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In re Top Hat 430, Inc.

United States Bankruptcy Appellate Panel of the Eighth Circuit

June 12, 2017

In re: Top Hat 430, Inc., Formerly doing business as Top Hat, Inc., doing business as Be Iced Jewelers, doing business as Be Iced Diamond Exchange, doing business as Gold Stop, doing business as Bidx Debtor
v.
Pennie Glasser Appellee/Cross-Appellant Randall L. Seaver, Trustee Appellant/Cross-Appellee

          Submitted: April 26, 2017

         Appeals from United States Bankruptcy Court for the District of Minnesota - Minneapolis

          Before SALADINO, Chief Judge, FEDERMAN and SHODEEN, Bankruptcy Judges.

          FEDERMAN, Bankruptcy Judge.

         Randall L. Seaver, Chapter 7 Trustee in the bankruptcy case of Top Hat 430, Inc., filed suit against Pennie Glasser, seeking to recover from her, as a preference, a payment made by the Debtor to her. Since the payment was made more than ninety days, but less than one year, prior to its filing bankruptcy, the Trustee can only prevail if Ms. Glasser is found to have been an insider of the Debtor at the time of payment. Ms. Glasser is the former wife of an insider of the Debtor, as well as a minor investor and employee of the Debtor at the time of payment. The Bankruptcy Court[1] held that Ms. Glasser was not an insider of the Debtor. Therefore, the payment was not an avoidable preference pursuant to 11 U.S.C. § 547(b) and Minnesota Statute § 513.45(b). The Trustee appeals, and Ms. Glasser cross-appeals the finding that, even though she was not an insider, the transaction between her and the Debtor was not at arm's length. For the reasons that follow, we AFFIRM.

         FACTUAL BACKGROUND

         Top Hat, Inc., was founded in 2004 by David Pomije, Sr. and Duane Wermerskirchen, and operated under the name of "Be Iced Jewelers." Pennie Glasser and her current husband, David Glasser, were stockholders of Top Hat, Inc., owning approximately 2.1% of the company's stock.

         Top Hat 430, Inc. the Debtor in this case, operated retail jewelry stores, buying and selling new and used jewelry, precious metals, and gemstones. In 2012, Top Hat 430 merged with Top Hat, Inc., with Top Hat 430 (the "Debtor") emerging as the surviving entity. Mr. Pomije was the president of the Debtor and had control over its operations.

         Pennie Glasser and Mr. Pomije had been married from December 1985 through February 1997, prior to the formation of the Debtor. They share three children, all of whom are grown. During the marriage, Ms. Glasser worked at two companies founded by Mr. Pomije, namely, Protectronics, Inc. and Funco, Inc. After the marriage ended, Ms. Glasser continued to work for other companies founded by Mr. Pomije, including 2nd Swing, Inc. and the Debtor. The couple's son also worked for the Debtor. Ms. Glasser testified that, due to Mr. Pomije's past successes, she had confidence in him as a business person.

         In March of 2011, which was before Ms. Glasser went to work for the Debtor, Mr. Pomije approached the Glassers (among other potential lenders) regarding a bridge loan for the Debtor. The bridge loans were intended to be short term loans which would be repaid from a new capital infusion, for which Mr. Pomije would seek investors. David Glasser negotiated the terms of the Glassers' loan with Mr. Pomije. As a result of those negotiations, on March 31, 2011, Mr. Pomije signed, on behalf of the Debtor, a promissory note in favor of the Glassers in the amount of $200, 000. The terms of the note provided for repayment of the $200, 000 principal within 90 days without interest, a $10, 000 origination fee, and a 20% interest rate if default occurred. Mr. Pomije personally guaranteed the note. Shortly after this loan was made, Ms. Glasser went to work sorting jewelry at the corporate office for the Debtor. Ms. Glasser testified she went to work at the Debtor because she wanted to "get out of the house."

         Several other people also made bridge loans to the Debtor. There is no evidence that the Debtor repaid the principal on any of those loans within 90 days. However, it did make interest payments, including $36, 555.55 to the Glassers, from the middle of 2011 through early 2012. Meanwhile, Mr. Pomije was working on raising capital to repay the bridge loans and operate the company. As part of those efforts, in November 2011, the Debtor issued a Private Placement Memorandum ("PPM") intending to raise $8 million in capital. The PPM described the lenders and terms of the bridge loans, and provided that $1.3 million of the capital raised would be used to pay bridge loans. As a result of the PPM, the Debtor raised $4 million in capital on or about April 13, 2012.[2] Using those funds, the Debtor made a payment in the amount of $205, 444.45 to the Glassers on April 19, 2012, paying the note in full. Some of the other bridge loans were also paid, but not all of them. In addition, a few, but not all, creditors with accounts over ninety days were paid. The evidence at trial was that it was Mr. Pomije who decided which creditors to repay with the $4 million capital infusion.

         Less than a year later, on February 12, 2013, the Debtor filed a Chapter 11 bankruptcy case. The case was converted to Chapter 7 on March 25, 2013, and the Chapter 7 Trustee filed an adversary proceeding against Ms. Glasser for recovery of the payment as a preference, asserting that she was a non-statutory insider, and so the one-year lookback period in § 547(b)(4) applied. Mr. Glasser was not named as a defendant in the preference action.

         Following a trial, the Bankruptcy Court entered judgment in favor of Ms. Glasser, finding that, although the transaction was not at arm's length, she was not an insider. The Trustee appeals. And, although Ms. Glasser prevailed as to the outcome, she cross-appeals the conclusion that the transaction was not at arm's length.

         STANDARD OF REVIEW

         Generally speaking, we review findings of fact for clear error and conclusions of law de novo.[3] However, as we commented in In re Rosen Auto Leasing, Inc., the appropriate standard of review for a determination of non-statutory insider status is in dispute.[4] Indeed, the United States Supreme Court recently granted certiorari on the question of whether review is de novo, clearly erroneous, or a combination of both.[5] In In re Rosen Auto, we said we believed the determination is a mixed question of law and fact and, until the Supreme Court says otherwise, we adhere to that opinion. Nevertheless, as was the case in Rosen Auto, we would reach the same result under either standard of review.

         DISCUSSION

         Section 547(b) of the Bankruptcy Code provides that a trustee may avoid the transfer of an interest of the debtor in property -

(1) to or for the benefit of a creditor;
(2)for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3)made while the debtor was insolvent;
(4)made--
(A)on or within 90 days before the date of the filing of the ...

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