Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-3_07-ap-03022/USCOURTS-canb-3_07-ap-03022-1/pdf.json

Parties Involved:
Andrea A. Wirum
Plaintiff
John O. Wilson
Defendant

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MEMORANDUM DECISION -1-

UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re

SDR CAPITAL MANAGEMENT, INC.,

Debtor.

 

ANDREA A. WIRUM, Chapter 7 Trustee,

Plaintiff, 

vs.

JOHN O. WILSON, individually and as

Trustee of the Wilson Family Living

Trust,

Defendant. 

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Case No. 05-34008 TEC

Chapter 7

Adv. Proc. No. 07-3022 TC

MEMORANDUM DECISION

This action was tried before the court on October 30 and

November 1, 2007. Dennis D. Davis appeared for Plaintiff Trustee. 

John H. MacConaghy appeared for Defendant Wilson. For the reasons

set forth below, I find for Defendant.

Signed and Filed: November 14, 2007

________________________________________

THOMAS E. CARLSON

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

November 15, 2007

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 1 of 6 
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MEMORANDUM DECISION -2-

Debtor SDR Capital Management, Inc. (Debtor) provided

financial advice to investors. Defendant John Wilson (Wilson)

served as chief economist for the firm from January 1999 through

October 2001, and as a director from January 1999 through December

2001. As part of his compensation, Wilson received shares of

Debtor’s stock. Debtor redeemed 205,240 of Wilson’s shares in the

spring of 2002 for $.62 per share, and redeemed Wilson’s remaining

175,000 shares in the summer of 2003 for $.52 per share.

Debtor filed a chapter 7 petition on October 11, 2005. 

Trustee, contending that Debtor was insolvent at the time of each

of the payments to Wilson, and that the shares redeemed had no

value to Debtor, seeks to recover the payments to Wilson as

constructive fraudulent conveyances and as shareholder

distributions prohibited by California Corporations Code Section

506. Wilson contends that Debtor actually made money on the

transactions by reselling at $1.00 per share the shares redeemed

from Wilson at $.62 and $.52 per share. I assume, without

deciding, that Debtor was insolvent at all times relevant.

The redemption of shares by an insolvent corporation generally

does not provide value to creditors of the corporation. Joshua

Slocum, Ltd. v. Boyle (In re Joshua Slocum, Ltd.), 103 B.R. 610,

618-19 (Bankr. E.D. Pa. 1989), aff’d 121 B.R. 442 (E.D. Pa. 1989);

Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply,

Inc.), 100 B.R. 127, 136 (Bankr. D. Mass. 1989). This is so

because the redemption payment decreases corporate assets without

decreasing corporate debt. Furthermore, redemption generally does

not provide value to the corporation’s creditors even when the

shares have value to a third party, because a corporation generally 

Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 2 of 6 
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MEMORANDUM DECISION -3-

can sell treasury shares without redeeming other shares. There is

no per se rule, however, and a court can find that retention of

shares does provide value to the corporation where it is a

necessary part of a broader transaction through which the

corporation obtains money or property. Corporate Jet Aviation,

Inc. v. Vantress (In re Corporate Jet Aviation, Inc.), 82 B.R. 619,

622-23 (N.D. Ga. 1987); aff’d 838 F.2d 1220 (11th Cir. 1988)

(table). 

The present case warrants departure from the general rule. 

The evidence shows that Debtor received reasonably equivalent value

for the funds paid to Wilson in redemption of his shares, because

that redemption was necessary to Debtor’s sale of treasury shares

at a higher price. 

Debtor would not have sold treasury shares to new investors

without redeeming shares previously issued. Debtor’s shareholders

had agreed that the total number of shares issued or on which

options had been granted (the Outstanding Shares) would not exceed

11,600,000. The corporate records demonstrate that Debtor honored

this agreement. In March 2002, shortly before the first redemption

of Wilson’s shares, there were exactly 11,600,000 Outstanding

Shares. Thereafter, each time Debtor issued shares, Debtor

redeemed a like number of shares at about the same time, so that

the Outstanding Shares never exceeded 11,600,000 for any extended

period of time. 

The redemption of Wilson’s shares was part of the means by

which Debtor sold treasury shares without breaching the limit on

Outstanding Shares. On April 30, 2002, Debtor recorded both the

redemption of 205,240 shares from Wilson, and the issuance of

Case: 07-03022 Doc# 41 Filed: 11/14/07 Entered: 11/15/07 11:57:32 Page 3 of 6 
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1

 Debtor also recorded on April 30, 2002 the issuance of

598,065 shares to Daniel Warmenhoven for $.57 per share, but

Debtor’s March 7, 2003 “Cap Table” indicates that these shares had

been issued to Warmenhoven before that date, and thus should not be

paired with the redemption of Wilson’s 205,240 shares.

2

 There is conflicting evidence as to exactly when each

redemption and transfer of shares occurred. The letter

memorializing the agreement to buy or redeem shares has one date,

the related payment is made on a different date, and the transfer

is recorded on the Debtor’s stock register on a third date. 

Notwithstanding this variation, and the fact that in some instances

the formal decision to redeem occurred after the sale of treasury

shares, I find that the general pattern was to redeem shares as

necessary to keep Outstanding Shares within the 11,600,000 limit,

and that Debtor made the redemptions of Wilson’s shares at issue

here with that intent.

MEMORANDUM DECISION -4-

196,905 shares to Butler, Russo and Young.1 On April 25, 2003,

Debtor recorded the issuance of 175,000 shares to Lis, causing the

Outstanding Shares to exceed the agreed-upon limit by approximately

181,000. On June 10, 2003, Debtor redeemed Wilson’s remaining

175,000 shares, and later redeemed additional shares from other

persons, to bring the number of Outstanding Shares within the limit

once again.2

Debtor made a profit both times that Debtor redeemed Wilson’s

shares and sold treasury shares. At about the same time Debtor

redeemed 205,240 shares from Wilson for $127,371, Debtor sold

196,905 shares to Butler, Russo and Young for $196,905. Shortly

before Debtor redeemed 175,000 shares from Wilson for $91,000,

Debtor sold 175,000 shares to Lis for $175,000. 

Based on the above, I determine that the redemption of

Wilson’s shares and the sale of treasury shares should be combined

for the purpose of determining whether Debtor received value for

the shares redeemed. The Ninth Circuit used just this approach in

a similar situation, combining two transactions in holding that the

recipient of an alleged fraudulent transfer had paid reasonably

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MEMORANDUM DECISION -5-

equivalent value. Wyle v. C.H. Rider & Family (In re United Energy

Corp.), 944 F.2d 589 (9th Cir. 1991). “Bankruptcy courts are

courts of equity. As such, they possess the power to delve behind

the form of transactions and relationships to determine the

substance.” Id. at 596. Thus, the bankruptcy court may combine

transactions that are “intimately intertwined.” Id.; accord

Vantress, supra, 82 B.R. at 622-23. 

Trustee contends that Debtor’s sale of treasury shares should

be accorded no weight, because a subsequent SEC examination

disclosed numerous irregularities in the sale of those shares. The

SEC report stated that Debtor breached its fiduciary duty by

selling shares to existing clients for more than it paid, and that

Debtor should not have sold its shares to clients who maintained

conservative portfolios. 

The SEC report does not justify disregarding the sale of

treasury shares in determining the value of the shares redeemed. 

That Debtor should not have sold shares to its clients at a profit

does not suggest that the shares were not worth at least what

Debtor paid Wilson. Equally important, creditors suffered no harm

as a result of the problems noted by the SEC. None of the persons

who purchased the treasury shares ever asserted claims against

Debtor. Thus, the net result of the related redemption-sale

transactions was to increase Debtor’s assets without increasing its

liabilities. Finally, to disregard the resale of shares for the

reasons urged by Trustee would not further the purpose of the

statutes under which Trustee asserts her claims (protecting

creditors against diminution of assets available to pay their

claims). Trustee’s approach would have Wilson pay the estate for 

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MEMORANDUM DECISION -6-

securities violations that: (1) did not harm creditors of the

estate; (2) Wilson did not perpetrate; and (3) have never been

formally charged or established in any court. 

I find that the redemption of Wilson’s shares was “intimately

intertwined” with the sale of treasury stock at a higher price, and

that Debtor received fully equivalent value for the redemption

payments. Trustee cannot recover the transfers at issue as

constructive fraudulent conveyances, because Wilson provided

reasonably equivalent value for the money received. Cal. Civ. Code

§ 3439.05. Trustee cannot recover the transfers at issue as

unlawful shareholder distributions, because Wilson provided

valuable consideration for the transfers. Cal. Corp. Code § 166. 

It is not necessary to reach the other issues raised by the

parties.

Judgment will be entered for Wilson.

This memorandum decision constitutes the court’s findings of

fact and conclusions of law.

**END OF MEMORANDUM DECISION**

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