In re Le Café Creme, Ltd., Debtor

Xavier and Danielle LeRoux and Denis and Celestine Peron (creditors) opened restaurant Le Café Creme, Ltd. (debtor) on January 1, 1991. The LeRouxs and Perons were the restaurant’s only shareholders, officers, and directors. The restaurant struggled from the outset and routinely bounced checks to suppliers. Over time, each couple loaned the restaurant more than $200,000. In February 1994, the LeRouxs sold their stock back to the restaurant, leaving the Perons sole owners. The parties entered a purchase agreement that essentially converted the LeRouxs’ debt into equity. The restaurant had partially repaid the LeRouxs but still owed them about $95,000. The restaurant agreed to pay the LeRouxs $200,000—about $95,000 to pay off the loan and $105,000 to purchase their stock. Funding came from restaurant revenues and additional loans from the Perons. The restaurant executed a promissory note for $150,000 and a security agreement giving the LeRouxs a security interest and a lien on the restaurant’s physical assets. In October 1997, the restaurant filed voluntarily for reorganization in bankruptcy, and the court ordered it sold to an outside buyer. Meanwhile, the restaurant had paid the LeRouxs only $135,671 of the $200,000 buyout price, so the LeRouxs filed a secured claim in the bankruptcy for the remaining $60,836. The restaurant moved to equitably subordinate the LeRouxs’ claim, alleging they engaged in conduct unfair to other creditors when they knew the restaurant could not pay its bills. Peron testified that when the restaurant bought out the LeRouxs, it had insufficient cash to operate and minimal assets. Finally, the restaurant’s expert witness testified that its liabilities outpaced its assets from 1991 to 1996 such that it faced deepening insolvency.