Opinion
No. 93-30093 HCD
November 22, 1993
Opinion
On February 8, 1993, Arnolt Corporation ("Arnolt"), the alleged debtor, filed its MOTION TO ABSTAIN AND TO DISMISS INVOLUNTARY PETITION. Petitioners Noblesville Casting, Inc., Indiana Decorative Plastics, Inc., and Industrial Heat Treating and Metallurgical Company filed their MOTION IN OPPOSITION TO DEBTORS MOTION TO ABSTAIN AND TO DISMISS INVOLUNTARY PETITION on February 18, 1993. The court held a continued trial on the motions on June 16, 1993, August 19, 1993, October 1, 1993, and October 15, 1993. For the reasons set forth below, the court grants Arnolt's motion and denies the petitioners' motion.
Jurisdiction
Pursuant to 28 U.S.C. § 157(a) and Northern District of Indiana General Rule 45, the United States District Court for the Northern District of Indiana has referred this case to this court for hearing and determination. After reviewing the record, the court determines that the matter before it is a core proceeding within the meaning of § 157(b)(2) over which this court has jurisdiction pursuant to 28 U.S.C. § 157(b)(1) and 1334. This entry shall serve as findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52, made applicable in this proceeding by Federal Rules of Bankruptcy Procedure 7052 and 9014.
Background
The petitioners filed an involuntary petition under Chapter 7 of the Bankruptcy Code against Arnolt on January 19, 1993. The court granted SIFCO Industries, Inc.'s motion to join in the involuntary petition as a petitioning creditor on June 16, 1993. Prior to the filing of the involuntary petition, on December 9, 1992, Noblesville Casting, Inc., filed a complaint against Arnolt in the Kosciusko Circuit Court, seeking the appointment of a receiver to manage and conserve Arnolt's assets. Following a hearing on January 8, 1993, the Kosciusko Circuit Court denied the request to appoint a receiver. On December 10, 1992, Arnolt and Society National Bank entered into an agreement to liquidate Arnolt's assets in an orderly fashion outside of bankruptcy. In its motion Arnolt asked the court to dismiss this case pursuant to 11 U.S.C. § 305. Arnolt asserted that an order for relief would provide no benefit to any creditor of Arnolt and would cause damage to Arnolt and Society National Bank ("Society") which holds a first priority security interest in all of Arnolt's assets. Arnolt stated in its motion that the petitioners have general unsecured, non-priority claims against Arnolt and that Arnolt is indebted to Society in the approximate amount of $1.2 million. Arnolt's motion at 1. Arnolt asserted that the maximum fair market value of its assets is $850,000. Id.
This figure apparently includes those assets that were liquidated pursuant to Arnolt's agreement with Society.
The petitioners opposed Arnolt's motion, alleging that the court should decline to abstain from this case because dismissal of the case will benefit only Society. The petitioners asserted that they are not recalcitrant creditors and that no state court insolvency proceedings or other equitable out-of-court arrangements are pending which would resolve these matters outside of bankruptcy. The petitioners argued that the bankruptcy court should determine whether Society actually is undersecured, whether the only proceeds available from Arnolt's estate are the tools and machinery sold at auction, whether Arnolt's real estate has any value to Arnolt's creditors, and whether any of Arnolt's assets were wrongfully transferred to another entity. As the court's decision to abstain from a proceeding is not reviewable by the court of appeals or the Supreme Court pursuant to 11 U.S.C. § 305(c), the petitioners urged the court to act cautiously in determining whether to abstain from the case.
At trial Dennis Tiberius ("Tiberius"), the President and a director of Arnolt, testified that his corporation, United Precision Machining Corporation ("UPM"), owns Arnolt. Tiberius explained that 80% of Arnolt's business was making aircraft tailhooks for the United States Navy. Tiberius indicated that Arnolt lost its contracts with the United States Navy in 1992 and that loss of the contracts resulted in a lack of cash flow, layoffs, and reductions in pay for Arnolt's workers. Tiberius explained that Arnolt was current in its payments to its secured lender, Society, until June 1992. On October 21, 1992, Society advised Arnolt to liquidate, indicating that it had no confidence in the company. On November 12, 1992, Society issued notice to Arnolt's creditors (Arnolt's Exhibit 22) directing them to send all payments due Arnolt to Society pursuant to a security agreement dated May 20, 1988. Tiberius indicated that issuance of Society's notice had a devastating effect on Arnolt's business. Arnolt's Exhibit 23 is a letter from Arnolt's counsel, discussing two different liquidation analyses of Arnolt's assets, including an immediate shutdown and an orderly liquidation. The exhibit indicated that Society would receive approximately $258,139 if Arnolt liquidated immediately and approximately $459,809 if Arnolt liquidated its assets in an orderly fashion. Attachments A and B to Arnolt's Exhibit 23.
Tiberius testified that pursuant to agreement among UPM, Arnolt, Society, and himself, dated December 10, 1992 (Arnolt's Exhibit 25A), all of Arnolt's accounts receivable were to be paid into a cash collateral account from which Arnolt could withdraw money for approved expenditures. The parties also agreed that Arnolt's equipment would be sold at an auction. Tiberius indicated that he and Society executed an agreement providing for the release of Tiberius' guaranty of Arnolt's and/or UPM's indebtedness to Society upon satisfaction of the following conditions:
A. The Bank receives a minimum of $500,000 for application toward the UPM and/or Arnolt debt from the liquidation of the collateral of UPM and/or Arnolt (excluding any proceeds received from real estate);
B. Tiberius cooperates fully with the Bank with respect to the disposition of the real estate upon which the Bank has a mortgage.
Arnolt's Exhibit 25C, at 2. Tiberius testified that he would have felt compelled to conduct an orderly liquidation of Arnolt's assets even without release of his guaranty. Pursuant to the agreement with Society (Arnolt's Exhibit 25A), Arnolt entered into a cash purchase agreement with Myron Bowling Auctioneers, Inc./Enterprise Machine, Inc., for the sale of its equipment (Arnolt's Exhibit 26). The cash purchase agreement provided that the auctioneer would pay Arnolt $260,000 for the equipment to be sold. Arnolt's Exhibit 26, at 1. The agreement gave Arnolt the option to sell additional equipment at the auction for a 10% commission and provided that the proceeds from the sale of certain "Steelcase office equipment" would be split equally between Arnolt and the auctioneer. Id. The cash purchase agreement allowed for the sale of leased equipment with consent of the owners of the equipment. Id. Tiberius indicated that he and other employees of Arnolt met with some of Arnolt's customers following the execution of the agreement with Society to assure them that Arnolt would complete their orders for products. Arnolt's Exhibit 27 is a copy of an expense report from a trip to a customer's business in Florida. Although Society received more than $500,000 from the liquidation of Arnolt's machinery and equipment, Arnolt and Society have not yet disposed of Arnolt's real estate.
Tiberius explained that he began a new business, Production Technology, Inc. ("PTI"), in December 1992 to provide an ongoing source of supplies for Arnolt's customers. John C. Norris ("Norris"), a former employee of Arnolt, became PTI's President. When Tiberius formed the new business he transferred his shares in his corporation, Quality Technology Corporation, to his wife, Judy H. Tiberius, and changed the name of the corporation to PTI. Tiberius agreed that his purpose in transferring the shares to Mrs. Tiberius was to avoid building up wealth in his name, owing to his liability stemming from personal guarantees of Arnolt's indebtedness. Tiberius explained that Quality Technology Corporation had some contracts for A-6 aircraft tailhooks before it became PTI. Tiberius indicated that he and Norris informed Arnolt's customers that Arnolt was going out of business and that they would protect the customers' interests in receiving quality products. Tiberius noted that Arnolt did not own the designs or specifications for its customers' parts; it simply provided a service to the customers in machining the parts. Tiberius testified that although PTI performed services for some of Arnolt's customers, AM General Corporation ("AM General") cancelled one of its contracts because Arnolt could not perform. Tiberius stated that for a time PTI solicited orders and shipped parts to Arnolt for machining. Tiberius felt that PTI's assistance benefitted Arnolt by giving its customers continued assurance of parts following Arnolt's demise. PTI's services also helped Arnolt avoid potential liability for shutdown costs of its customers in the event the supply of parts was cut off. Tiberius explained that funds which PTI paid to Arnolt for services rendered were deposited into Society's collateral account. PTI ultimately purchased some of Arnolt's equipment at the auction and began filling orders for products which Arnolt formerly supplied. Despite these and other efforts to reduce Arnolt's debt to Society, Tiberius indicated that Arnolt was able to satisfy only 50% of Society's secured claim and that no assets are available for Arnolt's unsecured creditors. Tiberius estimated that Arnolt's unsecured debt (including the sum still owed to Society) totals approximately $1.2 million. Arnolt's only remaining assets are its building, the land on which the building is located, and a parking lot. Petitioning Creditors' Exhibit X, an appraisal prepared for Society, valued Arnolt's real estate at $345,000 as of November 10, 1992.
Tiberius testified that Arnolt considered filing a chapter 11 petition, but did not do so because it would have needed $100,000 in new capital to continue operating. Tiberius noted that Arnolt was unable to use its inventory as collateral for a new operating loan. Tiberius explained that the filing of a bankruptcy petition would have jeopardized Arnolt's contracts with the United States Navy. Tiberius stated that he believed that going forward with Society's liquidating plan was the best alternative available to Arnolt, even though the plan provided no funds to unsecured creditors. Tiberius felt that he was the only person who could maximize the return for Society, Arnolt's employees, and Arnolt's customers. Tiberius agreed that his role involved complex and conflicting interests (i.e., pleasing Society, attempting to finish work to satisfy Arnolt's customers, pacifying Arnolt's unsecured creditors, and trying to avoid $700,000 in debt), but stated that he attempted to wind down Arnolt's business in as responsible a fashion as possible. Tiberius noted that Arnolt kept its employees working as long as it could and made every effort to finish outstanding orders for products. Tiberius stated that if Arnolt had not completed its contracts, it could have been liable for breaches of contract. None of Arnolt's customers, however, has sued Arnolt. Tiberius agreed that Arnolt paid invoices of some of its unsecured creditors from October to December 1992. Tiberius indicated that these creditors were suppliers who had to be paid immediately in order to insure that they would continue to do business with Arnolt so that Arnolt could complete its contracts. Tiberius testified that Arnolt made the payments with funds that Society had deposited into Arnolt's account pursuant to the liquidation agreement.
Tony Nielson ("Nielson"), Vice President of Society, testified that on November 4, 1992, Society's counsel issued a letter to Tiberius informing him that Society felt that Arnolt did not have the financial ability to continue operating. Nielson noted that Arnolt was in default on its obligation to Society, had lost customers, had no cash flow or working capital, and could not pay its continuing obligations in October 1992. Nielson testified that these factors caused Society to take steps to protect its secured interest in Arnolt's assets, including freezing Arnolt's checking account and notifying Arnolt's creditors to pay Society directly. Nielson indicated that although Society considered closing Arnolt's business immediately, it asked Arnolt to come up with a plan to liquidate its assets in an orderly manner. Nielson testified that Tiberius' and Arnolt's cooperation was necessary to obtain payment from the United States Navy for part of its contract. Nielson noted that the scrap value of the tailhooks which Arnolt produced for the United States Navy is about a dollar each; whereas, the finished value of one tailhook is $2,500. Arnolt completed 40 tailhooks after deciding to liquidate. Nielson indicated that it did not file an involuntary petition against Arnolt because of the additional expense of a bankruptcy proceeding. Nielson testified that the budget which Arnolt submitted in connection with its plan of liquidation included $35,000 in wages for Tiberius, an allotment of approximately $12,500 for attorney's fees, as well as incentives to Tiberius if Society obtained more than $500,000 from the sale of Arnolt's assets. Society received $596,000 from the liquidation, not including $30,000 remaining in the cash collateral account, although Society originally expected to receive no more than $500,000 for the assets. Nielson felt that the liquidating plan was the best deal for all, noting that Society received more than the appraised value for Arnolt's assets sold to the auctioneer. Nielson testified that the liquidation of Arnolt's assets (excluding its real estate) took 40 days of hard work and that additional cash was realized as a result of Arnolt's cooperation and assistance in the liquidation. Nielson estimated that the cost of cleaning up the environmental problems associated with Arnolt's real estate will be approximately $100,000.
Judy Tiberius testified that she is the owner of PTI and a former director of UPM. Petitioning Creditors' Exhibit I is a copy of a consent to resolutions of the Board of Directors of UPM, evidencing Mrs. Tiberius' resignation as an officer and director of UPM, effective October 22, 1992. Mrs. Tiberius stated that she resigned as a director of UPM when Society asked for her personal guaranty of UPM's obligations. Mrs. Tiberius indicated that she declined to guarantee the indebtedness in order to protect assets which she and Tiberius owned jointly. Mrs. Tiberius testified that she began PTI with monies she obtained from an inheritance and that she paid for the equipment previously belonging to Arnolt that PTI purchased from the auctioneer with funds transferred from her money market account. Mrs. Tiberius denied that any of Arnolt's contracts were transferred to PTI, noting that PTI went to Arnolt's customers and established new accounts. Mrs. Tiberius testified that PTI paid Arnolt for all work that Arnolt performed for PTI.
Norris testified that Arnolt laid him off in August 1992 because of a shortage of contracts. Arnolt recalled Norris to work as its contracts manager in mid September 1992. Norris became more fully aware of Arnolt's financial problems when he rejoined the company. Norris indicated that Mrs. Tiberius approached him about joining PTI in late October or early November 1992. Norris testified that he drafted a proposal from PTI to AM General (Arnolt's Exhibit 31) and joined Tiberius in presenting the proposal to AM General at a meeting on November 19, 1992. Norris stated that he visited a customer in Florida to assure the customer that Arnolt would fulfill its purchase orders, resulting in the collection of an additional $130,000 in accounts receivable for Arnolt. Norris indicated that PTI attempted to fill in the gap when Arnolt was unable to complete its obligations under a contract. He agreed that PTI bought some of Arnolt's equipment from the auctioneer. Norris stated that PTI paid a fair price for the equipment, noting that the auctioneer declined to accept PTI's initial offer to purchase equipment. PTI then made a second offer to purchase equipment which the auctioneer accepted. Norris indicated that PTI began supplying parts to customers in January 1993. Prior to that time, PTI ordered goods and delivered them to Arnolt for machining in order to assist Arnolt in meeting its contractual obligation. Norris testified that PTI's present business is not identical to Arnolt's, noting that PTI supplies different parts to customers and has re-engineered the tooling process for other parts. Norris denied that PTI purchased any of Arnolt's inventory, but agreed that Arnolt machined parts for PTI. Norris indicated that PTI paid Arnolt for its services. Norris felt that Arnolt benefitted from PTI's assistance in completing orders for Arnolt's customers because the customers could not refuse to pay their obligations to Arnolt when the products were supplied. Norris indicated that Arnolt did not have enough business to survive after losing the contracts with the United States Navy. Norris testified that Arnolt's former customers treated PTI as a new entity, rather than a continuation of Arnolt's business.
Raymond Krol ("Krol"), a senior buyer for AM General, testified that AM General bought shock mounts from Arnolt from 1985 to 1992. Krol stated that AM General had a good working relationship with Arnolt. Krol explained that at a meeting in November 1992, Tiberius and Norris informed AM General that Arnolt would cease operations and re-establish itself as a slimmed down company known as PTI. Arnolt's Exhibit 34 is a letter from AM General dated November 25, 1992, notifying PTI of the award of a purchase order for a lower shock mount. Krol stated that AM General awarded the contract to PTI partly because Arnolt's former employees worked for PTI.
Jake Jacoby ("Jacoby"), President and owner of Noblesville Casting, Inc., testified that Arnolt Owes $63,000 to Noblesville Casting, Inc., including $9,578 for a check that was returned for insufficient funds. Jacoby stated that his company provided shock mount castings for Arnolt's products. Jacoby testified that his company shipped no new products to Arnolt after its check was returned for insufficient funds on November 13 and 19, 1992. Jacoby indicated that when he contacted Arnolt about the bad check, Arnolt's representative advised him that Society had caused the problem. Jacoby was unaware whether Arnolt's account with Society was frozen when the check bounced.
Discussion and Decision
The issue is whether the court should dismiss this case pursuant to 11 U.S.C. § 305(a)(1). This section states in relevant part:
(a) The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if —
(1) the interests of creditors and the debtor would be better served by such dismissal or suspension. . . .
11 U.S.C.S § 305(a)(1). The legislative history to § 305 explains that "`[t]his section recognizes that there are cases in which it would be appropriate for the court to decline jurisdiction. Abstention under this section, however, is of jurisdiction over the entire case.'"Chemical Bank v. Togut (In re Axona Int'l Credit Commerce Ltd.), 924 F.2d 31, 35 (2nd Cir. 1991), quoting S. Rep. No. 989, 95th Cong., 2d Sess. 35 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5821. The legislative history provides an example of an instance in which dismissal under § 305(a)(1) is proper:
"The court may dismiss or suspend under the first paragraph, for example, if an arrangement is being worked out by creditors and the debtor out of court, there is no prejudice to the rights of creditors in that arrangement, and an involuntary case has been commenced by a few recalcitrant creditors to provide a basis for future threats to extract full payment. The less expensive out-of-court workout may better serve the interests in the case."
In re Wine and Spirits Specialties of Kansas City, Inc., 142 B.R. 345, 346 (Bankr.W.D.Mo. 1992) and In re Trina Assocs., 128 B.R. 858, 867 (Bankr.E.D.N.Y. 1991) (quoting H. Rep. No. 595, 95th Cong., 1st Sess. 325 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 36 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5822, 6281). Courts have observed that dismissal under § 305(a)(1) is an extraordinary remedy. In re Grigoli, 151 B.R. 314, 319 (Bankr.E.D.N.Y. 1993) (citing In re Melp, Ltd., 143 B.R. 890, 892 (Bankr.E.D.Mo. 1992); In re Wayne's Sport Haus, Ltd., 27 B.R. 521, 522 (Bankr.E.D.Mich. 1983)); In re Iowa Trust, 135 B.R. 615, 621 (Bankr.N.D.Iowa 1992), quoting In re M. Egan Co., Inc., 24 B.R. 189, 191 (Bankr.W.D.N.Y. 1982) (citing In re Bioline Laboratories, 9 B.R. 1013, 1023 (Bankr.E.D.N.Y. 1981) and In re Luftek, 6 B.R. 539, 548 (Bankr.E.D.N.Y. 1980)); In re Manchester Heights Assocs., 140 B.R. 521, 523 (Bankr.W.D.Mo. 1992) (citations omitted) (describing abstention as "an extraordinary power which is to be used only in extraordinary circumstances").
A court must look to the particular facts of each case to determine whether dismissal or suspension under § 305(a)(1) is appropriate. 151 B.R. at 320, citing In re Fitzgerald Group, 38 B.R. 16, 17 (Bankr.S.D.N.Y. 1983) and In re Artists' Outlet, Inc., 25 B.R. 231, 232 (Bankr.D.Mass. 1982); In re Fax Station, Inc., 118 B.R. 176, 177 (Bankr.D.R.I. 1990). Factors which may be relevant in determining whether to abstain or dismiss include: "fairness, priorities in distribution, capacity for dealing with frauds and preferences, speed, economy, freedom from litigation, and the importance of a discharge to the debtor." In re ABQ-MCB Joint Venture, 153 B.R. 338, 341 (Bankr.D.N.M. 1993). See also In re Trina Assocs., 128 B.R. at 867, quoting 118 B.R. at 177, indicating that the following criteria are relevant in analyzing a motion to dismiss under § 305(a):
"(1) economy and efficiency of administration; (2) whether another forum is available to protect the interest of both parties or there is already a pending proceeding in a state court; (3) whether federal proceedings are necessary to reach a just and equitable solution; (4) whether there is an alternative means of achieving the equitable distribution of assets; (5) whether the debtor and the creditors are able to work out a less expensive out-of-court arrangement which better serves all interest in the case; (6) whether a non-federal insolvency has proceeded so far in those proceedings that it would be costly and time consuming to start afresh with the federal bankruptcy process; and (7) the purpose for which jurisdiction has been sought."
Reviewing the circumstances in this case, the court concludes that dismissal under 11 U.S.C. § 305(a)(1) is appropriate. Pursuant to the agreement dated December 10, 1992, Arnolt, UPM, Society, and Tiberius have taken significant steps to liquidate Arnolt's assets in an orderly fashion. As in the Wine Spirits Specialties case, the liquidation of assets is "largely accomplished," although no state court proceeding is pending. 142 B.R. at 347. All that remains to be sold is Arnolt's real estate, which has significant environmental contamination problems and is subject to Society's security interest. The court is firmly convinced that the parties to the liquidation agreement have shown their good faith by making every effort to obtain the highest value for Arnolt's assets and applying substantial amounts of the proceeds to Society's secured debt. Id. Inasmuch as Society has a perfected, first priority security interest in all of Arnolt's assets and the indebtedness to Society is undersecured, the sale of the real estate (even at a good price) will not garner any proceeds for unsecured creditors. As one court noted: "It is not beneficial or economical for this Court to oversee [a] bankruptcy estate, which has no assets other than . . . fully incumbered property."In re ABQ-MCB Joint Venture, 153 B.R. at 342. The court concludes that Arnolt has no significant assets left for the bankruptcy court to administer and that the entry of an order for relief would provide little, if any, benefit to Arnolt and its creditors.
The petitioners raised concerns about the loss of Arnolt's good will and possible frauds and preferences. The court agrees that these matters are important factors to consider in determining whether to dismiss this case. Reviewing the evidence, however, the court concludes that the loss of Arnolt's good will was inevitable, no fraud or wrongdoing occurred in the transfer of some of Arnolt's business and assets to PTI, and any preferential payments to creditors were made with Society's cash collateral for the purpose of enabling Arnolt to complete its contracts and did not result in the diminution of Arnolt's estate. Tiberius testified that Arnolt's loss of its contracts with the United States Navy in 1992 had a devastating impact on Arnolt's business. He explained that although Arnolt considered filing a Chapter 11 petition, it was unable to obtain the requisite new capital to finance the reorganization. Nielson testified that Society had no confidence in Arnolt's ability to continue operating in the fall of 1992, owing to its default on its obligations to Society, the loss of customers, the lack of cash flow and working capital, and Arnolt's inability to pay its continuing obligations. The court believes that Tiberius and Nielson truthfully and accurately described Arnolt's desperate financial situation in October and November 1992. Given the circumstances, the court concludes that the close of Arnolt's business was unavoidable and that Arnolt and Society exercised good business judgment in deciding to liquidate the company outside of bankruptcy, appropriately recognizing that "[t]he interests of a defunct business enterprise would be little affected by the pendency of a bankruptcy proceeding." Remex Electronics Ltd. v.AXL Industries, Inc. (In re AXL Industries, Inc.), 127 B.R. 482, 486 (S.D.Fla. 1991), aff'd without op. in part, dismissed without op. in part, 977 F.2d 598 (11th Cir. 1992).
The court further determines that Arnolt's business had little or no going concern value (or good will) that could have been sold or transferred to another entity. Tiberius testified that 80% of Arnolt's business was making aircraft tailhooks for the United States Navy. Arnolt, though, had lost its contracts with the United States Navy in 1992 prior to the time the parties entered into the liquidation agreement. Tiberius explained that the United States Navy has stringent requirements for the approval of its suppliers and their products. In addition, nearly all government military contracts, including those awarded to Arnolt, prohibit assignment once the contract is awarded. Hence, even though Arnolt was an approved supplier for the United States Navy with the capability of obtaining ongoing government contracts, this status generated little good will for Arnolt because military contacts are not transferrable. Tiberius also testified that Arnolt did not own the designs or specifications for its customers' parts. This fact, too, convinces the court that the fair market value of Arnolt's ongoing business and good will was negligible.
From the testimony presented, the court believes that Arnolt failed to receive awards of new contracts with United States Navy in 1992. Arnolt apparently continued to finish work on previously awarded contracts throughout December 1992.
Albeit Tiberius and Norris used their expertise and contacts (perhaps gained while working for Arnolt) to establish a new business, the court is unable to conclude that these individuals committed any wrongdoing in liquidating Arnolt's assets and forming PTI. Considering the auctioneer's refusal to accept PTI's first offer to purchase equipment which formerly belonged to Arnolt, the unique nature of the items that PTI ultimately acquired, and the price which the auctioneer obtained for the equipment, the court concludes that PTI bought the assets in an arm's length transaction at a fair price. The court also finds that although Tiberius had somewhat conflicting roles in liquidating Arnolt's assets and forming PTI, he faithfully carried out his fiduciary obligations to Arnolt and acted in good faith in establishing the new company. The testimony and evidence before the court indicate that PTI paid Arnolt for all work that Arnolt performed for PTI and that Arnolt benefitted from PTI's assistance in completing Arnolt's purchase orders. Specifically, PTI's work enabled Arnolt to obtain a greater recovery of its accounts receivable and avoid potential liability for failing to fulfill its contractual obligations. The court finds that PTI operated as a new entity, rather than a continuation of Arnolt and that no wrongdoing or fraud occurred in PTI's formation that would warrant the entry of an order for relief.
Finally, the petitioner argued that if an order for relief is entered, the trustee may be able to recover preferences for the benefit of unsecured creditors pursuant to 11 U.S.C. § 547. The existence of avoidable preferences is a relevant consideration in determining whether to dismiss or abstain under § 305(a)(1). U.S. Trustee v. GPA Technical Consultants, Inc. (In re GPA Technical Consultants, Inc.), 106 B.R. 139, 144 (Bankr.S.D.Ohio 1989), citing In re Warner, 83 B.R. 807, 810 (Bankr.M.D.Fla. 1988), appeal dismissed, 94 B.R. 734 (M.D.Fla. 1988); In re Ceiling Fan Distributor, Inc., 37 B.R. 701 [, 703] (Bankr.M.D.La. 1983); In re Colonial Ford, Inc., 24 B.R. 1014, 1020 (Bankr.D.Utah 1982); In re L.N. Scott Co., Inc., 13 B.R. 387, 388 (Bankr.E.D.Pa. 1981). Reviewing the facts surrounding the alleged preferential payments to Arnolt's creditors, the court is not persuaded that a Chapter 7 trustee would have adequate grounds to avoid the payments. The court finds that the alleged preferential payments to Arnolt's creditors were made with Society's cash collateral for the purpose of allowing Arnolt to complete its contractual obligations and collect its outstanding accounts receivable, thereby increasing Society's recovery on its secured claim. Although the question is a close one, the court concludes that Society (rather than Arnolt) had primary control over the funds paid to Arnolt's creditors and that the payments did not diminish Arnolt's estate. In re Smith, 966 F.2d 1527, 1533-35 (7th Cir. 1992), cert. dismissed, Baker Schultz, Inc. v. Boyer, 113 S.Ct. 683 (1992) (dealing with provisional credit). As the funds were not available for the debtor's discretionary use, the court concludes that Arnolt's creditors would not have a right to a pro rata distribution of the funds under the provisions of the Bankruptcy Code. Id. at 1535.
The court finds that the out-of-court liquidation agreement equitably provided for distribution of the proceeds from the sale of Arnolt's assets to Society. Although the petitioners oppose the liquidation of Arnolt's assets outside of the bankruptcy court, they have failed to show that a bankruptcy court liquidation would generate more cash or any other benefit for Arnolt and its creditors. The evidence shows that, as a result of the commendable efforts of Tiberius and Arnolt's other employees, Arnolt received more in liquidating its machinery and equipment than the parties reasonably expected prior to the auction. In fact, Arnolt received more than the appraised value for some of its equipment. The court finds that even if the liquidation had taken place under the jurisdiction of this court, Arnolt's unsecured creditors would have received no distribution from the sale of Arnolt's machinery and equipment. Similarly, unsecured creditors have no right to a distribution from the proceeds of the sale of Arnolt's real estate. These facts convince the court that the out-of-court liquidation of Arnolt's assets was speedy, cost efficient, and fair to all parties. As the liquidation of Arnolt's estate is largely complete and bankruptcy jurisdiction is not necessary to rectify any wrongdoing or unfairness, the court finds that the additional time and expense of continuing with this involuntary case would be superfluous. Although the court believes that the petitioners filed the involuntary petition against Arnolt in good faith, it concludes that the interests of Arnolt and its creditors would be better served if this case is dismissed.
Conclusion
The court grants Arnolt's MOTION TO ABSTAIN AND TO DISMISS INVOLUNTARY PETITION and denies the petitioners' motion in opposition, finding under 11 U.S.C. § 305(a)(1) that dismissal of the case is in the best interests of Arnolt and its creditors.
SO ORDERED.