In Re: MacHne Manachem Inc. ( 2012 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 11-1496
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IN RE: MACHNE MENACHEM, INC.,
Debtor
v.
YAAKOV SPRITZER,
Appellant
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On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. No. 3-10-cv-00765)
District Judge: Honorable A. Richard Caputo
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Submitted Under Third Circuit LAR 34.1(a)
November 16, 2011
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Before: FUENTES, CHAGARES, Circuit Judges,
and RESTANI,* Judge
(Filed: January 03, 2012)
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OPINION OF THE COURT
RESTANI, Judge.
*
Honorable Jane A. Restani, Judge of the United States Court of International
Trade, sitting by designation.
1
Appellant Yaakov Spritzer (“Spritzer”) appeals a District Court judgment
affirming a Bankruptcy Court’s conclusion that $286,000 in advances made by Spritzer to
Debtor Machne Menachem, Inc. (“Machne”) between March 1997 and October 2002
were not loans. See In re Machne Menachem, Inc., 425 B.R. 749, 754 (Bankr. M.D. Pa.
2010), aff’d, 2011 U.S. Dist. LEXIS 18026, at *12 (M.D. Pa. Feb. 18, 2011). Spritzer
argues the checks he wrote to Machne were loans, and not donations, and therefore his
allowable bankruptcy claim should be increased by $286,000. For the following reasons,
we will affirm the District Court’s judgment.
Because we write for the parties, we recount only the essential facts and procedural
history.1 Machne is incorporated under the New York Not-For-Profit Corporation law to
run a summer camp for children. The Machne board of directors for the relevant time
period consisted of Yosef Goldman, Shmuel Heber, Mendel Hershkop, and Spritzer. On
March 17, 1997, Goldman, Heber, and Hershkop, acting as the board of directors of
Machne, passed a corporate resolution prohibiting Spritzer from undertaking further
activities on behalf of Machne (“Machne Resolution”).2 In July 1997, Spritzer obtained a
permanent injunction prohibiting directors Goldman, Heber, and Hershkop “from
interfering, in any way, with the administration of the affairs of the . . . camp, including
1
Additional facts can be found in Machne Menachem, Inc. v. Hershkop, 237 F.
Supp. 2d 227, 228–39 (E.D.N.Y. 2002).
2
The Machne Resolution and the related corporate minutes are not included in the
record. The parties, however, do not dispute the material facts relating to the Machne
Resolution.
2
the maintenance of bank accounts . . . .” (“Permanent Injunction”). Despite the Machne
Resolution, Spritzer continued to operate the Machne summer camp through October
2002. During his time as a director of Machne, Spritzer wrote multiple checks from his
personal bank account to Machne. In 2001, Machne filed for bankruptcy.
Spritzer filed a proof of claim with the Bankruptcy Court, stating his checks,
totaling $1,012,454, represented monies loaned to Machne and entitled Spritzer to
treatment as one of Machne’s creditors. Machne objected to the claim, arguing, inter alia,
that there was insufficient documentation of indebtedness, Machne never authorized the
debt, and the services were done without expectation of payment. The Bankruptcy Court
limited Spritzer’s claim to $76,000, finding there was insufficient evidence that the
parties intended to create a loan beyond this amount. In re Machne Menachem, Inc., 425
B.R. at 754, 756–57. The Bankruptcy Court relied in part on the Machne Resolution
prohibiting Spritzer from undertaking additional activities on behalf of Machne as of
March 17, 1997, and characterized all checks issued after this date as donations. Id. at
753–54. The District Court affirmed the Bankruptcy Court’s opinion. In re Machne
Menachem, Inc., 2011 U.S. Dist. LEXIS 18026, at *12. Spritzer’s current appeal relates
to checks written after March 17, 1997, totaling $286,000.
We have jurisdiction to review a final order of a district court pursuant to 28
U.S.C. §§ 158(d)(1) and 1291. This court exercises plenary review over final decisions of
a district court when the district court sits as an appellate court reviewing the decisions of
a bankruptcy court. Rhett v. Carnegie Ctr. Assocs. (In re Carnegie Ctr. Assocs.), 129
3
F.3d 290, 294 (3d Cir. 1997). We “stand in the shoes” of the district court and review the
bankruptcy court’s factual findings for clear error and its legal conclusions de novo.
Internal Revenue Serv. v. Pransky (In re Pransky), 318 F.3d 536, 542 (3d Cir. 2003). The
determination of whether an advance is debt or equity is a question of fact that we review
for clear error. Cohen v. K.B. Mezzanine Fund II (In re SubMicron Sys. Corp.), 432 F.3d
448, 457 (3d Cir. 2006).
As part of its equitable powers, a bankruptcy court may “recharacterize” an
advance as debt or equity when determining the amount of a creditor’s claim. Id. at 454.
“[T]he determinative inquiry in classifying advances as debt or equity is the intent of the
parties as it existed at the time of the transaction.” Id. at 457. Although this case
involves an advance to a non-profit corporation, as opposed to an advance to a for-profit
corporation as in SubMicron Systems, the intent of the parties at the time of the
transaction remains the determinative issue. In determining the intent of the parties,
courts may infer “from what the parties say in their contracts, from what they do through
their actions, and from the economic reality of the surrounding circumstances.” Id. at
456. Although the label given to a transaction by a party is a factor, it does not outweigh
what the parties actually intended or how they acted. See id. (“[T]he characterization as
debt or equity is a court’s attempt to discern whether the parties called an instrument one
thing when in fact they intended it as something else.”).
Here, the Bankruptcy Court analyzed the intent of the parties under SubMicron
Systems and determined Spritzer’s advances to Machne made after the Machne
4
Resolution were not loans. In re Machne Menachem, Inc., 425 B.R. at 752–54. We find
the Bankruptcy Court’s determination is not clearly erroneous and thus affirm that
advances made after March 17, 1997 were not loans.
Spritzer relies on deposit slips and checks written from Spritzer to Machne, some
with “loan” written on them, as evidence that the checks were loans.3 Spritzer provides
no additional evidence to demonstrate an expectation of repayment, such as a
contemporaneous written instrument indicating the due date, repayment schedule, or
default date of the purported loan. Thus, there is no written instrument for the court to
analyze and determine whether the terms suggest an expectation of repayment.
Moreover, Spritzer provides no evidence of intent on behalf of Machne to accept
or authorize the purported loans, such as a resolution from the board of directors, or
evidence that the board was aware of the loans. Spritzer argues that he, as the sole board
member not barred from camp administration by the Permanent Injunction, had to be
authorized to accept the loan on behalf of Machne.4 It would be unreasonable to interpret
3
Spritzer argues the Bankruptcy Court found that the notation of “loan” on
deposit slips was sufficient contemporaneous written evidence of a loan. In a finding not
appealed to this court, the Bankruptcy Court found some of the advances made prior to
the Machne Resolution of March 17, 1997 were supported by written evidence showing
an intent to establish a loan. In re Machne Menachem, 425 B.R. at 757. We do not opine
on whether such scant notation is sufficient to evidence an actual loan under the facts that
existed before March 17, 1997. For advances made after the Machne Resolution of
March 17, 1997, which are at issue here, the Bankruptcy Court found no intent to create a
loan obligation between Spritzer and Machne, despite any “loan” notations.
4
Spritzer argues the crux of the appeal is whether a permanent injunction trumps a
prior conflicting corporate resolution. Spritzer’s characterization of the appeal is
(continued...)
5
the Permanent Injunction as authorizing Spritzer to both make the loan to Machne and
accept the loan on Machne’s behalf because New York law prohibits such self-dealing,
unless, at a minimum, the board of directors is informed of the material facts of the
transaction. N.Y. Not-For-Profit Corp. § 715(a), (b).5 Here, Spritzer presents no
4
(...continued)
inaccurate because the Permanent Injunction and the Machne Resolution apply to
different individuals, and thus, do not conflict. The Permanent Injunction, which did not
expressly void the prior Machne Resolution, prevented Goldman, Heber, and Hershkop
from interfering with the administration of the camp, while the Machne Resolution
prevented Spritzer from undertaking further activities related to Machne. Spritzer argues
there is a conflict, and either the Permanent Injunction or Machne Resolution must give
way, because otherwise, no one would have been authorized to run Machne. Although
this may have been an unfortunate outcome for the children utilizing the camp, it does not
defy common sense that litigation and fighting among a board of directors would result in
a corporation being unable to function.
5
Section 715(a) and (b) of the New York Not-For-Profit Corporation law states:
(a) No contract or other transaction between a corporation and one or more of its
directors or officers, or between a corporation and any other corporation, firm,
association or other entity in which one or more of its directors or officers are
directors or officers, or have a substantial financial interest, shall be either void or
voidable for this reason alone or by reason alone that such director or directors or
officer or officers are present at the meeting of the board, or of a committee
thereof, which authorizes such contract or transaction, or that his or their votes are
counted for such purpose:
(1) If the material facts as to such director’s or officer’s interest in such
contract or transaction and as to any such common directorship, officership
or financial interest are disclosed in good faith or known to the board or
committee, and the board or committee authorizes such contract or
transaction by a vote sufficient for such purpose without counting the vote
or votes of such interested director or officer; or
(2) If the material facts as to such director’s or officer’s interest in such
contract or transaction and as to any such common directorship, officership
(continued...)
6
evidence that he informed the old board or a properly constituted new board of the
material facts relating to his purported loans or that any board of directors authorized the
loans at any time.6
Although Spritzer’s notation of “loan” is one factor to consider in determining the
intent of the parties, the lack of any documentation relating to the terms of the loan and
the lack of intent on behalf of Machne to accept a loan provides sufficient evidence to
support the Bankruptcy Court’s finding. Thus, it was not clearly erroneous for the
Bankruptcy Court to find the advances made by Spritzer to Machne after the resolution of
March 17, 1997 were not loans and therefore are not recoverable in the bankruptcy
5
(...continued)
or financial interest are disclosed in good faith or known to the members
entitled to vote thereon, if any, and such contract or transaction is
authorized by vote of such members.
(b) If such good faith disclosure of the material facts as to the director’s or
officer’s interest in the contract or transaction and as to any such common
directorship, officership or financial interest, is made to the directors or members,
or known to the board or committee or members authorizing such contract or
transaction, as provided in paragraph (a), the contract or transaction may not be
avoided by the corporation for the reasons set forth in paragraph (a). If there was
no such disclosure or knowledge, or if the vote of such interested director or
officer was necessary for the authorization of such contract or transaction at a
meeting of the board or committee at which it was authorized, the corporation may
avoid the contract or transaction unless the party or parties thereto shall establish
affirmatively that the contract or transaction was fair and reasonable as to the
corporation at the time it was authorized by the board, a committee or the
members.
N.Y. Not-For-Profit Corp. § 715(a), (b).
6
Spritzer’s argument that Machne’s use of the loan proceeds constitutes evidence
that Machne ratified the loans is unavailing. Machne’s use of the funds does not speak to
whether the advance was a loan or a donation because an organization would use the
proceeds from either.
7
proceeding.7
Accordingly, we will affirm the District Court’s judgment.
7
Spritzer argues that if his loans were not authorized, New York law would
prevent Machne from avoiding the loans without restoring the funds to him. Because
Spritzer has failed to show he intended to make a loan in the first place, we need not
analyze New York law to determine whether an unauthorized loan is void or voidable or
whether a corporation can void a loan without restoring the funds.
8