Acme Sec., Inc. v. CLN Props., LLC (In re Acme Sec., Inc.)

• Decision Date: 11 December 2012
• Docket Number: No. 12–57103–PWB.,12–57103–PWB.
• Citation: 484 B.R. 475
• Parties: In re ACME SECURITY, INC., Debtor. Acme Security, Inc., Movant/Objector, v. CLN Properties, LLC, Claimant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

484 B.R. 475

In re ACME SECURITY, INC., Debtor.Acme Security, Inc., Movant/Objector,

v.CLN Properties, LLC, Claimant.

No. 12–57103–PWB.

United States Bankruptcy Court,

N.D. Georgia,

Atlanta Division.

Dec. 11, 2012.

Edward F. Danowitz, Jr., Karen L. Kropp, Danowitz & Associates, P.C., Atlanta, GA, for Debtor.

David S. Weidenbaum, Office of the U.S. Trustee, Atlanta, GA.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

PAUL W. BONAPFEL, Bankruptcy Judge.

I. Introduction

This contested matter involves questions of successor liability under Georgia law when one corporation acquires the assets of another corporation, both controlled by the same principal, through exercise of its rights as a secured creditor under the Uniform Commercial Code. The Court concludes that successor liability does not apply in the circumstances here.

The chapter 11 debtor in this case, Acme Security, Inc., purchased the secured claim of a bank in the previous chapter 11 case of ALK Holdings, Inc (“ALK”). Michael Hassebrock and his wife were the sole shareholders of ALK, while Mr. Hassebrock is the sole shareholder of Acme Security.

The bank's claim of approximately $380,000 was secured by substantially all of ALK's assets, worth about $200,000. After dismissal of ALK's chapter 11 case, Acme Security and ALK agreed that Acme Security would accept all of ALK's assets in full satisfaction of the claim, as O.C.G.A. § 11–9–620 permits. Thereafter, Acme Security engaged in the same business as ALK in the same location with the same assets, employees, and customers.

CLN Properties, LLC (“CLN”), filed a proof of claim in the current case in which it asserts that Acme Security is liable to it in the amount of $465,640.20 as a successor to ALK for ALK's obligations as the tenant under a lease.¹ Acme Security has objected to the claim on the grounds that it is not a successor to ALK and that in any event CLN is not entitled to the amount it claims.²

The Court conducted an evidentiary hearing on October 2, 2012, at which both parties presented testimony and documentary evidence.³ The evidence at the hearing and the arguments of counsel present two issues.

The first issue is whether Acme Security is liable to CLN on a theory of successor liability. If it is, the second question is the amount of its claim. ⁴

The Supreme Court of Georgia summarized the law of successor liability in Georgia in Bullington v. Union Tool Corp., 254 Ga. 283, 284, 328 S.E.2d 726 (1985) (citations omitted), as follows:

Generally, a purchasing corporation does not assume the liabilities of the seller unless: (1) there is an agreement to assume liabilities; (2) the transaction is, in fact, a merger; (3) the transaction is a fraudulent attempt to avoid liabilities; or (4) the purchaser is a mere continuation of the predecessor corporation.

CLN asserts the third and fourth exceptions as the grounds for Acme Security's successor liability. Thus, CLN contends that Acme Security either acquired the assets of ALK in a fraudulent attempt to avoid ALK's liabilities or that Acme Security is a “mere continuation” of ALK.⁵

For reasons set forth below, the Court concludes that Acme Security is not liable to CLN as a successor to ALK. Accordingly, it is not necessary to determine the amount owed.⁶

Acme Security's objection to CLN's proof of claim is a core proceeding as described in 28 U.S.C. § 157(b)(2)(B) over which the District Court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and that has been referred to this bankruptcy judge pursuant to 28 U.S.C. § 157(a) and Local Rule 83.7, N.D. Ga. This Court has authority to enter a final judgment with regard to the objection pursuant to 28 U.S.C. § 157(b)(1), subject to review under 28 U.S.C. § 158.

Pursuant to Fed.R.Civ.P. 52(a), applicable underFed. R. Bankr.P. 7052, applicable underFed. R. Bankr.P. 9014, the Court makes the following findings of fact and conclusions of law.⁷

II. Findings of Fact

The testimony and exhibits introduced into evidence ⁸ do not raise any material disputes with regard to what happened.

In July 2003, Michael Hassebrock formed ALK Holdings, Inc. (“ALK”), to acquire the assets of a business known as Acme Lock & Key from its retiring owners. Mr. Hassebrock and his wife were the only shareholders, officers, and directors of ALK.

To finance its purchase of the assets, ALK borrowed approximately $550,000 from Chattahoochee National Bank. ALK granted the bank a security interest in substantially all of its then existing or after-acquired assets (Ex. M–5), ⁹ and Mr. Hassebrock personally guaranteed the debt. RBC Centura Bank (“the “Bank”) eventually became the holder of the note and security interest.

By 2006, ALK had developed a substantial business providing lock-work for Wachovia Bank that required more space than it had at its location on 1021 White Street in Atlanta, Georgia. Accordingly, in August 2006 ALK signed a 74–month lease with CLN Properties, LLC (“CLN”) for 9,544 square feet of office space at 4895 South Atlanta Road, Suites C & D, in Smyrna, Georgia, with occupancy to begin on November 1, 2006 and end on December 31, 2012. (Ex. C–1).

At the time of execution of the lease, Wachovia was ALK's largest customer, providing approximately 70 to 75 percent of its business revenues. After ALK moved into the Smyrna premises, however, Wachovia Bank significantly reduced the lock business that it sent to ALK and began disbursing the work to other contractors. ALK responded to the substantial decline in its revenues by attempting to reduce costs and laying off personnel. In addition, ALK sought to renegotiate its lease with CLN because it no longer needed all of the leased space and its reduced revenues could not support payment of rent at the contractual amount.

Negotiations between ALK and CLN with regard to modification of the lease were unsuccessful. On January 9, 2008, CLN made demand on ALK to pay past due rent of $30,283.01 and accelerated rent of $ 435,357.19 within ten days and to vacate the premises on the eleventh day if it did not pay these amounts. (Ex. C–2). On January 22, 2008, ALK filed a chapter 11 bankruptcy case in this Court, No. 08–60966–MGD (Ex. M–1).¹⁰ CLN filed a proof of claim in the ALK case on February 23, 2008, for the rent it had asserted, $465,640.20. (Ex. M–9).

On February 19, 2008, ALK filed a motion in its chapter 11 case to sell all of its assets to Acme Security, Inc., whose sole shareholder is Mr. Hassebrock, ¹¹ for $378,591.18, the amount then owed to the Bank. (Ex. C–3). The motion represented that the orderly liquidation value of the assets was only $200,270. Because the Bank would receive all of the sales proceeds from the sale of its collateral, the proposed sale would not have resulted in any money for the benefit of other creditors, who would have received no payment in the case. ALK solicited third-party offers for its assets, but received none.

The court in the ALK case declined to approve the proposed sale. In the course of the proceedings, however, an examiner was appointed to investigate the value of ALK's assets. At a hearing in the ALK case held on April 1, 2008, the examiner, Richard Elrod, an experienced auctioneer frequently employed by trustees in this district to liquidate business assets, reported his conclusion that the value of the assets was approximately $200,000, as ALK had represented.¹²

While the motion to sell its assets was pending, ALK rejected its lease with CLN, effective April 30, 2008, (Ex. M–3), and the Bank on April 17, 2008, filed a motion for relief from the stay to liquidate its collateral. (Ex. M–5). ALK moved into new space at 4451 Atlanta Road, Suite 136, Smyrna, Georgia, leased from VPBP, LLC, on April 21, 2008. ALK left the premises leased from CLN. (Ex. M–16).

On May 2, 2008, the Bank assigned its note and security interest to Acme Security for $ 392,248.65 (Ex. M–6), and the Bank's claim in the ALK case was assigned to Acme Security. (Ex. M–7, M–8). Acme Security acquired the funds to pay the Bank from Mr. Hassebrock and granted him a security interest in all of its assets to secure the loan. (Ex. M–12).¹³ After acquiring the loan and security interest, Acme Security did not pursue the motion for relief from the automatic stay and did not seek to exercise any of its remedies during the pendency of ALK's chapter 11 case.

Over the next 11 months following Acme Security's acquisition of the Bank's claim, ALK remained in bankruptcy. ALK had a cash flow that permitted it to pay its operating expenses and nothing more. In particular, it did not make any payments on its secured debt to Acme Security.

On April 6, 2009, the United States Trustee filed a motion to dismiss ALK's chapter 11 case or to convert it to chapter 7. (M–10). The motion represented that ALK's operating reports for December 2008 through February 2009 showed an average monthly positive cash flow of only $132.66, “woefully insufficient to satisfy administrative expense claims and make a meaningful distribution to creditors.” ( Id. at ¶ 7). The motion further asserted that ALK had no apparent ability to consistently generate sufficient cash flow post-petition and that it did not appear that ALK had the ability to formulate a plan of reorganization that could be confirmed. ( Id. at ¶¶ 8, 10).

The court in the ALK case conducted a hearing on the United States Trustee's motion to dismiss or convert, which CLN attended. On May 13, 2009, the court dismissed ALK's case, without opposition from any party in interest. (Ex. M–11).

At the time of dismissal of ALK's chapter 11 case, ALK had assets worth substantially less than the debt that encumbered them. Its lack of positive cash flow meant that it could not generate profits for any owner of the business, much less make payments on its secured or unsecured debts. It had no realistic prospects of continuing its operations and remaining in business.

Given these financial circumstances, it is clear that CLN and the other...