MEMORANDUM OPINION AND ORDER
The bankruptcy court below found that appellant River Bank America (“River Bank”) had received a fraudulent conveyance of $1.4 million from the debtor FBN Food Services, Inc. (“FBN”). The court avoided the $1.4 million transfer and granted Trustee James Carmel’s (“Trustee”) request to recover the funds, plus prejudgment and post-judgment interest. River Bank appeals that decision, arguing (1) that the transferred funds were never “property of the debtor,” (2) that River Bank was not shown to have committed actual or constructive fraud, and (3) that, in any event, the Trustee should not
I. Background 1
The underlying bankruptcy proceeding arises out of the operation of Sizzler restaurant franchises by FBN, Midwest Restaurant Concepts (“MRC”), and SIG Food Services Associates (“SFSA”). All three companies were owned by the same entities: SIG Partners, Quest Equities Corporation (“Quest Equities”) and Anthony Basile. 2 Quest Equities was a wholly owned subsidiary of appellant River Bank, and SIG Partners was a New York general partnership owned by Stuart Seigel, Irwin Cohen and Gerald Kaufman. Basile, president of FBN, was responsible for the operation of FBN’s Sizzler restaurant franchises, and, along with Kaufman, had personally guaranteed FBN’s obligations to Sizzler.
MRC leased the restaurant facilities and fixtures directly from Sizzler, and its obligations under these leases were guaranteed by FBN, Basile and Kaufman. In contrast, FBN leased its restaurant facilities and fixtures from SFSA. In order to acquire these hard assets, SFSA obtained a $7.5 million unsecured loan from River Bank (“River Bank Loan”) in 1987, as well as a $100,000 loan from Basile. 3 An additional $6.5 million loan was acquired from American National Bank & Trust Company of Chicago (“ANB”) in 1988; however, in order to secure this financing River Bank was required to subordinate the River Bank Loan to ANB pursuant to an intercreditor agreement.
Soon after receiving the initial River Bank Loan, SFSA defaulted. River Bank’s president Avrum Waxman sought the help of financiers William Landberg and Stephen Mann to assist in the refinancing of the River Bank Loan. Waxman also told Basile that if he helped Landberg successfully secure refinancing, River Bank would forgive Basile’s $100,000 promissory note to Quest Equities. These efforts at refinancing continued until late 1990, when Landberg finally guaranteed repayment of a $1 million loan made by World Life & Health Insurance Company of Penna to SFSA. In exchange, Quest Equities handed over to Landberg its interest in SFSA, FBN, and all the related entities.
In April 1989, ANB loaned an additional $4 million to MRC in order for it to purchase additional Sizzler restaurants and franchises. Although this loan was partially secured by a mortgage on the restaurants, ANB also required Sizzler to buy back MRC’s assets should the company default on the loan. In the event of such a default, MRC, FBN, Basile, Kaufinan and others agreed to be liable to Sizzler for repayment.
The operations of FBN and MRC did not flourish, and their relationship with Sizzler quickly began to sour. In February 1990 FBN and MRC filed an action in federal district court in Chicago (“FBN Litigation”), alleging that they were being treated differently from other franchisees and that they had been induced by Sizzler’s misrepresentations and fraudulent conduct into signing the franchise agreements. Sizzler counterclaimed against FBN for breach of the franchise agreement, and included as counterde-fendants Quest Equities, SFSA, Kaufman and Basile under an “alter ego” theory of liability. By June 1990, both FBN and MRC had closed their restaurants and became insolvent. After Sizzler was forced to buy back several of MRC’s restaurants for the benefit of ANB, Sizzler initiated an arbitration action against MRC in California to recoup these and other alleged losses (“MRC Arbitration).
4
Although MRC counter
In an effort to resolve both the FBN Litigation and the MRC Arbitration, a mediation conference between the parties was held in Chicago on September 16-17, 1990. Present at the mediation for Sizzler was Thomas Gregory,
6
the company’s chief executive officer, and two of its attorneys, David Kenagy and William Beynon. FBN was represented by Basile, Kaufman
7
and FBN’s attorney, Nicholas Etten. Although River Bank and Quest Equities had previously transferred their interests in FBN, the two corporations were also represented at the mediation by Waxman, Mann and Stahl. During the mediation presentations were made by FBN and Sizzler, but at no time were presentations made by Quest Equities or River Bank, nor were any claims by the two companies raised.
After receiving releases from all the parties involved in the FBN Litigation and MRC Arbitration, Sizzler paid out the settlement proceeds to FBN, SFSA, River Bank and Quest Equities. Although Quest Equities was to be paid $1.5 million, the payment from Sizzler was deposited into a River Bank account. After deducting $100,000 for the payment of FBN’s legal expenses, River Bank then applied the remaining $1.4 million to
Upon learning of the crediting of the River Bank Loan, ANB brought suit against River Bank for breach of the intercreditor agreement. In particular, ANB alleged that the $1.4 million credit violated River Bank’s agreement to subordinate the River Bank Loan to ANB’s loan. The parties eventually settled the dispute in 1991, whereby River Bank agreed to transfer its $7.5 million mortgage note to ANB, acknowledge that it had credited the River Bank Loan with the $1.4 million payment, and reverse the credit.
In the meantime, FBN was forced into a Chapter 7 bankruptcy by three of its other creditors. On July 9, 1992, the Trustee filed this adversary proceeding against River Bank, Quest Equities and Quest Realty, seeking to avoid and recover the $1.4 million transfer. After hearing three weeks of evidence and reviewing post-trial memoranda, the bankruptcy court avoided the $1.4 million transfer as a fraudulent conveyance and ordered River Bank to return the funds to the debtor.
II. Discussion
Appellant raises several objections to the factual and legal conclusions of the bankruptcy court. We review the factual findings of the court below for clear error, and its legal conclusions
de novo.
Fed.R.Bankr.P. 8013;
Meyer v. Rigdon,
A. Transfer of an Interest of the Debtor in Property
Appellant first attacks the bankruptcy court’s conclusion that the $1.4 million payment from Sizzler to River Bank effected a “transfer of an interest of the debtor in property.” 11 U.S.C. § 548(a). Essentially, River Bank argues that FBN had neither possession nor control over the $1.4 million at any time, and therefore it never had an interest in the money sufficient to invoke the fraudulent conveyance provision of the Code.
See Nordberg v. Sanchez (In re Chase & Sanborn Corp.),
We begin our analysis by examining whether the bankruptcy court correctly characterized the transactions at issue as “transfers.” The determination as to what constitutes a transfer under Section 548 is a
River Bank contends that this characterization of the alleged fraudulent conveyance was not supported by the evidence. Appellant argues that part one of the transaction — FBN’s release of its claims against Sizzler — was speculative at best, since FBN had limited assets and would have had trouble prosecuting its claims regardless of their merit. River Bank also raises the possibility that Sizzler paid the $1.4 million in exchange for releases from Quest Equities and River Bank, or to compromise MRC’s claims. At bottom, appellant seeks to challenge the factual finding of the bankruptcy court that Sizzler paid all of the settlement funds for the sole purpose of resolving FBN’s claims.
A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been made.... Where there are two permissible views of the evidence, the fact-finder’s choice between them cannot be clearly erroneous.
Anderson v. City of Bessemer City, N.C.,
We next review the lower court’s conclusion that the transfer at issue was of “an interest of the debtor in property.” Although the term “property” is defined by reference to federal law, a determination of the debtor’s legal or equitable interest in such property must be made according to state law.
See Barnhill,
Appellant’s citation to
In re Chase & Sanborn Corp.
is unavailing. In that case, the funds in question came from the debtor’s president, and were only passed in and out of the debtor’s bank accounts in order to facilitate a money laundering scheme. The Eleventh Circuit refused to hold that such funds were property of the debtor because the debtor never had the right to control their disbursement, and thus their transfer out of the debtor’s accounts did not actually deplete the assets of the estate.
Finally, appellant challenges a number of the bankruptcy court’s evidentiary rulings. In order to prevail on these objections, however, River Bank must overcome the heavy burden of demonstrating that the bankruptcy court abused its discretion in excluding the evidence.
Thompson v. Boggs,
Regardless, the failure to admit these statements into evidence does not amount to anything more than harmless error. As discussed above, River Bank’s contention that Sizzler wanted River Bank and Quest Equities at the mediation does not undermine the bankruptcy court’s conclusion that the deal was really between FBN and Sizzler. Sizzler wanted to insure that all of FBN’s principals agreed to any settlement, and River Bank, as the sole shareholder of Quest Equities, appeared to fall into that category. Because the admission of this evidence would not have rendered the bankruptcy court’s finding clearly erroneous, we must reject River Bank’s first evidentiary objection.
Appellant also contends that the bankruptcy court improperly limited the cross-examination of Nicholas Etten, FBN’s attorney. In particular, River Bank was not permitted to ask Etten about potential claims River Bank might have had against Sizzler, since on direct examination Etten only testified that no claims by Quest Equities were ever made known to him. The bankruptcy court was permitted to limit cross-examination “to the subject matter of the direct examination and matters effecting the credibility of the witness.” Fed.R.Evid. 611(b). “[B]eeause the management of cross-examination is peculiarly committed to the [trial] court’s discretion, the effect is to confine the matter largely to the trial level and to remove it from the areas of profitable appellate review.”
United States v. Carter,
In sum, we agree with the bankruptcy court that the transaction at issue, although not a common method means of conveying property of the debtor, constituted a transfer of an interest of FBN in property. As such, it satisfied the first element of a fraudulent conveyance.
B. Actual Intent to Defraud
Appellant next attacks the finding of the bankruptcy court that the transac
As the bankruptcy court applied the proper legal standard for determining whether actual intent to defraud existed, we review its findings for clear error.
Acequia, Inc. v. Clinton (In re Acequia, Inc.),
C. Constructive Intent to Defraud
The bankruptcy court also held that the $1.4 million transfer was voidable based on River Bank’s and FBN’s constructive intent to defraud FBN’s creditors. The Code mandates a finding of constructive fraudulent intent when the debtor “receive[s] less than reasonably equivalent value in exchange for [the] transfer or obligation^] and ... was insolvent on the date that such transfer was made or such obligation was incurred....” 11 U.S.C. § 548(a)(2). Although the parties do not dispute that FBN was insolvent at the time of the transfer, appellant challenges the bankruptcy court’s finding that the debtor did not receive reasonably equivalent value in exchange. We give “great deference” to the bankruptcy court’s determination on this fact-intensive issue.
Bundles v. Baker (In re Bundles),
River Bank argues that in exchange for the $1.4 million transfer, FBN received all the benefits of the settlement agreement, which included $250,000 in cash and the elimination of some $1.5 million in obligations owed by FBN. Such indirect benefits, appellant argues, must be considered when determining whether reasonably equivalent value was given to the debtor.
See In re Bowers-Siemon Chemicals Co.,
Moreover, the bankruptcy court found that the agreement to disburse the settlement funds was not reached by way of an arms-length transaction, but rather, through the coercion of the debtor by a major creditor. Id. The bankruptcy court heard the testimony of B asile, Gregory and Kaufman, and its findings on the nature of the settlement negotiations and the eventual disbursement of the proceeds were fairly supported by this evidence.
Finally, the court below found that FBN did not reap any benefit directly from the payment of $1.4 million to River Bank. These funds were initially credited to the River Bank Loan made to SFSA, an obligation on which FBN had no liability. Id. at 688-89. Although this credit could have reduced FBN’s indebtedness to SFSA, this did not occur because the credit to SFSA was subsequently reversed and no amount of the SFSA loan made to FBN was forgiven.
In sum, the evidence supported the bankruptcy court’s finding that FBN did not receive reasonably equivalent value in exchange for the $1.4 million payment to River Bank. We therefore defer to this finding and conclude that the trustee demonstrated constructive intent to defraud.
D. Limitation on the Trustee’s Recovery
Appellant’s final argument is that the trustee should be precluded from recovering the entire $1.4 million payment because any such recovery is limited to the amount of timely filed claims against the estate of the debtor. River Bank goes on to argue that SFSA’s claim of $2.4 million should be excluded on the grounds that it was untimely and would only benefit the insiders of the debtor. At bottom, River Bank seeks to challenge the bankruptcy court’s approval of SFSA’s claim. However, the bankruptcy court previously held that River Bank did not have standing to object to this claim, and this ruling has been affirmed by Judge Conlon.
In re FBN Food Servs.,
No. 93 C 6347,
III. Conclusion
For the reasons set forth above, the decision of the bankruptcy court is affirmed. It is so ordered.
Notes
. This lengthy discussion of the facts is derived primarily from the opinion of bankruptcy court.
Carmel v. River Bank America (In re FBN Food Services, Inc.),
. Although SFSA had an additional shareholder, that entity held only 1% of the outstanding shares of SFSA. A more detailed description of the ownership interests in these companies can be found in the bankruptcy court opinion.
. Basile, in turn, had borrowed the $100,000 from Quest Equities and executed a promissory note in exchange.
. With the commencement of the California arbitration proceedings, MRC was dismissed as a plaintiff from the FBN Litigation and its claims were moved to the arbitration.
. Basile believed that MRC had a very weak position in the arbitration, and that its liability to Sizzler was clear cut. Trans. 336-338. Philip Stahl, counsel for River Bank and Quest Equities, agreed that MRC would get "creamed” in the arbitration. Trans. 1785.
. The bankruptcy court found Gregory to be "especially credible,” given that he was a disinterested witness and testified in a forthright manner.
. Although Kaufman putatively represented FBN and SIG Partners, he also was on the hook to River Bank for approximately $8 to $9 million in guarantees, and thus had a personal interest in resolving the asserted claims.
. This figure was divided into $1.5 million for the purchase of the two parcels of real estate, and $300,000 to repay SFSA for an outstanding loan made to FBN.
. This amount was intended to offset a $625,000 loan made to SFSA, which in turn had been lent to FBN.
. This amount was further divided in $100,000 for the payment of FBN’s legal fees, and $1,400,-000 to pay down the River Bank Loan.
. Soon afterwards Waxman also demanded an additional $250,000 from SIG Partners to pay down the River Bank Loan, and a "side agreement” was entered into by Kaufman, Cohen and Seigel, whereby they agreed to execute a promissory note to River Bank for that amount. However, that agreement was contingent on ANB's approval, which was never given.
. Technically, the credit went to the account of Quest Realty Corporation, a wholly-owned subsidiary of Quest Holding Corporation, which itself was wholly-owned by River Bank.
. This portion of the Bankruptcy Code provides, in pertinent part, that:
[t]he trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation incurred, indebted; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer; ....
11 U.S.C. § 548(a). The parties do not dispute that the transfer at issue occurred within one year of the filing of FBN’s involuntary petition for bankruptcy.
.More accurately, appellee seeks to avoid the transfer from FBN to Quest Equities. However, appellant does not challenge the finding of the bankruptcy court that the money paid to Quest Equities actually benefited River Bank.
. Due to a numbering error in Pub.L. 101-647 (Crime Control Act of 1990), 11 U.S.C. § 101 currently contains two sections numbered (54). Nonetheless, we shall refer to the term “transfer” as being codified at § 101(54).
. Although River Bank argues that the bankruptcy court was inconsistent in its characterization of the transfers at issue, appellant misapprehends the opinion of the court below. The transfers were clearly outlined by the bankruptcy court, and any confusion concerning them stemmed from the complicated nature of the transactions themselves.
.River Bank seeks to avoid this deferential standard of review by arguing that the these issues involve mixed questions of law and fact, or that they deal with the proper interpretation of the Bankruptcy Code. Not so. The bankruptcy court correctly applied the proper legal standard for determining whether an interest of the debtor was transferred, and thus our review of the bankruptcy court’s factual conclusions is not plenary.
Cf. Edgewater Walk Apartments v. Mony Life Ins. Co.,
. In support of its contention that it gave value in exchange for the $1.4 million, appellant points to Sizzler’s demand to have all the principals of FBN sign the settlement agreement. River Bank then asserts that it would not have given its approval if it had not received these funds. However, the demand by Sizzler for unanimity is not inconsistent with the bankruptcy court’s conclusion, since in order to definitively settle the FBN Litigation Sizzler wanted to obtain releases from all of FBN’s principals. The court found that River Bank, as parent of Quest Equities, was included on that list because of its potential control over FBN, not because of any independent claims River Bank may have had. Given the evidence adduced at trial, this conclusion is not clearly erroneous.
. Appellant again seeks to avoid this deferential standard of review by arguing that (1) the court improperly imputed evidence of its fraudulent intent to FBN, and (2) as a matter of law, its actions could not have been construed as fraudulent. Both of these arguments lack merit. First, although River Bank cites several bankruptcy cases that focus solely on the intent of the trans-feror when analyzing the applicability of Section 548(a)(1), these cases do not preclude the imputation of the transferee's intent if the transferee controls or dominates the transferor. Indeed, this exception to the general rule is explicitly recognized in one of appellant's main cases,
Pinto v. Philadelphia Fresh Food Terminal Corp. (In re Pinto),
. Appellant contends that its approval of the Sizzler settlement was the value it gave in exchange for the $1.4 million transfer. However, as discussed below, appellant’s approval of the agreement was required because of Sizzler's belief that River Bank, as the sole owner of Quest Equities, was a principal of FBN. Thus, River Bank’s contention that its approval constituted "value” worth approximately $1.4 million is questionable at best.
. River Bank's fraudulent intent is further evidenced by its later reversal of the $1.4 million credit and transfer of its mortgage to ANB.
.The Supreme Court recently rejected
Bundles
in the limited context of deciding whether the price paid at a regularly conducted, non-collusive foreclosure sale constituted "reasonably equivalent value.”
See BFP v. Resolution Trust
Corp., - U.S. -, -,
. In addition, we doubt whether River Bank is correct in its assertion that the trustee is limited in his recovery to the claims of the creditors.
See