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#2314 signed 4-10-97



IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS








In Re:

DOUG RUEDLINGER, INC.,

FIRST BENEFITS, INC.,

DEBTOR(S).





CASE NO. 93-40062-7C

CASE NO. 93-40061-7C

CHAPTER 7



DARCY D. WILLIAMSON, Trustee for

the Bankruptcy Estate of Doug Ruedlinger,

Inc.

PLAINTIFF(S),

v. ADV. NO. 95-7052
DOUGLAS O. RUEDLINGER,

LANE RUEDLINGER, and

THE RUEDLINGER COMPANY, INC.

DEFENDANT(S).





ORDER DENYING SUMMARY JUDGMENT ON

THE TRUSTEE'S FIFTH CAUSE OF ACTION

This proceeding is before the Court on the trustee's motion for partial summary judgment. The trustee appears by counsel Patricia A. Reeder. Defendant The Ruedlinger Company, Inc. (TRC), appears by counsel Gary H. Hanson. The other defendants are not involved in this part of the proceeding. The Court has reviewed the relevant materials and is now ready to rule.

FACTS

The trustee seeks summary judgment on the fifth cause of action in her complaint, one seeking to avoid certain transfers under 11 U.S.C.A. §548 as fraudulent conveyances. Except as otherwise indicated, the following facts are uncontroverted. In 1990, Doug Ruedlinger, Inc. (DRI), entered into an employment contract with Mark E. Nordstrom, and DRI's parent company, Wheatland Group Holdings, Inc. (Wheatland), entered into a similar one with John R. Dietrick. The contracts called for the men to perform work for Wheatland and its subsidiaries as assigned, and also included covenants not to compete in the sale of certain types of insurance. Later, the men left their jobs and formed Monarch Management Corporation (Monarch). Believing this company was competing with them, Wheatland and DRI sued Nordstrom, Dietrick, and Monarch (collectively, the Monarch Group) in state court for damages based on Nordstrom and Dietrick's alleged violation of their covenants not to compete. Among other things, the complaint asserted that DRI had hired Nordstrom on behalf of itself and Wheatland, and that Wheatland had hired Dietrick on behalf of itself and DRI.

Eventually, on March 10, 1992, the suit against the Monarch Group was settled (the Settlement). Although the parties have not mentioned this, the Settlement also released Robert E. Steuart from a covenant not to compete which was included in a contract he had with DRI. In return for releasing Nordstrom, Dietrick, and Steuart from their covenants not to compete, Wheatland and DRI received a release from the Monarch Group of most claims they might have against either company and the return of original files and documents which the Monarch Group possessed. In addition, the Monarch Group were obliged to pay Wheatland a portion of their revenue from the sale of certain kinds of insurance for two years (the Revenue Share). Nothing in the Settlement explains why none of the Revenue Share was to be paid to DRI, which was the company that had contracted for two of the three covenants not to compete that were dealt with in the Settlement. The trustee contends these facts show DRI had an interest in the Revenue Share that was, in effect, transferred by directing the Monarch Group to pay all of the Revenue Share to Wheatland.

Less than ten days after the Settlement, Wheatland assigned it to Shannon D. Ruedlinger (Shannon). The assignment transfers "all right, title, and interest" in the Settlement, but no one signed it on behalf of DRI. Shannon has declared in his answer to a complaint filed against him in connection with Wheatland's bankruptcy case that he gave nothing for this assignment. In an affidavit submitted in support of DRI's response to the trustee's motion in this proceeding, Edwin P. Carpenter, an attorney in private practice who represented Wheatland and DRI from July 1990 to February 1993, swears that Wheatland made the assignment to compensate Shannon for Wheatland's past and continued use of his insurance licenses in various states. About two months after Wheatland assigned the Settlement to Shannon, the Monarch Group agreed to pay the Revenue Share to Shannon.

DRI filed a chapter 11 bankruptcy petition in January 1993, and the case was converted to chapter 7 three months later. DRI's schedules included no reference to the Settlement, either as a current asset or one transferred outside the ordinary course of the debtor's business or financial affairs within the year before filing for bankruptcy. TRC contends the Settlement gave DRI no interest in the Revenue Share.

On October 1, 1993, Shannon assigned the Settlement to TRC. No one signed this assignment on behalf of DRI. Shannon has declared in his answer to the complaint filed against him in connection with Wheatland's bankruptcy case that he received nothing for this assignment. Mr. Carpenter contends that Shannon owed TRC $1,000 for TRC stock he had received but never paid for, and that TRC considered the assignment to be payment for that debt.

Two weeks after receiving Shannon's assignment, TRC sued Monarch in state court for refusing to pay it the Revenue Share. The trial court ruled Monarch owed TRC about $131,000 but was entitled to a set-off of about $128,000. An appellate court rejected most of Monarch's set-off claim and ordered entry of a judgment for TRC of about $122,000. That judgment now appears to be final.

The trustee claims DRI was insolvent on March 10, 1992, relying largely on a lengthy expert report prepared by two CPA's which concludes DRI was insolvent on February 29, 1992. TRC contests this assertion. It relies on a two-page report by an accounting firm which consists of a letter from the firm and a balance sheet for DRI as of June 30, 1992. The letter states that the balance sheet was prepared solely from information provided by DRI's management, and that management "elected to omit all of the disclosures required by generally accepted accounting principles." It notes that DRI had ceased operations as of the date of the balance sheet, so its assets and liabilities should be carried on a liquidating basis but this had not been done.

In opposing the trustee's motion , TRC relies heavily on the affidavit of Edwin P. Carpenter which was mentioned earlier. Although Carpenter claims to have personal knowledge of the facts stated in the affidavit, this cannot be so for many of them and seems unlikely for others. For example, Carpenter does not indicate that he was corporate counsel for or a corporate officer of either Wheatland or DRI, yet he claims to have personal knowledge of many matters which only their corporate officers, or perhaps their corporate counsel, could personally know: (1) Dietrick may have performed some work for DRI but primarily worked for Wheatland; (2) Nordstrom was an officer and director of Wheatland and performed substantial services for it (even though his employment contract was with DRI); (3) Wheatland's management regarded Dietrick as the main competitive threat to its businesses; (4) Nordstrom was not considered to have business or management skills that would threaten Wheatland or its subsidiaries; (5) Carpenter structured the Settlement so the Revenue Share would be paid to Wheatland, not DRI, because Dietrick posed the real threat to the businesses; and (6) Wheatland's management did not expect Monarch's Revenue Share to be significant. On another matter unlikely to be within his personal knowledge, Carpenter declares the Monarch Group violated Dietrick and Nordstrom's covenants not to compete by selling competing products and "solicit[ing] agents who were under exclusive agency agreements with DRI to sell Monarch's insurance products."

Attempting to refute Shannon Ruedlinger's assertions that the assignments of the Settlement were made without consideration, Carpenter swears Wheatland had been using Shannon's insurance licenses in various states without paying him, and assigned the Revenue Share to him to pay for the past and future use of those licenses. Although Carpenter does not explain his connection with TRC or Shannon, he claims to know Shannon incorporated TRC in 1992 and received 1,000 shares of its stock in return for $1,000 which he did not actually pay. Finally stating a fact that would seem to be within his personal knowledge, he also states he later advised Shannon to assign his interest in the Monarch settlement to TRC to pay for the stock.





DISCUSSION AND CONCLUSIONS

The Court believes the trustee has demonstrated that DRI probably was entitled to an interest in the Revenue Share under the Settlement. After all, one of the covenants not to compete that formed the basis of the lawsuit was contained in a contract with DRI, as was the extra covenant that was included in the Settlement but not the lawsuit. Indeed, according to TRC's own proffered affidavit, part of the Monarch Group's improper competition was to solicit agents who were under exclusive agency agreements with DRI, a fact which, if true, would seem to strengthen DRI's claim to an interest in the Revenue Share. Nothing in the Settlement or any other material presented to the Court shows that Wheatland gave DRI anything in return for that interest.

The trustee has not, however, established the extent of DRI's interest. At most, the Court might be willing to begin with a presumption that DRI was entitled to one-half of the Revenue Share since it, in effect, owned one of the covenants sued on. Given the absence of any evidence beyond the fact both Wheatland and DRI participated in the lawsuit and Settlement, though, TRC's mere allegation this presumptive split is not correct is sufficient to raise a genuine issue of material fact on this question.

The Court would like to point out that it believes the two-page report TRC submitted as proof of DRI's solvency at the time Wheatland transferred the Settlement to Shannon is inadequate for that purpose, at least when opposed by the report of the trustee's accounting experts which is based on a review of much information that was not disclosed to the accountants who prepared the two-page report. TRC may be able to point out flaws in the report of the trustee's experts, but the two-page report could not be accepted by the factfinder at trial as establishing that DRI was solvent at the relevant time.

For these reasons, the trustee's motion for summary judgment on her fifth cause of action is hereby denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of April, 1997.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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