19910402b In Re Hamilton Taft Adversary Memo In Support

e· ?ELDMAN, WALDMAN , A Professional Co

2 ) J

PATRrcIA S. MAR L.J. CHRIS MARTINIAK ALA.N J. ZACHARIN 2700 Russ Building 235 Montgomery Street

San Francisco, CA Tel

(415)

94104 981-1)00

A ror Trustee rrederick S. Wyle

UNITED STATES BANKRUPTCY COURT NORT!-!ERN Dr

"

CT OF CALIFORNIA

10 I!

In ra

)

BANKRUPTCY NO.

91-~l077

LK

)

12

IJ IJ

15

HAMILTON TAFT & COMPANY, Debtor.

\8 19

20

Chapter 11

}

-----------------------------------)}

91 }

fREDERICK S. WYLE, Trus~ee in Bankruptcy of Hamilton Taft ny,

)

Pla

iff,

v. CONNIE C. ARMSTRONG, JR. , et a1.

De

Adversa

Proceeding

}

:aO~ouJlF al------sl K AND AUTHORITIES IN

}

SUPPORT OF APPLICATION FOR

)

)

16

17

) )

) ) )

) )

---------------------------------)

21

22 23 24

is 26

A IN SUPPORT Of TEMP RESTRAINING ORDER

MEMO Of P &.

/1bA- SF-

TABLE Ot

CONT~NTS

SECTION TABLE Of AUTHORITiES. . . . . . . . . . . . . . . . . . . . . . ..

. .................

L'.

5

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . , ....... 1

6

FACTS IN SUPPORT OF' INJUNCTI'IE RELIEf . . . . . . . . . . . . . . . . . . . . . . . . . . . )

..

Transfers to Affiliates .. ' .... , . . . . . . . , . . . . . . . ' ... _ .. , . . . . . . '"

8

financial Condition of Debtor ..... , . . . . . . . . , . . . . . . . . . . . . . . . . . . . . 7

I

9

10 II

Consideration for Transfers and Risk of Dissipation ............. 8 I.

16

17

CIRC~MST~NCES

OF THIS CASE

.......... 9

II.

THE TRUSTEE AND CREDITORS STAND TO SUFFER IRREPARABLE INJUR'l I f THE TRO DOES NOT ISSUE. . . . . . . . . 11

III.

AS THE AFFILIATES OBTAINED THE ASSETS THROUGH FRAUDULENT CONVEYMJCES, A CONSTRUCTIVE TRUST SHOULD BE ~STABLISHED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . lJ

IV.

THE INJUNCTI1!E RELIEF APPLIES TO PARTIES OUTSIDE THE TERRITORIAL JURISDICTION OF THIS COURT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IS

1.1

15

A. TEMPORAR'I' RESTRAINING ORDER IS APPROPRIATE

UNDER THE

12 I]

.4

COI'1CLUS ION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

IS 19

20 1\ 22

23

25

26 -i-

TABLE OF AUTHORITIES

C.~SES

j

5

6

Benda v. Craud Lodge of IAM, 584 F.2d J08 (9th Cir. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Big Shanty Land Corporation v. Comer Properties, Inc., 61

7

B. R.

272

(N. D.

Ga.

1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. J

calistoga Civic Club v. Calistoga, l4J Cal.

App.

3d 111

(1933) . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,

15

In Re Cumberland Investment Corporation, 11S B.R.

to 11

12

13

J

(Bkrtcy.

D.R.:.

1990) . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Haskel Engineering and Supply Co. v. Hartford Accident & Indemnity Co., 78 Cal.

App.

3d )71

(197B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Heckmann v. Ahrnanson, 168 Cal.

App.

3d 119

(1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

IML Seatransit Ltd. v. United States, 323 F. 15 \6 17

18 19

20 2\

Supp. 562

(N.D. Cal.

1971) . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Inglis and Son Baking Co. v. ITT continental Banking Ca. S :2 6 F. 2 d 2 6 ( 9 th c i r. 1 9 7 5) . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . 10 Los Angeles Memorial Coliseum Corn'n, v. National Football League, 634 F.2d 1197

(9th clr.

1980), . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Sturm/O'connell v. Continental Bank, 19 B.R.

965

(1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Waffenschmidt v. Mackay, 763

r. 2d

711

(5th Cir.

!.985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

22

23

25 L6

-i1-

2 ) J

9ankruptcy Rules Ru 1 e 7065 . . . . . . . . . . . . - . . . . . . . . . . . . . - . . . . . . . . . -. califc~nia

. ......... ,

Civil Cades

. , ........... ,,"

5

§

2224 . . . . . . . . . • • . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

,

6

§

2223 . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . 14

7

8

10

Federal Practice and Procedure §

2951 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 9

§

65 . . . . . . . . . . . .. ... , . . . . . . . , . . . . . . . . . . . . , . . . . . . . . . . . . . . . . 9

§

65(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . .. 9

,I

11 1)

14

\S 16

17

18 19

20 21

22

23 24

25 26 -iii-

IN1'ROOUCTTON An involuntary bankruptcy proceeding was filed J

Hamilton Taft 5. Co. March 26,

1991,

I

Inc.

(the "Debtor")

on March 20,

aga:~s:

en

1991.

the Court appointed Frederick S. WyLe as trust2e. h~5

Although the Trustee has been in office only one week,

6

accountant's early investigation has substantiated that the):'"€: ha'ls

7

been massive conveyances of assets from Debtor di):'"ectly or

a

indirectly to companies affiliated with Debtor. application,

preventing the affiliated entities,

1\

encumbering, transfe):'"ring,

\)

By this

the Trustee seeks a temporary restraining order

)0

f2

his

a~d

5

the defendants herein,

from

or disposing of any assets or any

proceeds of those assets, pending determination of the Trustee's adversary proceeding seeking recovery of the assets as fraudulent conveyances.

!S

10

17

18 19

20 21

The basis for issuance of a temporary restraining order and preliminary injunctive relief is clear. period that Connie Chip 1>.rmstrong Jr.

Ouring the two-year

("Armstrong") has owned and

controlled Debtor, extremely large sums of money collected from Debtor's clients for purposes of paying the clients' payroll taxes have instead been diverted to other companies owned and controlled by Armstrong

("Armstrong Companies").

Debtor's records examined

thus far show that at least $61,000,000 has been transferred during that period.

Debtor's records show that there are over

$84,000,000 in unpaid and overdue tax obligations that Debtor yas

25

ob 1 igated to pay on behal f of its cl ients.

26

MEMO Of P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-1-

I:

The Trustee has onl y

been able to locate about $5,000,000 in known liquid

?

~sse~s

G~

Debtor.

In return for the above described transfers,

)

~

received either nothing at all, or else unsecured

5

"hands" from the recipient companies.

o

instruments evidencing these

7

collateral.

8

transfers,

"~Qtes"

Debtor

"notes~

or

Trustee can find no written and "bonds" much less

any~~ i )L

_,

The Armstrong companies that received these cannot meet their own operating expenses without cash

"loans" from Debtor, are engaged in risky and speculative

:0

businesses, and have not even paid

Il

and J'bonds".

11

Nevertheless,

J

been spending money extravagantly,

I

IJ

!5

\6

17

\8 19

20

2I 12

2)

~he

interest due on the "notes"

Armstrong and his affiliate companies have purchasing a

multimilli~n

dollar "hobby" ranch for Armstrong'!:i residence,

installing a

multimillion a

pala~ial

dolla~

showhorse practice arena at the ranch,

Leasing

suite at the Mark Hopkins in San Francisco for a

reported SlJO,OOO, and maintaining a limousine and full time chauffeur in San Francisco for a few day's use per month. The legal requirements for issuing injunctive relief are The likelihood of success by the

well satisfied on these facts.

Trustee on the merits of the claims set forth in the complaint is compellingly high.

Virtually every ground for finding a fraudu-

lent conveyance exists here.

The Debtor has not been able to meet

its payment obligations when due for virtually the entire period 25

Armstrong has

contro~led

Debtor_

Conveyances have been made

26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-2- -

-

- - - - -- - - ----

'.,.ithout receiving reasonably equivalent value.

A.nd each

t~ans

:-2:

left Debtor more insolvent and undercapitalized, The risk that the assets will be dissipated is also

3

A.t least S80,OOO,OOO has been transferred

~

compellingly high.

5

entities under the control of the very person who engineered the

o

transfers, who has spent money lavishly, and who has refused to

7

provide any information to the Trustee about the transfers and

8

disposition of the Debtor's assets by the A.rmstrong companies.

~

Armstrong knew that the transfers wou~ct

~ould

La

render the

10

Debtor insolvent and

i I

contractual obligations.

12

recipients,

I]

they also should have known that the consideration,

\.1

in exchange for the transfers were not reasonably equivalent in

15

prevent Debtor from meeting its

Such knowledge is imputed to the

who were owned and controlled by Armstrong.

He and

it' any, given

value.

certainly the balance of potential harm tips scrongly in

\6

17

favor of granting the requested Lelief and prctecting the estate

18

from further dissipation of the transferred assets.

i9

injunctive relief should be issued forthwith. FACTS IN SUPPORT OF INJUNCTIVE RELIEF

20

The facts on Which this application is based are set

21

22

23

forth in the declarations of the Trustee, ("Wyle~),

26

Frederick S.

the Trustee's accountant, Lee Baly ("8alyn)

investigator Fred Daulton (UDaulton") 25

The requested

for injunctive relief,

Wyle and

filed with this application

as well as the declarations of Debtor's

former treasurer James Pa i 11 e

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

()I

Pa ille") and Debtor's E::Jrmer

-J-

controller Steven Solodof! (MSolodotfff) filed in connection ?

the motion of federal E

)

trustee.

J

!:'e

Re

ress

ticn for appointment or a

rences are to t

s of their:

lfied pa

tlve declarat.

5

Since Ma

L

1989, Armstrong has been the sale owner

nd in control of

of related compan

S 9

also owns and controls a

RemS.ngton Campa

including the following:

es, Inc, :

Real

The

ny: cel>. Ho

10

Inc.; CCAJ Corporat

11

and Investment

12

Acquisitions; Dei, !nc.; Oresdner 'financial Ma

13

Corporation: Dresdner Eote

J4

H. T. Interna tiona I, Inc.; Suisse Texas I Inc.; Knightsbridge

15

Companies, Inc.; and Kn

16

Da u 1 ton ,

~

Chase

., Chayson

ny; cal-Pacif

rises,

Management

Inc.;

.;

nt

ner

e!l..!m,

Guaranty Company.

sbri.

C.R.

le,

(

Inc.;

~

);

10«)

and records show that duri

,2 •

17

i

IS

Armstrong's control of Debtor, there have been numerous transfers

19

from

20

2J

24-

25

26

nies (di

accounts at Merrill Lynch a

investment

or

or accounts at Bank One in Dallas)

to Armstrong's umbrella

11

22

to

, Kn

Inc.

and

At least $61, 000 1000 has been so

during

's control of Debtor, as re

of lnte

receivables from appro\(

sho

after Armstrong acquired Debtor to

end of 1990,

se

a.8

plus transfers totalling 511,000,000

MEMO OF P & A IN SUPPORT OF TEMP REStRAINING CRDER

-4-

ilion

$18.9 1

as of the

and

february of 1991.

There are currently over $80,000,000 in

2

receivables from the Armstrong Campan

]

and ("ecoLds. ]

'J 7; Baly,

(Wyle,

.

~~

shown on Debtor's

4-6 and 12; Solodoff.

'17.)

On September 12, 1990 Debtor's books and records

a transfer oE S),JOO,OOO to Remington with the annotation

5

reflec~

6

that this was lIat Chip Armstrong's request". 4.

( Sa 1 y,

~1

9.)

According to the Eormer cash manager of Armstrong's

Patti Montague, upon obtaining control of

B

various companies,

9

Debtor, Armstrong immediately wired about $2,000,000 to the

10

holding company for some of the Armstrong companies.

~

4J

I

bOC~5

(Daul ton

J

9.)

5.

11

According to Debtor's former treasurer, James R.

in July, 19a9, Armstrong transferred approximately S3

I]

Paille,

1Q

million of funds belonging to the Debtor to Dresdner Enterprises,

IS 16

Inc., a company which formerly owned the Debtor and is currently owned by Armstrong. 6.

17 1B 19

22 2J

26

8).

According to Paille,

in July 1989, Armstrong

to the account of Dresdner Enterprises, 7.

According to Paille,

Inc.

(Paille,

~

9).

in August, 1989, Armstrong

transferred $7 million of the Debtor'S money to an account of Dresdner Enterprises,

Inc.

in order to purchase a shopping center

that Armstrong or one of the Armstrong companies was buying. (Paille,

25

~

ordered $9,000,000 transferred from Debtor to Morgan Guaranty Bank

20

21

(Fa i lle,

1 11). 8.

According to Montague,

in February 1990, Armstrong

transferred approximately $10 million of the Debtor'S funds to

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-5-

tor purchase of a showpiece ranch of over

~inthrop

2,000 ac~es

2

~rmstrong's

]

approximately $6.4 million was booked to Armstrong, who gave a

J

deed of

s

Winthrop in turn assigned the deed of trust to the Debtor.

personal residence.

tr~st

A loan in the amount of

on the property to Winthrop.

According to

Montag~e,

Portions oE the $10 million from the Debtor were also used for 7

improvements on Armstrong's ranch,

8

spent on a cutting horse

9

Armstrong's note.

II

$J

(Daulton,

~

and for prepaid interest on 16).

According to Montague, Armstrong transferred some

9.

to

a~ena,

including about $2.4 million

million of the Debtor's funds into Dresdner Petroleum to

12

purchase oil and gas leases in the name of Dresdner Petroleum.

13

(Daulton,

16 17

IS ;9

'2.0 21

15).

10.

1&

)5

~

Debtor,

According to Montague, after Armstrong acquired the

the Debtor became the primary source of funding for all of

Armstrong's Dallas operations.

The Armstrong Companies required

some S400,OQO a month in operating costs--alrnost

~S

million a

year--apart from any operating costs incurred by the Debtor itself.

The funds for such operating costs were obtained from the

Debtor.

(Daulton" 11.

10).

According to Montague, she prepared a weekly cash

summary projecting the Armstrong companies, cash needs for the 23 2.1

26 '

next several months.

If the cash flow showed that the entities

would soon run out of funds,

Armstrong would transfer the Debtor's

funds to the Dallas office.

These funds were then distributed to

whichever AfEiliated company needed them.

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-6-

(Daulton,

" 11).

Financial Condition of Debtor 12.

Throughout the time Armstrong controlled Debt·:: r

)

has been rendered unable to pay client

..:.

a result of transfers to Armstrong 1990 there were over

b

S8~,OOO,OOO

ta~

~:

obligations when due

Co~panies.

~s

As of the end of

in overdue tax obligations

~hich

Debtor was supposed to pay on behalf of its clients, and fcr

whic~

Debtor received funds from its clients to effectuate ?ayment, but

a

which have remained unpaid.

9

have accrued on these unpaid tax obligations.

10

~

4; Solodoff,

13.

\ I 12

1J

18

~

2I

22

20).

Debtor now has only about $5,000,000 in liquid

This

2). 14.

Debtor'S internally prepared budget for 1991 shows

projected gross revenues to be about $9,000,000 to meet projecLed ope~ating

and payroll expenses of $8,705,J75 for 1991 from the

following sources:

(a) 20

tJ 15; Wyle,

account may include money on deposit with Debtor for tax payments.

15

17

(Baly,

assets that Trustee has been able to find and recover.

(Wyle,

16

~

Substantial penalties and interest

About $4,lJO,OOO in net fees and overnight deposit

earnings on legitimate business operations, and (b)

About $5,lJO,OOO in interest expected to be paid by

affiliated entities on $57,000,000 in intercompany bond receivables.

24

25 26

The budget does not show any interest income projected on the Sll,BOO,DOO intercompany note receivable shown on Debtor's books and records.

(Ball',

~

16.)

MEMO Or P & A IN SUPPORT of TEMP RESTRAINING ORDER

-7-

Consideration for Transfers and Risk of Dissipation On Debtor's records,

15.

the intercompany

are recol:"ded as either "shot"t teri:l receivables",

"1.ong teL.:! nee::::;"

"

or "long term bonds".

5

(al

6

obLigations,

(bl

obligations,

(c) evidence of repayment of any portion of long ter-;n

obligations,

(d) evidence of payment oE interest on such

.9

notes,

bonds,

obligations. 16.

10

Howevet",

receivab~as

the Trustee has not found any:

or other instruments evidencing the interconpan; collateral or security agreements securing such

(Wyle,

~

9).

The priDary business of the Armstrong Companies

II

appears to be somewhat risky and speculative in that it involves

I]

the acqUisition of failing companies with the hope of turning them

I)

around.

( Wy 1 e , III 1 O) •

17. IS 16 !7

20 21

their own operating expenses and

Debt~r;s

meet such expenses.

10).

~ire

(Daulton,

~

funds have been used co

According to Montague, after February 1990,

the

transfers from Debtor to Armstrong Companies increased, and

Armstrong's personal living style became more extravagant. Armstrong or his companies purchased: (a)

22

a large suite of luxury rooms at the Mark

Hopkins Hotel in San Francisco, (b) 25

funds of

Debtor have been unable to generate sufficient revenue to pay

18. 19

Armstrong Companies which have received

at a cost of over $130,000;

a red jaguar Ear 5105,000 at the 1990 nCattle

Baron's Ball;"

26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-8-

1

for $135,000 at another C!:at':.:.-,·

(c)

a Rolls

Cd)

a BMW for $36,000 (paid for by Debtor)

event.

.\

Ha

5

~Jone

ft vice

lton

ident, christine Grambling.

of Armstrong's companies, other chan Debtor, had sufficient

revenues or funds available to Eu ;'

II

these expenses.

Armst

19.

has,

through his attorneysj

tell the trustee whether and where the notes and

\

refused to s can be

c

. what assets are owned by the

,

(Daul ton t

17.)

3 Q

fot a

to

the notes and bonds, why interest is not being I?Cl

rt

,or any other

information regarding transfers of the Debtors assets and disposiI)

tion of the transferred funds.

(Wyle,

~

8).

DISCUSSION 15

I.

Bankruptcy Rule 7065 proves that Federal Rule of Civil

17

18 19

20 2\

A TEMPORARY RESTRAINING ORDER IS APPROPRIATE

Procedure Rule 65 sets Earth the

a~in

ceedings.

FRCP 65 [b)

a temporary restraining

tests for issuance of such an order are

to those required to prevail on a motion for

§ 2951

25

rsary

ances under wh

order may be g

injunction.

24

in

1

imi

11 Wright & Miller, . ); see,

(1973 and 1986

states, 32) F.

.

562,

564

(N.D. Cal.

Ninth circuit:

26 MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

9

1971).

As held by the

In this circuit the moving party may meet ~ts burden by demonstrating either l} a combination of probable success on the merits and the possibility of i~reparable injury or 2) that serious questions are raised and the balance of hardships tips sharply in its Eavor. Inolis rand Son Bakina Co. v. ITT Continental Banking Co.] SUi F.2d (86) at 88 (9th Cir. 1975). These are not separate tests, but the outer reaches "of a single continuum" Benda rv. Craud Lodge of rAM, 584 F.2d J08 (9t.h Cir. 1978) I at. )15. Los Angeles Memorial Coliseum Com/no v. National roo t b ail La a g u e, 6 J 0.\ F. 2 d 119 7, 102:' ( 9 the i r .

.3 .I

s 6

1980) .

a

The foregoing Eacts support the following conclusions

9

10

~hich ~arrant

1.

II I2

13

issuance oE injunctive relief: Debtor is,

that Debtor cannot,

and for months has been,

insolvent in

and for months has been unable to,

pay when

due the tax obligations for which it collected money from clients and Debtor's liabilities exceed its assets. 2.

15 10

17

}e 19

or misappropriation of the assets of the Debtor by Armstrong, or commingling of Debtor's funds

22

23

~ith

such transferees. )

an oral

.

Even if some of the transfers were in exchange for

(or even an as yet unfound written)

26

promise to repay,

transfers are not for reasonably equivalent value, market value of such lonq term,

undocumented,

obligations from privately held,

25

those of Armstrong Companies,

and therefore assets of the Debtor are being wrongfully held by

20 21

Many or most of the transfers constitute conversion

the

since the fair

and unsecured

financially shaky companies under

the control of a spendthrift (Armstrong), would be a small fraction of their principal value of 568.8 million,

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-10-

and clearly

not reasonably equivalent in value to the transfers. 1

transfers to 4.

j

(b)

prevent

I.;as prov

5

contractual obI

such transfers would prevent Debtor from came due, and

Debtor was insolvent at the time the transfers

There is a

tantial risk of dissipation of the

breached his fiducia

Armst

16

the transfers in that he failed to

17

duties to Debtor ently invest and

ling, and he

a conflict of interest, he engaged in self

misa

iated the II.

s.

THE TRUSTEE AND CREDITORS STAND TO SUfFER IRREPARABLE

Debtorls own records establ dollars of the Debtor were fraudulent

25

ed to the

the funds under his custody and control, he put himself In

1S

23

tians,

companies controlled by Armstrong.

15

21

e.o Debtor

nts,

assets of the Debtor that have been fraudulent

20

t

were 5,

19

nces.

such transfers would interfere with and

paying its obligations as ( d)

12

the money transfer

from perfonni (c)

e.:-.e

to such Annstro A.rmstrong,

by Debtor's clients for tax: pa

9

10

were fraudulent conve

rs were

t~ans

(a)

7

B

All

C~mpanies

with their knowledge,

5 6

~rmstrong

Thus,

iss owned and controlled by

26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-11-

t

tens of millions of to A.rmst

• the cantrall

shareholder of the Debtor and the person primarily 2

its current status.

By issuing a temporary restraining order, this court

1 J

'..Jill preserve the status quo, examination,

allow the Trustee to conduct his

and allov the court time to resoLve the Debtor's

6

rights to assets in the possession of the Armstrong Compani~s

7

without fear that the

9

wrongfully held assets,

~hose

It)

preserving

I!

Debtor to the

I2 1J J

17

18 19

20 21 22

2]

Companies will dissipate the

either intentionally or by gross

assets which have been transferred from the

~rmstr~ng

Co~panies.

Arms~rong,

who either owns or

controls those companies, will be free to transfer the assets or further dissipate the assets either by continuing his fraudulent practices or by simple gross mismanagement. The present case is similar to the factual situation of

15 16

~rmstrong

Should the TRO not issue there is no way of

mismanagement.

1

responsi~le

Sturm/o'Connell v.

Continental BanK,

19

S.R.

965

(1982).

In

sturm, the trustee of an estate aSKed the Bankruptcy Ccurt to enter a preliminary injunction to prohibit the f~om

0

~ransters

of funds

banking account held by a third party corporation alleging

that although

~he

account was in the name of another entity,

money in the account was,

in fact,

that of the debtor .

the

The Court

issued a preliminary injunction preventing any transfers pending the completion of the trustee's investigation and disposition of the trustee's complaint in view of the serious allegations raised

25 21'1

by the trustee concerning the conduct of the debtor. In Re Cumberland Investment CorDoration,

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-12-

118 B.R.

J

See, also, (Bkrtcy.

- - - - - - - _ .-

D.R.I. 1990)

--

(the debtor W'as r-estrained from selling coins,

=xc~;::

pending the results ot the examine='s

:

~ith

J

investigation)

..I

Inc., 61

5

debtor and transferee from transferring debtor's sale asset, a

6

tract of valuable undeveloped land).

prior court approval,

7

a . .R.

i

Big Shanty Land Corooration v. Comer Prooet'ties,

272

(N.

D. Ga. 1985)

(the Court enjoined a Chapter

The intercompany diversion of funds and gross

8

mismanagement of satte has been specifically set forth in the

9

accompanying declarations and shall not be repeated here. over~helming

10

it to say that the

1\

that the assets nominally held by the Armstrong Companies,

12 IJ \ d

15 16 17

!.l.

Suffice

evidence compels the conclusion

companies either oW'ned or operated by Armstrong are,

in legal

effect, assets of the Debtor that are subject to the protection

and jurisdiction of this Court.

The preliminary injunction

pending investigation and determination of the Trustee's complaint would serve only to protect the creditors of the estate. II I.

AS THE AFFILIATES OBTAINED THE ASSETS THROUGH FRAUDULEUT CONVEYANCES, A CONSTRUCTIVE TRUST SHOULD BE EST.tI.BLISHED.

18 19

20 21

Because the acquisition of the assets held by the Armstrong Companies was through fraudulent conveyances,

i.e"

obtained through wrongful means, a constructive trust should be established to hold those funds far the benefit of the Debtor .

2J

constructive trust is a re!':1edy used by a court of equity to compel a person who has

proper~y

co

~hich

25 26

HEMO Of P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-lJ-

he is not justly entitled to

transfer it to the ~erson entitled thereto. t .,

pass

e p

, the only duty being to convey

The trust is rty.

) J

78 Cal.

App.

5

==~~~=,

3d )71,

14] Cal. The pr

6

t~o

i

)75

(1979) i

.

)d 111/

117

(1983),

e of constructive trust situations are

covered by

8

"One who wrongfully detains a thing is an involuntary trustee

9

thereof, provides:

II

r2 I)

general Code

sec~

7

ns

Civil Code § 222) provides:

for the benefit of the owner." MOne who gains a thi

Civil Code § 2224

fraud,

accident, mistake,

undue influence, the violation of a trust, or other wrongful act, is,

unless he or she has same other and better right thereto, an

involuntary trustee of the thing ga

, for the benefit of the

person who would otherwise have had it."

The wrongful act giving

IS 16

17 18 19

20

21

12 23 2.1 2)

26

1

The trustee ot a ban y estate has broad powers under the Bankruptcy Code to Havo "certain transfers of property made by the debtor either after or shortly before the filing of the bankruptcy it The rty be returned to the estate for the benefit of all who have valid claims aga the debtor. In this ease, all assets transferred trom the Debtor to Armst ies should also be avoided under Sect 548. lows the trustee to avoid a transfer if less than a reasonably equivalent value in transfer or obl tion." Section 548(a) (1) permits the trustee to avoid any transfer made with nactual intent to hinder, delay or defraud any entity to which the debtor was or became ... indebted,n Section 550 authorizes the trustee to recover the transferred property from the in ial or nt trans feree. Sections 548(a) (2) the debtor #rece

Any transfers of funds made by the Debtor to the Arms companies thin the last year are avoidable as fraudulent conve ness.

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-14-

"

rise to a constructive trust need not amount to fraud or intentional misrepresentation.

)

acquisition of the property was wrongful and that the keeping cf

J

the property

5

The remedy in constructive trust cases is to convey to the person

o

entitled the property held in constructive trust or to grant such

7

person an equitable lien.

S

dependent on the absence of adequate legal remedy .

9

Ahma,Dson, 168 Cal. App,

11

12

13 14

15

by the defendant would constitute unjust enrichwent,

In the

10

18 19

21

22 2)

2J 25 26

Calistoga at 117.

3d 119

p~esent

case,

The action is not Heckmann v.

(1985).

the evidence clearly shows that the

assets of the Armstrong Companies are,

in fact,

those oe the

Debtor obtained through various and numerous fraudulent conveyances tor whiCh no adequate consideration was received. As such.

a constructive trust should be imposed on these assets

in favor of the Debtor. constructive trust,

\7

All that must be shown is thac

~~~

2

Pending final judgment imposing a

injunctive relief should be granted preserving

the status quo of the assets.

To fail to do so could irreparably

injure the estate's interests,

IV.

THE INJUNCTIVE RELIEf APPLIES TO PARTIES OUTSIDE THE T~RRITORIAL JURISDICTION Of THIS COURT '

The Trustee seeks to enjoin the transfer or disposition of the assets of the Defendants even though arguably some ot the Defendants are not located

~ithin

california.

It is

~ell

settled

that a district cou~t order has nationwide application and that parties or non-parties who ~eside outside the territorial jurisdiction of a district

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

cour~

are subject to that court's

-15-

jurisdiction if, with actual notice of the court's order,

t~ey

2

actively aid and abet a violation at the order.

)

Mackay,

l

absence of

5

Defendants are Armstrong and corporations controlled by

6

~rmstrong

7

affiliation with the Debtor.

8

to grant the TRO to restrain Armstrong and his entities from

9

transferring assets that belong to the bankruptcy estate.

763

F.2d 711, o~her

714

(5th Cir. 1985).

contacts with the forum.

WafEens:;chnidt ..

This is so despite In this case,

:~2

the ArmstrQn~.

has ample contact with the forum state through his The Court should have no reluctance

CONCLUSION

10

In sum,

II

the THO should issue upon the strong evidence

12

that Defendants have acquired property from the Debtor herein

13

thrbugh fraudulent conveyances, without adequate consideration,

ld

and the Trustee, acting on behalf of the creditors of the estate

\5

of the Debtor herein,

16

injunction was not issued.

would suffer irreparable injury if the

A temporary restraining order should

17

therefore issue restraining Defendants from encumbering,

18

transferring or disposing of assets in their possession pending a

19 .' hearing on a

preliminary injunction and

of the claims of the Trustee.

20

2\

Dated:

22

~2,I 177/

FELDMAN, WALDMAN & KLINE A Professional Corporation

BY~~~ ,-Chris

2)

24

the Court's consideration

I

L. J • Martiniak Attoroeys for Trustee frederick S. Wyle

25 26 MEMO OF' P & A IN SUPPORT OF TEMP RESTRAINING ORDER

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