## Facts

- Fett Roofing and Sheet Metal Co., Inc. was a closely held Virginia corporation solely owned and controlled by Donald M. Fett, Sr., who served as president and active manager.
- The corporation was formed with minimal initial capital (about $5,000) and was found to have been undercapitalized from inception.
- From 1974 to 1976, Fett obtained personal loans from outside lenders and transferred the proceeds to the corporation, labeling the transfers as corporate “loans.”
- After the business deteriorated and the corporation became insolvent, Fett caused the corporation to execute deeds of trust on corporate assets to secure his claimed insider debt.
- The bankruptcy court found the deeds of trust were executed after insolvency, backdated to appear earlier, and intended to place Fett ahead of other creditors.
- Fett Roofing was placed into involuntary bankruptcy in 1976 with substantial secured debt; the trustee and creditors challenged Fett’s asserted secured status and claim priority.
- The bankruptcy court held Fett’s advances were capital contributions, treated the corporation as Fett’s alter ego, avoided the deeds of trust as fraudulent, and subordinated Fett’s claims to general creditors.
- Fett appealed to the district court.

## Issues

1. Whether the bankruptcy court properly treated Fett’s insider advances as equity contributions rather than bona fide loans due to undercapitalization and control.
2. Whether deeds of trust executed after insolvency and backdated to appear earlier were avoidable as fraudulent conveyances under bankruptcy and state law.
3. Whether Fett’s insider claims could be equitably subordinated to protect outside creditors.
4. Whether the evidence supported treating the corporation as Fett’s alter ego for purposes of claim treatment and priority.

## Decision

- The district court affirmed the bankruptcy court in all material respects.
- It upheld findings that the corporation was undercapitalized and that Fett’s advances functioned as necessary capital contributions, not true debt.
- It affirmed avoidance of the deeds of trust as fraudulent conveyances, based on execution after insolvency and backdating intended to defraud or hinder other creditors.
- It agreed that Fett Roofing was Fett’s alter ego, supporting disregard of separateness in evaluating insider priority tactics.
- It affirmed subordination of Fett’s claims below those of general creditors.

## Legal Principles

- In bankruptcy, insider advances to a thinly capitalized, closely held corporation may be recharacterized as equity when they operate as risk capital necessary to sustain the enterprise rather than arm’s-length debt.
- Security interests granted to an insider after insolvency, especially when backdated or otherwise manipulated to appear earlier, may be avoided as fraudulent conveyances under federal bankruptcy law and applicable state fraudulent-transfer law.
- A court may disregard the corporate entity (alter-ego theory) where a controlling shareholder dominates the corporation and uses it to obtain unfair advantage over creditors.
- Insider claims may be equitably subordinated when an insider uses control and superior information to obtain priority over outside creditors, and subordination is necessary to prevent unfairness in distribution.

## Conclusion

The court affirmed bankruptcy rulings that treated a sole shareholder’s purported loans to an undercapitalized corporation as equity, avoided backdated insider deeds of trust granted after insolvency as fraudulent, and subordinated the insider’s claims to protect outside creditors from control-based priority manipulation.


Fett Roofing & Sheet Metal Co. v. Moore, 438 F. Supp. 726 (E.D. Va. 1977)