In re Northern Merchandise

In February 1998, Northern Merchandise (Northern), a supplier to grocery stores, took out a $60,000 loan from Frontier Bank (Frontier) (defendant) that was secured by Northern’s inventory and other assets. Northern sought an additional loan of $150,000 in October 1998, but Frontier refused to provide it because of Northern’s weak financials. Frontier agreed, however, to loan the $150,000 directly to Northern’s shareholders, who had better credit. All parties understood that the funds would be used by Northern and, in fact, Frontier deposited the funds directly into Northern’s account. In exchange for the loan, the shareholders executed a promissory note and Northern executed a security agreement in favor of Frontier, pledging its assets as collateral. On March 5, 1999, Northern ceased operations. It had approximately $400,000 of inventory, which it transferred to Benjamin News Group (BNJ), a company owned by one of Northern’s shareholders, for $125,000. BNJ paid Frontier $125,000 toward the balance of the October loan. Frontier received another $25,000 toward the October loan balance through proceeds from an earlier sale of inventory by Northern. On March 22, 1999, an involuntary Chapter 7 petition was filed against Northern by its creditors. The appointed trustee (the trustee) (plaintiff) filed a complaint against Frontier, alleging that its receipt of the security interest by Northern for the October loan and the $125,000 payment made via BNJ were fraudulent. Frontier argued in response that the transfers were not fraudulent because Northern received reasonably equivalent value for what it gave. The bankruptcy court granted the trustee’s motion for partial summary judgment on the issue, and the Bankruptcy Appellate Panel (BAP) affirmed. Frontier appealed.