transfer, General Highway Express argues that it did not receive reasonably equivalent value in the purchase of the nine trucks for two reasons. First, General Highway Express contends that it had no need for the trucks because it had no black oil hauling business. As with the Convoy transaction, the district court found that Pedler intended for General Highway Express to develop a black oil hauling business and that it needed the trucks as part of this plan. The district court's finding that Pedler truly planned to expand into black oil hauling is well supported by Pedler's hiring Frasure and by his establishing an initial client base. That Pedler's death caused his plans to abort does not warrant holding that the trucks had no value to General Highway Express at the time of the transaction.

Second, General Highway Express argues that it paid too much for the trucks because they sold for an average of $13,000 at an August, 1983 repossession sale and because they were appraised in December, 1982 at a value of $16,000 to $17,000 per truck. Putting aside any depreciation in the trucks over the year, a repossession sale price cannot alone be determinative of the value of trucks. The testimony regarding the appraisal, as noted by the bankruptcy court, was given no foundation. This evidence simply is insufficient to overturn the district court's decision.

If General Highway Express had not received reasonably equivalent value for any of the transactions discussed above, we would then examine its financial standing at the time of the transactions to determine whether it was solvent. If a company does not receive reasonably equivalent value and either was insolvent or became insolvent because of the transaction, we must void the transaction as a fraudulent conveyance. 11 U.S.C. § 548(a) (2). Because we affirm the district court's finding that General Highway Express received reasonably equivalent value, we need not review its determination as to solvency.

General Highway Express also may void each of the three transactions as a fraudulent conveyance if it can show that Fruehauf had actual intent to hinder, delay or defraud its creditors. 11 U.S.C. § 548(a) (1). In order to prevail, General Highway Express must make this showing by clear and convincing evidence. Lackawanna Pants Mfg. Co. v. Wiseman, 133 F.2d 482, 486 (6th Cir. 1943). General Highway Express fails to make a showing in any of these transfers. Although Pedler and some of the officers at Fruehauf were friends, there is no evidence that Fruehauf exercised any control over Pedler or his companies or that Pedler ever acted in any interest other than that of General Highway Express. In the May 10, 1982 transaction, there is no evidence that Pedler intended, much less that Fruehauf was aware that Pedler intended, to use General Highway Express's line of credit at Centran Bank instead of 4440's certificate of deposit to pay the $500,000. Further, there is no evidence that Fruehauf knew that Pedler later pledged the certificate of deposit, with which 4440 was to pay General Highway Express for this loan, as security in another transaction. Without such evidence, the district court properly refused to find actual fraud.

In the Convoy transfer, there similarly is no evidence that Fruehauf intended to defraud General Highway Express.

In the Terra/100 Corporation transfer, no clear and convincing evidence supports an intent to defraud. The attempt to expand into black oil hauling appears to have been a good faith decision, not a mere sham; otherwise, Frasure would not have left his employment of 19 years to organize it. Further, if the goal of the transaction had been for General Highway Express to assume the debt of Terra 100 Corporation, General Highway Express could have assumed the debt on all of the trailers on which Terra/100 owed money to Fruehauf, instead of merely nine. We affirm the district court's holding that Fruehauf did not commit fraud in these transactions under section 548(a) (1) of the Bankruptcy Act.

For the above reasons, we affirm the district court in its holding that none of the transactions discussed above were fraudulent conveyances.