Wirum v. Wilson

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-1-	MEMORANDUM DECISION
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
SDR CAPITAL MANAGEMENT, INC.,
Debtor.
ANDREA A. WIRUM, Chapter 7 Trustee,
Plaintiff,
vs.
JOHN O. WILSON, individually and as
Trustee of the Wilson Family Living
Trust,
Defendant.
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Case No. 05-34008 TEC
Chapter 7
Adv. Proc. No. 07-3022 TC
MEMORANDUM DECISION
This action was tried before the court on October 30 and
November 1, 2007. 	Dennis D. Davis appeared for Plaintiff Trustee.
John H. MacConaghy appeared for Defendant Wilson. 	For the reasons
set forth below, I find for Defendant.
Signed and Filed: November 14, 2007
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 15, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 1 of 6

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-2-	MEMORANDUM DECISION
Debtor SDR Capital Management, Inc. (Debtor) provided
financial advice to investors. 	Defendant John Wilson (Wilson)
served as chief economist for the firm from January 1999 through
October 2001, and as a director from January 1999 through December
2001. 	As part of his compensation, Wilson received shares of
Debtor’s stock. 	Debtor redeemed 205,240 of Wilson’s shares in the
spring of 2002 for $.62 per share, and redeemed Wilson’s remaining
175,000 shares in the summer of 2003 for $.52 per share.
Debtor filed a chapter 7 petition on October 11, 2005.
Trustee, contending that Debtor was insolvent at the time of each
of the payments to Wilson, and that the shares redeemed had no
value to Debtor, seeks to recover the payments to Wilson as
constructive fraudulent conveyances and as shareholder
distributions prohibited by California Corporations Code Section
506. 	Wilson contends that Debtor actually made money on the
transactions by reselling at $1.00 per share the shares redeemed
from Wilson at $.62 and $.52 per share. 	I assume, without
deciding, that Debtor was insolvent at all times relevant.
The redemption of shares by an insolvent corporation generally
does not provide value to creditors of the corporation. 	Joshua
Slocum, Ltd. v. Boyle (In re Joshua Slocum, Ltd.), 103 B.R. 610,
618-19 (Bankr. E.D. Pa. 1989), aff’d 121 B.R. 442 (E.D. Pa. 1989);
Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply,
Inc.), 100 B.R. 127, 136 (Bankr. D. Mass. 1989). 	This is so
because the redemption payment decreases corporate assets without
decreasing corporate debt. 	Furthermore, redemption generally does
not provide value to the corporation’s creditors even when the
shares have value to a third party, because a corporation generally
Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 2 of 6

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-3-	MEMORANDUM DECISION
can sell treasury shares without redeeming other shares. 	There is
no per se rule, however, and a court can find that retention of
shares does provide value to the corporation where it is a
necessary part of a broader transaction through which the
corporation obtains money or property. 	Corporate Jet Aviation,
Inc. v. Vantress (In re Corporate Jet Aviation, Inc.), 82 B.R. 619,
622-23 (N.D. Ga. 1987); aff’d 838 F.2d 1220 (11th Cir. 1988)
(table).
The present case warrants departure from the general rule.
The evidence shows that Debtor received reasonably equivalent value
for the funds paid to Wilson in redemption of his shares, because
that redemption was necessary to Debtor’s sale of treasury shares
at a higher price.
Debtor would not have sold treasury shares to new investors
without redeeming shares previously issued. 	Debtor’s shareholders
had agreed that the total number of shares issued or on which
options had been granted (the Outstanding Shares) would not exceed
11,600,000. 	The corporate records demonstrate that Debtor honored
this agreement. 	In March 2002, shortly before the first redemption
of Wilson’s shares, there were exactly 11,600,000 Outstanding
Shares. 	Thereafter, each time Debtor issued shares, Debtor
redeemed a like number of shares at about the same time, so that
the Outstanding Shares never exceeded 11,600,000 for any extended
period of time.
The redemption of Wilson’s shares was part of the means by
which Debtor sold treasury shares without breaching the limit on
Outstanding Shares. 	On April 30, 2002, Debtor recorded both the
redemption of 205,240 shares from Wilson, and the issuance of
Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 3 of 6

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1 Debtor also recorded on April 30, 2002 the issuance of
598,065 shares to Daniel Warmenhoven for $.57 per share, but
Debtor’s March 7, 2003 “Cap Table” indicates that these shares had
been issued to Warmenhoven before that date, and thus should not be
paired with the redemption of Wilson’s 205,240 shares.
2 There is conflicting evidence as to exactly when each
redemption and transfer of shares occurred. 	The letter
memorializing the agreement to buy or redeem shares has one date,
the related payment is made on a different date, and the transfer
is recorded on the Debtor’s stock register on a third date.
Notwithstanding this variation, and the fact that in some instances
the formal decision to redeem occurred after the sale of treasury
shares, I find that the general pattern was to redeem shares as
necessary to keep Outstanding Shares within the 11,600,000 limit,
and that Debtor made the redemptions of Wilson’s shares at issue
here with that intent.
-4-	MEMORANDUM DECISION
196,905 shares to Butler, Russo and Young. 1 	On April 25, 2003,
Debtor recorded the issuance of 175,000 shares to Lis, causing the
Outstanding Shares to exceed the agreed-upon limit by approximately
181,000. 	On June 10, 2003, Debtor redeemed Wilson’s remaining
175,000 shares, and later redeemed additional shares from other
persons, to bring the number of Outstanding Shares within the limit
once again. 2
Debtor made a profit both times that Debtor redeemed Wilson’s
shares and sold treasury shares. 	At about the same time Debtor
redeemed 205,240 shares from Wilson for $127,371, Debtor sold
196,905 shares to Butler, Russo and Young for $196,905. 	Shortly
before Debtor redeemed 175,000 shares from Wilson for $91,000,
Debtor sold 175,000 shares to Lis for $175,000.
Based on the above, I determine that the redemption of
Wilson’s shares and the sale of treasury shares should be combined
for the purpose of determining whether Debtor received value for
the shares redeemed. 	The Ninth Circuit used just this approach in
a similar situation, combining two transactions in holding that the
recipient of an alleged fraudulent transfer had paid reasonably
Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 4 of 6

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-5-	MEMORANDUM DECISION
equivalent value. 	Wyle v. C.H. Rider & Family (In re United Energy
Corp.), 944 F.2d 589 (9th Cir. 1991). 	“Bankruptcy courts are
courts of equity. 	As such, they possess the power to delve behind
the form of transactions and relationships to determine the
substance.” 	Id. at 596. 	Thus, the bankruptcy court may combine
transactions that are “intimately intertwined.” 	Id.; accord
Vantress, supra, 82 B.R. at 622-23.
Trustee contends that Debtor’s sale of treasury shares should
be accorded no weight, because a subsequent SEC examination
disclosed numerous irregularities in the sale of those shares. 	The
SEC report stated that Debtor breached its fiduciary duty by
selling shares to existing clients for more than it paid, and that
Debtor should not have sold its shares to clients who maintained
conservative portfolios.
The SEC report does not justify disregarding the sale of
treasury shares in determining the value of the shares redeemed.
That Debtor should not have sold shares to its clients at a profit
does not suggest that the shares were not worth at least what
Debtor paid Wilson. 	Equally important, creditors suffered no harm
as a result of the problems noted by the SEC. 	None of the persons
who purchased the treasury shares ever asserted claims against
Debtor. 	Thus, the net result of the related redemption-sale
transactions was to increase Debtor’s assets without increasing its
liabilities. 	Finally, to disregard the resale of shares for the
reasons urged by Trustee would not further the purpose of the
statutes under which Trustee asserts her claims (protecting
creditors against diminution of assets available to pay their
claims). 	Trustee’s approach would have Wilson pay the estate for
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-6-	MEMORANDUM DECISION
securities violations that: (1) did not harm creditors of the
estate; (2) Wilson did not perpetrate; and (3) have never been
formally charged or established in any court.
I find that the redemption of Wilson’s shares was “intimately
intertwined” with the sale of treasury stock at a higher price, and
that Debtor received fully equivalent value for the redemption
payments. 	Trustee cannot recover the transfers at issue as
constructive fraudulent conveyances, because Wilson provided
reasonably equivalent value for the money received. 	Cal. Civ. Code
§ 3439.05. 	Trustee cannot recover the transfers at issue as
unlawful shareholder distributions, because Wilson provided
valuable consideration for the transfers. 	Cal. Corp. Code § 166.
It is not necessary to reach the other issues raised by the
parties.
Judgment will be entered for Wilson.
This memorandum decision constitutes the court’s findings of
fact and conclusions of law.
**END OF MEMORANDUM DECISION**
Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 6 of 6