Bay Plastics v. BT Commercial Corp.

Bay Plastics, Inc. (Bay) (plaintiff) was founded in 1979 by Bob Younger, Abner Smith, and Paul Dodson (“the selling shareholders”) (defendants). In July 1988, Bay entered into a substantial requirements contract with Shintech. As part of the deal, Shintech received a security interest in all of Bay’s assets and personal guaranties by the shareholders. On October 31, 1988 the selling shareholders sold their stock in Bay to Milhous Corporation (Milhous). The deal was financed as a leveraged buyout (LBO). Milhous caused Bay to obtain a $3.95 million loan from BT Commercial Corp. (BT) (defendant) and then directed that $3.5 million be transferred directly from escrow to the selling shareholders. Prior to the sale, the selling shareholders and their counsel were aware of the LBO nature of the deal as well as the risk that the transaction could be challenged as a fraudulent transfer. Because the rights of Shintech impeded the proposed sale, the selling shareholders and Milhous convinced Shintech in late October to release both the security interest and personal guaranties. Shintech was not informed that the sale would be financed as an LBO. Prior to the transaction, Bay’s balance sheet showed net equity of $1.1 million. After the transaction, the balance sheet showed approximately $7 million in assets and $9 million in liabilities. Goodwill in the amount of $2.6 million was added as a post-transaction asset despite having never before been included on the balance sheet. Bay could not keep up with its debt obligation. In January 1990, it filed a petition under Chapter 11 of the Bankruptcy Code. At that time, Bay had essentially two creditors: BT for $4 million in secured debt and Shintech for $3.5 million in unsecured debt. Bay moved for summary judgment on the claim that the financing of its sale to Milhous was a fraudulent transfer. It settled with BT prior to the court’s decision.