                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


10-2-2000

Buncher Co. v. Official Com. of Unsec. Creditors
Precedential or Non-Precedential:

Docket 99-3925 & 99-3950




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Filed October 2, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 99-3925 & 99-3950

BUNCHER COMPANY;
FINANCIAL INSTITUTIONAL FUNDING, INC.;
RICHARD SANTUCCI; JOHN T. STABILE

v.

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF
GENFARM LIMITED PARTNERSHIP IV,
       Cross-Appellants in 99-3950

BUNCHER COMPANY; JOHN T. STABILE,
       Appellants in 99-3925

ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. No. 98-cv-00792)
District Judge: Honorable Donetta W. Ambrose

Argued August 8, 2000

Before: BARRY, WEIS and GREENBERG, Circuit Jud ges

Filed: October 2, 2000

       Robert J. Ridge, Esquire (ARGUED)
       Katarincic & Salmon
       2600 CNG Tower
       Pittsburgh, PA 15222

       Attorney for Appellants
       The Buncher Company, D.C. and
       John T. Stabile
       David B. Salzman, Esquire
        (ARGUED)
       Philip E. Milch, Esquire
       Campbell & Levine, LLC
       1700 Grant Building
       Pittsburgh, PA 15219

       Counsel for Appellees/
       Cross-Appellants Official Committee
       of Unsecured Creditors of GenFarm
       Limited Partnership IV

OPINION OF THE COURT

WEIS, Circuit Judge.

In this appeal we conclude that when limited partners
sold their interests to their financially strapped partnership,
the transaction was a constructive fraudulent conveyance,
and as such it was properly declared void by the
bankruptcy judge. Because the ruling by the bankruptcy
judge restored the former partners to their previous status
of equity investors, it was unnecessary for the bankruptcy
judge to rule on the matter of subordination, advanced as
an alternative theory of recovery. We will affirm the
judgment as to the fraudulent conveyance and vacate the
ruling on subordination raised in the cross-appeal.

This is an adversary proceeding brought by the Official
Committee of Unsecured Creditors of GenFarm Limited
Partnership IV against D. C. Guelich Explosive Co., Inc.
and other former limited partners referred to collectively
here as the Buncher Group.1 In 1988, Rodney Bohn
organized GenFarm IV as a limited partnership with himself
as sole general partner for the purpose of establishing and
operating an experimental dairy farm in Florida. The
_________________________________________________________________

1. In the Bankruptcy Court the Buncher Group included the Buncher
Company, Financial Institutional Funding, Inc., John T. Stabile, and
Richard J. Santucci. Financial Institutional, Santucci and Guelich have
since settled their disputes with the Committee and are no longer parties
in this dispute.

                               2
partnership filed a petition under Chapter 11 in June of
1995; and all of the assets were scheduled to be sold to
Ebony Bull Capital Co., an entity controlled by Bohn. The
Buncher Group objected to the sale price as inadequate,
but withdrew its opposition upon payment of $300,000,
now held in escrow, and a promissory note in the amount
of $700,000 from Ebony Bull.

In August 1992, Guelich, the Buncher Group, and
GenFarm IV filed several law suits in state courts against
Ebony Bull and Bohn to remove him as general partner and
recover damages. The allegations against Bohn are
described in detail in the following excerpt from the state
trial judge's opinion overruling preliminary objections:

        "Plaintiffs [GenFarm IV, Guelich, and the Buncher
       Group] claim that Mr. Bohn and Ebony Bull have
       engaged in various acts of fraud and misrepresentation
       to the detriment of the limited partners. They allege
       that prior to the formation of the partnership, Mr.
       Bohn represented that the genetics program was in
       place on other farms even though he knew that it was
       not yet viable; that he failed to describe unfavorable
       information that he had received concerning the
       operations of other dairy farms which he was operating
       through Ebony Bull; that he purchased cows for
       GenFarm IV from his other farms for substantial sums
       of money even though they had no value; that he
       purchased semen from his other farms that was never
       used; that he chose a site for GenFarm IV which he
       knew to have environmental problems without
       furnishing this information to the limited partners; that
       he obtained the limited partners' approval for
       additional borrowing by misrepresenting the condition
       of the business and overstating its value; that he made
       unauthorized payments to Ebony Bull and other
       entities which he operated; and that he engaged in
       fraudulent activities in connection with March 1990
       and November 1991 transactions with banks that
       resulted in a refinancing of the partnership's
       indebtedness and increased indebtedness. Mr. Bohn
       denies these allegations -- he contends that plaintiffs
       cannot produce evidence showing that he breached any
       fiduciary duties."

                               3
GenFarm Limited Partnership IV v. Ebony Bull Capital Corp.,
141 P.L.J. 190, 191 (Pa. Ct. of Common Pleas 1993).

The parties settled the state court suits in June 1993
with each party agreeing to release all claims against the
others. The settlement called for a closing transaction on
October 4, 1993. Bohn had the option to step down and
turn over his interests in the partnership, or remain as
general partner and purchase the interests of Guelich and
the Buncher Group. He chose the latter, but assigned to
GenFarm IV his right to purchase. At the closing, GenFarm
IV bought the limited partnership interests for $3.5 million
in cash and a note secured by a second-priority mortgage
on substantially all the partnership assets. On that same
day, GenFarm IV sold the interests it had purchased from
the Buncher Group and Guelich, together with minor
limited partnership interests that it had previously
acquired, to Bohn and Ebony Bull for $1.705 million.

Simultaneously, GenFarm IV refinanced its obligations to
its bank. Following the closing, GenFarm IV increased the
herd size, but the following summer it began selling cows in
order to pay expenses. The partnership continued its
downward financial spiral, culminating in the Chapter 11
petition.2

In January 1996, the Committee filed this adversary
action against Guelich and the Buncher Group to recover
all payments made pursuant to the 1993 settlement, the
$300,000 escrow fund, and the $700,000 Ebony Bull note.
The complaint alleges claims under theories of fraudulent
conveyance, preferences and subordination.

After a bench trial, the bankruptcy judge found that the
October 4, 1993 transactions rendered the partnership
insolvent and that GenFarm IV did not receive fair
compensation for the Buncher Group limited partnership
interests. He also determined that between October 1993
and the petition date, the Buncher Group received
_________________________________________________________________

2. Other limited partnerships established by Bohn for similar ventures
also went into bankruptcy. Although some relationships between these
entities and GenFarm IV existed, they are not material to the issues
raised on this appeal.

                               4
$822,851.77 in the initial transfer and in payments on the
$2.75 million note of GenFarm IV.

The Bankruptcy Court rejected the contention that the
release of GenFarm IV in the 1993 settlement benefitted the
partnership, pointing out that the Buncher Group had not
asserted any claims against GenFarm IV in the state
litigation. In addition, the Court noted that the retention of
Bohn as general partner was, if anything, a detriment to
GenFarm IV, and that the refinancing with the bank that
was part of the settlement was so restrictive that it did not
provide a benefit to the partnership.

After analyzing the various elements of the 1993
settlement agreement, the Bankruptcy Court decided that
the transaction was voidable under Pennsylvania's Uniform
Fraudulent Conveyance Act. Pa. Stat. Ann. tit. 39,SS 351-
63 (repealed Dec. 3, 1993 and replaced by the Uniform
Fraudulent Transfer Act, 12 Pa. Cons. Stat. Ann.SS 5101-
10 (effective February 1, 1994)). The Court then considered
the question of subordination and determined that in the
circumstances, section 510(b) of the Bankruptcy Code
required that the Buncher Group's claims be subordinated
to the claims of unsecured creditors.

Having determined that the 1993 settlement was a
fraudulent conveyance, the Court declared that the note
and mortgage of that date in the amount of $2.75 million
were void. The Court directed the Buncher Group to turn
over to the debtor's estate the $822,851.77 received from
GenFarm IV pursuant to that note and mortgage, as well as
the $300,000 in the escrow account and the $700,000 note
from Ebony Bull.

On appeal, the District Court held that the bankruptcy
judge did not err in finding that GenFarm IV received no
benefit from the release of claims by the Buncher Group.
Further, the Group's limited partnership interest did not
constitute fair consideration for the cash and note received
from the 1993 settlement.

The District Court, however, concluded that as a result of
the settlement, the Buncher Group did not have an equity
interest in GenFarm IV at the time the Chapter 11 petition
was filed, and therefore the mandatory subordination

                                5
provisions of section 510(b) of the Bankruptcy Code did not
apply. Consequently, the Court reasoned it was necessary
to consider equitable subordination under section 510(c).

The District Court also rejected an additional claim
presented for the first time on appeal by the Buncher
Group. It had argued it was entitled to a lien for the
amount transferred to GenFarm IV in the voided fraudulent
conveyance. Because the Buncher Group had failed to raise
the issue in the Bankruptcy Court, the District Court held
that the claim for a lien had been waived. The Court,
therefore, affirmed the judgment in favor of the Committee
on the fraudulent conversion claim, but reversed and
remanded on the subordination issue.

On appeal to this Court, the Buncher Group argues that
the release of claims against GenFarm IV constituted fair
consideration for the 1993 settlement. In addition, the
Group contends that the bankruptcy judge erred in not
considering the value of the partnership interests
transferred to GenFarm IV and in failing to grant a lien for
that amount. The Committee filed a cross-appeal from the
District Court's reversal of the mandatory subordination
order of the Bankruptcy Court.

I.

The District Court's remand of the subordination issue
raises an issue of finality that must be considered in
connection with our appellate authority. We have
jurisdiction under 28 U.S.C. S 158(d) to review "final
decisions, judgments, orders and decrees entered under
subsections (a) and (b) of this section." Section 158(a) in
turn authorizes district court review of final and
interlocutory orders of bankruptcy judges. The Bankruptcy
Court's disposition of the adversary proceeding here was
unquestionably final, but the District Court's order is not
so readily categorized.

Based on pragmatic considerations unique to this area of
the law, we have traditionally applied a relaxed standard of
finality in bankruptcy cases. United States Trustee v.
Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d
Cir. 1999). Under this standard, a partial remand by the

                                6
District Court does not automatically bar us from
considering an appeal. Id.

In deciding whether this Court has jurisdiction, four
factors are pertinent:

       (1) The impact on the assets of the bankrupt estate;

       (2) Necessity for further fact-finding on remand;

       (3) The preclusive effect of our decision on the merits
       of further litigation; and

       (4) The interest of judicial economy.

Official Committee v. Westmoreland County MH/MR., 183
F.3d 273, 277 (3d Cir. 1999). The most important of these
factors is the impact on the bankruptcy estate. In re
Blatstein, 192 F.3d 88, 94 (3d Cir. 1999); In re Meyertech
Corp., 831 F.2d 410, 414 (3d Cir. 1987). See also Commerce
Bank v. Mountain View Village, Inc., 5 F.3d 34, 37 (3d Cir.
1993) (discussing finality); In re Porter, 961 F.2d 1066,
1072 (3d Cir. 1992) (same).

A passing glance at the parties' contentions in this appeal
reveals that a major effect on the estate's assets is at stake.
As a result of the Bankruptcy Court's determination, any
substantial recovery by the unsecured creditors will be
affected by the outcome of this appeal. Furthermore,
because the record from the trial has been fully developed,
it appears unlikely that additional fact-finding would be
required in the Bankruptcy Court. From a pragmatic
standpoint, resolution of this matter must be made at some
point, and expeditious disposition would best serve the
interests of all concerned. We therefore conclude that we
should review the appeal at this juncture.

II.

Our standard of review is set out in Universal Minerals,
Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir. 1981).
In assessing the trial court's ruling, we apply the clearly
erroneous test to narrative facts and plenary review to
questions of law. Id. Ultimate facts are examined by
applying the appropriate standards to the factual and legal
components. Id.

                               7
The Bankruptcy Code provides that a trustee in a
bankruptcy proceeding "may avoid any transfer of an
interest of the debtor in property or any obligation incurred
by the debtor that is voidable under applicable law by a
creditor holding an unsecured claim . . . ." 11 U.S.C.
S 544(b) (1979). In this case, the applicable law is that of
Pennsylvania as set out in the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act, and
the Statute of 13 Elizabeth.3See Pa. Stat. Ann. tit. 39,
S 361; 12 Pa. Cons. Stat. Ann. S 5110; Golder v. Bogash,
188 A. 837, 838 (Pa. 1937).

The purpose of fraudulent conveyance law is to make
available to creditors those assets of the debtor that are
rightfully a part of the bankruptcy estate, even if they have
been transferred away. See In re Cybergenics Corp., No. 99-
5592, 2000 WL 1257270, at *3-4 (3d Cir. 2000). When
recovery is sought under section 544(b) of the Bankruptcy
Code, any recovery is for the benefit of all unsecured
creditors, including those who individually had no right to
avoid the transfer. 2 Collier Bankruptcy Manual P 544.09[5]
(Lawrence P. King ed., 3d ed. rev. 1999). The remedy in this
section adopts the longer "reach-back" provisions of state
law. Id. P 544.09[2].

Under section 4 of Pennsylvania's Uniform Fraudulent
Conveyance Act, a conveyance made or obligation incurred
by a person who thereby becomes insolvent is fraudulent as
to creditors, regardless of intent, if the transaction is
without fair consideration. Pa. Stat. Ann. tit. 39,S 354.
Section 5 provides that when a person in business conveys
assets without fair consideration and receives so little in
return that the remaining capital is unreasonably small,
the transaction is fraudulent as to creditors. Pa. Stat. Ann.
tit. 39, S 355. Like section 4, section 5 does not consider
intent. Id.

Fair consideration is given when property of a fair
equivalent is transferred in good faith. Pa. Stat. Ann. tit.
39, S 353(a). A party lacks good faith if it knows that the
_________________________________________________________________

3. The parties do not contend that the differences between the
Fraudulent Conveyance Act and the Fraudulent Transfer Act affect the
outcome in the present case.

                               8
transaction would render the other party insolvent. Id.;
United States v. Tabor Court Realty Corp., 803 F.2d 1288,
1296 (3d Cir. 1986).

Section 4 refers to insolvency immediately before the
conveyance or it can mean "present insolvency after the
conveyance as affected by it." Angier v. Worrell, 31 A.2d 87,
89 (Pa. 1943). In Larrimer v. Feeney, 192 A.2d 351, 353
(Pa. 1963), the Pennsylvania Supreme Court held that the
Uniform Fraudulent Conveyance Act encompassed
insolvency in the bankruptcy sense, i.e., a negative net
worth; and also in the equity sense, i.e., the debtor has
insufficient presently salable assets to pay existing debts as
they come due.

The primary inquiry under a constructive fraud provision
is limited to whether there is a link between the challenged
conveyance and the debtor's insolvency. If insolvency is
established, the burden shifts to the transferee to show
that the assets were transferred for fair consideration.
Elliott v. Kiesewetter, 98 F.3d 47, 56-57 (3d Cir. 1996).

The bankruptcy judge in this case heard conflicting
expert testimony on whether GenFarm IV was rendered
insolvent by the October 1993 transaction. He analyzed the
evidence at some length in his opinion and concluded that
GenFarm IV "was insolvent on October 4, 1993, or became
insolvent as a result of the closing on the Settlement
Agreement."

The Buncher Group does not frontally assault the
insolvency findings. Instead, it argues that the bankruptcy
judge erred in failing to properly evaluate the consideration
the Buncher Group furnished to GenFarm IV in the
settlement. In that connection, the Group says that it
released the partnership from viable claims worth in excess
of $9 million.

In its brief, the Buncher Group states that "the
Committee stipulated that a fraud was being perpetrated on
the [Buncher Group]. Thus, it is entirely uncontradicted
that the [Buncher Group] had valid, viable claims against
GenFarm IV, which they released." The record, however,
does not bear out this statement. During the trial, some
discussion took place about the fraud issues asserted in

                                9
the state litigation by the Buncher Group. The bankruptcy
judge stated, "I think you will all agree that the [Buncher
Group] defendants here believe that Rodney Bohn was
guilty of fraud in formulating and operating this limited
partnership." Committee counsel replied, "And, as I said,
Your Honor, we will stipulate that they believe that." This
exchange is far from a concession that the Buncher Group
had viable claims against GenFarm IV, whatever might
have been the circumstances with respect to claims against
Bohn.

The Buncher Group also argued in the Bankruptcy Court
that part of the $3.5 million it received was in return for
releasing claims against the partnership not asserted in the
state suit. The Buncher Group suggested that the
subsequent sale of the limited partnership interest by
GenFarm IV to Ebony Bull for $1.705 million on the closing
date established the value of those interests. The Buncher
Group pointed out that it received $3.5 million when it
conveyed those same interests to the partnership.
Accordingly, it argued the difference between the two
figures was some measure of the value of the Buncher
Group's release of claims against GenFarm IV.

Although somewhat persuasive on its face, this argument
fails when the terms of the settlement agreement are
examined closely. The settlement was based on the premise
that the Buncher Group and Bohn would go their separate
ways. Between the June agreement date and the October
closing day, Bohn was forced to choose between buying out
the Buncher Group, or turning over his interests in the
partnership. As counsel for the Buncher Group stated at
oral argument before this Court, "the way we[settled the
case] we did not know who [was] going to wind up with
control of this partnership, but whoever does, that's it. . . .
Everyone has to go their separate ways."

Significantly, the $3.5 million obligation agreed to by
Bohn under the buyout option was his alone, although he
was free to assign it to anyone, including GenFarm IV.
Sometime later, but before the October closing date, Bohn
opted to assign to GenFarm IV the right to buy the Buncher
Group shares.

                                10
Thus, the $3.5 million clearly was not based in part on
any previously unasserted claims against the partnership.
The $3.5 million figure was agreed upon in negotiations
between the Buncher Group and Bohn on his own behalf.
If the $3.5 million figure represented any claims other than
the value of the Buncher Group's partnership interest,
these would have been claims against Bohn, not against
GenFarm IV.

If Bohn had not assigned his obligation to GenFarm IV,
the Buncher Group would still have received the $3.5
million and the partnership would have owed nothing to the
Buncher Group. Whatever Bohn's motives for transferring
his obligation to GenFarm IV, the assignment does not
establish the Buncher Group's contention that a portion of
the $3.5 million represents payment for claims against
GenFarm IV.

The Buncher Group failed to persuade the bankruptcy
judge that it had viable claims at the time of the settlement
in any amount, let alone $9 million, a figure which included
treble damages under a theoretical RICO claim. In
dismissing the Buncher Group's arguments, the
bankruptcy judge observed that it had not presented any
claim against GenFarm IV in the state litigation, but that
its fire had been directed solely at Bohn, not the
partnership.

Neither the Bankruptcy Court nor this Court disputes the
Buncher Group's contention that a release of a claim not in
suit may serve as consideration for a settlement, but the
Group failed to establish the reality of such claims. On this
record, the unasserted claims may fairly be considered non-
existent. Consequently, the bankruptcy judge properly
found that no part of the consideration received by the
Buncher Group represented compensation for release of
claims against the partnership.

In scrutinizing the transfer of the Buncher Group's
partnership interest, the Bankruptcy Court correctly
treated the interest of a limited partnership as an equity
security. Under the Bankruptcy Code, the term "equity
security" includes the "interest of a limited partner in a
limited partnership." 11 U.S.C. S 101(16)(B). Citing In re

                                11
Roco Corp., 701 F.2d 978, 982 (1st Cir. 1983), the judge
concluded that a partnership receives less than reasonably
equivalent value when it redeems the equity interest of its
principals. Roco held that in determining whether a stock
redemption is a fraudulent transfer, a transaction in which
the corporation receives nothing but outstanding stock
amounts simply to a reduction in capitalization. Id. From
the perspective of the creditors, there is ordinarily no value
to the corporation in such an exchange.

The Buncher Group argues that "[u]nder [this] rationale,
a valid and legitimate settlement between a debtor and an
equity interest holder, even if it is reached years prior to
bankruptcy, is subject to being set aside." This objection
ignores the fact that it is insolvency which cabins the reach
of fraudulent conveyance law. Therefore, where equity
shareholders inform themselves of the entity's solvency,
this concern is allayed.

In effect, what the Buncher Group sought as a result of
the October 1993 transaction was to transform its failing
investment into a secured creditor relationship, to the
detriment of the partnership's unsecured creditors. We
conclude that the Bankruptcy Court was correct in its
determination that from the creditors' perspective, the
partnership did not receive fair consideration.

The Buncher Group also protests the fact that the
Bankruptcy Court did not award a lien for the value it
transferred to GenFarm IV. In United States v. Tabor Court
Realty, 803 F.2d at 1298-99, we cited section 548(c) of the
Bankruptcy Code providing that a transferee or obligee of a
fraudulent transfer or obligation who takes for value and in
good faith may retain the interest transferred or the
obligation incurred. That provision permits a good faith
transferee or obligee to retain his lien.

We agree with the District Court that the Buncher Group
waived the lien issue by failing to raise it in the Bankruptcy
Court. Not only did the Buncher Group neglect to raise the
issue at trial, but the evidence in the record is insufficient
to permit a court to realistically value the lien.

III.

We come now to the Committee's cross-appeal
challenging the District Court's remand of the

                               12
subordination issue to the Bankruptcy Court. It is helpful
to put the cross-appeal in context. In the adversary
proceeding, the Committee sought relief under several
alternative theories. In its brief at the conclusion of the
trial, the Committee said, "to the extent that the Committee
could establish, either through successful prosecution of
the fraudulent conveyance claim or the equitable
subordination claim, that such claim was not allowable or
alternatively, subject to subordination, the escrow fund
would belong to the estate." In this connection, it is worth
noting again that the Committee had also sought recovery
under a preference theory.

The contingent nature of the subordination claim is
demonstrated in the Committee's response to this Court's
pre-argument inquiry about appellate jurisdiction. The
Committee explained that it had pleaded four alternative
causes of action, three of which were based on theories that
might have been applied had the fraudulent conveyance
count failed. "Once the transfer is avoided," the Committee
wrote, "applicable law mandates Buncher be returned to its
original status as an equity holder. Such a result affords
the Committee complete relief in this matter, inasmuch as
everything received by Buncher in respect of the Transfer
would be avoided and returned to the Debtor's bankruptcy
estate." In short, the cross-appeal was a precautionary
move by the Committee to be considered by this Court only
if the fraudulent conveyance judgment were reversed; if the
fraudulent conveyance claim is affirmed, the Committee
disclaims its cross-appeal.

Once they had upheld the fraudulent conveyance claim,
the Bankruptcy Court and the District Court need not have
addressed the subordination count because it was
academic at that point. In the interest of prudence and
judicial economy, both courts chose to discuss the issue for
the benefit of appellate review. This practice is frequently
followed and is an aid to judicial efficiency. We conclude,
however, at this juncture that the subordination claim is no
longer germane and we need not discuss it.

Accordingly, we will affirm the judgment of the District
Court insofar as it affirms the Bankruptcy Court's ruling on
the fraudulent conveyance action. We will modify the

                               13
District Court's remand to the Bankruptcy Court by
directing that the District Court direct the Bankruptcy
Court to vacate its order on the subordination claim.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               14
