Poseidon Pool & Spa Recreational, Inc. et al v. Estate of Vincent J. Arbore et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
--------------------------------------------------------x
In re:
Case No.: 8-05-87603-478
Poseidon Pool & Spa Recreational, Inc.
Chapter 7
Debtor.
--------------------------------------------------------x
Andrew M. Thaler, Trustee,
Estate of Poseidon Pool & Spa
Recreational, Inc., 	Adversary Proceeding No. 8-06-8222-478
Plaintiff,
- against -
Estate of Vincent J. Arbore, Deceased,
Diane Arbore, in her capacity as Executrix
of the Estate of Vincent J. Arbore, Diane
Arbore, Ann Arbore, Peter Arbore, Jayvin
Arbore, Allison Arbore, Michael Arbore,
Katherine Arbore, Alan Arbore, James
Arbore, Rosa Dinicolo and Rita Cannillo,
Defendants.
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MEMORANDUM DECISION
Appearances:
Kim D. Victor, Esq.
Attorney for Plaintiff Trustee
Thaler & Gertler, LLP
90 Merrick Avenue, Suite 400
East Meadow, New York 11554
Linda S. Agnew, Esq.
Attorney for Defendants
Jaspan Schlesinger Hoffman LLP
300 Garden City Plaza
Garden City, New York 11530
Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge
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The limited issue before the Court at this time is whether the Debtor had adequate surplus
funds to purchase its shares, or was insolvent or rendered insolvent during the period from when
the Debtor and Vincent J. Arbore entered into the redemption agreement at issue in May of 2002
and at any time thereafter when payments were being made pursuant to such redemption
agreement. This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334. This
contested matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), and (O) and 11
U.S.C. §§ 541, 544, 548 and 550, and § 270 et seq. of the NEW YORK DEBTOR AND CREDITOR
LAW and § 513 of the NEW YORK BUSINESS CORPORATION LAW . The following constitutes the
Court’s findings of fact and conclusions of law as mandated by Rule 7052 of the Federal Rules
of Bankruptcy Procedure.
FACTS
The Debtor was a corporation that sold pools, spas and related items to retail customers.
Vincent Arbore (“Abore”) was an employee, officer and director of the Debtor. Arbore was also
a shareholder of the Debtor with a one-third ownership interest. On or about May 24, 2002,
Arbore, the Debtor and the Debtor’s other shareholders entered into an agreement whereby the
Debtor agreed to redeem Arbore’s ten shares of common stock in the Debtor which represented
his entire ownership interest in the Debtor in exchange for $450,000.00 (the “Redemption
Agreement”). The Debtor paid Arbore $50,000.00 upon execution of the Redemption
Agreement and executed a promissory note in the amount of $400,000.00 (the “Note”) with 10%
interest per annum which was secured by the stock repurchased by the Debtor and a Guarantee
and Pledge Agreement executed by the Debtor and the other shareholders of the Debtor. The
Note provided, inter alia, that the Debtor would pay Arbore in installments of $6,500 per month
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commencing on June 24, 2002 and ending no later than May 24, 2007 for Arbore’s sale of his
stock. On May 24, 2002, Arbore resigned his position as employee, officer and director of the
Debtor.
Arbore died in September of 2002. After Arbore’s death, all payments due under the
Redemption Agreement and the Note were paid to his estate, the Defendants in this adversary
proceeding. The Debtor made payments under the Redemption Agreement and the Note from
June 2002 to August 2005.
The Debtor filed for chapter 11 bankruptcy relief on October 7, 2005 (the “Petition
Date”). In its bankruptcy petition and schedules, the Debtor listed $541,501.62 in assets and
$3,937,364.25 in liabilities as of the Petition Date. The Debtor subsequently amended its
petition to include an additional $750,000 of general unsecured liabilities. Debtor’s liabilities
included unpaid prepetition sales tax owed on a quarterly basis to the State of New York as
follows as set forth in a proof of claim filed by the state:
Period Ending 	Tax 	Penalty 	Interest
May 31, 2003 	$62,240.72 	$ 	0.00 	$14,042.58
August 31, 2003 	$15,746.94 	$ 4,723.89 	$ 7,997.82
November 30, 2003 	$11,502.66 	$ 3,460.66 	$ 5,842.16
February 29, 2004 	$7,686.00 	$ 2,305.80 	$11,580.81
May 31, 2004 	$9,784.60 	$ 2,935.26 	$ 4,952.60
August 31, 2005 	$122,940.00 	$36,881.62 	$47,321.26
November 30, 2005 1 $43,903.63 	$ 	0.00 	$ 	0.00
On June 8, 2006, the Debtor commenced this adversary proceeding against the
Defendants seeking the return of payments made by the Debtor to Arbore and his estate pursuant
to the Redemption Agreement within one year of the Debtor’s bankruptcy filing on the grounds
1 A portion of this sale tax liability may be with respect to the postpetition liability as the
Petition Date falls within the sales tax reporting period ending on November 30, 2005.
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that the Debtor received no consideration in exchange for the payments under the Redemption
Agreement, that the Debtor was insolvent commencing on or about January 1, 2005 and the
payments were made at a time when the Debtor was insolvent, thereby rendering the payments
fraudulent or voidable transfers under, inter alia, 11 U.S.C. § 544 and 550, NEW YORK DEBTOR
AND CREDITOR LAW § 270 et. al. and NEW YORK BUSINESS CORPORATION LAW §513(a). Under
the Debtor’s complaint, it sought to recover only 10 payments made from January 1, 2005 to the
Petition date.
Andrew Thaler, Esq., was appointed the Chapter 11 Operating Trustee on September 12,
2006. The case was subsequently converted to a chapter 7 on the Operating Trustee’s motion on
September 21, 2006 and Mr. Thaler was appointed as the Chapter 7 trustee (the “Trustee”). Upon
conversion of the case, the Trustee was replaced as the plaintiff of this adversary proceeding.
The Trustee’s analysis of the Debtor’s financial condition with the assistance of his accountant,
Bernard J. Sandler, CPA, of Sandler, Rosengarten, Denis & Berger, LLP, led the Trustee to
conclude that the Debtor was financially insolvent during the entire time the Debtor made
payments under the Redemption Agreement (i.e., commencing from June 24, 2002 to the
Petition Date). Accordingly, the Trustee sought to amend the Debtor’s complaint and avoid all
the payments made under the Redemption to Arbore and his estate since June 24, 2002. After a
hearing on the Defendants’ objection to the Trustee’s motion to amend, the Court granted the
Trustee’s motion authorizing the filing of the amended complaint.
An evidentiary hearing on the issue of whether the Debtor was insolvent from May 2002
to the Petition Date was held on January 25, 2010 at which time the Trustee’s accountant
testified. Brian A. Serotta, CPA testified as a rebuttal expert witness on behalf of the
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Defendants.
In conducting his investigation, the Trustee’s accountant obtained the Debtor’s books and
records, spoke with the Debtor’s principals, accountants and an employee of the Debtor who was
in charge of the Debtor’s records at the premises, and viewed the Debtor’s premises and
warehouse inventory. The Debtor’s books and records consisted of the debtor’s accounting
records that were maintained on software known as “Quick Books”, quarterly trial balances from
December 31, 2001 to September 30, 2005, including a trial balance as of May 31, 2002, which
was seven days after the execution of the Redemption Agreement, and trial balances for years
2001 through 2004 and annual general ledgers, which were provided by the Debtor’s prepetition
accountant, Goodman Associates. In addition, the Debtor’s books and records included the
Debtor’s tax returns for the years 2002 through 2005. In preparing his expert report, the
Trustee’s accountant not only read the books and records of the Debtor but also took into
account the deposition testimony of the Debtor’s prepetition accountant, Alan Goodman, CPA,
and the Debtor’s postpetition accountant, Harold Korcarz, CPA.
As indicated on the Debtor’s 2002 tax return, the Debtor’s opening balance sheet as of
January 1, 2002 reflected an earned surplus of $308,900. When the Debtor entered into the
Redemption Agreement and Note to purchase Arbore’s stock in the company for $450,000, the
Debtor did not have sufficient funds to pay the entire purchase price. While an earned surplus of
$308,900 at the beginning of the year may indicate that the Debtor may have been in a position
to make installment payments under the Redemption Agreement and the Note at the time of
execution of this agreement, as discussed below, both the Trustee and the Defendants agreed at
the evidentiary hearing that the Debtor’s books and records on their face are inaccurate, though
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there is a dispute as to the extent of such inaccuracies and whether such inaccuracies would
affect the surplus reflected in the Debtor’s books and records for 2002 and any period thereafter
to the Petition Date.
The first inaccuracy in the Debtor’s books and records is evidenced by the prepetition
inventory levels and accounts payable reported on the Debtor’s books and records remaining
unchanged for months at a time.
Period ending 	Inventory 	Accounts Payable
December 31, 2001 to September 30, 2002 	$ 806,500 	$513,900
December 31, 2002 	$1,155,000 	$710,900
March 31, 2003 	$ 	806,500 	$513,900
June 30 to September 30, 2003 	$1,300,000 	$828,400
December 31, 2003 to September 30, 2004 	$1,223,500 	$751,000
December 31, 2004 to September 30, 2005 	$2,016,200 	$1,553,200
For the period ending September 30, 2005, the Debtor’s books and records indicated $2,008,400
in assets consisting of $2,016,200 in inventory, ($27,000) in cash, and $19,200 in other assets,
and only $1,902,100 in liabilities.
Yet, a week after September 30, 2005, the Debtor listed on its bankruptcy schedules,
which were signed under penalties of perjury, $541,501.62 in assets of which $363,001.62
consisted of inventory, and $3,937,364.25 in liabilities as of the Petition Date. The Debtor’s
postpetition inventory levels fluctuated approximately between $388,000 and $521,000 from the
Petition Date until the end of March 2006. In April 2006, the Debtor’s inventory approached $ 1
million and remained slightly above $1 million through July 2006, the last month for which an
operating report was filed by the Debtor. The increase in inventory levels during the summer
months in 2006 was consistent with the seasonal nature of the Debtor’s business, whereas the
inventory levels on the Debtor’s prepetition books and records remained the same throughout
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most of each year at issue without reflecting a decrease for the off season. Soon after the case
was converted, the Debtor’s inventory was sold at two public auction sales held in October of
2006 which generated total proceeds of $684,565.75.
One of the reasons for the discrepancy is that the Debtor did not maintain perpetual
inventory records prepetition. It appears that the Debtor calculated its ending inventory using
the gross profit method. The gross profit method is:
[a] method of estimating ending inventory. Purchases are added to ending
inventory in order to calculate goods available for sale. The estimated gross
profit margin is multiplied by sales and the result is subtracted from net sales to
estimate cost of goods sold. The cost of goods sold is subtracted from cost of
goods available for sale to determine the cost of ending inventory. The gross
profit method is suitable for interim reports, but not for annual financial
statements.
David L. Scott, The American Heritage Dictionary of Business Terms 234 (2009). During the
period of 2002 through 2005, the Debtor’s books and record consistently reported inventory
using a gross profit of 28% each year. The Debtor’s tax returns show a gross profit percentage
of 28% for years 2002 through 2004 and only 12% for year 2005 as opposed to 28%. The
drastic difference with respect to the Debtor’s inventory levels between what was stated in its
books and records for the months leading up to the Petition Date and what was stated on its
bankruptcy petition indicates that the Debtor’s prepetition inventory levels as shown on its books
and records were overstated at least for those several months prepetition.
Aside from the inaccuracy of the Debtor’s recording of its inventory levels and accounts
payables, the Debtor recorded its monthly payment of $6,500 to Arbore and the Defendants
under the Redemption Agreement on its books and records as a reduction of principal only. The
Debtor did not allocate any portion of the payment between principal and interest as required
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under the Redemption Agreement and the Note. This resulted in the interest expense not being
recorded on the Debtor’s tax returns and the liability with respect to the outstanding principal
under the Note being reduced at a rate faster than the amortization schedule.
In addition, the Debtor also failed to record sales tax liability for certain quarters and
improperly recorded all customer deposits for merchandise as actual sales instead of liabilities,
regardless of whether the customer actually took title to the merchandise or whether the Debtor
had the merchandise in inventory. The Trustee’s accountant did not have sufficient information
to make an adjustment for these errors but noted that each of these errors or omissions would
artificially inflate the Debtor’s assets and net worth and most likely further reduce and deplete
the surplus, if any.
DISCUSSION
Pursuant to NEW YORK BUSINESS CORPORATION LAW § 513(a),
[n]otwithstanding any authority contained in the certificate of incorporation, the
shares of a corporation may not be purchased by the corporation, or, if
redeemable, convertible or exchangeable shares, may not be redeemed, converted
or exchanged, in each case for or into cash, other property, indebtedness or other
securities of the corporation (other than shares of the corporation and rights to
acquire such shares) if the corporation is then insolvent or would thereby be made
insolvent. Shares may be purchased or redeemed only out of surplus.
N.Y. BUS . CORP . LAW §513 (McKinney 2003). Section 102(a)(8) of the N.Y. BUS . CORP . LAW
defines “insolvent” as “being unable to pay debts as they become due in the usual course of the
debtor’s business”. See also In re Industrial Ceramics, Inc., 253 B.R. 323, 332 (Bankr.
W.D.N.Y. 2000). Section 102(a)(13) of the N.Y. BUS . CORP . LAW defines “surplus” as “the
excess of net assets over stated capital”. A transfer of assets made by a corporate debtor in
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violation of N.Y. BUS . CORP . LAW § 513(a) is avoidable under section 544(b) of the Bankruptcy
Code. Le Café Creme, Ltd. v. Le Roux (In re Le Café Creme, Ltd.), 244 B.R. 211, 243-44
(Bankr. S.D.N.Y. 2000). “ A corporation may not make installment payments to purchase its
own shares of stock whem it is insolvent or would be rendered insolvent”. Id., 244 B.R. 244.
The Trustee needs to demonstrate that the Debtor was insolvent by a preponderance of
the evidence at the time the Redemption Agreement and Note was entered into on May 2002 or
for any period thereafter up to the Petition Date in order to avoid the payments made by the
Debtor to Arbore and the Defendants under the Redemption Agreement and Note during the
relevant periods. Grogan v. Garner, 498 U.S. 279, 286 (1991). “There is no presumption one
way or another as to the existence of a surplus.” 	Nakano v. Nakano McGlone Nightingale
Advertising, Inc., 84 Misc.3d 905, 908 (N.Y. Sup. Ct. 1975)(quoting Murphy v. George Murphy,
Inc., 7 Misc. 2d 647, 650 (N.Y. Sup. Ct. 1957). A determination of insolvency, whenever
possible, should be based upon appraisals or expert testimony but “appraisals are neither the
exclusive or dispositive means to make the determination.” Lawson v. Ford Motor Company (In
re Roblin Indus., Inc.), 78 F.3d 30, 38 (2d Cir. 1996).
As discussed above, the Debtor did not maintain perpetual inventory records but
estimated its ending inventory for a particular period using the gross profit method which
resulted in the Debtor’s inventory levels being overstated. From 2002 to 2005, the Debtor’s
books and records reflected approximately 28% gross profit for each of those years with a
discrepancy of 12% being reported in the Debtor’s 2005 tax return. The Trustee’s accountant
testified that the use of the gross profit method by the Debtor likely overstated the Debtor’s
inventory levels year after year until the Debtor’s bankruptcy filing at which point the Debtor
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had to determine approximately how much inventory it actually did have for purposes of
disclosing its assets and liabilities under the Bankruptcy Code. The Debtor’s postpetition
inventory levels reported in its monthly operating reports for the months after the bankruptcy
filing were much lower than what the Debtor reported for the previous years in question.
To determine a more accurate gross profit percentage for 2002 through 2005, the
Trustee’s accountant obtained the average gross profit percentage for that period. This was done
by taking the $6,389,300 in cumulative gross profit reported for the combined four year period
and dividing that by the $26,711,200 in total sales reported by the Debtor for the same period.
The resulting average gross profit percentage was 23.92% which was approximately 4.69%
lower than what was reported in the Debtor’s books and records for 2002 to 2005. He then
adjusted the Debtor’s gross profit for each quarter of 2002 to 2005 by the 4.69% difference
which results in a reduction in the Debtor’s recorded inventory levels and a corresponding
reduction in the surplus recorded for those quarters. The Trustee asserts that the 4.69%
downward adjustment in the gross profit percentage was conservative and reasonable in light of
additional errors contained in the Debtor’s books and records, such as the failure to record sales
tax liability for certain quarters and the improper recording of all customer deposits as actual
sales instead of liabilities, which would have reduced and depleted the Debtor’s surplus earlier in
time.
In addition, with respect to the Debtor’s monthly payment of $6,500 to Abore and the
Defendants under the Redemption Agreement and Note, the Trustee’s accountant allocated a
portion of the $6,500 monthly payment as an interest expense as required under the Redemption
Agreement and Note. This allocation reduces the Debtor’s equity and therefore reduces the
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recorded surplus on the Debtor’s books and records for each quarter from 2002 through 2005.
Without the reduction for interest expense, by September 2005 the Debtor’s net worth and
liquidity would be overstated by $100,300, the aggregate sum of the interest expense under the
Redemption Agreement and Note. When the reduction of equity due to the allocation of the
interest expense is taken into account along with the reduction in inventory and gross profit as a
result of the decrease in the Debtor’s gross profit percentage by 4.69%, the Debtor’s adjusted
books and records show not a surplus but a deficit of ($228,398) starting from around July 1,
2003 and that deficit continued to expand to the Petition Date. This deficit from July 1, 2003
does not take into consideration the Debtor’s liability for the payment of principal under the
Redemption Agreement and Note.
If the Debtor’s liability for the payment of principal under the Redemption Agreement
and Note were taken into account along with adjustments to the Debtor’s books and records for
gross profit, inventory, and the interest expense with respect to the payments under the
Redemption Agreement and Note, the Trustee’s accountant states that the Debtor would start
showing a deficit at the quarter ending June 30, 2002 of approximately ($2,344) with increasing
deficits for each quarter thereafter to the Petition Date. Under this analysis, he concludes that
the Debtor did not have a surplus and was insolvent at the time the Debtor entered into the
Redemption Agreement and Note and for every month thereafter to the Petition Date.
In addition to the methodology of adjusting for gross profit, inventory and the payments
under the Redemption Agreement Note described above, the Trustee’s accountant also undertook
two alternative analysis. Under the first alternative, he noted that there was more than a
$3,000,000 deficit in stockholder’s equity as of December 31, 2005 and used the Debtor’s books
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and records to adjust the stockholder’s equity/deficit for all preceding periods by rolling back the
$3,000,000 deficit through those periods. He concludes under this roll back methodology that
the Debtor’s $3,000,000 deficit in stockholder equity as of December 31, 2005 arose as a result
of operating losses sustained from January 1, 2002 through September 30, 2005 and the
payments made under the Redemption Agreement and the Note. However, there is no
explanation as to how the adjustments were made in terms of rolling back the deficit and how
much of the deficit was allocated to each preceding period. The Court therefore gives this theory
little to no consideration.
Under the second alternative, the Trustee’s accountant attempted to determine what was
the stockholder’s equity at the time of the execution of the Redemption Agreement. Under this
method, he noted that the Debtor reported earned surplus as of January 1, 2002 of $310,000 and
a net profit of approximately $79,000 on its 2002 tax return on sales of $5,298,700. Using the
reported sales for the period that ended April 30, 2002 and reported operating expenses for the
year, he determined that the Debtor’s incurred operating expenses at a rate of approximately
$120,000 per month. Based upon the Debtor’s “historic maintained gross profit margin of
23.92%” for the 4 year period in question, he concluded that the Debtor would have incurred a
loss of $141,300 from January 1, 2002 through April 30, 2002, the month prior to the execution
of the Redemption Agreement and Note. This loss would have reduced the earned surplus to
$168,700.
Based upon the various methodologies undertaken for valuing the Debtor’s assets and
liabilities, the Trustee’s accountant concludes that the Debtor had a deficit in accumulated
earnings during the period starting July 1, 2003 which continued thereafter to the Petition Date.
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Given the many inaccuracies in the Debtor’s books and records as discussed above and if further
adjustments were made to take into account some of the additional inaccuracies other than items
relating to inventory levels, gross profit and the failure to allocate interest expense on the
redemption payments, the Trustee’s accountant concludes that the Debtor was insolvent or
rendered insolvent when the Redemption Agreement and Note were entered into.
While the Debtor may have failed to properly record the actual inventory levels, accounts
payable, interest payments made under the Redemption Agreement and Note, and certain sales
tax owed in its various trial balances, general ledgers and tax returns, the Defendants do not
dispute that these are nonetheless the business records of the Debtor which the Court must
consider and evaluate in its determination on the issue of insolvency. Although the Defendants
argue that one cannot determine with any certainty that the Debtor was insolvent as a result of
the inaccuracies found in the Debtor’s books and records, the Trustee only needs to show by a
preponderance of the evidence that the Debtor was insolvent during the periods in question and
need not show the exact dollar amount of such insolvency.
Defendants attacked the calculations of the Debtor’s insolvency by the Trustee’s
accountant on the basis that the calculations were based upon inaccurate books and records
maintained by the Debtor given the fact that the Debtor never maintained inventory records and
the accounts payables remained unchanged for months at a time. However, the Defendant’s
accountant agrees that in order for the Debtor to actually have 28% gross profit remain the same
year after year without evidentiary support is an unlikely scenario and the Defendants do not
dispute that the use of the gross profit method by the Debtor to determine the level of inventory
without maintaining perpetual inventory records can be unreliable. While the Defendants find
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fault in some of the assumptions made by the Trustee’s accountant in arriving at the reduced
gross profit percentage of 23.92%, they have not offered any evidence or expert testimony to
show what would be the more appropriate measure of the Debtor’s inventory levels, gross profit,
equity and surplus. Similarly, the Defendants’ argument that the Trustee’s accountant failed to
factor in the value of intangibles and goodwill can be given only little weight because the
Defendants did not demonstrate that the Debtor had any intangibles and goodwill that should be
considered and whether these items, if any, had value such that it would offset some of the
adjustments made by the Trustee’s accountant.
Indeed, the Defendants have not submitted any evidence to rebut the testimony and
analysis by the Trustee’s accountant that the Debtor was insolvent as of July 1, 2003 or perhaps
prior to July 1, 2003 when the Redemption Agreement was entered into. None of the
Defendants’ arguments has shown that the Debtor was indeed solvent at least from July 1, 2003
up to the Petition Date, other than the surplus shown on the Debtor’s unadjusted books and
records. If the Court were to grant the Defendants relief based upon their assertions that the
Debtor’s books and records, inaccurate as they may be, should be taken at face value, such
reliance by the Court would reward the Defendants for inaccurate, unreliable and questionable
record keeping by the Debtor. The Court refuses to do so and believes that the analysis by the
Trustee’s accountant is supported by the record when all the financial information is taken into
consideration.
After reviewing the evidence and the documents filed in this bankruptcy case and
adversary proceeding and upon consideration of the testimony of the expert witnesses, the Court
finds there is sufficient evidence to show that the Debtor was insolvent for at least a part of the
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years in question. The Court finds that the allocation by the Trustee’s accountant of the monthly
payments of $6,500 between principal and interest and the corresponding adjustments to the
Debtor’s books and records is reasonable. While the Court finds that some reduction or
downward adjustment in the Debtor’s gross profit percentage, inventory, and surplus levels is
appropriate, it is unclear whether an across the board reduction of 4.69% for the entire period of
2002 through 2005 would accurately reflect the Debtor’s solvency or insolvency during this
period. Yet, when taken into consideration with some of the alternative methodologies
undertaken by the Trustee’s accountant and the fact that the Debtor consistently failed to pay its
quarterly sales tax liability for the period ending May 31, 2003 and continuing for most of the
months leading up to the Debtor’s bankruptcy filing as evidenced by the proofs of claim filed by
the State of New York, there is evidentiary support for the Court to find that the Debtor did not
have a surplus and was indeed insolvent from at least July 31, 2003 and thereafter.
In addition, a review of the other proofs of claim filed in this bankruptcy case shows that
many of the claims against the Debtor arose in 2004 and 2005. The Debtor’s inability to pay its
ongoing sales tax liability and other debts from July 1, 2003 to the Petition Date is clear and
undisputed evidence of the Debtor’s inability to pay its debts as they became due in the usual
course of business during this period. Accordingly, the Court finds that the Trustee has proven
by a preponderance of the evidence that the Debtor was insolvent from July 1, 2003 to the
Petition Date under N.Y. BUS . CORP . LAW § 513(a).
For the period from May 24, 2002 to June 30, 2003, there is no other evidence with
respect to whether the Debtor had a deficit other than the adjustments to the Debtor’s books and
records as made by the Trustee’s accountant. As discussed above, the Court questions the
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appropriateness of applying an across the board reduction in the Debtor’s gross profit for 2002 to
2005 by 4.69% based upon the average gross profit percentage for such 4 year period to
determine the surplus/deficiency levels from May 24, 2002 to June 30, 2003 given the
inaccuracies found in the Debtor’s books and records. While the Trustee’s accountant concludes
that the Debtor was probably insolvent during the period prior to July 1, 2003 given that further
downward adjustments to reported surplus aside from interest payments and inventory levels
may be warranted, there is a lack of support given for what those adjustments may be and
whether such adjustments would be reasonable. More importantly, there is an absence of
corresponding evidence showing that the Debtor was unable to pay its debts as they became due
during the ordinary course of business from May 24, 2002 to about June of 2003. Given this
uncertainty and based upon the evidence presented to the Court, the Court cannot find by a
preponderance of the evidence that the Debtor was insolvent under section 513(a) of N.Y. BUS .
CORP . LAW § 513(a) from May 24, 2002 through June 30, 2003.
CONCLUSION
Based upon the foregoing, the Court finds by a preponderance of the evidence that the
Debtor was insolvent or rendered insolvent from July 1, 2003 and thereafter but is unable to find
that the Debtor was insolvent from May 24, 2002 to June 30, 2003 under section 513(a) of N.Y.
BUS . CORP . LAW .
A continued pre-trial conference in this adversary proceeding shall be held on October
26, 2010 at 10:00 a.m.
15	15
____________________________
Dorothy Eisenberg
United States Bankruptcy Judge
Dated: Central Islip, New York
September 30, 2010
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