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In the Matter of Lifschultz Fast Freight

132 F.3d 339 (1997)

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In the Matter of Lifschultz Fast Freight

United States Court of Appeals for the Seventh Circuit
132 F.3d 339 (1997)

  • Written by Philip Glass, JD

Facts

With Lifschultz Fast Freight, Inc., in financial crisis, its insiders Theodore Cohen, Salvatore Berritto, Anthony Berritto, Sebastian DeMarco, and Michael DeMarco (the insiders) established a new corporation, Liftschultz Fast Freight Corporation (Lifschultz) (debtor), to which the insiders moved all operations but which lacked working capital at the start. The insiders’ salaries were raised by Lifschultz’s directors in the spring and summer of 1990, despite Lifschultz’s financial problems. On March 13, 1990, Lifschultz obtained a secured loan from Salson Express Co, Inc. (Salson) (creditor). In August 1990, Lifschultz received a $1 million loan from informed non-insider Ambassador Factors, with which Lifschultz had a long-established relationship. On November 20, 1990, Lifschultz filed for Chapter 11 bankruptcy. Lifschultz still owed Salson $300,000 of the loan amount on entering Chapter 11. Consequently, Salson and the insiders asserted a bankruptcy-court claim for the $300,000 owed. The trustee requested the claim’s equitable subordination, averring that Lifschultz was undercapitalized. The bankruptcy court rejected this request, determining that the insiders had not engaged in inequitable conduct. The district court reversed, finding that Lifschultz was undercapitalized. The insiders appealed.

Rule of Law

Issue

Holding and Reasoning (Cudahy, J.)

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