47 Fed. R. Evid. Serv. 670, 11 Fla. L. Weekly Fed. C 349 General Trading Incorporated, Plaintiff-Counterclaim-Defendant-Appellant-Cross-Appellee. v. Yale Materials Handling Corporation, Defendant-Counterclaim-Plaintiff-Appellee-Cross-Appellant, Jose M. Baeza, Sr., Counterclaim Jose M. Baeza, Jr., Counterclaim General Trading Incorporated, Plaintiff-Counterclaim-Defendant-Appellant v. Yale Materials Handling Corporation, Defendant-Counterclaim-Plaintiff-Appellee, Jose M. Baeza, Sr., Counterclaim Jose M. Baeza, Jr., Counterclaim General Trading Incorporated, Plaintiff-Counterclaim-Defendant-Appellee v. Yale Materials Handling Corporation, Defendant-Counterclaim-Plaintiff-Garnishor- Appellant-Appellant-Cross-Appellee, Gonzalez Trading, Inc., a Foreign Corporation, Jose M. Jose Manuel Baeza, Sr., Jose M. Baeza, Jr., Javier Baeza, Counterclaim-Defendants- Appellees-Cross-Appellants, Power Depot, Inc., a Florida Corporation, Michele M. Baeza, Involuntary Supplemental Encarnacion Gonzalez, Involuntary Supplemental G

Citation: 119 F.3d 1485Docket: 94-4526

Court: Court of Appeals for the First Circuit; August 22, 1997; Federal Appellate Court

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The case involves multiple parties, primarily General Trading, Inc. (GTI) and its president, Jose Baeza, Sr., who initiated legal action against Yale Materials Handling Corporation (Yale) for the termination of a franchise agreement related to the sale of forklifts and parts. Yale responded with counterclaims and included additional parties, such as Baeza, Sr.'s sons, Jose Baeza, Jr. and Javier Baeza, as well as Gonzalez Trading, Inc., a corporation linked to Baeza, Sr. Following the start of the litigation, Yale filed an involuntary bankruptcy petition against GTI, which was subsequently dismissed by the bankruptcy court. The case features appeals concerning these claims and counterclaims arising from both the district and bankruptcy courts.

The district court case was ultimately referred to a magistrate judge for trial and final resolution. The magistrate judge determined that Yale did not wrongfully terminate the franchise agreement with GTI, but found that GTI breached the agreement. Additionally, the judge ruled that Yale wrongfully filed an involuntary bankruptcy petition. Javier Baeza and Baeza, Jr. were not held liable to Yale. Following this judgment, the magistrate judge granted Yale's motion to implead new parties, including Baeza, Jr., who were accused of receiving fraudulent transfers from GTI and Baeza, Sr. After hearings, several fraudulent transfers to the new transferees were set aside. The new transferees withdrew their motion for a new trial, accepting the magistrate's judgment but later challenged the judge's authority under 11 U.S.C. § 636(c). The original counter-defendants also questioned the magistrate's authority. This opinion addresses appeals from both the original parties and the newly impleaded transferees.

In November 1978, Yale entered into a Dealer Marketing Agreement (DMA) with GTI, allowing GTI to act as a dealer for Yale's forklifts and parts, financed through an open account with Yale and floor plan financing from Heller Financing Company. Yale terminated the franchise agreement in December 1987 due to GTI's misuse of pricing practices, submission of false warranty claims, and misrepresentation of used forklifts as new. In response, GTI ceased payments to Heller and Yale despite continuing to sell Yale forklifts. Heller declared GTI in default, prompting Yale to take assignment of Heller's rights under the financing plan.

Shortly after the termination, GTI and its president, Jose Baeza, Sr., filed suit in state court for wrongful termination of the DMA, which was removed to federal court due to diversity jurisdiction. Yale counterclaimed for breaches of the DMA, fraudulent asset conveyance, and failure to pay debts. Yale later added counter-defendants including Javier Baeza, Baeza, Jr., and Gonzalez Trading, a competing dealership. The district court issued a prejudgment writ for the return of Yale forklifts remaining on GTI's premises. In 1990, the case was tried over 13 days before a judge, who resigned before completion, leading to the case being transferred to District Judge William J. Zloch.

On August 30, 1991, attorneys for the parties in a litigation case discussed referring the matter to a United States magistrate judge during a status conference. On November 20, 1991, attorneys for Yale, GTI, Baeza, Sr., Javier Baeza, and Baeza, Jr. consented to complete the trial before Magistrate Judge Ted E. Bandstra, as allowed under 28 U.S.C. § 636(c). The consent document included stipulations to proceed under Amended Rule 63 of the Federal Rules of Civil Procedure, although Gonzalez Trading was not explicitly mentioned in the preamble. Baeza Jr.'s attorney indicated no objection to the magistrate handling the case.

On November 27, 1991, the district court issued an order formally referring the case to the magistrate, affirming the consent and stipulation, and allowing seven days for any objections, which went unfiled. After the trial concluded on September 30, 1992, the magistrate ruled in favor of Yale on GTI's wrongful termination claim, awarding Yale $1,119,612 for breach of contract and other claims, while determining that GTI's bankruptcy petition was filed in bad faith, resulting in punitive damages of $500,000 and attorney's fees of $89,777 for GTI. Co-defendants Javier Baeza and Gonzalez Trading were found not liable. An amended final judgment on April 28, 1993, awarded Yale $1,139,528 against GTI and Baeza, Sr., and a further judgment of $2,279,181.36 on November 10, 1993, for attorney's fees and costs.

Yale conducted discovery related to the execution of its judgment and identified fraudulent transfers made by GTI and Baeza, Sr. after September 30, 1992. On July 8, 1993, Yale filed an emergency motion under Fed. R. Civ. P. 69 and Florida Statute 56.29, requesting the magistrate judge to compel several parties—including Javier Baeza, Jose Baeza, Jr., Power Depot, Michele M. Baeza, and Encarnacion Gonzalez—to demonstrate why property received from GTI or Baeza, Sr. should not be subject to execution to satisfy Yale's judgment. Yale alleged these transfers violated Florida's Uniform Fraudulent Transfers Act and bulk sales laws, seeking to invalidate the transfers and claim the assets as partial payment of the judgment.

Initially denied, Yale renewed its motion, which the magistrate judge granted on September 17, 1993, impleading new transferees and ordering them to show cause regarding the fraudulent acquisitions. The new transferees responded and presented proposed findings prior to evidentiary hearings. On February 25, 1994, the magistrate judge invalidated several specific transfers, including real estate and bonuses linked to Baeza, Sr. and GTI, while concluding Power Depot was not liable. Subsequent to the magistrate's final judgment, the new transferees sought a new trial, which they later withdrew in favor of a written acceptance of judgment, indicating acceptance without admission of facts for peace of mind.

On May 2, 1994, the new transferees filed a motion for an emergency hearing to vacate the magistrate's judgments, claiming they had not consented to the magistrate's authority under 11 U.S.C. § 636(c) and that the magistrate lacked subject matter jurisdiction.

GTI, Baeza, Sr., Baeza, Jr., and Gonzalez Trading filed motions questioning the magistrate judge's authority, which were denied following a hearing on May 10, 1994. They appealed the denial on May 23, 1994. Concurrently, Baeza, Jr. and Gonzalez Trading sought to vacate the referral order via the district court, which denied their motion on October 24, 1994, citing lack of jurisdiction due to the pending appeal and finding that they had consented to the magistrate's authority under 28 U.S.C. § 636(c). This denial was also appealed. On August 21, 1995, the appellate court affirmed the district court's dismissal, confirming that the district court could not entertain the motion while the appeal regarding the magistrate's authority was active.

Separately, on April 8, 1988, Yale filed an involuntary bankruptcy petition against GTI in the Southern District of Florida under Chapter 7. Yale sought relief from the automatic stay to pursue prejudgment remedies, which was granted. The bankruptcy court dismissed the petition on June 30, 1988, after finding that Yale's claims regarding inventory payments and collateral were subject to a bona fide dispute in the district court. The court determined that the creditors had not demonstrated GTI's inability to pay debts and concluded that adequate relief could be obtained in the district court. This dismissal was upheld by the district court on May 26, 1989, leading to Yale's appeal regarding the bankruptcy court's ruling.

The bankruptcy court did not address whether Yale wrongfully filed the petition, reserving that issue for later determination. The magistrate judge later ruled that Yale filed the petition in bad faith, awarding GTI punitive damages of $500,000 and attorney's fees of $87,777. Yale's appeal of this ruling is also under consideration. The court will address the following issues on appeal: the consent of GTI and others to the magistrate judge's authority, whether Power Depot was a recipient of a fraudulent transfer, the determination of bad faith in Yale's bankruptcy petition, and the district court's affirmation of the bankruptcy court's dismissal of the involuntary petition.

Factual findings in district court proceedings are reviewed for clear error, while legal applications to those facts are reviewed de novo. For a finding to be deemed clearly erroneous, there must be a definite conviction that a mistake was made. In bankruptcy proceedings, determinations of law are also reviewed de novo, but factual findings are subject to the clearly erroneous standard. 

Regarding the applicability of 28 U.S.C. § 636(c), a magistrate judge requires the "consent of the parties" to oversee nonjury civil matters and issue judgments. Consent must be "clear and unambiguous," not inferred from conduct. On appeal, GTI, Baeza, Sr., Baeza, Jr., Gonzalez Trading, and new transferees contend they did not consent to the magistrate judge's authority.

Upon review, evidence indicates that GTI, Baeza, Sr., Baeza, Jr., and Gonzalez Trading explicitly consented to the magistrate judge's oversight. During a status conference on November 20, 1991, their attorneys presented a signed consent and stipulation. Although the preamble did not mention Baeza, Jr. or Gonzalez Trading, their consent was evident in the proceedings. Baeza, Jr.'s attorney confirmed no objection to proceeding before the magistrate, demonstrating clear consent. Gonzalez Trading's attorney signed the consent document, and its president was present, affirming the collective agreement. The magistrate judge noted this consensus on the record, validating the explicit consent of all parties involved.

GTI, Baeza, Sr., Baeza, Jr., and Gonzalez Trading were instructed by the district court to file any objections to a magistrate judge's referral order within seven days. The failure to object, especially after consenting to the magistrate's authority, results in a waiver of the right to an Article III judge, as supported by the precedent in Peretz v. United States. The parties participated in pre-trial and post-trial proceedings without objection and only contested the magistrate's authority after an adverse ruling, leading the court to find their claims of lacking consent to be incredulous and their right to an Article III judge waived.

Regarding new transferees Michele Baeza, Javier Baeza, Encarnacion Gonzalez, and Power Depot, the court determined they also consented to the magistrate judge's authority by accepting the judgment post-final ruling, as consent does not require a specific form or written acknowledgment. Their subsequent acceptance of judgment indicated consent, thus waiving any claims of constitutional rights deprivation.

Furthermore, Yale's discovery revealed fraudulent transfers by GTI and Baeza, Sr. between September 30, 1992, and May 7, 1993. Following evidentiary hearings, the magistrate judge invalidated several transfers, including Baeza, Sr.'s transfers of real estate and a yacht to family members, as well as significant payments made by GTI to family-owned businesses and individuals, highlighting the fraudulent nature of these transactions.

The magistrate judge concluded that while certain transfers were fraudulent conveyances, GTI's transfer of $1,185,000 in inventory and fixed assets to Power Depot was not deemed fraudulent. Power Depot, established by former GTI director Javier Baeza, operated at GTI's location, employed its staff, and utilized its suppliers and customers. On appeal, Yale argues that the transfer was fraudulent, that Power Depot is GTI's alter ego liable for its debts, and that the transfer violated Florida's bulk sales laws. The magistrate judge referenced Fla. Stat. § 56.29(6)(a), which allows a judgment creditor to reach property transferred by a debtor within one year of service if the transferee has a close relationship with the debtor. Under this statute, GTI bore the burden to prove the transfer was not intended to defraud Yale, requiring only a preponderance of evidence to establish fraud. Additionally, Florida's Uniform Fraudulent Transfer Act (UFTA) was applicable, defining a fraudulent transfer as one made with intent to defraud or without receiving equivalent value, particularly when the debtor is at risk of insolvency. The UFTA outlines specific "badges of fraud" to assess actual intent, including insider transfers, retention of control over assets, concealment of the transfer, prior lawsuits, and insolvency of the debtor.

A single badge of fraud may suggest suspicious circumstances but is insufficient alone to invalidate a conveyance. However, multiple badges of fraud may allow for an inference of fraudulent intent. The Uniform Fraudulent Transfer Act (UFTA) acknowledges various badges of fraud but also permits consideration of additional factors beyond those listed when assessing intent. Courts evaluate the specifics of each conveyance to determine a debtor's intent to hinder or delay creditors, rather than making determinations in isolation.

Florida Statute § 726.106 is relevant as it applies to transfers affecting present creditors, such as Yale, and does not require proof of fraudulent intent if the debtor was insolvent or became insolvent due to the transfer, or if the transfer was made to an insider who knew of the debtor's insolvency. 

The magistrate judge concluded that Power Depot did not receive a fraudulent transfer, a finding which raises doubts and is therefore vacated. The magistrate identified several badges of fraud: GTI was in litigation at the time of the transfer, the transfer was for value comparable to the assets, and GTI became insolvent shortly after the transfers. However, the judge noted that Power Depot was not an insider merely because its sole owner, Javier Baeza, was not classified as such under Florida law, and that the transfer did not encompass all of GTI's assets.

Concerns arise regarding the magistrate's assertion that the sale of approximately $1,185,000 in inventory and fixed assets from GTI to Power Depot was for fair value, as the good will of the business was not considered in this valuation. Furthermore, despite claiming the property was sold for equivalent value and profit, this was also categorized as a badge of fraud. The magistrate's broader conclusion that Power Depot was not an insider is questioned; Baeza's control over Power Depot and his position as an insider at GTI suggest a close relationship that should be treated as indicative of fraudulent intent. The case reflects broader issues regarding the validity of transfers and the relationship between transferors and transferees in fraudulent transfer claims.

The reviewing court evaluated the factors constituting badges of fraud relevant to a jury verdict regarding the transfer of assets between Bruce Bowen, Inc. and Banner Construction Corporation. Key elements included the familial relationships of the officers and stockholders in both entities, the financial distress of Bruce Bowen, Inc., and the dual role of Bruce Bowen as an officer in both companies. The court upheld the jury's verdict based on these indicators.

The situation involving GTI and Power Depot mirrored the circumstances in the Banner case, with GTI’s officers also being related and Power Depot being established shortly after GTI faced significant financial challenges. The court found issues with the magistrate judge's analysis regarding the transfer of GTI's assets, particularly concerning the interpretation of "substantially all" of the debtor's assets under Florida Statute 726.105(2)(e). The transfer occurred during GTI's business cessation, with strong evidence suggesting that most of GTI's assets and inventory were indeed transferred to Power Depot, which continued operations using GTI's resources and personnel.

Additionally, concerns arose from the timing of GTI's asset liquidation, coinciding with multiple fraudulent transfers attributed to GTI and its president, Baeza, Sr. Following a judgment against him and GTI, Baeza, Sr. reportedly engaged in extravagant spending, raising questions about his ability to fulfill financial obligations related to Yale's judgments. The magistrate judge's conclusions regarding the completeness of the asset transfer lacked sufficient clarity, particularly regarding the standard for determining badges of fraud.

Actions by GTI and Baeza, Sr. following an unfavorable district court ruling suggest a pattern of fraud intended to obstruct and deceive Yale. Concerns exist regarding the district court's conclusion that Power Depot's acquisition of GTI's assets and inventory was not a fraudulent transfer, but a decision to reverse is not warranted at this stage. This is partly because Yale's judgment may have already been satisfied by assets deemed fraudulent by the magistrate judge. If the asset transfer was legitimate, Yale could access GTI's value without a fraudulent transfer finding. However, doubts remain about whether Power Depot compensated GTI adequately. Further investigation is needed regarding the full value paid for the assets, inventory, and goodwill, as well as whether "substantially all" of GTI's assets were sold to Power Depot. Consequently, the district court's decision is vacated, and the case is remanded for additional proceedings.

Regarding Yale’s appeal of the magistrate judge’s finding that it filed an involuntary bankruptcy petition against GTI in bad faith, Yale argues that the magistrate applied an incorrect standard. Since "bad faith" lacks a specific definition in the bankruptcy code, courts have adopted various tests to assess it. One test, the "improper purpose test," determines bad faith based on motivations of ill will or harassment toward the debtor. Another, the "improper use test," identifies bad faith when a creditor misuses bankruptcy proceedings for personal advantage instead of protecting against disproportionate advantages to other creditors. A third approach correlates bad faith to violations of Bankruptcy Rule 9011, akin to Federal Rule of Civil Procedure 11.

An analysis under Rule 9011 requires both an objective and subjective inquiry regarding the legal justification for a claim or defense, specifically focusing on reasonable investigations into facts and law, as well as ensuring the bankruptcy proceeding is not pursued for improper motives like harassment or delay. The magistrate judge found that Yale wrongfully filed an involuntary petition against GTI, concluding it acted with bad faith due to the presence of ill will, supported by evidence that GTI was solvent, Yale had a personal guaranty from Baeza, Sr., and could pursue damages in another case. On appeal, Yale contended that both objective and subjective inquiries should have been applied to assess bad faith. However, the appellate review determined that the magistrate's finding was erroneous, emphasizing that Yale's primary motivation for filing the petition was to protect its interests against other creditors potentially obtaining GTI's assets disproportionately. Evidence indicated GTI favored other creditors over Yale, including the sale of Yale's collateral without remitting proceeds to Yale, which raised concerns of asset liquidation detrimental to Yale's recovery. Yale had grounds to believe that Baeza, Sr. intended to deplete GTI's assets and prioritize payments to other creditors, as demonstrated by various financial transactions.

Harold Moorefield, Jr., counsel for Yale, testified that many payments in GTI's records were preference payments to non-insider creditors, recoverable only through bankruptcy proceedings. Under the Bankruptcy Code, a trustee can avoid such payments made within 90 days prior to filing a petition. Yale's decision to file was influenced by the belief that it needed to act within this period to recover funds transferred by GTI. The bankruptcy court dismissed Yale's involuntary petition, determining that GTI was solvent, which meant it did not meet the criteria for relief under 11 U.S.C. 303(h)(1) that applies when a debtor is not generally paying debts as they come due. This determination was based on Yale's claims being excluded as they were deemed to be subject to a "bona fide dispute." The courts recognized that if Yale's claims had not been excluded, the petition may not have been dismissed. 

The district court affirmed the bankruptcy court's finding of a bona fide dispute, despite acknowledging the lack of a clear definition in the Bankruptcy Code and the existence of differing judicial tests. The issue examined was whether Yale's claims in the involuntary petition were distinct from GTI's counterclaims. While it was not decided if the district court erred in finding a bona fide dispute, it noted that the courts did not adhere to a precedent suggesting that a counterclaim does not inherently create a bona fide dispute regarding the petitioner's claim. Had this precedent been followed, Yale's claims likely would not have been seen as disputed, suggesting that Yale had a reasonable legal basis for believing its petition would succeed. If the petition had not been dismissed, Yale would not have faced a bad faith inquiry under 11 U.S.C. 303(i)(2), and holding Yale liable for losing the bona fide dispute argument would be inappropriate.

Yale had substantial justification for filing an involuntary bankruptcy petition against GTI and acted in good faith, leading to the reversal of the magistrate judge's finding of bad faith. The court finds that the issue of the bankruptcy court's dismissal of Yale's petition may be moot and declines to address it, suggesting that any party wishing to pursue the issue should first seek a resolution of mootness in the district court before appealing again. The court affirms the magistrate judge's order confirming consent from the original parties and new transferees for proceedings before him, vacates the finding that GTI's asset transfer to Power Depot was fraudulent, and reverses the bad faith finding regarding Yale's petition. The new transferees include Javier Baeza, Power Depot, Michele M. Baeza, and Encarnacion Gonzalez. Other details include GTI's history of false information for special pricing from Yale and failed payments to Heller related to the financing agreement. The magistrate judge's consent to the trial was also noted, with no objections from the involved attorneys.

Yale's emergency motion alleged fraudulent transfers involving Baeza, Jr., who is not considered a new transferee as he was a party in earlier proceedings. The court granted Yale's motion to appoint a receiver. Following the magistrate judge's judgments, Yale and the Receiver filed a joint motion for contempt due to defendants and new transferees evading judgments. An evidentiary hearing was held on March 10, 1995, with no response or evidence from GTI or Baeza, Sr. On March 23, 1995, the magistrate judge certified facts for contempt and issued an order to show cause. Yale then sought a limited remand for a contempt hearing, which the court granted on October 10, 1995. The district court imposed contempt sanctions on March 28, 1996. The new transferees did not appeal the magistrate judge's findings. Yale, along with creditors Richard Bandler Co. Inc. and International Brokerage, Inc., joined the petition, while GTE International, Inc. and Compania Dominicana de Telefonos, C. Por intervened later. GTI and Baeza, Sr. initially raised various claims on appeal regarding the magistrate judge's orders but later abandoned these arguments, conceding them during oral arguments. Yale's assertions about the magistrate judge's handling of certain counts were also deemed abandoned. The relevant statute, 28 U.S.C. § 636(c)(1), requires consent and specific designation by the district court for magistrate judges to conduct proceedings. The November 27, 1991 order of referral met this requirement. GTI and Baeza, Sr. argued the magistrate judge lacked jurisdiction to deny motions to vacate the final judgment, referencing a previous court ruling affirming the district court's dismissal of a related motion due to lack of jurisdiction.

The district court was found to lack jurisdiction to vacate the referral order because the matter of the magistrate judge's authority was pending on appeal. The appellants incorrectly interpreted a prior opinion from August 21, 1995, claiming it resolved the jurisdiction issue, but this argument was deemed frivolous. Although the consent issue was not clearly raised on appeal, the court assumed it was for the sake of discussion. The argument regarding the need for consent from Richard Bandler & Co. was dismissed as meritless. Javier Baeza, who was previously severed from the case and later became an involuntary defendant, was also discussed in relation to consent. The court established that the parties had consented to the magistrate judge's authority and did not address whether a lack of objection constituted a waiver of consent under 28 U.S.C. § 636(c). 

Regarding the new transferees, they contested their impleadment by the magistrate judge, arguing that they should have been served with a summons and complaint. However, the court disagreed, citing Federal Rule of Civil Procedure 69, which allows state law to govern supplementary proceedings unless overridden by federal law. Under Florida Statute 56.29, the prerequisites for supplementary proceedings were met, and the transferees did not challenge this. They acknowledged that federal courts could implement supplemental proceedings via an order to show cause but claimed the process was defective due to being conducted by a magistrate judge rather than a district court judge. This argument was waived since the transferees had consented to proceed before the magistrate without objection. Additionally, the court noted that failing to assert personal jurisdiction at the appropriate time results in a waiver of that defense, thereby conferring personal jurisdiction by consent.

The court rejects the new transferees' claims regarding defects in their impleading and the district court's personal jurisdiction over them, finding their arguments meritless. The magistrate judge identified the transfers as fraudulent under several Florida statutes, including Fla. Stat. 56.29 and Fla. Stat. 726.105. Baeza, Sr. was deemed an insider of GT corporation due to his role as president and principal shareholder. The fraudulent transfer determination negates the need to consider Yale's alternate claims regarding GTI and Power Depot. Under Fla. Stat. 56.29, defendants must prove that any transfer of personal property within one year prior to service of process was not intended to defraud creditors. Insider definitions under Fla. Stat. 726.102(7)(b) include directors, officers, and controlling individuals of GTI. The court recognizes the relevance of prior case law, such as Banner Constr. Corp., in interpreting the Uniform Fraudulent Transfer Act (UFTA). Notably, if a transfer lacks fair value and GTI is insolvent, fraudulent intent is not required for a finding of fraudulent transfer. Additionally, under 11 U.S.C. 303(i)(2), a court can award damages against a petitioner if a dismissed involuntary petition was filed in bad faith.

Damages related to certain filings are limited to those directly caused by the filing or punitive damages. Under Rule 9011, an attorney's or party's signature certifies that they have read the document, believe it is grounded in fact and law, and is not intended for improper purposes such as harassment or delay. The magistrate judge noted potential ill will in Yale's petition, yet Yale provided plausible justifications for its actions. For instance, Yale's refusal to repurchase inventory from GTI was not mandatory due to GTI's default, and Yale lacked knowledge of the inventory's value or condition. The magistrate judge's concerns about Yale's termination of the DMA were noted, but ultimately, no breach was found. Thornborough's affidavit included statements from Baeza, Sr. that were admissible as non-hearsay, indicating Yale's rationale for protecting its bankruptcy rights. Despite other collection avenues, Yale reasonably perceived its claims as inadequately protected due to Baeza, Sr.'s statements and subsequent insolvency, even after previously having substantial personal wealth. Evidence suggested that Baeza, Sr. engaged in fraudulent transfers to evade a judgment against him, including extravagant spending that led to his declared insolvency. Additionally, there were indications of potential preference payments or fraudulent transfers from GTI to insiders, involving significant sums that were promptly distributed to Baeza, Sr. and his sons after cashing CDs used as loan collateral.

Yale's position was impacted by the fact that Ocean Bank ceased to be a secured creditor of GTI, leading to the possibility of recovering payments made by the Baezas to Ocean Bank as preference payments to a non-insider. A preference payment, as defined under 11 U.S.C. § 547(b), is a transfer benefiting a creditor for an antecedent debt made within 90 days of filing a petition, which allows the creditor to receive more than under a Chapter 7 proceeding. In contrast, transfers to insiders can be voided for up to one year prior to filing. GTI contended that the reach-back period for avoiding transfers to Baeza, Sr. or his sons should be one year due to a personal guaranty from Baeza, Sr., though not all contested transfers were to insiders.

The determination of whether a debtor is generally paying debts as they come due involves a comparison of unpaid debts to those paid, along with an assessment of delinquency and the debtor's financial conduct. Yale was GTI's primary creditor, making the exclusion of Yale's debts critical in evaluating GTI's solvency. Section 303(h)(1) of the Bankruptcy Code excludes debts under bona fide disputes from this assessment, while § 303(b)(1) states that claims in an involuntary petition cannot be disputed. The district court affirmed the bankruptcy court's dismissal based on this reasoning, though it applied a different standard for determining bona fide disputes. The court refrained from addressing whether the district court erred in affirming the dismissal, as this issue may be moot, and jurisdictional motions related to the case were addressed in a separate section of the opinion.