Duplan Corp., In re

• Decision Date: 17 November 1978
• Docket Number: Nos. 8,202 and 393,201,D,s. 8
• Citation: 591 F.2d 139
• Parties: , Bankr. L. Rep. P 67,147 In re The DUPLAN CORPORATION, Debtor. CHEMICAL BANK, the First National Bank of Chicago, North Carolina National Bank and Security Pacific National Bank, Appellants, v. Alfred P. SLANER, as Trustee in Reorganization of The Duplan Corporation, Debtor, Appellee, United States Trust Company of New York, Successor Indenture Trustee, Appellee, Securities and Exchange Commission, Appellee. ockets 78-5009, 78-5011, 78-5013 and 78-5021.
• Court: U.S. Court of Appeals — Second Circuit

Page 139

591 F.2d 139

5 Bankr.Ct.Dec. 58, Bankr. L. Rep. P 67,147

In re The DUPLAN CORPORATION, Debtor.

CHEMICAL BANK, the First National Bank of Chicago, North

Carolina National Bank and Security Pacific

National Bank, Appellants, v. Alfred P. SLANER, as Trustee in Reorganization of The Duplan

Corporation, Debtor, Appellee,

United States Trust Company of New York, Successor Indenture

Trustee, Appellee,

Securities and Exchange Commission, Appellee.

Nos. 8, 201, 202 and 393, Dockets 78-5009, 78-5011, 78-5013

and 78-5021.

United States Court of Appeals,

Second Circuit.

Argued Sept. 27, 1978.

Decided Nov. 17, 1978.

Henry L. Goodman, New York City (Zalkin, Rodin & Goodman, New York City, Richard S. Toder, Andrew D. Gottfried and Richard A. Gerard, Washington, D. C., of counsel), for appellants, cross-appellants and appellees Chemical Bank, First Nat. Bank of Chicago, North Carolina Nat. Bank and Security Pac. Nat. Bank.

Philip R. Mann, New York City (Shea, Gould, Climenko & Casey, New York City, Martin I. Shelton, New York City, of counsel), for appellant, cross-appellee and appellee Alfred P. Slaner.

John P. Campbell, New York City (Curtis, Mallet-Prevost, Colt & Mosle, Stephen K. Bone and Robert G. Zack, New York City, of counsel), for appellant, cross-appellee, and appellee U. S. Trust Co. of N. Y.

Jerome Feller, New York City (Securities and Exchange Commission, Washington, D. C., David Ferber, Irving H. Picard, Washington, D. C., Marvin E. Jacob, New York City, of counsel), for appellee Securities and Exchange Commission.

Before FRIENDLY and MULLIGAN, Circuit Judges, and WYATT, District Judge. ^*

FRIENDLY, Circuit Judge:

On August 31, 1976, The Duplan Corporation (Duplan) filed in the District Court for the Southern District of New York a petition for an arrangement under Chapter XI of the Bankruptcy Act. Little more than a month later the Bankruptcy Judge directed that reorganization should proceed under Chapter X. Alfred P. Slaner was thereafter appointed Trustee.

The appeals and cross-appeal now before us concern orders relating to the pleadings in an adversary proceeding filed against the Trustee under Chapter X Rule 10-701, which incorporates Part VII of the Bankruptcy Rules, by four banks (the Banks). These were Chemical Bank (Chemical), The First National Bank of Chicago (First Chicago), North Carolina National Bank (NCNB) and Security Pacific National Bank. A fairly lengthy summary of the pleadings is needed as background for the point concerning our lack of appellate jurisdiction, which we regard as dispositive.

The complaint, as amended and supplemented, alleged in substance as follows:

Duplan had entered into a Credit Agreement with the Banks dated as of December 31, 1974, which was later amended. On August 31, 1976, Duplan's indebtedness under the Credit Agreement aggregated $38,465,831.55, evidenced by promissory notes. At the same time Duplan and subsidiaries of Duplan had entered into a Security Agreement with NCNB, also later amended, then restated and further amended and supplemented, granting it, for itself and as agent for the other Banks, a security interest, duly perfected by NCNB, in collateral consisting of fixed assets owned by Duplan and their proceeds (Duplan Fixed Assets Collateral). Also at that time, Duplan had entered into a Pledge Agreement with First Chicago, for itself and as agent for the other Banks, under which Duplan later delivered to First Chicago all of the issued and outstanding common stock of six subsidiaries ¹ and some preferred stock of one of these subsidiaries (the Stock Collateral). Both the Security Agreement and the Pledge Agreement had been executed in order to secure Duplan's obligations under the Credit Agreement (Duplan Liabilities). Duplan as debtor in possession and the Reorganization Trustee have sold portions of the Duplan Fixed Assets Collateral free of liens and the Reorganization Trustee intends to continue to do so; the Reorganization Trustee holds or has control over the proceeds of such sales (Duplan Fixed Assets Collateral Proceeds). Finally Duplan and one of its subsidiaries had entered into a Factoring Agreement with Chemical, which granted Chemical a security interest in all sums and all property of Duplan at any time to Duplan's credit or in Chemical's possession as security for all obligations of Duplan at any time owing to Chemical, whether arising under the Factoring Agreement or otherwise. At the time of the filing of the Chapter XI petition Chemical held $1,474,000 subject to the lien so created (Duplan Cash Credit Balance). The value of the Duplan Fixed Assets Collateral, the Duplan Fixed Assets Collateral Proceeds and the Stock Collateral was less than the amount owed by Duplan to the Banks under the Credit Agreement, and Chemical's share of those items of collateral even when added to the Duplan Cash Credit Balance was less than the amount owed by Duplan to Chemical under the Credit Agreement.

The complaint asked that an order and judgment be entered against the Reorganization Trustee:

A. declaring and determining that NCNB, for itself and as Agent for the Banks, and the Banks, hold valid first liens upon, and first security interests in, the Duplan Fixed Assets Collateral and the Duplan Fixed Assets Collateral Proceeds, subject only to such prior liens as are set forth on Schedule A annexed hereto, for the equal and ratable benefit of the Banks, to secure payment of the Duplan Liabilities owing to each of the Banks;

B. declaring and determining that First Chicago, for itself and as Agent for the Banks, and the Banks, hold valid first liens upon, and first security interests in, the Stock Collateral for the equal and ratable benefit of the Banks, to secure payment of the Duplan Liabilities owing to each of the Banks C. declaring and determining that Chemical holds a valid first lien upon, and security interest in, the Duplan Cash Credit Balance and any additions thereto to secure payment of the Duplan Liabilities owing to Chemical;

D. authorizing and directing Chemical to apply the Duplan Cash Credit Balance as it may now or hereafter exist, in reduction of the Duplan Liabilities owing to Chemical;

E. requiring the Reorganization Trustee to account to NCNB for all sums or other dispositions of the Duplan Fixed Assets Collateral made on and after August 31, 1976, and upon such accounting, directing and instructing the Reorganization Trustee to turn over to NCNB, for the equal and ratable benefit of the Banks, all of the Duplan Fixed Assets Collateral Proceeds so accounted for, whether now or hereafter in existence by reason of subsequent sales and dispositions of the Duplan Fixed Assets Collateral, together with interest thereon from the dates any of the Duplan Fixed Assets Collateral were sold or disposed of by the Reorganization Trustee, or from the dates such Duplan Fixed Assets Collateral Proceeds came into the possession or control of the Trustee (together with interest thereon which may have been earned by or have accrued to Duplan as debtor in possession);

F. determining the monthly amounts of depreciation attributable to all unsold Duplan Fixed Assets Collateral used by the Trustee in the operations of the business of Duplan and directing and instructing the Reorganization Trustee to pay to NCNB, for the equal and ratable benefit of the Banks, such monthly amounts as determined for the periods of October 6, 1976 to October 31, 1976, November 1, 1976 to November 30, 1976, December 1, 1976 to December 31, 1976, and for each consecutive month thereafter on the first day of the succeeding month, commencing February 1, 1977, until further order of this Court;

G. directing the Reorganization Trustee to turn over to First Chicago, for the equal and ratable benefit of the Banks, all surplus proceeds arising from the discontinuance of the business of Suzanne and the liquidation of its assets, after payment or provision for all valid liabilities and obligations of Suzanne.

The answer of the Reorganization Trustee included, in addition to a general denial, numerous defenses and counterclaims, most of which were not directly involved in the orders under appeal but which we must nevertheless summarize, for reasons that will later appear. These included claims that the transfers to the Banks were voidable under § 70e(1) and, with respect to those transfers within the year preceding the filing of the petition, § 67d(2) of the Bankruptcy Act and various state laws ² because they were made with actual intent to hinder, delay or defraud creditors of Duplan, were made while Duplan was insolvent and were without fair consideration, and left Duplan unreasonably small capital in its business with knowledge that Duplan would incur debts beyond its ability to pay as they matured. Other counterclaims against each Bank alleged that Duplan was insolvent during the four months preceding the filing of its petition, that the Bank knew or had reason to know this, and that the Banks received payments on account of antecedent indebtedness, which were voidable preferences under § 60a and b of the Bankruptcy Act. Four other counterclaims attacked setoffs made by each Bank at the time of the filing of the Chapter XI petition. Another counterclaim challenged the adequacy of the UCC-1 Financing Statements and the real estate mortgages filed by the Banks with respect to certain properties. The Reorganization Trustee further claimed that Chemical's effort to obtain a security interest in the Duplan Cash Credit Balance "by virtue of a minor clause in the Factoring Agreement", in the face of an alleged agreement between Duplan and the Banks that the only security for the Banks' advances would be the collateral other than the Duplan Cash Credit Balance, was unconscionable; another counterclaim against Chemical challenged Chemical's claims to the Duplan Cash Credit Balance on a different ground.

This brings us to the two parts of the answer of the...