Bunch v. J.M. Capital Finance, Ltd. (In re Hoffinger Industries, Inc.)

Hoffinger Industries, Inc. (Hoffinger) (debtor) filed for bankruptcy in 2001 following a $13.5 million personal-injury judgment against Hoffinger in favor of Leesa Bunch (plaintiff). Hoffinger did not adequately address Bunch’s judgment in its proposed reorganization plan. Bunch objected to the proposed plan and brought an adversary proceeding against J.M. Capital Finance, Ltd. (J.M.) (defendant), questioning claims filed in the bankruptcy by J.M. and by Hoffinger’s products-liability insurer, Arrowhead Insurance Company (Arrowhead). J.M. was wholly owned by Arrowhead, and Arrowhead was owned by another entity owned by the Hoffinger family. In 1993, Hoffinger borrowed $8.25 million from Clinton Pool Company (CPC), another Hoffinger-family-controlled entity, for the purpose of distributing interest to Hoffinger’s shareholders. However, no real distribution occurred. Instead, CPC merely claimed that it funded the loan to Hoffinger with the money the family had received from the shareholder distribution. The collateral for the CPC loan was Hoffinger’s assets, making CPC a secured creditor and rendering Hoffinger judgment-proof against collection efforts by unrelated third parties. In 1999, Hoffinger borrowed $10 million from J.M. to pay the purported $8.25 million debt to CPC and distribute $1.75 million to Hoffinger’s shareholders. The financing for the J.M. loan came from Arrowhead. J.M. took liens on Hoffinger’s assets as collateral for the loan. Martin Hoffinger, Hoffinger’s founder and the head of the Hoffinger family, acknowledged that the J.M. loan further judgment-proofed Hoffinger. There was no credible evidence regarding how the CPC or J.M. loan transactions had actually occurred or the relationship between J.M. and CPC regarding the debt obligations created by the J.M. transaction. As the bankruptcy court noted, none of the entities were operating in their own best interests and had not treated the transactions as creating actual debt obligations. Nevertheless, in the bankruptcy, Hoffinger treated J.M.’s claim as secured and planned to fully pay the claim. In the adversary proceeding, Bunch asserted that J.M.’s claim should be disallowed, reconsidered, equitably subordinated, or recharacterized.