Re: Autostyle Plastics Inc.

• Decision Date: 06 March 2001
• Docket Number: No. 00-1102,00-1102
• Citation: 269 F.3d 726
• Parties: (6th Cir. 2001) In re: Autostyle Plastics, Inc., Debtor. Bayer Corporation, Plaintiff-Appellant, v. MascoTech, Inc.; Citicorp Venture Capital, Ltd.; and The Treasurer of the State of Michigan, as custodian of several state retirement systems, Defendants-Appellees. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 726

269 F.3d 726 (6th Cir. 2001)

In re: Autostyle Plastics, Inc., Debtor.

Bayer Corporation, Plaintiff-Appellant, v. MascoTech, Inc.; Citicorp Venture Capital, Ltd.; and The Treasurer of the State of Michigan, as custodian of several state retirement systems, Defendants-Appellees.

No. 00-1102

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: March 6, 2001

Decided and Filed: October 22, 2001

Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 99-00800. Gordon J. Quist, District Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Thomas D. Maxson (briefed), ECKERT SEAMANS CHERIN & MELLOT, Pittsburgh, Pennsylvania, William E. Kelleher, Jr. (argued and briefed), COHEN & GRIGSBY, Pittsburgh, Pennsylvania, for Appellant.

I. William Cohen, Joel D. Applebaum (argued and briefed), PEPPER, HAMILTON & SCHEETZ, Detroit, Michigan, Thomas F. Schimpf, Asst. Attorney Gen., Nancy A. Piggush, Matthew H. Rick, Office of the Attorney General of Michigan, Lansing, MI, for Appellees.

Before: KRUPANSKY and BOGGS, Circuit Judges; and TARNOW, District Judge.^*

OPINION

BOGGS, Circuit Judge.

This complex case concerns a reasonably simple issue: the relative priority of claims to the proceeds of a bankruptcy estate. Plaintiff Bayer Corporation ("Bayer") appeals the bankruptcy court's judgment, affirmed by the district court, granting summary judgment to defendants, MascoTech, Inc. ("MascoTech"); Citicorp Venture Capital, Ltd. (CVC or Citicorp); and the Treasurer of the State of Michigan, as custodian of several state retirement systems (SMRS) (collectively "the defendants"), in this adversary action relating to the bankruptcy of AutoStyle Plastics, Inc. ("AutoStyle"). Both the district court and the bankruptcy court concluded that the defendants' claims have priority over Bayer's claim. For the following reasons, we affirm.

I. Procedural History

Before reviewing the facts, we will briefly review the procedural history of this case, which explains how this inter-creditor dispute between Bayer and the defendants developed within the context of AutoStyle's bankruptcy proceeding. On June 3, 1996, AutoStyle filed a Chapter 11 petition with the bankruptcy court. On June 7, 1996, the bankruptcy court entered an order authorizing the lease and sale of all personal property of AutoStyle, including machinery and equipment that served as collateral for Bayer's security interest, to Venture Industries Corporation ("Venture"). On July 30, 1996, AutoStyle's Chapter 11 case was converted to Chapter7.

On September 17, 1996, the bankruptcy court entered a Consent Order Providing Adequate Protection and Other Relief that directed Venture to pay its monthly lease payment of $257,000 directly to CIT Group/Credit Finance, Inc. (CIT), rather than to Bayer. CIT had a perfected first-priority security interest in all of AutoStyle's assets. The loans that CIT made to AutoStyle through its credit facility had been repaid by this time; however, certain loans made by the defendants pursuant to participation agreements in the credit facility had not been repaid. It is because of these participation interests that the bankruptcy court ordered payment by Venture to CIT, rather than to Bayer. Bayer acknowledges CIT's first-priority status, but contends that the defendants' participation agreements are subordinate to Bayer's lien position.

On February 27, 1997, Bayer filed a Motion for Adequate Protection Directing Trustee to Make Rental Payments to Bayer Corporation ("Motion for Adequate Protection") in the United States Bankruptcy Court for the Western District of Michigan. Bayer asserted that it has a security interest in certain machinery and equipment of AutoStyle that is second in priority to CIT's security interest and ahead of the defendants' participation interests. Bayer argued that CIT's secured interest was paid in full and that rental payments should be directed to Bayer as the holder of the next secured interest following CIT. The bankruptcy court agreed to treat Bayer's motion as an adversary proceeding.

After several telephonic status conferences and scheduling orders and extensive discovery, the parties filed cross-motions for summary judgment. On December 31, 1997, the bankruptcy court issued its first opinion, granting, in part, the defendants' motion for summary judgment and denying Bayer's motion for summary judgment. The court granted the defendants summary judgment as to Bayer's contention that the defendants' claims be equitably subordinated to Bayer's claim. The court ruled that it did not have jurisdiction to address Bayer's argument that the defendants' participation agreements be recharacterized from debt to equity. Finally, the court did not reach a decision as to whether the defendants' participation agreements with CIT were valid. Instead, the court required the defendants to show evidence that they provided payment to CIT for their participation interests. The defendants complied with the bankruptcy court's requirement.

On July 14, 1998, the bankruptcy court issued a supplemental opinion, finding that the participation agreements were valid and reaffirming its December 31, 1997 opinion. Bayer appealed. On May 25, 1999, the district court affirmed the bankruptcy court's opinion with respect to all issues except Bayer's claim that the defendants' alleged debt should be recharacterized as equity. The district court ruled that the bankruptcy court had jurisdiction to address this issue and remanded it to the bankruptcy court.

On remand, acting at the defendants' suggestion, the bankruptcy court agreed to review the record and the previously filed briefs to determine whether the recharacterization issue could be decided without further hearing. On August 18, 1999, without further hearing, the bankruptcy court issued an opinion rejecting Bayer's recharacterization claim. On December 16, 1999, the district court affirmed the bankruptcy court's decision. Bayer subsequently filed a timely appeal.

II. Facts

AutoStyle was originally incorporated as C & F Stamping, Inc., in the mid-1960s. Starting in the mid-1970s, AutoStyle began manufacturing plastic parts for the automotive industry. AutoStyle eventually moved into a process known as reaction injection molding, where two or more chemicals are mixed and reacted to form flexible plastic. Bayer was AutoStyle's exclusive supplier of these chemicals. Bayer also provided credit and other financial accommodations to AutoStyle.

On March 16, 1982, AutoStyle entered into a long-term credit facility (also referred to as a revolving-loan agreement) with CIT. The credit facility was secured by a properly and continuously perfected blanket lien on substantially all of AutoStyle's assets. The credit facility was expandable in that it contemplated the possibility of future advances. Specifically, it stated that CIT agreed "[t]hat it will from time to time make advances to [AutoStyle]."

On March 28, 1985, AutoStyle, Inc. was formed. The same day, AutoStyle, Inc. acquired the majority of the outstanding stock of AutoStyle. CVC and SMRS were shareholders of AutoStyle, Inc. CVC owned approximately 35% of AutoStyle, Inc. stock and SMRS owned approximately 16% of AutoStyle, Inc. stock. The remaining 49% of stock was divided between the prior owners of AutoStyle; certain senior management; and Patrick Bailey, for pre-acquisition sales commissions. After the transaction, AutoStyle and AutoStyle, Inc. retained separate Boards of Directors.

On November 18, 1987, AutoStyle and AutoStyle, Inc. held meetings of their Boards of Directors to discuss AutoStyle's cash flow problems. At these meetings, AutoStyle, Inc.'s Board of Directors approved the borrowing of up to $4,000,000 from CVC and SMRS. AutoStyle's Board also recognized that AutoStyle "is in desperate need of $4 million dollars short-term cash." Richard M. Cashin, Jr., a director of AutoStyle and AutoStyle, Inc. and a senior officer (and later president) of CVC, stated that CVC might be interested in loaning AutoStyle $2 million if it received AutoStyle warrants in connection with the offering. On November 19, 1987, AutoStyle's attorney wrote a letter to Cashin confirming the planned loan to AutoStyle and enclosing a letter agreement regarding the stock warrants and a proposed note from AutoStyle for $2 million. The letter confirmed CVC's intention to wire transfer the funds the next day. There was no indication of participation in CIT's credit facility or a security interest in favor of CVC in either the Board minutes, counsel's letter, or proposed note from AutoStyle to CVC.

This planned direct loan never occurred. Bayer admits that the "[t]he record contains no explanation for why the direct loan was not ultimately documented as such." Instead, the parties entered into a different form of transaction. The record contains a document entitled "Subordinated Participation Agreement" between CIT and CVC ("First Participation Agreement"), whereby CVC paid $2 million to CIT, which allowed CIT to fund additional borrowings by AutoStyle. The First Participation Agreement granted CVC a 100% "subordinated participation" in CIT's credit facility in exchange for the $2 million CVC paid to CIT. CVC would receive repayment only if AutoStyle paid CIT and only after CIT and other loan participants received repayment for their shares of the loan. In addition, AutoStyle signed a separate demand note and CVC received stock warrants directly from AutoStyle, Inc. The defendants state that the additional funding was used by AutoStyle primarily for working capital. This transaction was the first of five subordinated participation agreements that CIT entered with the defendants, with each one expanding the total amount of CIT's credit facility.

On January 12, 1988, SMRS entered into a separate "Subordinated Participation Agreement" with CIT,...