Daewoo Motor Am., Inc. v. Daewoo Motor Co. (In re Daewoo Motor Am., Inc.)

• Decision Date: 17 May 2012
• Docket Number: No. 2:10–CV–5445 SVW.,Bankruptcy No. 2:02–24411–BB.,Adversary No. 2:03–2155–BB.,2:10–CV–5445 SVW.
• Citation: 471 B.R. 721
• Parties: In re DAEWOO MOTOR AMERICA, INC., Reorganized Debtor. Daewoo Motor America, Inc., Plaintiff, v. Daewoo Motor Co., Ltd., Defendant.
• Court: U.S. District Court — Central District of California

471 B.R. 721

In re DAEWOO MOTOR AMERICA, INC., Reorganized Debtor.

Daewoo Motor America, Inc., Plaintiff,

v.Daewoo Motor Co., Ltd., Defendant.

No. 2:10–CV–5445 SVW.

Bankruptcy No. 2:02–24411–BB.

Adversary No. 2:03–2155–BB.

United States District Court,

C.D. California.

May 17, 2012.

Carol Chow, Los Angeles, CA, for Plaintiff.

Peter I. Ostroff, Michelle B. Goodman, Joshua E. Anderson, and Sally S. Neely, Sidley Austin LLP, Los Angeles, for Defendant.

STEPHEN V. WILSON, District Judge.

Daewoo Motor America, Inc. appeals a final judgment by the United States Bankruptcy Court for the Central District of California in its adversary proceeding against Daewoo Motor Company, Ltd. For the reasons set forth below, the judgment of the bankruptcy court is AFFIRMED.

I. INTRODUCTION AND PROCEDURAL BACKGROUND¹

Daewoo Motor America, Inc. (“DMA”) was established in June 1997 as a wholly-owned subsidiary of Daewoo Corporation. On December 31, 1998, Daewoo Corporation sold 100% of its interest in DMA to its affiliate, Daewoo Motor Company, Ltd., a South Korean automobile manufacturer. Throughout this Order, the Court will refer to both Daewoo Motor Company, Ltd. and its predecessor-in-interest Daewoo Corporation as “DWMC.” DMA served as DWMC's exclusive distributor of Daewoo automobiles in the United States, and provided warranty services and replacement parts to U.S. Daewoo dealers.

A. Financing of DMA

DMA's April 1998 business plan contemplated that DMA's initial capitalization would consist of $40 million. DMA's July 1998 business plan projected that, with a total capitalization of $50 million, DMA would generate substantial revenues and profits during its first three years of operation.

Between April and July 1998, DWMC provided $20 million in equity funding to DMA in exchange for stock. In November and December 1998, DWMC contributed an additional $30 million in equity funding to DMA in exchange for stock. In November 1998, PPM Finance, Inc. (“PPM”) agreed to extend DMA a $300 million line of credit (the “PPM Agreement”). In December 2000, at the request of PPM, and in order to ensure DMA's compliance with the PPM Agreement, DWMC converted to equity $60 million of debt owed by DMA to DWMC (for unpaid purchases of vehicles and parts), raising DWMC's total equity investment in DMA to $110 million.

B. DMA's Purchases of Vehicles and Parts

During the relevant time period, DMA purchased vehicles and parts from DWMC pursuant to a January 1, 1998 Automobile Purchase and Distribution Agreement, and a substantially identical November 18, 1999 Automobile Purchase and Distribution Agreement (collectively, the “Distribution Agreement”). Pursuant to the Distribution Agreement, each purchase order was documented by a document against acceptance agreement (“D/A”), which was executed by both parties and included, among other information, the items purchased, the purchase price, the payment due date (either 120 days or 180 days from the date of the “Bill of Lading” prepared for each purchase), and the applicable interest rate (generally LIBOR plus 6%).

As found by the bankruptcy court, the process by which DMA purchased vehicles and parts from DWMC can be broken down into three distinct time periods: (1) November 1997 to November 1998 (the date of the first shipment of vehicles from DWMC to DMA through the date of the PPM Agreement); (2) November 1998 to November 2000 (the date of the PPM Agreement to the date of the commencement of DWMC's Korean reorganization proceedings); and (3) November 1998 to November 2000 (the date of the commencement of DWMC's Korean reorganization proceedings to the date of the last shipment of vehicles from DWMC to DMA).

During each time period, DMA purchased vehicles and parts from DWMC as follows:

1. November 1997 to November 1998

During this time period, DMA was to pay for vehicles exclusively through the above-described “D/A” method. Thus, DMA was to pay 100% of the purchase price for each shipment of vehicles either 120 or 180 days from the Bill of Lading date.

2. November 1998 to November 2000

During this time period, DMA was to pay for 70% of each shipment of vehicles “at sight” in cash, using the line of credit provided under the PPM Agreement. The remaining 30% of each shipment was to be paid through the D/A method.

3. November 1998 to November 2000

During this time period, DMA was to pay for the entire purchase price of each shipment “at sight” in cash, with 70% to be paid using line of credit provided under the PPM Agreement, and the remaining 30% to be paid by wire transfer.

C. Warranty and Free Maintenance Expenses

Under the Distribution Agreement and related “audit confirmation letters,” DWMC agreed to reimburse DMA for certain warranty and free maintenance expenses incurred by U.S. Daewoo dealers.

D. DWMC's Reorganization Proceedings

On November 30, 2000, DWMC entered into reorganization proceedings in South Korea. DWMC subsequently entered into negotiations with General Motors Corp. (“GM”) regarding the purchase of DWMC's assets. In September 2001, DWMC and GM entered into a non-binding Memorandum of Understanding, which provided for the sale of certain assets, including DMA, to GM. On April 30, 2002, however, GM and DWMC (and certain of DWMC's creditors) entered into a Master Transaction Agreement (“MTA”), pursuant to which GM purchased certain assets of DWMC, excluding DMA, and then transferred these assets to GM Daewoo Auto & Technology Co. (“GMDAT”). On September 30, 2002, the Korean court approved DWMC's Modified Reorganization Plan, which incorporated the terms of the MTA.

E. DMA's Bankruptcy Proceedings

DMA suffered substantial operating losses in each of its five years of operation (from 1998 to 2002). On May 16, 2002 (the “Petition Date”), DMA filed a voluntary Chapter 11 petition for bankruptcy in the Central District of California. Two aspects of these bankruptcy proceedings are relevant to the instant appeal.

1. The GM Litigation

On July 22, 2003, DMA filed a complaint in bankruptcy court against General Motors Corp. (“GM”); GM Daewoo Auto & Technology Co. (“GMDAT”), as the successor-in-interest to DWMC; Suzuki Motor Corp.; and American Suzuki Motor Corp., alleging claims for: (1) Fraud; (2) Tortious Interference With Contract; (3) Tortious Interference With Prospective Economic Advantage; (4) Aiding and Abetting Breach of Fiduciary Duty; (5) Violation of the Cartwright Act; (6) Unfair Competition; (7) Unjust Enrichment; (9) Fraudulent Transfer; and (10) Violation of the Automatic Stay. The case was subsequently transferred to the United States District Court for the Middle District of Florida by the Multi District Litigation (“MDL”) panel.

The district court granted defendants' motion to dismiss DMA's complaint, holding that all of DMA's claims were barred under the doctrine of international comity, because they constituted an impermissible collateral attack on the Korean court's approval of DWMC's Modified Reorganization Plan and, in particular, the Korean court's approval of the MTA. Daewoo Motor America, Inc. v. General Motors Corp., 315 B.R. 148 (M.D.Fla.2004). The Eleventh Circuit affirmed. Daewoo Motor America, Inc. v. General Motors Corp., 459 F.3d 1249 (11th Cir.2006).

2. DMA's Adversary Proceeding Against DWMC

On November 18, 2002, DWMC timely filed a proof of claim in DMA's bankruptcy proceeding, seeking $122,729,359.79 for vehicles and parts shipped to DMA before the Petition Date, plus $36,227,129.00 in prejudgment interest. On July 28, 2003, DMA filed on Objection to DWMC's Proof of Claim and Counterclaims against DWMC for:

(1) Declaratory Relief; (2) Equitable Subordination; (3) Recovery of Setoff; (4) Breach of Contract; (5) Breach of Fiduciary Duty; (6) Violation of the Automatic Stay; and (7) Tortious Interference with Contract.

After extensive motion practice, the bankruptcy court conducted a four-day bench trial. After DMA presented its case-in-chief, DWMC moved for judgment on partial findings pursuant to Federal Rule of Civil Procedure 52(c). On July 6, 2010, the bankruptcy court entered judgment in favor of DWMC, finding that DWMC had a general unsecured claim in DMA's Chapter 11 case in the total amount (including prejudgment interest) of $118,131,046.99.

DMA timely appealed to this Court.

II. CLAIMS ON APPEAL

DMA raises eight issues in this appeal:

1. Did the bankruptcy court err in refusing to recharacterize from debt to equity the amounts owed by DMA to DWMC for vehicles and parts?

2. Did the bankruptcy court err in finding that DWMC did not breach the Distribution Agreement by failing to deliver vehicles and parts to DMA?

3. Did the bankruptcy court err in finding that DWMC did not breach the Distribution Agreement by failing to reimburse DMA for certain warranty and free maintenance expenses on the basis DWMC was entitled to “recoup” these expenses against the amounts that DMA owed DWMC for vehicles and parts under the Distribution Agreement?

4. Did the bankruptcy court err in finding that the amount of unpaid warranty expenses as of the Petition Date was $22,708,265.36?

5. Did the bankruptcy court err in finding that DWMC was not liable to DMA for consequential damages?

6. Did the bankruptcy court err in refusing to award DMA prejudgment interest?

7. Did the bankruptcy court err in awarding DWMC $33,962,113.53 in prejudgment interest?

8. Did the bankruptcy court err in dismissing DMA's claim for equitable subordination?

The Court will address each of these issues in turn.

III. DISCUSSIONA. Recharacterization of Debt to Equity

The “D/A” agreements generated for each shipment of vehicles and parts from DWMC to DMA expressly provided that DMA would pay for the items being shipped. Nevertheless, DMA contends that the parties did not, in fact, intend that DMA would be liable for these unpaid “D/A receivables.” Instead, DMA contends that these unpaid amounts constituted equity investments in DMA by DWMC. Accordingly, DMA argues that these unpaid D/A...