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Voest-Alpine Trading USA Corp. v. Vantage Steel Corp.

argued: May 31, 1990.


On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. No. 87-3320.

Stapleton, Hutchinson and Garth, Circuit Judges.

Author: Garth


GARTH, Circuit Judge

This appeal arises from an action filed in the District Court for the Eastern District of Pennsylvania by the plaintiff-appellee Voest-Alpine Trading USA Corp. (hereinafter, "VATCO") claiming that the defendant-appellants, Vantage Steel Corporation ("Vantage"), Marvin F. Stabler, and Holley Sue Stabler*fn1 (hereinafter, "Stabler") had, to the detriment of VATCO and other creditors, transferred the assets of one corporation controlled by the Stablers (Paige Steel Corp.) to another corporation established and controlled by them (Vantage), in such a manner as to violate the Uniform Fraudulent Conveyance Act, as adopted in Pennsylvania, 39 P.S.A. §§ 351-63.

While this case was pending in the district court, where it had been brought on June 5, 1987, Vantage filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. VATCO was granted relief from the stay provisions of 11 U.S.C. § 362 in an Order of the Bankruptcy Court dated December 30, 1988. In a bench trial, the district court after extensive fact-finding, held that Paige assets were fraudulently conveyed to Vantage and entered judgment for VATCO on November 14, 1989 in the amount of $520,070.06. 732 F. Supp. 1315. The district court also ordered certain equitable relief against the Stablers intended to accomplish the equivalent of a rescission of that conveyance.

We have diversity jurisdiction under 28 U.S.C. § 1332 (a). Vantage and the Stablers filed a timely appeal of the district court's final Order of November 14, 1989. 28 U.S.C. § 1291.

We affirm in part but reverse so much of the district court's Order as provided that certain guarantees given by the Stablers to the New Jersey National Bank ("NJNB") inure to the benefit of VATCO.


Vantage, a now-bankrupt Pennsylvania steel fabricator, is a successor to the Paige Group, a group of several now-defunct companies under the 100% control of Marvin and Holly Sue Stabler. The Paige Group was effectively dissolved in a series of transactions (described infra [Slip Op.] at 5-6) that took place on August 8, 1986. Vantage, itself also under the effective control of the Stablers, emerged out of the corporate reorganization as the successor to Paige, which had transferred and conveyed the Paige Group's assets to Vantage.

The commercial transaction underlying this appeal took place in August 1985. At that time, VATCO sold Paige $528,727 worth of steel, for which it received $100,000 on account. No further payments were made. VATCO soon thereafter filed suit in the District Court for the Eastern District of Pennsylvania. Paige did not contest the action, and VATCO on June 12, 1986 moved for summary judgment. On October 2, 1986, summary judgment was granted in favor of VATCO in the amount of $452,307.15.*fn2 VATCO's judgment resulted in VATCO's becoming Paige's largest unsecured creditor, to the extent of about 50% of Paige's unsecured debt.

On June 13, 1986, the day after VATCO filed for summary judgment against Paige, the Stablers, through their attorney in that action and in conjunction with their secured lender, New Jersey National Bank (NJNB), to which they owed over $1.5 million, put the Paige Group up for sale. At the end of July 1986, Marvin Stabler and his attorney proposed to NJNB that Stabler form a new company that would, with financing from NJNB, purchase Paige's assets. That purchase was found by the district court to have been structured "through a 'foreclosure' by NJNB in order to launder the assets [in question] and cleanse the Paige Group of its unsecured debt." Finding of Fact No. 20.

Friday, August 8, 1986 witnessed a series of simultaneous transactions, which the district court found to have been in reality a single integrated and fraudulent transaction whose purpose and effect was to convey assets, at less than fair value, from the old corporation, Paige, to the new corporation, Vantage, without exposing them to Paige's creditors. Findings of Fact No. 30, 43, 52-61. Through these transactions, the Stablers were able to freeze out VATCO and other unsecured Paige creditors while maintaining for themselves an equity interest in, and full effective control over, the new firm, Vantage. Finding of Fact No. 68.

The following transactions took place simultaneously at 5:00 p.m. on August 8, 1986: (1) NJNB foreclosed on all Paige assets, including receivables; (2) NJNB sold all of those assets, other than receivables to Vantage;*fn3 (3) Vantage purchased the Paige inventory for $513,645 or about half of its book value; (4) NJNB gave Vantage a $2 million revolving line of credit, $513,645 of which was used immediately to purchase the Paige inventory and another $500,000 of which was used to purchase Paige's other assets (except receivables);*fn4 (5) NJNB made a term loan to Vantage of another $500,000 for the purpose of buying Paige's machinery and assorted equipment; (6) NJNB released an $80,000 Stabler Certificate of Deposit it had been holding as security for the Paige loan and exchanged it for a new personal guarantee by the Stablers of $200,758 -- the approximate amount of outstanding Paige receivables, and an amount that was in fact collected within six months.

Thus, on Monday morning August 11, 1986 Vantage opened for business with Stabler as an officer of Vantage and with the same address, staff, office, telephone number, and assets that Paige had closed with at the end of the day on Friday, August 8. Findings of Fact No. 52-56.

Before the foreclosure, Paige was a troubled but going business with assets of over $1.7 million,*fn5 a debt to NJNB of $1.5 million (guaranteed by the Stablers whose known assets were about $300,000),*fn6 and debts to unsecured creditors of about $800,000, which included the debt owed to VATCO. After the August 8, 1986 transactions, Paige had no assets and no secured debts. It did, however, continue to owe its unsecured creditors, who for their part, however, now had no Paige assets from which to collect.

Stabler, with the assistance of his attorney and over his own name, on August 22, 1986 sent a letter on Paige stationery to all of Paige's creditors advising them that "there are no assets remaining with which to make any payments on Paige's account. . . ." After expressing his disappointment that "Paige could [not] restructure its financing to continue in business," Stabler described the recently executed combined transactions as follows:

At the end of July Paige's lender discontinued further extensions of credit and foreclosed on Paige's assets, as permitted under the loan agreement. Our lender has since sold Paige's assets, and after applying the proceeds of the sale to the loan, Paige continues to have more than $300,000 of secured debt outstanding. I remain personally liable . . . and have had to pledge my assets to secure this obligation.

The district court, in its Findings of Fact No. 64-68, characterized Stabler's purpose in sending the letter, in failing to identify the asset purchaser as Vantage, and in concealing the relationship between the foreclosure and the sale of assets, as an attempt to conceal the August 8, 1986 transaction with the intent to defraud Paige's unsecured creditors, including VATCO. In addition, the district court found that Vantage was used as an instrument to preserve the Stablers's equity in the new business. Findings of Fact 64-68 read as follows:

64. Marvin Stabler's purpose in sending the letter was to convince his unsecured creditors that it would be futile to scrutinize the transaction whereby Paige Steel's assets were purportedly foreclosed upon by Paige's secured lender. He did this by stating that a significant amount of secured debt remained outstanding which would take precedence over the unsecured debt in the event any remaining assets were found in the hands of Paige Steel. . . .

65. The letter failed to identify the purchaser of the assets as Vantage, thereby making it difficult for any creditor to follow Paige's assets into the hands of their new owner. . . . The letter also failed to disclose the Stablers' controlling equity interest in Vantage.

66. By stating that the foreclosure took place at the end of July, 1986, the letter concealed the instantaneous relationship between the foreclosure and the sale of the assets.

67. The efforts to conceal the August 8, 1986 transaction and the structure of the transaction itself establish that Stabler intended to hinder and delay collection by, and to defraud, Paige Steel's unsecured creditors, including VATCO.

68. The Stablers used Vantage as their instrument to attempt to take the assets of Paige Steel free from VATCO's claim and to preserve their equity position in the business.

VATCO was one of the recipients of Stabler's letter of August 22. Not long thereafter, on October 2, 1986, VATCO was granted summary judgment in its earlier action against Paige for $452,307.15. VATCO then pursued discovery in aid of execution of its judgment. VATCO's discovery efforts, according to the findings of the district court, "were met with objections at every stage," and, when finally deposed in January 1987, Stabler "lied under oath in several material respects."*fn7

Finally, VATCO brought this suit against Vantage and the Stablers in June 1987, alleging, among other grounds,*fn8 that they had violated the Uniform Fraudulent Conveyance Act, 39 P.S.A. §§ 351-63. As earlier noted, Vantage itself filed in chapter 11 bankruptcy on November 30, 1988, while VATCO's instant suit was pending in the district court.


In his Memorandum and Order of November 14, 1989, which followed a non-jury trial, the district court judge found that the Stablers had engineered a fraudulent conveyance of assets from Paige to Vantage. He therefore ruled for VATCO, awarding it both money and equitable remedies. In addition to: (1) awarding VATCO $520,070.06, the current value of the earlier judgment against Paige, the district court judge, acting in equity, also (2) impressed a constructive trust on the ownership interests of the Stablers in Vantage for the benefit of the unsecured creditors of Paige, and (3) ordered reinstitution of the personal guarantees of the Stablers, which had run from Paige to NJNB and which had been canceled as part of the consideration mix in the fraudulent Paige-Vantage conveyance, to the extent that the cancellation of those guarantees impaired VATCO's ability to collect its judgment against Paige.


Vantage and the Stablers here challenge both the district court's findings of fact and conclusions of law as well as the remedies it ordered. In reviewing the district court's factual findings as to the Paige-Vantage transactions, the value of the Paige inventory conveyed to Vantage, prejudice to VATCO and other unsecured creditors of Paige, as well as all other factual determinations, we will not disturb any finding unless it is clearly erroneous.

In reviewing the district court's interpretation of the Pennsylvania Fraudulent Conveyance Act, 39 P.S.A. §§ 354-59, the conclusions of law at which the district court arrived, and the legal bases for the remedies it prescribed, our standard of review is plenary.

Finally, our standard of review for considering the equitable remedies ordered by the district court, and for which a legal basis exists, is whether the district court properly exercised its discretion. U.S. v. Tabor Court Realty Corp., 803 F.2d 1288, 1301 (3d Cir. 1986); Evans v. Buchanan, 555 F.2d 373, 378 (3d Cir. 1977).


The district court's extensive fact-finding led to its conclusion that the August 8, 1986 conveyance of assets from Paige to Vantage for less than fair value was a knowing and purposeful effort to preclude VATCO and other unsecured creditors from reaching Paige's assets. It concluded that the conveyance was, in effect, a sham transaction intended to defraud Paige's unsecured creditors.*fn9 Finding of Fact No. 67.

In other words, Vantage was the Stablers' instrument for acquiring Paige's assets at less than fair value and free from claims by unsecured creditors while, at the same time, securing the Stablers' own equity position. Consequently, Vantage might "be regarded as merely a continuation of the same [Paige] corporate entity under a different name" (Dist. Ct. Op. at 29) as well as the beneficiary of a breach of fiduciary duties by the officers of Paige, who should have sought to maximize the return on sale of its assets, rather than conveying those assets fraudulently to Vantage for half their fair value.

The district court arrived at these conclusions on the basis of some 73 individual findings of fact. Our review of the record reveals that none of those findings of fact, including the lack of good faith*fn10 on the part of Vantage and the Stablers, was clearly erroneous. These findings may be clustered around the three determinative issues: a) were the transactions of August 8, 1986 effectively a single, integrated transaction that functioned as a subterfuge; b) was the district court's assessment of the true fair value of Paige's inventory at something in excess of $1 million an accurate assessment; and c) were Paige's creditors, among them VATCO, prejudiced, as a matter of fact, by the August transactions? The district court found the answer to all three questions to be "yes." We agree and reject the challenge to those findings made here on appeal by Vantage and the Stablers.


Evidence that the transactions of August 8 were, as a factual matter, in reality a single transaction functioning as a subterfuge was abundant. The evidence, including testimony from the various participants in the transaction, was assessed by the district court, which summarized its findings on this key issue in Findings of Fact No. 58 and 67:

58. Each portion of the transaction [of August 8, 1986] was dependent upon the occurrence of the other. For example, Marvin Stabler would not have permitted NJNB to foreclose on the Paige assets if NJNB had not simultaneously agreed to sell them to Vantage and to extend Vantage a credit facility which could be used to purchase them.

67. The efforts to conceal the August 8,1986 transaction and the structure of the transaction itself establish that Stabler intended to hinder and delay collection by, and to defraud, Paige Steel's unsecured creditors, including VATCO.

These findings, which were supported by evidence and are not erroneous, refute the claim made here by Vantage and the Stablers that, since NJNB was contractually entitled to foreclose, its decision to do so makes it impossible to consider the foreclosure a part of the conveyance. On the contrary, the evidence is clear that absent the Stabler initiative to have NJNB foreclose as part of the transaction, there would have been no NJNB foreclosure. As VATCO correctly put it, "the record is undisputed that the bank foreclosed at the request of Stabler and Scharmett [Paige's, Vantage's and the Stablers' attorney] and at a time and place convenient to them." Appellee's Brief at 16.

The Stablers and Vantage also insist that the district court, in collapsing the August 8, 1986 transactions into a single, integrated conveyance, improperly relied on U.S. v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986). They claim that because Tabor Court Realty addressed a complex leveraged buyout (LBO) involving "numerous transferors, transferees, lenders, guarantors, stockholders, agents and corporate officers" (Appellants' Brief at 25) it is not analogous to the transactions in this action. We cannot agree.

We recognize that the transaction in Tabor Court Realty was more complex and involved more money and a larger number of parties than were involved here. Nonetheless, the findings reviewed and affirmed by this court in Tabor Court Realty*fn11 in sustaining the collapse of the various transactions into one integral transaction are relevant and analogous to the findings made by the district court in the present case -- findings that we will not disturb.

Indeed, in Tabor Court Realty, which upheld the district court's determination that the various loans and repayment schemes made there ...

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