# In Re Smtc Mfg. of Texas

> United States Bankruptcy Court, W.D. Texas · September 11, 2009 · 421 B.R. 251

URL: https://www.frixlaw.com/law-library/cases/1949219

## Case

- **Court:** United States Bankruptcy Court, W.D. Texas
- **Decided:** September 11, 2009
- **Citations:** 421 B.R. 251
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Craig A. Gargotta
- **Cited by:** 13 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1949219

## How later opinions describe it (automated extraction)

- finding that a one-year gap between the debt incurring and the transfer was not short
- finding that four or five badges of fraud are sufficient
- finding that four or five badges of fraud is sufficient

## Opinion text

421 B.R. 251 (2009)
In re SMTC MANUFACTURING OF TEXAS, Debtor.
Ronald E. Ingalls, Chapter 7 Trustee, Plaintiff,
v.
SMTC Corporation, SMTC de Chihuahua S.A. de C.V., SMTC Mex Holdings, Inc., SMTC Manufacturing Corp. of North Carolina, SMTC Manufacturing Corporation of Canada, and HTM Holdings, Inc., Defendants.
Bankruptcy No. 04-16354-CAG. Adversary No. 06-1283.
United States Bankruptcy Court, W.D. Texas, Austin Division.
September 11, 2009.
*259 Randell W. Livingston, Jr., Teresa Ruiz Schober, Law Office of Randell W. Livingston, Jr., Austin, TX, for Plaintiff.
Miguel S. Rodriguez, Taylor Dunham and Burgess LLP, Austin, TX, for Defendants.
MEMORANDUM OPINION
CRAIG A. GARGOTTA, Bankruptcy Judge.
The above referenced adversary proceeding came before this Court for trial the weeks of March 23 and March 30, 2009. After trial, the Court took the matter under advisement. The Court also requested certain post-trial briefing from *260 the parties, which has been submitted and reviewed. This is a core proceeding. This Court has jurisdiction to enter a final order with regard to matters presently under submission pursuant to 28 U.S.C. § 1334 (a), (b) and (d), 28 U.S.C. § 157 (a) and (b), 28 U.S.C. § 151 and the Standing Order of Reference of Bankruptcy Matters entered by the United States District Court for the Western District of Texas. This Memorandum Opinion is being issued as written findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.
CONTENTS
PROCEDURAL HISTORY .................................................................. 262
THE PARTIES ......................................................................... 263
THE WITNESSES ....................................................................... 263
BACKGROUND FACTS .................................................................... 264
THE TRUSTEE'S CLAIMS AND THE PARTIES' ALLEGATIONS ................................... 265
FINDINGS OF FACT .................................................................... 266
The Facts Regarding the Joint Cash-Management System and the Zero Balance
Accounts ...................................................................... 268
The Joint Cash-Management System Prior to March 2002 .......................... 268
The Joint Cash-Management System from March 2002 Onward ....................... 269
The Facts Regarding Claim Category 1: The Intercompany Transfers .................... 269
The Facts Regarding Claim Category 2: The Expense Reallocations ..................... 271
The Facts Regarding Claim Category 3: The Net Balance Transfer ...................... 272
The Facts Regarding Claim Category 4: The Fixed Assets Transfers .................... 272
The Facts Regarding the Decision to Shut Down ....................................... 274
The Facts Regarding Corporate Control and Corporate Formalities ..................... 277
CONCLUSIONS OF LAW .................................................................. 277
Preliminary Issue I: Whether the Trustee's Expert Testimony Was Sufficient .......... 279
Preliminary Issue II: Whether the Lien Securing the Lehman Loan Fully
Encumbered All of the Debtor's Property, So That There Was No "Asset"
That Could Have Been the Subject of a "Transfer" .............................. 280
Preliminary Sub-Issue IIA: Whether the Definition of "Asset" under
TUFTA, as Interpreted in Mullins, Means That Even When There
Is Equity in the Collateral Considered as a Whole, There Is No
"Transfer" of an "Asset" So Long as the Value of the Item(s) of
Property Conveyed Is Less Than the Entire Secured Debt ................. 281
Preliminary Sub-Issue IIB: Whether the Debtor Should Be Considered
Liable for the Full Amount of the Lehman Loan Balance, or for
Only Some Lesser Amount ................................................ 283
Whether the Debtor's Liability Should be Considered "Contingent" ....... 283
Whether the Trustee Proved the Debtor's Liability Should Be
Discounted ....................................................... 288
Preliminary Sub-Issue IIC: Whether the Lehman Loan Balance Exceeded
the Value of All the Debtor's Property at the Time of the
Conveyances ............................................................ 291
Preliminary Issue III: Insolvency ................................................... 296
The Trustee's Claims for Transfers Made with Actual Intent to Hinder, Delay or
Defraud ....................................................................... 298
Direct Evidence of Actual Intent .............................................. 300
The Early Wind-Down Period ............................................. 300
The Post-Default Period ................................................ 301
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim
Category 1: The Intercompany Transfers ................................. 303
Badge of Fraud 1: Transfers made to insiders or obligations to
insiders incurred ................................................ 304
Badge of Fraud 2: The debtor retained possession or control of the
property transferred after the transfer .......................... 304
*261
Badge of Fraud 3: The transfer or obligation was concealed ............. 304
Badge of Fraud 4: Before the transfer was made or obligation was
incurred, the debtor had been threatened with suit ............... 304
Badge of Fraud 5: The transfer was of substantially all the debtor's
assets ........................................................... 304
Badge of Fraud 6: The debtor absconded ................................. 304
Badge of Fraud 7: The debtor removed or concealed assets ............... 304
Badge of Fraud 8: The value of the consideration received by the
debtor was reasonably equivalent to the value of the assets
transferred or the amount of the obligation incurred ............. 304
Badge of Fraud 9: The debtor was insolvent or became insolvent
shortly after the transfer was made or the obligation was
incurred ......................................................... 306
Badge of Fraud 10: The transfer occurred or the obligation was
incurred shortly before or shortly after a substantial debt
was incurred ..................................................... 306
Badge of Fraud 11: The debtor transferred the essential assets of
the business to a lienor who transferred the assets to an
insider of the debtor ............................................ 307
Summary: Badges of Fraud on the Intercompany Transfers ........................ 307
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim
Category 2: The Expense Reallocations .................................. 307
Badge of Fraud 1: Transfers made to insiders or obligations to
insiders incurred ................................................ 307
Badge of Fraud 2: The debtor retained possession or control of the
property transferred after the transfer .......................... 307
Badge of Fraud 3: The transfer or obligation was concealed ............. 307
Badge of Fraud 4: Before the transfer was made or obligation was
incurred, the debtor had been threatened with suit ............... 307
Badge of Fraud 5: The transfer was of substantially all the debtor's
assets ........................................................... 308
Badge of Fraud 6: The debtor absconded ................................. 308
Badge of Fraud 7: The debtor removed or concealed assets ............... 308
Badge of Fraud 8: The value of the consideration received by the
debtor was reasonably equivalent to the value of the assets
transferred or the amount of the obligation incurred ............. 308
Badge of Fraud 9: The debtor was insolvent or became insolvent
shortly after the transfer was made or the obligation was
incurred ......................................................... 309
Badge of Fraud 10: The transfer occurred or the obligation was
incurred shortly before or shortly after a substantial debt
was incurred ..................................................... 309
Badge of Fraud 11: The debtor transferred the essential assets of
the business to a lienor who transferred the assets to an
insider of the debtor ............................................ 309
Summary: Badges of Fraud on the Expense Reallocations .................. 309
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim
Category 3: The Net Balance Transfers .................................. 310
Badge of Fraud 1: Transfers made to insiders or obligations to
insiders incurred ................................................ 310
Badge of Fraud 2: The debtor retained possession or control of the
property transferred after the transfer .......................... 310
Badge of Fraud 3: The transfer or obligation was concealed ............. 310
Badge of Fraud 4: Before the transfer was made or obligation was
incurred, the debtor had been sued or threatened with suit ....... 310
Badges of Fraud 5: The transfer was of substantially all the
debtor's assets .................................................. 311
Badge of Fraud 6: The debtor absconded ................................. 311
Badge of Fraud 7: The debtor removed or concealed assets ............... 311
*262
Badge of Fraud 8: The value of the consideration received by the
debtor was reasonably equivalent to the value of the asset
transferred or the amount of the obligation incurred ............. 311
Badge of Fraud 9: The debtor was insolvent or became insolvent
shortly after the transfer occurred or the obligation was
incurred ......................................................... 313
Badge of Fraud 10: The transfer occurred or the obligation was
incurred shortly before or shortly after a substantial debt
was incurred ..................................................... 313
Badge of Fraud 11: The debtor transferred the essential assets of
the business to a lienor who transferred the assets to an
insider of the debtor ............................................ 313
Summary of Badges of Fraud on the Net Balance Transfer ................. 313
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim
Category 4: The Fixed Assets Transfers ................................. 313
Badge of Fraud 1: Transfers made to insiders or obligations to
insiders incurred ................................................ 313
Badge of Fraud 2: The debtor retained possession or control of the
property transferred after the transfer .......................... 313
Badge of Fraud 3: The transfer or obligation was concealed ............. 314
Badge of Fraud 4: Before the transfer was made or obligation was
incurred, the debtor had been threatened with suit ............... 314
Badge of Fraud 5: The transfer was of substantially all the debtor's
assets ........................................................... 314
Badge of Fraud 6: The debtor absconded ................................. 315
Badge of Fraud 7: The debtor removed or concealed assets ............... 315
Badge of Fraud 8: The value of the consideration received by the
Debtor was reasonably equivalent to the value of the assets
transferred or the amount of the obligation incurred ............. 315
Badge of Fraud 9: The debtor was insolvent or became insolvent
shortly after the transfer occurred or the obligation was
incurred ......................................................... 315
Badge of Fraud 10: The transfer occurred shortly after a
substantial debt was incurred .................................... 316
Badge of Fraud 11: The debtor transferred the essential assets of
the business to a lienor who transferred the assets to an
insider of the debtor ............................................ 316
Summary of Badges of Fraud on Fixed Assets Transfers ................... 316
Conclusions Regarding the Trustee's Claims for Transfers Made with Actual
Intent to Hinder, Delay or Defraud ..................................... 316
The Trustee's Claims for Transfers Made with Constructive Fraud ..................... 316
Constructive Fraud Elements as to Claim Category 1: The Intercompany
Transfers ........................................................ 316
Constructive Fraud Elements as to Claim Category 2: The Expense
Reallocations .................................................... 317
Constructive Fraud Elements as to Claim Category 3: The Net Balance
Transfer ......................................................... 318
Constructive Fraud Elements as to Claim Category 4: The Fixed Assets
Transfers ........................................................ 318
The Trustee's Veil Piercing Claims .................................................. 319
The Trustee's Veil-Piercing Claim Based on Alter Ego .......................... 320
The Trustee's Veil-Piercing Claim Based on Sham to Perpetrate a Fraud ......... 323
CONCLUSION .......................................................................... 325
PROCEDURAL HISTORY
The Trustee initiated this adversary by filing his Original Complaint on December 13, 2004. The Trustee filed his Fourth Amended Complaint on October 27, 2008. Rulings on the Defendants' 12(b)(6) and *263 summary judgment motions limited the claims remaining for trial. Specifically, the Court dismissed the Trustee's single enterprise and conspiracy theory causes of actions and limited the Trustee's veil-piercing liability, if any, to SMTC Corporation ("SMTC Corporate"), HTM Holdings, Inc. ("HTM"), and SMTC Manufacturing Corporation of Canada ("SMTC Canada").
Thus, as claims remaining for trial, the Plaintiff/Trustee on behalf of the estate of the Debtor, SMTC Manufacturing Corporation of Texas ("SMTC Texas") seeks to avoid pursuant to 11 U.S.C. § 544 (b) and §§ 24.005(a)(1), (2) and 24.006(a) of the Texas Uniform Fraudulent Transfer Act ("TUFTA") certain allegedly fraudulent transfers to certain Defendants that occurred from January 2002 through December 2003 and with an alleged value in excess of $80 million dollars. Additionally, the Plaintiff/Trustee requests relief under Texas law against certain Defendants based on corporate veil-piercing theories of alter ego and sham to perpetrate a fraud.
The case was tried over nine days. At the close of the Trustee's evidence, the Defendants moved under Rule 52(c) for a judgment as a matter of law on the TUFTA claims, arguing that there were no "transfers" of any "assets" as defined in that statute. The Court denied that motion, for reasons stated on the record.
At the close of all the evidence, Defendants once again made a motion under Rule 52(c) (the "Rule 52(c) Motion"), asserting a number of grounds including those urged in their prior motion that had been denied. The post-trial motion was carried with the Court's consideration after trial of the merits of the action, and was taken under advisement.
THE PARTIES
The Plaintiff in this action is Ron Ingalls, the Chapter 7 Trustee ("Trustee") of the Debtor.
The Defendants in this action are:
1. SMTC Corporate, a corporation organized under the laws of Delaware and is the parent company of all the SMTC corporations [1] ;
2. HTM, a corporation organized under the laws of Delaware and the holding company for several subsidiaries of the SMTC family and a wholly-owned subsidiary of SMTC Corporate;
3. SMTC Manufacturing Corporation of North Carolina ("SMTC Charlotte"), a wholly-owned subsidiary of HTM;
4. SMTC Mex Holdings, Inc. ("SMTC Mex"), a corporation organized under the laws of Delaware and is a wholly-owned subsidiary of HTM;
5. SMTC de Chihuahua, S.A. de C.V. ("SMTC Chihuahua"), a corporation organized under the laws of Mexico and is a wholly-owned subsidiary of SMTC Mex; and
6. SMTC Canada, a corporation organized under the laws of Canada and a wholly-owned subsidiary of SMTC Nova Scotia Company, which is a wholly-owned subsidiary of SMTC Corporate.
THE WITNESSES
1. Ron Ingalls, the Chapter 7 Trustee and the Plaintiff;
2. Kirk Hartstein, the vice president and general manager of the Debtor from 1999 to 2002 and the vice-president of the Debtor from 2002 until its closing;
*264 3. John Sommerville, the director of engineering and vice president of operations of the Debtor from June, 1999 to March, 2003;
4. Scott Kingery, a test engineer for the Debtor from 1999 to just prior to its closing;
5. Richard Winter, the vice-president and general manager for Debtor from 1996 to 1999;
6. Frank Skerlj, director of finance for SMTC Canada and the corporate representative for all the Defendants;
7. Julian Alexander, the expert hired by the Trustee, the owner of Accounting Economics Appraisal Group, a Certified Public Accountant, certified in financial forensics, and a certified fraud examiner;
8. Margaret Reinhart, an expert originally hired by the Trustee [2] and a shareholder in Forensic Strategic Solutions;
9. Kell Mercer, the attorney who prepared the proof of claim for Flextronics International, Inc.;
10. Cliff Ernst, corporate lawyer in Austin, Texas, who prepared the initial incorporation documents of the Debtor and handled various other corporate matters;
11. Mario Ochoa, a corporate representative of Flextronics International, Inc., whose video deposition testimony was admitted at trial;
12. Alma Carbajal Velasquez, currently the controller of SMTC Chihuahua/SMTC Mex, who held positions with that company as accounting supervisor prior to 2000 and accounting manager between 2000 and 2002;
13. Terry Hart, who testified by deposition and was the former manufacturing manager of the Debtor, a position which required him to work with the accounting department at SMTC Chihuahua (or Mex) in connection with exporting products from SMTC Chihuahua to SMTC Texas. Defendants introduced Mr. Hart's testimony by deposition;
14. Tom Rossi, a former employee of SMTC Chihuahua and/or SMTC Mex, whose testimony was offered by the Defendants by video deposition;
15. Kristin Markland, a former accounting manager for Debtor, who prior to that position had worked as an accounts payable supervisor and clerk as well as an administrative assistant and receptionist for the Debtor;
16. B.J. Desai, the former director of engineering with SMTC Corporate, whose primary responsibility was accountability for all of the equipment held by all of SMTC Corporate's subsidiaries;
17. Jane Todd, the current president and CFO of SMTC Corporate and also the secretary and treasurer for most of the subsidiaries; and
18. Otto Wheeler, a Certified Public Accountant who owns Wheeler and Company and who testified as Defendants' expert witness.
BACKGROUND FACTS
Two Austin American Statesman articles were written in mid-2002 regarding the economic difficulties associated with *265 computer component manufacturers. These articles directly address problems experienced not only by SMTC Texas, but also the Debtor's lessor, Flextronics International, Inc. ("Flextronics"):
SMTC will lay off about 1000; U.S. Foodservice also plans to pare jobs Weak demand from computer buyers and a grinding price war among computer makers continue to take a heavy toll on component manufacturers.
SMTC Corp., which makes motherboards for Dell Computer Corp. servers will lay off about half of the 200 workers at its North Austin plant in August. Like the computer makers, suppliers such as Toronto-based SMTC have been closing facilities and cutting jobs in an effort to return to profitability. In the first quarter, SMTC closed a plant in Cork, Ireland.
SMTC is moving motherboard production to its plant in Chihuahua, Mexico, said Kirk Hartstein, general manager of the Austin plant. As computer prices continue to fall, manufacturers have increasingly farmed out work to plants in Mexico, where wages are much lower than in the United States.
SMTC is just the latest contract manufacturer in Central Texas to cut jobs in the wake of the slowdown in technology spending. Last month, Flextronics, Inc. said it will close its New Braunfels plant in August, eliminating 780 jobs, according to a filing with the Texas Workforce Commission.
Exh. D-31, Austin American Statesman Online Archives dated June 6, 2002 by John Pletz.
Plant changes helped Dell avoid Mexico move
The dramatic productivity improvements achieved at Dell Computer Corp.'s Parmer North 2 plant, in part, helped keep the production of corporate desktop computers in Austin instead of Mexico.
...
Although Dell couldn't figure out a way to make Mexico work out logistically for its own finished PCs, components are another story. Many of the computers coming down the conveyors at Parmer join up with monitors bearing the Dell logo that are assembled in Mexico.
...
Several Dell suppliers have moved to Mexico because of their ever shrinking profits in the computer-industry food chain.
SMTC Corp., which makes motherboards for Dell, laid off 100 workers in Austin recently and moved production to Chihuahua, in central northern Mexico. Flextronics, Inc., which made metal computer housings for Dell, closed its plants in New Braunfels, laying off the last of about 1,000 workers this month and moved production offshore.
Exh. D-32, Austin American Statesman Online Archives dated August 26, 2002 by John Pletz
It is within the context of this economic downturn that the decision to shut down the Debtor and later to file bankruptcy, ultimately leading to the filing of this adversary proceeding.
THE TRUSTEE'S CLAIMS AND THE PARTIES' ALLEGATIONS
The Trustee brought suit to avoid allegedly fraudulent pre-petition transfers of cash and fixed assets made by the Debtor to certain Defendants from January 2, 2002 through December 2003. The allegedly more than $80 million of fraudulent transfers can be divided into four categories:
*266 1) transfers of cash, allegedly totaling approximately $37 million, to SMTC Mex and SMTC Charlotte between February 2002 and February 2003 (the "Intercompany Transfers"),
2) the reallocations to the Debtor from September 2002 through January of 2003 of certain costs totaling $1.959 million, previously borne by SMTC Corporate (the "Expense Reallocations"),
3) cash transfers between January 2002 and December 2003 between SMTC Texas's bank accounts and the HTM consolidated bank accounts, which the Trustee and his expert netted out to arrive at a net transfer of approximately $41.1 million in favor of HTM (the "Net Balance Transfer"), and
4) transfers of SMTC Texas's fixed assets to affiliates in March and April of 2003 (the "Fixed Assets Transfers").
Finally, the Trustee also asserts a claim alleging that certain of the Defendants should be responsible for the debts of the Debtor under various veil-piercing theories.
The Trustee asserts that SMTC Corporate, SMTC Canada and HTM orchestrated, planned, and arranged to bankrupt the Debtor and transfer all the cash, capital, and other property from the Debtor to certain affiliates at the Debtor's expense to avoid the financially cumbersome lease obligation the Debtor owed to Flextronics. The Trustee claims that as part of the plan to siphon cash and other assets from the Debtor to certain affiliates, SMTC Corporate decided to disengage the Debtor from its largest and most lucrative customer, Dell. Then, once it became known that Debtor had disengaged from Dell, other customers left the company. By mid-2002, the Debtor, having lost almost its entire customer base, commenced lay-offs and initiated the shutdown of its operating facility and such activity defrauded not only Flextronics, the Debtor's largest creditor, but other creditors as well.
The Defendants dispute the Trustee's allegations. The Defendants allege that no transfers occurred because all of the Debtor's assets were fully encumbered by a lien to its lender and were therefore beyond the reach of TUFTA. Defendants further allege that the Debtor's bankruptcy was the result of economic and market conditions prevailing in Austin, Texas, and in the technology sector at that time. Defendants assert the Debtor could not continue to service the Dell account without the aid of its sister company in Mexico and ultimately not at all due to the continuous pricing pressure put on it by Dell. Furthermore, Defendants assert the Debtor did not have enough income to pay its debts and its lease so it chose to pay creditors other than Flextronics. With the exception of Flextronics, most obligations incurred by the Debtor prior to closing its doors in the spring of 2003 were paid. That is reflected by the low number of proofs of claim filed in this case, all but one of which are claims that did not arise until after the Debtor closed its doors in May of 2003. Defendants assert that for every transfer by the Debtor, reasonably equivalent value was provided to the Debtor. Defendants also assert that any liability of a Defendant for avoidance is offset by Defendants' right of setoff and recoupment.
FINDINGS OF FACT
SMTC Texas was engaged in the business of manufacturing computer components in Austin, Texas. The Debtor was at all relevant times a wholly-owned subsidiary of HTM which is itself a wholly-owned subsidiary of SMTC Corporate. The Debtor is a corporation duly organized under the laws of Texas. P-120, 121. The Debtor is one of several subsidiaries *267 owned by HTM and was considered an operating subsidiary, that is, its purpose was to manufacture electronic component parts for computer and other technology related companies. The Debtor was one of several subsidiaries under the SMTC umbrella. The SMTC entities operated globally with companies in Canada, the United States, Mexico, and Ireland.
The Debtor's operations consisted of a single manufacturing facility in Austin, Texas. The Debtor leased this facility from Flextronics pursuant to a lease agreement dated September 1, 2001 (the "Lease"). The Lease was a ten-year lease to which the Debtor was committed through September 2011. The Debtor had initially commenced operations at another location in 1996. It also owned property on Bratton Lane in Austin, Texas but did not use the property in its operations. As its operations expanded in 2000, it was necessary for the Debtor to find additional space, resulting in the Lease with Flextronics.
The SMTC entities financed their operations collectively, as co-debtors and co-guarantors. On or about July 27, 2000, SMTC Corporate, HTM, SMTC Canada and several wholly-owned subsidiaries, including the Debtor, executed a restated and amended credit and collateral agreement ("Lehman Loan Agreement") with several banks and financial institutions, the primary lenders being Lehman Commercial Paper, Inc. ("Lehman") and General Electric Capital Corporation (collectively the "Lenders").
The Lehman Loan Agreement consists of two documents (1) the Amended and Restated Credit and Guarantee Agreement ("Credit Agreement"), Exh. D-107, and (2) the Amended and Restated Guarantee and Collateral Agreement ("Guarantee Agreement"), Exh. D-108.
Pursuant to the Credit Agreement and Guarantee Agreement, the Lenders extended credit and granted loans ("Lehman Loan") for the general corporate purposes of HTM and its subsidiaries. SMTC Corporate and several of HTM's subsidiaries, including the Debtor, were parties to and guaranteed the Lehman Loan. The Debtor absolutely and unconditionally guaranteed the Lehman Loan pursuant to the Guarantee Agreement.
All of Debtor's assets secured the Lehman Loan. Exh. D-107 and D-108. Lehman filed UCC-1 financing statements to perfect its security interest in the Debtor's assets.
The Debtor maintained a portion of the Lehman Loan debt on its books. Although the Debtor was not the actual borrower on the Lehman Loan, it had guaranteed this debt and it used the borrowed funds in its daily operations. During operations, the Debtor's individual use of the Lehman Loan fluctuated. The monthly outstanding balances on the Lehman Loan for the all of the entities and the portion carried on the books of the Debtor are as follows:
-------------------------------------------------
Debtor's
Entire Balance Proportionate
of the Lehman Share of the
Date Loan Lehman Loan
-------------------------------------------------
January 2002 $138,753,000.00 $32,715,000.00
-------------------------------------------------
February 2002 132,622,000.00 33,435,000.00
-------------------------------------------------
March 2002 112,452,000.00 35,603,000.00
-------------------------------------------------
April 2002 131,903,000.00 43,184,000.00
-------------------------------------------------
May 2002 119,970,000.00 41,565,000.00
-------------------------------------------------
June 2002 114,036,000.00 35,619,000.00
-------------------------------------------------
July 2002 118,577,000.00 33,930,000.00
-------------------------------------------------
August 2002 104,602,000.00 27,990,000.00
-------------------------------------------------
Sept. 2002 90,163,000.00 25,129,000.00
-------------------------------------------------
Oct. 2002 96,509,000.00 23,894,000.00
-------------------------------------------------
Nov. 2002 92,307,000.00 21,544,000.00
-------------------------------------------------
Dec. 2002 82,589,000.00 19,971,000.00
-------------------------------------------------
January 2003 82,311,000.00 21,462,000.00
-------------------------------------------------
*268
-------------------------------------------------
Debtor's
Entire Balance Proportionate
of the Lehman Share of the
Date Loan Lehman Loan
-------------------------------------------------
February 2003 86,844,000.00 19,736,000.00
-------------------------------------------------
March 2003 80,869,000.00 20,705,000.00
-------------------------------------------------
April 2003 79,197,000.00 16,097,000.00
-------------------------------------------------
May 2003 76,426,000.00 15,395,000.00
-------------------------------------------------
June 2003 67,160,000.00 14,642,000.00
-------------------------------------------------
July 2003 77,716,000.00 15,624,000.00
-------------------------------------------------
August 2003 77,592,000.00 15,757,000.00
-------------------------------------------------
Sept. 2003 74,922,000.00 15,925,000.00
-------------------------------------------------
Oct. 2003 72,717,000.00 16,218,000.00
-------------------------------------------------
Nov. 2003 76,170,000.00 17,093,000.00
-------------------------------------------------
Dec. 2003 70,077,000.00 17,327,000.00
-------------------------------------------------
Exh. D-24 ("Total Debt") and Line 342 on Exhs. D-l and D-2; see also Defendants' Motion For Final Summary Judgment on Lien, Reasonably Equivalent Value, and Conspiracy Issues.
The monthly total value for the assets of the Debtor, according to its balance sheet, are as follows:
----------------------------------------------
Date Value of the Debtor's Property
----------------------------------------------
January 2002 $50,297,000.00
----------------------------------------------
February 2002 53,451,000.00
----------------------------------------------
March 2002 57,373,000.00
----------------------------------------------
April 2002 63,950,000.00
----------------------------------------------
May 2002 66,108,000.00
----------------------------------------------
June 2002 60,349,000.00
----------------------------------------------
July 2002 59,539,000.00
----------------------------------------------
August 2002 50,837,000.00
----------------------------------------------
Sept. 2002 38,296,000.00
----------------------------------------------
Oct. 2002 32,768,000.00
----------------------------------------------
Nov. 2002 30,890,000.00
----------------------------------------------
Dec. 2002 22,129,000.00
----------------------------------------------
January 2003 22,232,000.00
----------------------------------------------
February 2003 20,614,000.00
----------------------------------------------
March 2003 14,916,000.00
----------------------------------------------
April 2003 7,513,000.00
----------------------------------------------
May 2003 4,599,000.00
----------------------------------------------
June 2003 2,332,000.00
----------------------------------------------
July 2003 1,360,000.00
----------------------------------------------
August 2003 1,299,000.00
----------------------------------------------
Sept. 2003 1,181,000.00
----------------------------------------------
Oct. 2003 1,270,000.00
----------------------------------------------
Nov. 2003 1,206,000.00
----------------------------------------------
Dec. 2003 83,000.00
----------------------------------------------
Line 324, Exhs. D-l and D-2.
The Facts Regarding the Joint Cash-Management System and the Zero Balance Accounts
The SMTC entities used a joint cash-management system that facilitated efficient financing from the Lehman Loan. This system operated in tiers or levels and was initially operated one way and then, at the request of Lehman, the arrangement changed.
The Joint Cash-Management System Prior to March 2002
At the top tier of the banking arrangement is the Lehman Loan which funded all operations of the SMTC entities. The consolidated accounts (all other operating subsidiaries) constitute the second tier. Prior to March 2002, there was only one consolidated account: the HTM-maintained consolidated zero-balance account, Comerica Account Number xxxxxx5417 ("Consolidated ZBA Account"). The bottom tier constituted each of the subsidiaries' various bank accounts. Each subsidiary maintained a general bank account. The Debtor's general bank account was Comerica Account Number xxxxxx5375 ("Debtor General Bank Account"). Debtor's payroll bank account was Comerica Account Number xxxxxx5367 ("Debtor Payroll Bank Account").
When the Debtor would receive money from a customer, Debtor deposited it into the Debtor General Bank Account. When the Debtor needed to pay a bill, debt or any payable, funds from the Lehman Loan would be deposited into the Consolidated ZBA Account and from there deposited into the Debtor General Bank Account. *269 Funds needed for payroll were deposited into the Debtor Payroll Bank Account. Any other expenses were paid directly out of the Debtor General Bank Account.
At the end of the business day, whatever funds remained in Debtor General Bank Account (including deposits from customers and funds that had not been used to pay bills or other expenses) would be swept into the Consolidated ZBA Account, and then swept again and applied to the Lehman Loan.
The Joint Cash-Management System from March 2002 Onward
The banking arrangements changed in March 2002. Additional disbursement accounts were established and a "lockbox" arrangement was instituted which prevented the SMTC entities from accessing the money deposited from customers into the general accounts.
A new consolidated disbursement bank account was created: Comerica Account Number xxxxxx5393 ("Consolidated Disbursement Account"). After March 2002, funds were no longer disbursed to the subsidiary accounts through the Consolidated ZBA Bank Account. Rather, funds needed by the operating subsidiaries would be deposited into the new Consolidated Disbursement Account. Likewise, new disbursement bank accounts were created for each individual subsidiary. Debtor's disbursement bank account was Comerica Account Number xxxxxxx4651 ("Debtor Disbursement Bank Account"). Instead of funds flowing from the Consolidated ZBA Bank Account to Debtor General Bank Account, they now flowed from the Consolidated Disbursement Bank Account to Debtor Disbursement Bank Account. The Debtor Payroll Bank Account remained in place. However, if funds were needed to pay payroll, they would now flow from the Debtor Disbursement Bank Account to the Debtor Payroll Bank Account.
The inflow of cash essentially remained the same as it was before March, 2002. That is, Debtor continued to receive deposits from customers into the Debtor General Bank Account. Just as before, at the end of each day these funds were swept into the Consolidated ZBA Account and then finally swept again and immediately applied to pay down the Lehman Loan.
What distinguished the arrangement in place after March 2002 is the Lender's control over deposits. Prior to March 2002, the subsidiaries would use the funds that were deposited into their general accounts to pay vendors immediately, and only the net remaining in the account was swept up and applied to the Lehman Loan. After March 2002, a "lockbox" arrangement existed. Subsidiaries could no longer access any money deposited into their respective general accounts. As noted, economic pressures had been plaguing electronics manufacturers since 2001, and Lehman demanded more control.
HTM facilitated the operation of the consolidated accounts. The Debtor would make its funding requests for its expenses to SMTC Canada which would then authorize HTM to allow the Lehman Loan funds to be put into the Debtor's Disbursement Bank Account to pay expenses and then into the Debtor's Payroll Bank Account to make payroll. This was a routine, automatic efficient method of paying down the debt as well as reducing the amount of interest ultimately paid on the Lehman Loan.
The Facts Regarding Claim Category 1: The Intercompany Transfers
All of the subsidiaries purchased and sold products from one another. With respect to the transfers in question, the Debtor purchased products from two of its subsidiaries, SMTC Charlotte and SMTC *270 Mex. The alleged fraudulent transactions occurred between February 2002 and February 2003 and were a result of the need for the Debtor to outsource to Mexico to maintain competitiveness.
John Sommerville testified that SMTC Mex ramped up to offer customers a lower cost of production. Customers wanted to then shift production to Mexico to take advantage of lower manufacturing costs. In particular, Dell, the Debtor's main customer, was aggressive in its pricing strategies. As such, the Debtor, along with Dell, moved the Dell production to SMTC Mex to be profitable. Kirk Hartstein corroborated the testimony of Mr. Sommerville. Mr. Hartstein agreed that Dell was a continually difficult and demanding customer. SMTC Mex had the capacity to fulfill orders from the Debtor, and to remain competitive and profitable, the Debtor moved the manufacturing to Mexico.
Mr. Hartstein acknowledged that Dell's products were being built in Mexico and shipped to Texas. The labor in Mexico was $3.00 an hour and in Texas $19.00 an hour. Mexico would ship the requested goods to Texas. Dell would then pay Texas for the goods and Texas would place the goods in inventory for receipt by Dell. Texas received a markup for holding the inventory and servicing Dell in connection with the products made in Mexico. Mr. Hartstein could not testify as to the exact mechanics of how the intercompany financial transactions were set up to handle these purchases from Mexico. He indicated this area was Mr. Giordano's responsibility. Mr. Giordano was the Debtor's on-site controller. Mr. Hartstein, however, acknowledged that the Mexico intercompany transactions existed.
Terry Hart, former manufacturing manager of the Debtor, also confirmed that the Debtor purchased product from SMTC Mex. Likewise, Kristin Markland, the Debtor's accounting manager at the time the intercompany transfers took place, also acknowledged that Debtor purchased product from Mexico as well as Charlotte because she processed the payables to SMTC Mex and SMTC Charlotte. Ms. Markland indicated that the Debtor would receive the product into inventory where it was recorded in an inventory program. She would then receive an invoice that she would match to the inventory. The transactions were documented with voided "dummy checks" payable to the subsidiary providing the product and by journal entries into the general ledger.
Tom Rossi, a former employee of SMTC Chihuahua also verified that product was made and shipped to the Debtor from Mexico. And, Alma Carbajal, the accounting manager at SMTC Mex also confirmed the Debtor's purchase of the product from SMTC Mex. Once SMTC Mex shipped the product from its warehouse, then SMTC Mex would invoice. She explained that an invoice would not be generated unless the goods were actually shipped. Ms. Carbajal also explained that SMTC Chihuahua actually manufactured the goods for SMTC Mex who sold the product to the Debtor. This was due to the maquiladora laws in effect in Mexico. She also acknowledged that the payments were by intercompany transaction and that when the Debtor purchased product from SMTC Mex and issued a dummy check, entries would be made on both SMTC Mex and the Debtor's 10800 general ledger account.
There was no controverting evidence in connection with this testimony nor any documentary evidence that the transactions were somehow falsified. In fact, Mr. Alexander, the Plaintiffs own expert, assumed in his analysis that value was received and that all the entries in the general ledger of SMTC Texas, which included the dummy checks, were valid. *271 Transcript-Alexander (Mar. 27, 2009), p. 91 line 23 through p. 92 line 1. He further assumed for his report that the goods were received by the Debtor and that they were then sold based on the Debtor's financial reporting. Transcript-Alexander (March 27, 2009), p. 131 1.12 to 1.17. Mr. Alexander did question certain missing papers in connection with the shipping of the goods from Chihuahua to El Paso; however, B.J. Desai explained that SMTC Chihuahua owned its own trucks and used them to deliver the products to El Paso for shipping.
The Debtor negotiated with Dell to move the manufacturing of its products to SMTC Mex because of lower costs of production. This was no secret. See Newspaper Articles, supra. Dell continued to use the Debtor as its primary SMTC contact. The Debtor would then place the purchase orders with SMTC Mex on behalf of Dell. SMTC Mex would have SMTC Chihuahua manufacture the product, invoice the Debtor, and deliver the goods to the Debtor. The Debtor would purchase the product from SMTC Mex and then turn around and sell it to Dell with a price markup. The Debtor invoiced Dell and Dell paid the Debtor. The Debtor at trial produced invoices, Mexican custom records, and freight documents to demonstrate the Debtor received the products from SMTC Mex in exchange for these payments. Exhs. D-40 through D-55, D-68, D-69 and D-71.
There was little testimony on the Debtor's purchase of goods from Charlotte. On cross examination, Mr. Hartstein did acknowledge that the Debtor did purchase some goods and assembly time from the North Carolina subsidiary and that Charlotte would ship goods to the Debtor for it to then ship to its customers. Mrs. Markland also acknowledged these transactions. Mr. Hartstein acknowledged that this would again have been some type of intercompany transaction and that the Debtor's on-site controller, Mr. Giordano, would handle the financial aspects of these transactions.
The Debtor, at trial, produced the original purchase orders, invoices, packing lists and shipping memos as evidence of the fact that products were received from SMTC Charlotte in exchange for these payments. Exhs. D-56 through D-68.
These transfers were all documented by voided intercompany checks instead of money actually changing hands. As such, these transfers between the Debtor and SMTC Mex and SMTC Charlotte were not reflected on the bank statements but only on the general accounting ledgers of the various subsidiaries. Rather than tie up funds and increase interest payments to Lehman, the SMTC entities simply recorded the entries on their respective ledgers, making the appropriate debit or credit to the respective subsidiaries' general ledger 10800 account. All of the intercompany payments for these transactions were then reconciled through the ZBA Consolidated Bank Account at the HTM level.
The Facts Regarding Claim Category 2: The Expense Reallocations
Starting on September 29, 2002, SMTC Corporate reallocated certain costs to all of its subsidiaries for services rendered since 2000. Exh. D-2, lines 200 and 222, Exhs. D-233 through D-237. In the months preceding the September reallocations, there had been no allocation of costs in either the Corporate Reallocation category or the Sales and Marketing Reallocation category. Exh. D-2, lines 200 and 222. The Debtor's books reflect a Corporate Reallocation charge in September 2002 of approximately $750,000 and a Sales and Marketing Reallocation of $1.138 million. Exh. D-2, lines 200 and 222. The Debtor's Income Statement reflects Corporate *272 Reallocation charges after September 2002 of $19,000 in October, $34,000 in November, and $36,000 in December of 2002, and $23,000 in January of 2003. Exh. D-2, line 200. For Sales and Marketing Reallocation, monthly charges were negative: in October, in November, and in December of 2002, and in January of 2003. Exh. D-2, line 222.
The SMTC Corporate services covered by these charges (the "Expense Reallocations") were sales and marketing consultation, training, centralized buying, and information technology services as well as other services incurred by the corporate office that benefitted each subsidiary and would have been incurred by the subsidiary individually had SMTC Corporate not provided these services. Originally, these costs had been incorrectly allocated solely to SMTC Corporate and needed to be allocated to the benefit of each subsidiary for tax purposes. The Expense Reallocations apparently corrected this problem.
Frank Skerlj and Kirk Hartstein both acknowledged that SMTC Corporate assisted the Debtor in many ways and that the Debtor received value for the services rendered by the parent and that all SMTC entities, not just the Debtor, were allocated the proper share of expenses. Mr. Kingery also indicated that SMTC Corporate provided leadership and a benefit to the Debtor. Mr. Kingery explained that Derek D'Andrade, an engineer at SMTC Corporate, would provide advice and suggestions to the Debtor regarding engineering issues on the lines. Richard Winter testified that SMTC Corporate negotiated more favorable financing terms for the entities and more favorable equipment terms and also helped in soliciting customers for the Debtor. Jane Todd and Frank Skerlj further explained that financial procedures and methodologies were in place to allocate these costs and that KPMG, a well-known accounting firm, had reviewed and approved these guidelines. Exh. D-239.
Other than perhaps the size of the charges reallocated, the Trustee produced no testimony or other evidence tending to show that the services were not actually rendered or that the costs allocated were not reasonably equivalent to the value of the services provided.
The Facts Regarding Claim Category 3: The Net Balance Transfer
Between January 2002 and December 2003 an aggregate net of $41.1 million was swept from the Debtor's Comerica bank account to the consolidated bank accounts, meaning that the Debtor sent more cash to the Consolidated ZBA Bank Account handled by HTM than came back into the Debtor General Bank Account.
Mr. Alexander prepared a chart (the "Net Balance Chart") showing amounts flowing between the bank accounts of the Debtor and HTM. Exh. P-9. When asked, both Mr. Skerlj and Mr. Wheeler (Defendants' expert witness) agreed that the calculations reflected in Mr. Alexander's Net Balance Chart are entirely correct.
The Facts Regarding Claim Category 4: The Fixed Assets Transfers
In March and April of 2003 as Debtor finalized its closing, its remaining fixed capital assets (except for the Bratton Lane land) were transferred to SMTC Chihuahua and SMTC Canada. As of March, 2003, the book value of SMTC Texas's fixed assets on its balance sheet was approximately $5,386,000.00. Exh. D-2, line 318. Of this amount, leasehold improvements accounted for approximately $2,730,000.00. These improvements were not transferred but abandoned back to Flextronics. The Bratton Lane land was *273 also included in this calculation and had a value of $537,000.00.
Several witnesses testified as to what assets they thought remained in the building after the Debtor closed for business. Mr. Sommerville remembers some equipment on hand at closing but could not remember any specifics regarding disposition although he surmised that any leased equipment was returned to lessors and any Debtor-owned equipment was moved to another site, as it was standard upon closing to move equipment to an affiliate.
Mr. Kingery testified he purchased five testers for the Debtor and at the time they were purchased, three cost from $200,000 to $250,000, the gen rad tester cost between $400,000 and $450,000, and the probe tester cost $250,000. He could not verify if the testers had actually been purchased by the Debtor or leased by the Debtor. Mr. Kingery recalled that there were 7 to 9 lines in good working condition (a line being several pieces of equipment that worked together to manufacture the electronic components) remaining at the building when the Debtor ceased operations, but that he had not purchased any of those lines and he did not know which components of the lines, if any, were owned or leased by the Debtor. Mr. Kingery explained that in his current position with Flextronics he purchases lines which cost between $400,000 and $500,000.
Mr. Hartstein also testified that he thought there were seven operational lines at the facility upon closing which were purchased originally at $2 million each and which were eventually shipped at closing to Chihuahua and Canada. He also acknowledged that some of the equipment was owned by the Debtor and some of it leased but did not testify as to any specifics with respect to the equipment.
B.J. Desai, who managed all the subsidiaries' equipment for SMTC Corporate, testified on behalf of the Defendants. Mr. Desai actually prepared a list of each piece of equipment the Debtor transferred to Chihuahua and Canada. Exh. P-124. The list contained each manufacturer, serial and model number, ship date (which were dates in March and April 2003) and whether the equipment was owned by the Debtor or leased at time of shipment. The list also placed a value on each item. The SMTC Texas owned equipment was valued at no more than $301,000. In February 2003 the Debtor's total assets on the Balance Sheet totaled $20,614 million and its current liabilities were $6,706 million. Exh. D-2, lines 324, and 338. At that time the portion of the Lehman Loan carried on its balance sheet was $19,736 million. Exh. D-2, line 342. In March of 2003, the total assets on the Debtor's Balance Sheet (which did not include the capital assets) was $14,916 million and its current liabilities were $5,487 million with the portion of the Lehman Loan being $20,705 million. Exh. D-2, lines 324, 338 and 342. By April 2003 (when the $301,000 of Debtor's assets were fully transferred to Chihuahua and Mexico) the Debtor listed total assets of $7,513 million, current liabilities of $6.3 million, and the Debtor's portion of the Lehman Loan was $16,097 million. Exh. D-2, lines 324, 338 and 342.
The Trustee produced a personal property tax appraisal reflecting furniture, fixtures and equipment valued as of January 29, 2002, at $4,212,334. The Defendants claim SMTC Chihuahua and SMTC Canada assumed Debtor's portion of the Lehman Loan as consideration for this exchange; however, the Debtor continued to carry the Lehman Loan on its books until December 2003 and listed the Lehman Loan in its entirety on its bankruptcy schedules.
The Debtor wrote off its capital assets to zero in March 2003 and did not place *274 these assets back on its books. The Debtor recorded all items in accordance with Generally Accepted Accounting Principles. KPMG audited the Debtor and its affiliates. The Debtor and its affiliates regularly reported on a consolidated basis to the SEC and issued 10-Ks annually regarding its operations.
The Facts Regarding the Decision to Shut Down
On May 22, 2002, Paul Walker, president of SMTC Corporate as well as the president of the Debtor, sent an email to a group of SMTC executives asking them to help prepare a proposal for the board of directors of SMTC Corporate. Exh. P-80. The proposal envisioned by Mr. Walker involved closing the Austin facility in the 3rd quarter of 2002, but "[t]he actual timing is not as important as determining the restructuring charges and balance sheet impact." Exh. P-80.
On May 29, 2002, Paul Walker, along with other corporate executives, traveled to Austin and negotiated a disengagement with Dell that required a methodical winding down of business between Dell and the Debtor as the Debtor continued to sell product to Dell through 2002. That same day Paul Walker emailed SMTC executives the following:
We just told Dell we are disengaging, they understood, and we are going to put a plan in place to be finished in the next few months.
They committed to keep it confidential, as we have not told anyone at SMTC yet, and we need to keep it amongst ourselves as well, as it has effects on the Austin site and people.
Freeing up this working capital to deploy to other sites and programs is the way to go, and in my opinion, is a major step in insuring the financial health and long term viability of SMTC.
I have given the finance team certain scenario's to model as to what SMTC will look like for the rest of 2002 and 2003 and my guess is "... short term pain in 2002 for long term gain in 2003..." but let's see what the scenario's look like....
Exh. P-81.
On May 31, 2002, Phil Woodard, the COO of SMTC Canada, sent an email to corporate executives (including Mr. Walker). Exh. P-82. In the body of the email, Mr. Woodard asked the others for their help in finalizing the worksheet so that it could be presented at the board meeting: We need to complete this in draft form for presentation to the Board on Tuesday so we need [the] following reviewed ASAP:
1. Building Lease-Gary lets have BJ [Desai] finish the summary of the lease today. I just plugged in a 3 year obligation as a starting point and you can see that drives $6.5m of lease payments and probably another $5m of building maint. And tax's. We need to discuss other options of sub-letting it earlier, buying the building and then reselling it or bankrupting the Texas company and walking away from the lease.
There are no board minutes from the board meeting held June 4, 2002 reflecting what actions the Board did or did not approve with respect to the Debtor's operations. These minutes were requested by the Trustee in discovery but were never produced by the Defendants or used at trial by the Defendants. At the time of these emails in May 2002, the Debtor's books reflected over $66 million in assets. Exh. D-2, line 324. Current liabilities were $30 million and the Debtor's portion of the Lehman Loan was $41,565 million. Exh. D-2, line 338 and 342.
On September 9, 2002, Kirk Hartstein received an email from Scott Jessen of the *275 Morse Company which reflects that this company was attempting to lease or sell the property (and attaches the confidential property offering materials) and which states that Mr. Jessen is "excited about working with you [the Debtor] to find a user that is interested in buying and or leasing the facility." Mr. Jessen indicates in his email that he is sending a copy of the materials to Mike Carney and Dan Hollingsworth of Flextronics for their comments. Exh. D-322. Mr. Hartstein testified that the email reflected some of the efforts of the Debtor to sublet/sell the building after the Dell disengagement.
On September 19, 2002, Phil Woodard again emailed certain corporate executives regarding closure of San Jose, Charlotte, and Donegal, Ireland sites. In connection with Austin, he indicated a plan for Austin to remain for "entire year" based on being able to settle with "Flex" and have a transition plan with Alcatel. Exh. P-83.
On September 24, 2002 Kirk Hartstein sent the following email regarding the Debtor's continuing operations:
Dave:
Thank you for taking the time to talk with me this morning.
As I mentioned, SMTC is remaining in Austin. We have disengaged with Dell, (our decision due to pricing pressures), but still remain supporting Alcatel, General Bandwidth and Xplore Technologies in Austin. We have about 120 employees at the facility and are working to grow the business back.
Exh. D-321.
On January 22, 2003 Phil Woodard sent the following email to Gary Walker, Paul Walker, and Derek D'Andrade at SMTC Corporate:
Austin—
• I spoke to John this morning, he see's [sic] the writing on the wall with Alcatel's lower requirements.
• I think we need to make the decision to shut the site down by end of Ql by next week to give us enough time to do it by end of March.
Exh. P-84.
On February 14, 2003, John Sommerville sent an email to Paul Walker copying Gary Walker and Phil Woodard:
w.r.t. Alcatel they did communicate their intent to end production of the Quads/ABCU's during meetings with Paul and later me in late December. Production was to end in March '03. They have significantly increased their fest. to us for Feb./Mar. To the point where SMTC has the majority of production on the above assemblies vs. the planned 30%. On 2/13 they confirmed that despite their ongoing performance issues in Nogales it is still their intent to migrate both products to Nogales and SMTC will not see loading beyond March '03.
Exh. P-85. On February 14, 2003, Paul Walker drafted a return email to John Sommerville:
1) Nothing stays internal, and it will be out in public in a "New York minute."
2) Do we have to specifically mention Alcatel? As I am sure they do not want to be blamed for this, but just as important the message will get all messed up as more people in the industry become aware, and I know it will end up being that "SMTC lost the Alcatel account" completely which is far from the truth.
3) Can't we just do the WARN for now, which indicates "significant" reductions and then in the next short while ie 1 to 2 weeks take it to a shutdown decision.
*276 4) We still have to prepare our complete game plan for talking to Flex, so we may need a week or so on that....
Exh. P-85.
A March 19, 2003 email from John Sommerville to Paul Walker regarding a Flextronics tour of the building stated:
Terry is the GM of Flextronics Piano site. He is looking for 20K sq. ft. for some work they plan to do for Applied. He wanted to make sure I was comfortable with collocation. I don't think he had any other agenda. If he was checking us out the place is still busy and staffed so it would not be obvious we are exiting next month.
Exh. P-87.
In a March 25, 2003 email to Paul Walker, Nicholas Giordano, the on-site controller, stated:
I received a call from Melissa Stone-Credit Manager of Flextronics ... inquiring about the March rent payment ($185K). Apparently, Flextronics has done a financial review and they would like SMTC to sign a Parent Company Guaranty for the Austin Facility. You've got to love the timing on this one!
I told her I would look into the March Rental payment and get back with her today. The check is cut, but has not been released by the site per John S. Do you want me to release the check.
She will be forwarding the PCG documentation to me and I will subsequently forward it on once I get it. I have not committed or enlightened her about Austin's present scale back....
Exh. P-86. Paul Walker's same day response to Mr. Giordano was to release the check and say no more. Exh. P-86. However, the Debtor did not send the March rent check.
When Flextronics demanded payment of the rent from the Defendants on April 3, 2003, Paul Walker responded on April 9, 2003, with:
When looking at the Texas operation, it is a stand alone entity, and at this point, due to the downturn in business, doesn't have any assets to speak of, let alone cash for buyouts. We do have 20 acres of land valued at $500k, that although is is [ sic ] pledged to the bank group, our attorneys feel strongly that we can get it released, and offer it to Flex as that is really the only asset of any value in the entity. I realize that the last thing you want is more land in Texas, but frankly, that is all we have.
Exh. P-89. In March 2003, the Debtor's balance sheet showed nearly $15 million in assets, Exh. D-2, line 324, $5,487 million in current liabilities, and the Debtor's portion of the Lehman Loan was $20,705 million. Exh. D-2, lines 338 and 342.
On Wednesday April 9, 2003, Flextronics employee, Mike Carney, sent an email to Paul Walker that stated:
Thank you for your input in describing your difficulties in Texas, obviously a 500k settlement would not be attractive or acceptable to Flextronics with 8 years remaining on a 10 year lease. As I do understand your difficulties in Texas I would look to you to provide Flextronics with a more suitable settlement knowing you would need to draw from resources other than your Texas corporation.
Exh. P-117.
Prior to shutting down, the Debtor paid $3.5 million to most of its remaining creditors. Exhs. D-77 and D-348. The Debtor made its monthly payments to Flextronics through February 2003.
The Debtor filed bankruptcy on December 14, 2004. It listed on its schedules the *277 full amount of the Lehman Loan as a liability.
Seven proofs of claim were filed in the Debtor's bankruptcy: (1) the claim of Flextronics (later amended) for $6,471,190.32, (2) an electric bill in the amount of $9,209.82 for services billed in May, June and July of 2003, after the Debtor had exited the building, (3) a secured claim by Travis County of $272,333.86 for property taxes for the years 2003 and 2004, (4) secured claims by Round Rock ISD of $133,247.99 for property taxes for the years 2003 and 2004 and for 2005 and 2006, and two minor unsecured claims, (5) a claim by Bax Global Exchange for $114.40 for services performed between October 27, 2004 and November 15, 2004, (6) a claim by Digikey Corp. for $577.30, and (7) a claim by Broadway Advisors for an alleged preferential payment received by the Debtor, in the amount of $1,391,402.95, which apparently is no longer being pursued.
Although SMTC Texas stopped paying rent after the February 2003 payment, the $475,000.00 security deposit held by Flextronics satisfied the Debtor's March and April rent as testified to by Kell Mercer. SMTC Texas surrendered the building on May 22, 2003. After the Debtor's surrender of the property, Flextronics occupied the building and eventually sold it to Long Vista Industrial, L.P., on August 2, 2005 for $8.25 million. Exhs. D-326 and D-277.
The Facts Regarding Corporate Control and Corporate Formalities
SMTC Corporate was involved in the day to day operations of the Debtor. SMTC Corporate made the decision to disengage from Dell. Hartstein and Sommerville both testified that the Debtor requested permission from corporate to proceed with certain operations. And, the Debtor operated with no cash. HTM/SMTC Canada handled the financing for all the operating subsidiaries and determined what funding and when should be made to the subsidiaries to pay each's expenses. This was in part due to the structuring of the Lehman Loan and the entities' attempts to save on interest payments. Mr. Winter testified that SMTC Corporate's stance on controlling certain operations was much more pronounced after the large decline in value in 2000 in the technology sector of the economy. Additionally, this centralized control obtained economies of scale, i.e., SMTC Corporate provided various services to the Debtor in an attempt to control costs at each site.
After March 2003, any cash received by HTM was never redirected back to the Debtor to pay Flextronics. All the Debtor's manufacturing equipment was transferred to Chihuahua and Canada. All of the Debtor's accounts receivable and other assets were liquidated by the end of 2003. Paul Walker told Flextronics that the Debtor had no assets to speak of when in fact the books showed not only accounts receivable and inventory but certain fixed manufacturing assets and land. He did, however, indicate that the Debtor owned land although that asset was subject to the bank loan and had questionable value for settlement purposes. At the time he relayed this information, in April of 2003, the Debtor's assets were $7,513 million, its current liabilities were $6.3 million, and its portion of the Lehman Loan was $16,097 million. Exh. D-2, lines 324, 338 and 342.
CONCLUSIONS OF LAW
To create liability under TUFTA, the Debtor must have made a transfer or have incurred an obligation:
1) with actual intent to hinder, delay or defraud any creditor of the debtor; or
*278 2) without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor:
(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transactions; or
(B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.
Tex. Bus. Com.Code Ann. § 24.005(a) (Vernon 2009).
In addition, § 24.006(a) (Transfers Fraudulent as to Present Creditors) provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
Tex. Bus. Com.Code Ann. § 24.006(a) (Vernon 2009).
Thus, other than the claims involving the Expense Reallocations (which were obligations incurred, not transfers of assets), each of the Trustee's claims requires the "transfer" of an "asset," both of which are defined terms for purposes of TUFTA. The term "asset" is defined as "property of a debtor, but the term does not include: (A) property to the extent it is encumbered by a valid lien...." Tex. Bus. Com. Code Ann. § 24.002 (2) (Vernon 2009). In that same section, transfer is defined as ""[t]ransfer" means every mode ... of disposing of or parting with an asset or an interest in an asset...." Tex. Bus. Com. Code Ann. § 24.002 (12) (Vernon 2009).
Further, § 24.003 of TUFTA regarding "insolvency" provides:
(a) A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation.
(b) A debtor who is generally not paying the debtor's debts as they become due is considered to be insolvent.
...
(d) Assets under this section do not include property that has been transferred, concealed or removed with intent to hinder, delay or defraud creditors or that has been transferred in a manner making the transfer voidable under this chapter.
(e) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.
Tex. Bus. Com.Code Ann. § 24.003(a), (b), (d) and (e) (Vernon 2009).
Section 24.004 of TUFTA regarding "value" provides, in relevant part:
(a) Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but does not include an unperformed promise made otherwise than in the ordinary course of the promisor's business to furnish support to the debtor or another person.
...
(d) "Reasonably equivalent value" includes without limitation, a transfer or obligation that is within the range of values for which the transferor would have sold the assets in an arms length transaction.
Tex. Bus. Com.Code Ann. § 24.004(a) and (d) (Vernon 2009).
Proof that assets were transferred and an assessment of their value *279 are essential to sustaining a fraudulent conveyance action. Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333, 341 (Tex.2009). "It is the creditor's burden to offer evidence addressing the elements of fraudulent transfer as to each transfer." Walker v. Anderson, 232 S.W.3d 899, 913 (Tex.App.-Dallas 2007, no pet.); Tow v. Pajooh (In re CRCGP LLC), Adv. No. 07-3117, 2008 WL 4107490 , at *3 (Bankr.S.D.Tex. Aug.28, 2008); see G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836, 843 (Tex.App.-Dallas 2006, no. pet.). Further, the Trustee bears the burden of proving all elements of his TUFTA claims by a preponderance of the evidence. Walker v. Anderson, 232 S.W.3d at 913 ; Tow v. Pajooh, 2008 WL 4107490 , at *3; In re Sullivan, 161 B.R. 776, 780 (Bankr. N.D.Tex.1993); Texas Custom Pools, Inc. v. Clayton, 293 S.W.3d 299, 311-12 (Tex. App.-El Paso 2009) (op. on motion).
As discussed above, the Defendants moved at the close of evidence under Rule 52(c) for judgment as a matter of law on several grounds. Specifically, they argued (as they had in their previous motion under that Rule, which was denied by the Court) that none of the transfers at issue involved "assets" subject to "transfer" (as those terms are defined under TUFTA) because all of the Debtor's assets were encumbered by a valid lien. Defendants also asserted that the Trustee: (1) failed to prove insolvency, (2) failed to produce sufficient evidence under § 24.005(a)(1) to prove actual intent to hinder, delay, or defraud a creditor, (3) produced no evidence under § 24.005(a)(2)(A) and (B) to show that the Debtor failed to receive reasonably equivalent value for the property it transferred, and (4) failed to provide sufficient evidence to support his veil-piercing theories.
The Court may render judgment on partial findings after hearing all the evidence. Fed.R.Civ.P. 52(c); Fed. R. Bankr.P. 7052. The Court is not bound by the denial of a motion for judgment as a matter of law made at the conclusion of plaintiffs case. See Weissinger v. U.S., 423 F.2d 795, 797-98 (5th Cir.1970). As the ultimate fact-finder in a bench trial, the Court need not draw any special inferences in favor of the nonmovant. Premier Capital Funding, Inc. v. Earle (In re Earle), 307 B.R. 276, 289 (Bankr.S.D.Ala.2002); Regency Holdings (Cayman), Inc. v. The Microcap Fund, Inc. (In re Regency Holdings (Cayman), Inc.), 216 B.R. 371, 374 (Bankr. S.D.N.Y.1998). Rather, the Court may weigh the evidence, resolve any conflicts and decide where the preponderance of evidence lies. Earle, 307 B.R. at 289 ; Regency Holdings, 216 B.R. at 374 .
Certain of the issues raised by the Rule 52(c) Motion and raised generally by the evidence presented at trial affect many of the causes of action asserted, and they will be addressed first. Those three preliminary issues are: (1) whether the Trustee's expert testimony was sufficient, (2) whether the lien securing the Lehman Loan fully encumbered all of the Debtor's property so that, as defined in TUFTA, there was no "asset" that could have been the subject of a "transfer," and (3) whether the Debtor was insolvent at the time of the challenged transfers.
The other issues raised by the Defendants in their Rule 52(c) Motion are discussed below in the Court's conclusions on each of the elements of the Trustee's TUFTA claims and veil-piercing theories.
Preliminary Issue I
Whether the Trustee's Expert Testimony Was Sufficient
The Defendants claim that the Trustee's expert testimony is insufficient because it is based on unreliable data and therefore cannot support the fact findings necessary to a judgment for the Trustee. *280 See Defendants' Rule 52(c) Motion. The Defendants argue that Mr. Alexander's opinions are speculative and unreliable because he relied, in part, on data compiled by Forensic Strategic Solutions ("FSS") and should not be considered by the Court. The Trustee originally retained FSS as the forensic consulting firm to the estate on an hourly-rate basis, but was later forced to place FSS on a contingency arrangement because of limited estate funds. Mr. Alexander was retained to testify in this case after Ms. Reinhart's firm, FSS, was disqualified as an expert witness because of the contingency compensation arrangement that Texas law prohibits as unethical.
The Defendants claim that Mr. Alexander testified that he relied on FSS to collect information critical to his analysis. He also testified that he received and reviewed a copy of FSS's initial report, which could not be used because of the improper compensation agreement.
Mr. Alexander testified that he relied on FSS to simply gather raw financial data that had been produced by the Defendants to the Trustee. He further testified that the only compilations he might have relied upon are the summaries of bank statements and bank "downloads" that he used to create his Net Balance Chart. Exh. P-9. These bank statements and downloads were produced by Defendants in discovery. Further, the remainder of his analysis came straight from the numbers on the Debtor's balance sheet. Mr. Alexander's opinions are neither based on improper evidence nor speculative, and so they will be considered.
Preliminary Issue II
Whether the Lien Securing the Lehman Loan Fully Encumbered All of the Debtor's Property, So That There Was No "Asset" That Could Have Been the Subject of a "Transfer"
Other than his claim involving the Expense Reallocations, which involves the incurrence of a fraudulent obligation, not a fraudulent transfer of an asset, each of the Trustee's claims under TUFTA require a finding that there was a "transfer" of an "asset." Both of these terms are defined in TUFTA. Section 24.002(12) of TUFTA provides that ""[t]ransfer" means every mode ... of disposing of or parting with an asset or an interest in an asset." Section 24.002(2) provides that ""[a]sset" means property of a debtor, but the term does not include ... property to the extent it is encumbered by a valid lien...." The Defendants contend that no "transfer" occurred because none of the Debtor's property that was conveyed was at the time an "asset." That is because, they argue, the evidence showed that "the extent" to which each item of property was "encumbered by a valid lien" was at all times complete —i.e. the property was fully encumbered.
First, the Defendants assert that whether the Debtor was liable for the entire balance on the Lehman Loan or for only a portion of it, at the time of each conveyance by the Debtor the amount of its liability, and the corresponding extent of the lien, exceeded the value of the particular item or items of property that the Debtor conveyed. Under this argument each of those items of property was not an "asset" that could have been "transferred" under TUFTA. The Defendants claim this result is mandated by Mullins v. TestAmerica, Inc., 564 F.3d 386 (5th Cir.2009).
Alternatively, the Defendants argue that even if the value of all of the Debtor's property that was subject to the lien was considered, because the Debtor was liable for the entire balance of the Lehman Loan, the value of the lien which secures the Lehman Loan exceeded the combined value of all the Debtor's property, and so at all times the Debtor's property was fully *281 encumbered. Accordingly, the Defendants argue, none of the conveyances by the Debtor was a "transfer" that involved an "asset" of the Debtor.
The Trustee's position, if correct, defeats both these arguments. He does not dispute, and the Court so finds, that under the loan documents the collateral on which the Debtor granted the lien included all of its property. Exhs. D-35, D-36. The Trustee also does not dispute that the lien was valid. He claims, however, that the evidence at trial established that on each occasion when the Debtor's property was conveyed, its property was not fully encumbered by the lien.
To defeat either of the Defendants' arguments, the Trustee must establish that the debt that was secured by all of the Debtor's property was less than the value of that property. To do so he argues that, based on established case law involving insolvency determinations, the Debtor's liability should be considered contingent and reduced according to the likelihood that the Debtor would ever have had to pay on that liability. The Trustee then claims that the evidence showed that there was virtually no possibility at the time of the transfers that the Debtor would have had to pay any of the Lehman Loan, and so the Debtor's liability should be discounted to $0.00, or at least to a de minimus amount. Thus, the Trustee argues, at all relevant times there was equity in the property conveyed by the Debtor and, therefore, the conveyances were "transfers" of "assets."
The Court's analysis of the broad issue of whether the Debtor in this case transferred any asset begins with the undisputed legal proposition that TUFTA does not apply to "an alleged fraudulent transfer of property to the extent that such property is encumbered by a security interest." Mullins, supra ; see Yokogawa Corp. of Am. v. Skye Int'l Holdings, Inc., 159 S.W.3d 266, 269 (Tex.App.-Dallas 2005, no pet.) (noting that "[p]roperty encumbered by a valid lean [ sic ] is not an asset under TUFTA"); see also United States v. Commercial Tech., Inc., 354 F.3d 378 , 387 n. 5 (5th Cir.2003) (concluding that "an asset does not include, among other things, `property to the extent it is encumbered by a valid lien'").
The two legal questions presented for the Court in connection with its decision on whether an "asset" could have been the subject of a "transfer" are (1) how to decide whether property conveyed is fully encumbered in the context of a blanket lien covering all assets of a debtor — i.e., whether the Debtor should be considered to have conveyed some of its encumbered property, or some of its equity with each conveyance; and (2) whether, for purposes of a TUFTA analysis, the Debtor should be considered to have been liable for the entire Lehman Loan balance. The first of these questions hinges on the Court's interpretation of the holding in Mullins , recently decided by the Fifth Circuit Court of Appeals.
Preliminary Sub-Issue IIA
Whether the Definition of "Asset" under TUFTA, as Interpreted in Mullins, Means That Even When There Is Equity in the Collateral Considered as a Whole, There Is No "Transfer" of an "Asset" So Long as the Value of the Item(s) of Property Conveyed Is Less Than the Entire Secured Debt
As the Court understands it, the Defendants' first argument with respect to whether any "assets" were "transferred" starts from the indisputable proposition that the Trustee must prove each and every element with respect to each conveyance he claims was fraudulent. Walker v. Anderson, 232 S.W.3d 899, 913 (Tex.App.-Dallas *282 2007, no writ). From there, the Defendants reason that so long as each conveyance involved property that had a value less than the amount of debt secured by all of the Debtor's property, and even if that debt was determined to be something less that the entire balance of the Lehman Loan, each conveyance involved property that was fully encumbered by a lien, which is not disputed to have been valid. Therefore, the Defendants assert, according to TUFTA's definitions, no conveyance was a "transfer" of an "asset." In support of their reading of the statute, the Defendants rely on the recent decision of the Fifth Circuit Court of Appeals in Mullins v. TestAmerica, Inc., 564 F.3d 386 (5th Cir.2009), which they claim is factually indistinguishable from this case.
The Trustee characterizes the issue presented by the Defendants' first argument based on their reading of Mullins as whether or not, in a case "[w]here the debtor has some equity in its total assets, and a portion of those assets is transferred to an insider, ... the asset represents the debtor's equity." Trustee's Response to Defendants' Rule 52(c) Motion, p. 18. According to the Trustee, if the facts show that the value of all the Debtor's property was greater than the amount of debt secured by the lien, the property transferred should be considered to represent part of that equity rather than part of the encumbered collateral, so that each conveyance involved property that was not fully encumbered — i.e., each conveyance involved an "asset" that was "transferred."
This Court has previously ruled on this precise argument when it denied the Defendants' Rule 52(c) Motion presented at the close of the Trustee's case. Its decision has not changed, and for the reasons stated on the record on April 2, 2009, when it made that ruling, as repeated below, it rejects the Defendants' argument and now holds that any conveyance made by the Debtor at a time when the debt secured by all its property was less than the value of all that property, was a "transfer" of an "asset" under TUFTA.
In Mullins a creditor challenged, as a fraudulent transfer under TUFTA, a transfer of a portion of the proceeds of the sale of the debtor's assets to its majority shareholder. The material facts were: (1) the debtor, TestAmerica, owed a total of approximately $26.2 million to Fleet Capital Corporation; (2) the debt to Fleet was secured by a valid lien; and (3) according to the court, Fleet's "loans were secured by all of TestAmerica's assets." TestAmerica sold all its assets for $33.5 million, establishing the value of those assets. Therefore, at the time of the sale, there was equity of $7.3 million in the collateral available to pay other claims.
These facts in Mullins are analogous to those in this case if the Court finds that the debt secured by the Debtor's property was less than the combined value of all that property, at the time of the challenged conveyance. But in Mullins , however, there were additional facts that distinguish it from this case.
In Mullins at the closing of the sale the secured party partially released its lien, agreeing to be paid only $23 million in full satisfaction of its debt, and directing that the $3.2 million in proceeds that was released from the lien be instead transferred at closing to the majority shareholder of the debtor, Sagaponack Partners, LP. The Court held that the $3.2 million was fully encumbered by Fleet's lien and so under TUFTA was not an "asset" that was "transferred."
Looking solely at those facts and the result, it might appear that when the Court of Appeals found that the property transferred was fully encumbered and not *283 an asset under TUFTA, it found the fact that there was equity in the collateral (collateral value of $33.5 million less secured debt of $26.2 million) to be immaterial, looking only at whether the value of the property transferred, $3.2 million to Sagaponack (even when considered with the $23 million that was transferred to Fleet), was less than or equal to the amount of the debt to Fleet — $26.2 million.
However, the third fact recited above-that the loans were secured by all the assets of the debtor — was only the court's observation of the parties' positions at a time before the transaction in question. It was not the situation by the time of the sale, and so not the transaction addressed by the court of appeals — i.e., at the time of the transfers to Fleet and Sagaponack, the loans were in fact not secured by all the assets of the debtor. Rather, the court points out that Fleet released its lien on the remaining collateral — the equity — at the closing of the transaction in question. Id. at 415 ("In consideration for HIG's payment of Fleets' discounted loan, Fleet agreed to release it security interests `upon receipt of payment on the day of closing.'"). The value of Fleet's collateral from that point on was therefore limited to the amounts paid at closing — $23 million to Fleet and $3.2 million to Sagaponack, or $26.2 million total, and because the Court found that value to have been equal to the amount of the debt secured by that property — $26.2 million — it found that the property that was transferred was fully encumbered and not an "asset."
That is the critical distinction between Mullins and this case. In this case, truly all of the Debtor's property is undisputedly subject to the lien. Thus, the Court agrees with the Trustee that if the total value of all property exceeded the amount of the debt that it secured at the time of a conveyance, each item of property that was conveyed should be considered part of the Debtor's equity, and not fully encumbered. Therefore, as to any such "assets," the Debtor "transferred" them within the meaning of TUFTA.
Preliminary Sub-Issue IIB
Whether the Debtor Should Be Considered Liable for the Full Amount of the Lehman Loan Balance, or for Only Some Lesser Amount
The Trustee claims that the Debtor's liability for the Lehman Loan was contingent or should be discounted to an amount reflecting the likelihood it would have to pay on its full guaranty on the Lehman Loan. Therefore, he argues, there was equity in the Lenders' collateral, their lien did not fully encumber the Debtor's property, and its "assets" were thus "transferred" (both as defined in TUFTA).
Whether the Debtor's Liability Should be Considered "Contingent"
The Defendants rely on the express terms of the documents, and certain Texas cases involving joint and several guarantee liability, to support their assertion that at the time of the transactions in question, the Debtor was liable for the entire balance of the Lehman Loan. In particular, the Second Amended and Restated Guarantee and Collateral Agreement, dated as of June 1, 2004 provides, in relevant part:
2.1 Guarantee, (a) Each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the General Administrative Agent, for the ratable benefit of the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at stated maturity, by acceleration or otherwise) of the Borrower Obligations.
* * *
*284 2.5 Guarantee Absolute and Unconditional .... Each Guarantor understands and agrees that the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment..... When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, the General Administrative Agent or any Lender may, but shall be under no obligation to, make a similar demand hereunder or otherwise pursue its rights and remedies as it may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Lender to [do so] shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the General Administrative Agent or any Lender against any Guarantor....
Exh. D-108, pp. 10-12. In addition, the Guarantee Agreement provided that the Guarantors pledge their property as collateral to secure the entire Lehman Loan:
* * *
SECTION 3. GRANT OF SECURITY INTEREST
(a) Each Guarantor hereby confirms that pursuant to the Existing Guarantee and Collateral Agreement such Grantor has assigned and transferred to the General Administrative Agent, and hereby confirms that pursuant to the Existing Guarantee and Collateral Agreement such Grantor has granted, or pursuant hereto hereby continues such grant, to the General Administrative Agent, for the ratable benefit of the Lenders, a first priority security interest (junior only to the Congress Liens) in all of the following property now owned or at any time in the future hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grantor's Obligations in respect of the [Lehman Loan]:
[there follows a list of types of collateral that the parties agree covers every type of property of the Debtor]
Exh. D-108, p. 13.
It is undisputed that the Debtor was one of the Guarantors and Grantors under the Guarantee Agreement. "Borrower Obligations" as used therein is defined as, among other things, the "unpaid principal and interest on the [Lehman] Loan[ ]," without any limitation. Exh. D-108, p. 5. Thus, according to the terms of the documents, the Debtor was liable to the Lenders (as defined therein) for, and its property secured, the full amount of the Lehman Loan.
The Trustee argues that the Debtor's property should not be considered to have secured the entire balance of the loan because to burden the Debtor with the entire debt ignores the joint and several nature of the Debtor's obligation — that there were other obligors on the debt, including the primary obligor.
In particular, the Trustee claims that the liability should be reduced to $0.00 based on the reasoning of In re Xonics Photochemical, Inc., 841 F.2d 198 (7th Cir. 1988), the seminal case on the need to reduce or discount contingent liabilities in *285 determining solvency. [3] In Xonics, the Court of Appeals addressed the valuation of one affiliate's guarantee and co-maker obligations in determining that affiliate's solvency for purposes of deciding whether a transfer was preferential under the Bankruptcy Code. The Court found that each of those obligations, as "a contingent asset or a contingent liability .... must be reduced to its present, or expected, value before a determination can be made whether the firm's assets exceed its liabilities." Id. at 200 .
The Defendants contend that Xonics and the line of cases that follow it are not applicable to the Debtor's obligation under the Guarantee because those cases apply only to contingent claims and, by its terms (quoted above), the Guarantee was not contingent but rather it was "absolute and unconditional" and the Debtor's liability was several. This fact, they argue, compels the conclusion that the Debtor's liability should not be discounted at all.
In support, the Defendants cite a number of cases under Texas law for the propositions that a guarantee is not contingent, but is absolute and unconditional, when it requires no condition precedent to its enforcement other than the default of the principal obligor, and that a guarantor's liability under an absolute and unconditional guarantee is the same liability that the principal obligor bears. See e.g., Reece v. First State Bank, 566 S.W.2d 296, 297 (Tex.1978); Mid-South Telecommunications Co. v. Best, 184 S.W.3d 386, 391 (Tex.App.-Austin 2006, no writ); RTC v. Northpark Joint Venture, 958 F.2d 1313 (5th Cir.1992); see also cases cited in Defendants' Motion for Final Summary Judgment (on Lien, Reasonably Equivalent Value and Conspiracy Issues) (filed under seal, see docket # 156), pp. 30-31.
With only one exception, the cases cited by the Defendants involved the legal rights and obligations of the parties in the context of the enforcement of a guarantee against the guarantor by the lender or other obligee. [4] This Court does not disagree with such decisions that find guarantees to be not legally "contingent" under those circumstances. In fact, it agrees with the Defendants that, under Texas law, the Guarantee in this case is "absolute" as between the Guarantors under the Guarantee Agreement (including the Debtor) and the Lenders. If this were a case involving the Lenders' legal right to enforce *286 the Guarantee against the Debtor, the Court would find that they were entitled to recover from the Debtor the full amount of the outstanding balance of the Lehman Loan.
However, those are not the facts of this case. Instead, the Court is asked to determine, for purposes of deciding under TUFTA if the Debtor fraudulently conveyed its property, whether at the time of those conveyances the Debtor had equity in that property over and above the amount of the lien securing the Lehman Loan. Under these facts, there is a contingency present that is not present when a lender is enforcing its rights against the guarantor: the contingency that some or all of the debt may be satisfied by another obligor.
The difference is this. At the point when a lender sues to collect from its guarantor, it has made its choice that it will seek payment in full from that particular obligor. At that point, the focus is on the guarantor that is being sued and there is no contingency that the debt will be paid by another — the relief sought is that it be paid in full by the defendant guarantor. However, in this case and in Xonics and similar cases, the issue to be decided is not what the lender is entitled to collect, but whether a guarantor's liabilities exceed its assets — i.e., whether a guarantor is insolvent for the purpose of deciding whether property had been fraudulently or preferentially transferred. In such a case, it is necessary to consider whether the guaranteed debt would be satisfied by another obligor in order to decide whether or not there are enough of the guarantor's assets available to satisfy all claims against it. [5] In other words, because the liquidation analysis performed by a court is hypothetical, it is entirely appropriate, even necessary, that a court also hypothesize the payment of the debt, in whole or in part, by another obligor.
Stated otherwise, the meaning of "contingent" used in Xonics and in this case is different from the one urged by the Defendants and supported by the cases they cite, that defines the legal rights and obligations of the parties to an obligation. Rather, "contingent" as used in Xonics and as applicable here, is used similarly to its use in accountancy where it refers to a liability (or an asset) that, because of some possible occurrence in the future, should not be considered from the perspective of the owner/debtor to be "worth" its full face value. "Discounting a contingent liability by the probability of its occurrence is good economics and therefore good law, for solvency... is an economic term." Covey v. Commercial Nat. Bank of Peoria, 960 F.2d 657, 660 (7th Cir.1992).
The Xonics Court's discussion of its reasoning shows that this economic definition of "contingent" is the one it used in its analysis:
Every firm that is being sued or that may be sued, every individual who has signed an accommodation note, every bank that has issued a letter of credit, *287 has a contingent liability. Such liabilities are occasionally listed on the firm's balance sheet, for example by earmarking a portion of surplus for contingent liabilities. (They are supposed to be listed "if the future event is likely to occur and if its amount can be reasonably estimated." Nikolai et al., Intermediate Accounting 6111 (3d ed.1985) (emphasis in original).) More often they are listed in a footnote, thus leaving the firm's stated net worth undisturbed. Often they are not listed at all, when they are remote or when they are too small to affect net worth substantially. On the proper accounting treatment of contingent liabilities see id. at 610-14; Faris, Accounting for Lawyers 362-64 (3d ed.1975); Williams, Stanga & Holder, Intermediate Accounting 609-17 (1984); Meigs, Mosich & Johnson, Accounting: The Basis for Business Decisions 288 (3d ed.1972); Financial Accounting Standards Board, FASB Statement of Standards No. 5 (1975).
Xonics, 841 F.2d at 199-200 . [6] Mr. Alexander's testimony shows that this economic definition, and not the "legal definition" urged by the Defendants, is also the meaning of "contingent" that he used in forming his opinions:
the valuation of contingent liability ... could be a liability arising under a guaranty agreement, it could be an asset arising under a recovery action such as this, and those are matters that auditors routinely consider, the valuation of the amount that should or should not be disclosed or recorded.
* * *
Because Generally Accepted Accounting Principles require disclosure of all important elements of a credit agreement, I didn't need to read the [Lehman Loan Credit] agreement. The most important thing that I needed to do was assess the likelihood or the probability that that contingent liability would become a reality, and do that not from reading the agreement; I made an assumption about what that agreement said based on the disclosures. You do that by evaluating the financial position of the company as well as reading the audit opinion ... of the auditors that are also obligated to make the same kind of review in far more detail than I am. Transcript — Alexander — March 26, 2009, p. 12, lines 12-18, p. 47, line 17-p. 48, line 3.
Admittedly, Mr. Wheeler testified that one would "assess the value of the liability for a breach of a covenant" from the. lender's perspective, and that "Lehman's risk upon breach of a covenant" was "[ultimately" the entire amount of the loan. Transcript — Wheeler — April 3, 2009, pp. 47-49. However, this testimony followed questioning by counsel about "the approximate minimum outstanding balance under the Lehman facility ... as to the whole company," a reference to the entire group of SMTC affiliates. Transcript — Wheeler — April 3, 2009, pp. 48-49 (emphasis added). Mr. Wheeler was never asked to *288 provide an opinion on whether, for an accountant's consideration of equity in collateral or solvency, the Debtor alone should have been considered liable for the entire balance of the Lehman Loan.
Finally, a review of the facts of Xonics also confirms that the appellate court was using this definition of contingent, and not its "legal definition." The obligations considered by the court in Xonics included not only the guarantee, but also an obligation as a co-maker on a note:
The startling feature of the case is the parties' apparent assent to the proposition that if the loan guarantee and the note that Xonics Photochemical had co-signed were valid obligations, Xonics Photochemical was insolvent as of the date the obligations were assumed, on the theory that they created liabilities greater than the company's net assets (much greater: $28 million in liabilities versus less than $2 million in net assets). The proposition is absurd; it would mean that every individual or firm that had contingent liabilities greater than his or its net assets was insolvent-something no one believes.
Id. at 199 (emphasis added). With a co-maker obligation, not even the condition of a primary obligor's default stands in the way of the lender's right to payment by the co-maker. Yet the Xonics court applied the same analysis to that obligation that it did to the guarantee, considering them both contingent and both subject to being discounted depending on the likelihood of payment. The contingency common to both obligations, in the context the court considered them in Xonics, is the possibility that another obligor on the debt will pay some or all of it so that the debtor as co-maker or guarantor would not do so. That same contingency being present in this case, this Court finds that the Debtor's liability under the Guarantee at the time of the challenged conveyances was contingent within the meaning used in Xonics, so that it is proper and necessary to consider the probability that the Debtor would have to pay that obligation.
Whether the Trustee Proved the Debtor's Liability Should Be Discounted
In dicta, the Seventh Circuit Court of Appeals in Xonics suggested, as a method of determining the extent of the liability of the guarantor/co-maker, that the likelihood the guarantor/co-maker would have to pay the debt in full be converted into a percentage, and that that percentage be applied to the value of the assets of the guarantor/co-maker (on the theory that the amount the guarantor/co-maker could pay on the debt was limited to the value of its assets). [7] Xonics, 841 F.2d at 200 . The Trustee urges this Court to adopt such a method, and argues that the evidence showed that the appropriate percentage of likelihood that the Debtor would have had to pay the Lehman Loan in full, determined as of the time of the conveyances in question, was 0%, or at least a percentage so small that it results in a de minimus liability.
In support, the Trustee offers the conclusion of his expert, Mr. Alexander, that "[t]he guaranty contingent liability could not have any reasonable value whatsoever *289 based on the SEC forms filed by its parent company, by SMTC Texas's parent company, SMTC Corp." Transcript — Alexander — March 26, 2009, p. 47, lines 6-8. The basis for that conclusion, according to Mr. Alexander's testimony, was the Form 10-Ks of SMTC Corporate, for the years 2001 through 2004. Specifically, he testified that
... contingent liabilities of that sort are disclosed in 10(k)s, so I obtained the SEC-filed Form 10(k)s for SMTC Corporate and read those financial statements, taking particular note of ... [t]he assets of the parent company, the financial position of the parent company, and the audit opinion expressed by KPMG during the relevant years.
Transcript — Alexander — March 26, 2009, p. 46, line 22-p. 47, line 4.
The Trustee argues that such information should persuade the Court, as it did Mr. Alexander, that there was virtually no likelihood that the Debtor would have to pay on the Guarantee, particularly when considered with other evidence that the Lehman Loan was never in default and that the Lenders never foreclosed on any assets of the Debtor, SMTC Corporate or any of the SMTC affiliates or other subsidiaries. See Plaintiff's Letter Brief to the Court, docket #266, p. 3, filed April 1, 2009, in response to Defendants' Rule 52(c) Motion made at the close of Plaintiff's case; Transcript Mr. Wheeler April 6, 2009, p. 46 (to his knowledge, based on financial records he had reviewed, the Lehman Loan had never been "placed into default during the period of its existence."). As further evidence that the Debtor was never required to pay on the Guarantee and so the liability should be discounted to $0.00, the Trustee points to the fact that the Lehman Loan "was paid in full in 2004, including through the raising of equity to new investors." Exh. P-54, 2004 10-K of SMTC Corporate, at p. 18.
Courts have considered events occurring subsequent to challenged transfers, as well as those occurring contemporaneously with those transfers, as evidence on the likelihood a guaranteed obligation would be paid. For example, in In re Martin, 145 B.R. 933 (Bankr.N.D.Ill.1992), appeal dismissed, 151 B.R. 154 (N.D.Ill.1993), the bankruptcy court considered the payment "history" on the guaranties and the primary obligations following the date of the alleged fraudulent transfer. It found that, because the holders of the guarantees "had not called on [the debtor] to honor his guarantees as of June 1, 1985 [the date of the alleged fraudulent transfer], and neither of these creditors' moved to enforce these guarantees during the four years after that date," and because the primary obligors "were paying their debts to [the creditors] in 1985," the creditors were unlikely to call on their guarantees at the time of the transfers and so the guarantee obligations should be "conservatively valued at zero" for purposes of the Court's analysis under Illinois fraudulent transfer laws. Id. at 943.
In this case, however, contrary to the Trustee's contentions, the evidence did not show that there were no subsequent defaults on the Lehman Loan. Rather, Jane Todd testified that the covenants of the Loan had been breached, but that the Lenders waived those defaults. See also Transcript — Wheeler — April 3, 2009, pp. 46-47. In addition, rather than having been paid in full from the resources of the other obligors, the Lehman Loan was in fact only partially paid by them, the balance having been restructured. Exh. P-54, pp. 17-18 ("On June 1, 2004, we completed... a transaction with SMTC's pre-existing lenders to repay a portion of SMTC's pre-existing debt and restructure *290 the balance of SMTC's pre-existing debt...."). Specifically, "SMTC ... repaid $40 million of debt at par; ... exchanged $10 million of debt for $10 million of SMTC's common stock and warrants... and ... converted $27.5 million in debt into second lien subordinated debt with maturity ranging from four to five years." Exh. P-54 at p. 18.
The Trustee argues that the Lenders' acceptance in 2004 of $10 million worth of SMTC's common stock and warrants in satisfaction of that amount of existing debt is also evidence that the Lenders considered the other obligors as being able to pay the debt without the Debtor's participation, and therefore the risk that the Debtor would have had to pay on the Guarantee during the period 2002-2003 was de minimus. The Court finds, however, that such evidence may equally be considered as a concession made by the Lenders because of their assessment that the other obligors did not have the ability to pay the debt in full in cash.
Finally, although subsequent occurrences may be relevant to the likelihood of payment, they are not in this case conclusive. The determination of the amount of the Guarantee obligation that was secured by the lien on the Debtor's property must still be made as of the time of the alleged fraudulent conveyances — in 2002 and 2003. The fact that after those conveyances the Lehman Loan was satisfied by others obligated to pay it does not necessarily mean that it was likely or probable at the time of the conveyances that the Debtor could not have paid it. Those other obligors may have ultimately had to pay or restructure the Loan without the Debtor's participation because the Debtor by that time had become unable to pay its share. While that fact may be obvious in hindsight, in light of the Debtor's having ceased doing business, disposed of its assets and filed this bankruptcy case, the determination of whether to discount a debt because of the likelihood of payment should be made from the perspective of the Debtor, operating as it was at the time of the transfers. See Travellers Int'l AG v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 134 F.3d 188, 194, 196-97 (3d Cir.1998) (determining solvency by treating the debtor as a going concern "[b]ecause liquidation in bankruptcy was not clearly imminent on the date of the challenged transfer" and therefore finding that the court "cannot consider the market's devaluation of [the debtor's publicly traded] debt resulting from the possibility as of the date of the transfer that [it] would cease operations and be unable to satisfy its promises.").
The Debtor in this case was still operating as late as March of 2003. Exh. P-87 (March 19, 2003 email from John Sommerville to Paul Walker, stating that "the place is still busy and staffed...."). Its financial statements show that it had sufficient assets to have made at least some significant payments on the Lehman Loan throughout the period when the transfers occurred, with the exception of December of 2003. In fact, it paid down its share of the Lehman Loan fairly steadily from April of 2002 to June of 2003, from a high of $43,184 million to $14,642 million. Exh. D-2, line 342. At worst, between July and December of 2003, the Debtor's share of the Lehman Loan increased less than 11%, from $15,624 million in July to $17,327 in December, but until December it still listed assets in excess of $1 million. Exh. D-2, line 324. Overall, the Debtor reduced its share of the Lehman Loan by a total of $25,857, or by almost 60%, from April of 2002 to December of 2003. Exh. D-2, line 324. The Court finds, therefore, that when it made the transfers in question, the *291 Debtor was paying or could have paid on its Guaranteed obligation.
The Court therefore cannot find that there was no likelihood that it would pay, or even that there was merely a de minimus probability that it would, and so finds that the Trustee's contention that the Debtor's liability on the Guarantee should be discounted to $0.00 or a de minimus amount is not supported by the evidence. The Trustee presented no evidence of any other appropriate discount. In the absence of such evidence, the Court is unable to find that the lien did not secure the entire amount of the Guarantee.
The inquiry as to whether the property transferred was fully encumbered, and therefore not an asset, does not end there. To determine whether the Debtor's property was fully encumbered, the debt — the entire balance of the Lehman Loan — must be compared to the value of the Debtor's property at the relevant times.
Preliminary Sub-Issue IIC
Whether the Lehman Loan Balance Exceeded the Value of All the Debtor's Property at the Time of the Conveyances
The parties and their experts focused on the Debtor's balance sheets as evidence of the value of the Debtor's property at the time of the conveyances. According to Mr. Wheeler's testimony, the approximate fair market value of the Debtor's property can be considered as reflected in the figures on line 324 of its financial statements. Compare testimony of Otto Lee Wheeler, April 3, 2009, Transcript p. 36, line 20, with line 324 on Exhs. D-1 and D-2. The following chart shows that comparison between the value of the Debtor's property as shown on its balance sheets (line 324 on Exhs. D-1 and D-2), and the entire balance on the Lehman Loan, according to the Consolidated Debt Spreadsheet ("Total Debt" on Exh. D-24).
-----------------------------------------------------
Entire Balance
Value of the of the Lehman
Date Debtor's Property Loan
-----------------------------------------------------
January 2002 $50,297,000.00 $138,753,000.00
-----------------------------------------------------
February 2002 53,451,000.00 132,622,000.00
-----------------------------------------------------
March 2002 57,373,000.00 112,452,000.00
-----------------------------------------------------
April 2002 63,950,000.00 131,903,000.00
-----------------------------------------------------
May 2002 66,108,000.00 119,970,000.00
-----------------------------------------------------
June 2002 60,349,000.00 114,036,000.00
-----------------------------------------------------
July 2002 59,539,000.00 118,577,000.00
-----------------------------------------------------
August 2002 50,837,000.00 104,602,000.00
-----------------------------------------------------
Sept. 2002 38,296,000.00 90,163,000.00
-----------------------------------------------------
Oct. 2002 32,768,000.00 96,509,000.00
-----------------------------------------------------
Nov. 2002 30,890,000.00 92,307,000.00
-----------------------------------------------------
Dec. 2002 22,129,000.00 82,589,000.00
-----------------------------------------------------
January 2003 22,232,000.00 82,311,000.00
-----------------------------------------------------
February 2003 20,614,000.00 86,844,000.00
-----------------------------------------------------
March 2003 14,916,000.00 80,869,000.00
-----------------------------------------------------
April 2003 7,513,000.00 79,197,000.00
-----------------------------------------------------
May 2003 4,599,000.00 76,426,000.00
-----------------------------------------------------
June 2003 2,332,000.00 67,160,000.00
-----------------------------------------------------
July 2003 1,360,000.00 77,716,000.00
-----------------------------------------------------
August 2003 1,299,000.00 77,592,000.00
-----------------------------------------------------
Sept. 2003 1,181,000.00 74,922,000.00
-----------------------------------------------------
Oct. 2003 1,270,000.00 72,717,000.00
-----------------------------------------------------
Nov. 2003 1,206,000.00 76,170,000.00
-----------------------------------------------------
Dec. 2003 83,000.00 70,077,000.00
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This comparison, standing alone, would indicate that there was no equity in the Debtor's property for all of the period 2002 through 2003.
The Trustee argued, however, that there is another reason, other than discounting the Debtor's liability on its Guarantee of the Lehman Loan, why its property was not fully encumbered at that the time of the conveyances. He argues that the Debtor's rights of contribution against the other obligors on the Lehman Loan should be included as part of its property. When the value of those rights of contribution is included, the Trustee claims, the value of *292 all the Debtor's property exceeded the amount of the lien, and so the property was not fully encumbered at the time of the conveyances.
The language of the Guarantee Agreement supports the Trustee's position in theory, inasmuch as it expressly provides for such rights of contribution. Paragraph 2.2 provides:
2.2 Right of Contribution. Each Subsidiary Guarantor hereby agrees that to the extent that a Subsidiary Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Subsidiary Guarantor shall be entitled to seek and receive contribution from and against any other Subsidiary Guarantor hereunder which has not paid its proportionate share of such payment.... The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Subsidiary Guarantor to the General Administrative Agent and the Lenders for the full amount guaranteed by such Subsidiary Guarantor hereunder.
Exh. D-108, p. 10.
The Defendants point out that under the language of Paragraph 2.2, the Debtor's obligation to the Lenders under the Guarantee is not affected by its rights of contribution, and so argue against considering them when determining the extent of the lien on the Debtor's property. They cite First City Beaumont v. Durkay (In re Ford), 967 F.2d 1047 (5th Cir.1992), in support. In Ford, the Court of Appeals addressed the rights of the obligee, the bank, which had actually asserted a claim (by filing a proof of claim against the co-maker/debtor) for the entire amount of the debt. The trustee argued that in light of the debtor's rights of contribution, the court should estimate, as a contingent liability, the amount of the debtor's liability as a co-maker on the note. The Court of Appeals held that the bank was entitled to assert a claim for the entire amount of the debt, but it also acknowledged the right of the co-maker (or guarantor) to collect from its co-obligors their proportionate share(s) of the debt. Id. at 1053 ("[T]he debtor's right to pursue the other co-makers is independent of the creditor's right to payment of the debt, and in no way affects the creditor's right to pursue its claim for the full amount against any co-maker, including the debtor."). See also, generally, Traders Natl. Bank v. Clare, 76 Tex. 47 , 13 S.W. 183, 187 (1890) ("While all were bound to the lender, as between themselves, each was primarily bound for the money by him received, and, from that standpoint has the right to protect himself."); Barton v. Farmers' State Bank, 276 S.W. 177, 183 (Tex.1925) ("For while, in respect of the bank, Barton, Hutto, and McCann are principal debtors, jointly and severally liable, yet, as between themselves, each is a principal only to the extent of his aliquot part of the debt and a surety for the remainder.").
Much of the evidence that is relevant to the value of the Debtor's rights of contribution is the same as described above with respect to the Trustee's argument that the Debtor's liability on the Guarantee should be discounted: the 10-K of SMTC Corporate, containing financial information showing its ability to pay the Lehman Loan and information regarding its ultimate payment and/or restructuring by obligors other than the Debtor, and the testimony of Jane Todd that the Lenders never foreclosed on any of the Debtor's property securing the Lehman Loan. While the Court has found that such evidence is insufficient to show how likely it was, and to what extent, that the Debtor would be called upon to pay the Guarantee, it does find that SMTC Corporate's financial information and the information regarding *293 the Lehman Loan's subsequent payment and restructuring by obligors other than the Debtor support the Trustee's position that the other obligors had the ability to pay the Lehman Loan in full and, therefore, the Debtor's rights to contribution from those other obligors had substantial value.
However, under Para. 2.2 of the Guarantee Agreement, the parties, including the Debtor, expressly limited the right of each guarantor for contribution to the amount by which it "shall have paid more than its proportionate share of any payment made" on the Lehman Loan. Thus, one must assume that the Debtor had paid more than its share to "trigger" a right to contribution. Therefore, even if one assumed that all the other guarantors had the ability to pay the Lehman Loan in full, the value of the Debtor's rights of contribution could be no more than the total balance on the Lehman Loan less the Debtor's "proportionate share" of that debt.
The evidence showed that each guarantor's "proportionate share" of the Lehman Loan was the amount of the proceeds of that Loan that that guarantor had actually received and used or was used by an affiliate for its benefit. Specifically, the Debtor received, on a daily basis, a portion of the proceeds of the Lehman Loan funded through HTM, and used those borrowed funds in its daily operations.
The testimony of Messrs. Wheeler and Skerlj and the Debtor's bank records established the amount of the Lehman Loan proceeds that it used in its operations on a monthly basis, a figure that is reflected as a line item on its financial statements. Exhs. D-15, D-16, 10850 Consolidated Disbursement Account Bank Reconciliations (Comerica 5393) (showing draws from the Lehman Loan credit facility and transfers to the Debtor's Comerica account ending in 4651). By the Defendants' own admission, the "Sub-Total Revolver" entries on line 342 of its financial statements reflected the Debtor's proportionate share of the Lehman Loan balance during the relevant time period. See e.g., Defendants' Supplemental Reply to Plaintiffs Supplemental Response to Defendants' Rule 52(c) Motion, p. 4 ("[T]he debt reflected on line 342 of the Debtor's financial statements... constitutes SMTC Texas's individual balance on the Lehman loan; the amount of the Lehman loan actually used and ultimately never re-paid by SMTC Texas....").
Using again the figures from the Debtor's financial statements, the following chart shows the value of the Debtor's rights of contribution during the relevant periods:
----------------------------------------------------------------------------------
Debtor's Value of Debtor's
Entire Balance of Proportionate Share Rights of
Date the Lehman Loan of the Lehman Loan Contribution
----------------------------------------------------------------------------------
January 2002 $138,753,000.00 $32,715,000.00 $106,038,000.00
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February 2002 132,622,000.00 33,435,000.00 99,187,000.00
----------------------------------------------------------------------------------
March 2002 112,452,000.00 35,603,000.00 77,300,000.00
----------------------------------------------------------------------------------
April 2002 131,903,000.00 43,184,000.00 88,716,000.00
----------------------------------------------------------------------------------
May 2002 119,970,000.00 41,565,000.00 78,405,000.00
----------------------------------------------------------------------------------
June 2002 114,036,000.00 35,619,000.00 78,417,000.00
----------------------------------------------------------------------------------
July 2002 118,577,000.00 33,930,000.00 84,647,000.00
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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1949219. Public record. Not legal advice.