In re Northern Merchandise

Northern Merchandise (Northern) already owed Frontier Bank (Frontier) $60,000 secured by its inventory when it sought an additional $150,000 loan; Frontier, wary of Northern's weak finances, instead loaned the $150,000 directly to Northern's shareholders, who had better credit, but deposited the funds straight into Northern's account, with everyone understanding Northern would use the money. In exchange, the shareholders signed a promissory note and Northern granted Frontier a security interest in its own assets. When Northern later ceased operations, it sold roughly $400,000 of inventory to a company owned by one shareholder for $125,000, which was paid to Frontier toward the shareholder loan; Frontier also received $25,000 from an earlier inventory sale. After an involuntary bankruptcy petition was filed against Northern, the trustee sued Frontier to avoid the security interest and the $125,000 payment as fraudulent transfers, and the bankruptcy court and Bankruptcy Appellate Panel (BAP) agreed with the trustee; Frontier appealed.