Hechinger Liq. Trust v. Bankboston Retail Finance, Inc.

• Decision Date: 10 December 2002
• Docket Number: No. CIV.A.00-973-SLR.,CIV.A.00-973-SLR.
• Citation: 287 B.R. 145
• Parties: HECHINGER LIQ. TRUST, not individually, but solely as indenture trustee aka HSBC Bank USA, Plaintiff, v. BANKBOSTON RETAIL FINANCE, INC., individually and as agent for lenders under Credit Agreement dated as of September 26, 1991, Credit Agreement dated as of December 31, 1998 and Amended and Restated Credit Agreement dated March 18, 1999, Defendant.
• Court: U.S. District Court — District of Delaware

287 B.R. 145

HECHINGER LIQ. TRUST, not individually, but solely as indenture trustee aka HSBC Bank USA, Plaintiff, v. BANKBOSTON RETAIL FINANCE, INC., individually and as agent for lenders under Credit Agreement dated as of September 26, 1991, Credit Agreement dated as of December 31, 1998 and Amended and Restated Credit Agreement dated March 18, 1999, Defendant.

No. CIV.A.00-973-SLR.

United States District Court, D. Delaware.

December 10, 2002.

Mark Minuti and Tara L. Lattomus of Saul Ewing LLP, Wilmington, Delaware, Counsel for Plaintiff, Of Counsel: David M. Friedman, Richard F. Casher, Andrew K. Glenn of Kasowitz, Benson, Torres & Friedman LLP, New York City.

Richard S. Cobb of Klett, Rooney, Lieber & Schorling, P.C., Wilmington, Delaware, Counsel for Defendant, Of Counsel: Paul S. Samson, Jeffery D. Ganz of Riemer & Braunstein, LLP, of Boston, Massachusetts.

MEMORANDUM OPINION

SUE L. ROBINSON, Chief Judge.

I. INTRODUCTION

This case is an adversary proceeding initiated in connection with the bankruptcy petition filed by Centers Holdings, Inc. and its subsidiaries under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The order of reference has been withdrawn and the case is pending before this court. (D.I.1) The court has jurisdiction over this action pursuant to 28 U.S.C. § 1334.

Currently before the court are a motion for partial summary judgment filed by the plaintiff, the Hechinger Liquidation Trust ("the Trust"), and a motion for summary judgment filed by the defendant, BankBoston Retail Finance, Inc. ("BankBoston").¹ (D.I. 27, 19) The plaintiff, acting as Indenture Trustee, is seeking an equitable lien against BankBoston and equitable subordination of BankBoston's claims to the claims of the Trust. On October 31, 2002 this court ordered defendant to re-submit certain illegible exhibits. Having received and reviewed these exhibits, the court denies both parties' motions for summary judgment.

II. BACKGROUND

This case involves a complex series of transactions resulting in the merger of two do-it-yourself home improvement retail store chains, the Hechinger Company chain of home improvement stores ("Hechinger's") and the Builders Square, Inc. chain of home improvement stores ("Builders Square"). The transactions at issue occurred in September 1997.

Prior to the merger, Hechinger's entered into an indenture ("the Indenture") with First Union National Bank of North Carolina as Indenture Trustee.² (D.I.30, Ex. 1) Pursuant to the Indenture, Hechinger's issued $100 million of senior unsecured debentures in November 1992 and an additional $100 million of senior unsecured debentures in October 1993 ("the Notes"). (Id., Exs. 2, 3) The Indenture included a Negative Pledge clause stating, in part, that

the Issuer will not, and will not permit any Restricted Subsidiary to, create, assume, incur any Indebtedness secured by a Lien on any Operating Property or Operating Asset of the Issuer or any Restricted Subsidiary, whether such Operating Property or Operating Asset is now or hereafter acquired[.]

(Id., Ex. 1 at § 3.6) Thus, the Negative Pledge clause restricted Hechinger's and its subsidiaries from issuing any additional secured debt on certain operating assets and property whether currently owned or later purchased.

The Indenture required that if any indebtedness issued in violation of the Negative Pledge, Hechinger's must "effectively provide[ ] concurrently with the issuance, assumption or guarantee of any such Indebtedness that the [Notes] be secured equally and ratably with such Indebtedness." (Id.) The Indenture allowed for two exceptions to the Negative Pledge clause: (1) a purchase money exception;³ and (2) a refinancing exception.⁴ (Id., Ex. 1 at §§ 3.6(c) and (h)) The purchase money exception allowed Hechinger's to purchase new assets with additional indebtedness provided that only the new assets were offered as collateral. The refinancing exception allowed Hechinger's to refinance an existing loan without violating the Negative Pledge.

The transactions at issue were facilitated by Leonard Green & Partners L.P. ("Leonard Green"), an investment banking firm. (D.I. 25, Ex. B at 15) In preparation for the September 1997 transactions, a group of investors affiliated with Leonard Green formed Center Holdings, Inc., which created BSQ Acquisition, Inc. ("BSQ Acquisition") as a subsidiary. In addition, Builders Square, a subsidiary of the Kmart Corporation, Inc., formed BSQ Transferee Corp. ("BSQ Transferee").

On September 25, 1997, Builders Square transferred certain operating assets and liabilities to BSQ Transferee. (D.I. 30, Ex. 5 at § 1.4) BSQ Acquisition purchased the stock of BSQ Transferee from Builders Square for $10 million in cash, plus a warrant to purchase shares of stock in Center Holdings, Inc. (Id., Ex. 5 at § 1.7) Thus, BSQ Transferee became a subsidiary of BSQ Acquisition. Centers Holdings, Inc. and BSQ Acquisition would ultimately be parent corporations of the corporate entity operating the Hechinger's-Builders Square home improvement chain.

BSQ Transferee then obtained a $171 million interim loan from the Chase Bank Group ("Chase"). (Id., Ex. 7) The loan was secured by the inventory, accounts receivable and equipment of BSQ Transferee. (Id., Ex. 7 at Ex. H) BSQ Transferee loaned $110 million to BSQ Acquisition. (Id., Ex. 8 at 5) BSQ Acquisition used the loan to purchase all of the Hechinger Company stock from the shareholders, making Hechinger Company a subsidiary of BSQ Acquisition. (Id.) Chase also loaned the Hechinger Stores Company (a subsidiary of Hechinger Company) $112 million to refinance an existing loan from CIT Credit Corporation.⁵ (D.I. 21, Ex. 3 at 174; D.I. 30, Ex. 8 at 6)

On September 26, 1997, Hechinger Investment Company of Delaware ("HICD"), a subsidiary of Hechinger Company, entered into a permanent loan agreement with Chase. (D.I.31, Ex. 20) The loan agreement provided for a maximum availability of $600 million with an initial advance of $243 million. (Id.) HICD used the $243 million to purchase from BSQ Transferee certain operating assets and liabilities originally purchased by BSQ Transferee from Builders Square. (D.I.30, Ex. 9) BSQ Transferee then used part of the $243 million payment to repay the $171 million interim loan from Chase. (Id., Ex. 8 at 9) The Hechinger Stores Company repaid the $112 million loan to Chase using, in part, the funds remaining from the initial $243 million advance to HICD. (Id., Ex. 8 at 9-10)

On September 29, 1997 the Hechinger Stores Company and the Hechinger Stores East Coast Company transferred operating assets to HICD. (D.I.23, Exs.137, 138) Thus, the merger of the Hechinger's chain and the Builders Square chain was completed, operating under HICD.

In March 1999, BankBoston (now Fleet Retail Financing) refinanced the existing Chase permanent loan with HICD. (D.I. 30, Ex. 14; D.I. 31, Exs. 15, 21, 22) In June 1999, Hechinger's and its various affiliates filed for protection under Chapter 11 of the Bankruptcy Code. On July 20, 1999, the bankruptcy court entered the final order authorizing post-petition secured super-priority financing. Pursuant to the bankruptcy proceedings, BankBoston's loans have been repaid in full from the liquidation of various Hechinger's assets. (D.I. 29 at ¶ 7) The unsecured creditors, including the Noteholders pursuant to the Indenture, have not received any recovery as of February 20, 2002. (Id.) HSBC Bank U.S.A., as legal representative of the Noteholders, commenced this adversary proceeding against BankBoston on May 26, 2000, seeking an equitable lien against BankBoston for violation of the Indenture as well as equitable subordination of BankBoston's claims to the claims of the Noteholders.⁶ (D.I.2)

III. STANDARD OF REVIEW

A court shall grant summary judgment only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of proving that no genuine issue of material fact exists. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 n. 10, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "Facts that could alter the outcome are `material,' and disputes are `genuine' if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct." Horowitz v. Fed. Kemper Life Assurance Co., 57 F.3d 300, 302 n. 1 (3d Cir.1995) (internal citations omitted). If the moving party has demonstrated an absence of material fact, the nonmoving party then "must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita, 475 U.S. at 587, 106 S.Ct. 1348 (quoting Fed.R.Civ.P. 56(e)). The court will "view the underlying facts and all reasonable inferences therefrom in the light most favorable to the party opposing the motion." Pa. Coal Ass'n v. Babbitt, 63 F.3d 231, 236 (3d Cir.1995). The mere existence of some evidence in support of the nonmoving party, however, will not be sufficient for denial of a motion for summary judgment; there must be enough evidence to enable a jury reasonably to find for the nonmoving party on that issue. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). If the nonmoving party fails to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof, the moving party is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

IV. DISCUSSION

Plaintiff asserts that the value of the Builders Square assets is determined by the arm's length transaction between BSQ Transferee and BSQ Acquisition. According...