Askenaizer v. Recore Trading Co. (In re Catco Recycling, LLC)
| Decision Date | 09 August 2016 |
| Docket Number | Adv. No. 15–1022–BAH,Bk. No. 14–11021–BAH |
| Citation | 559 B.R. 293,2016 BNH 009 |
| Parties | In re: Catco Recycling, LLC, Debtor Michael S. Askenaizer, Chapter 7 Trustee, Plaintiff v. Recore Trading Company, LLC, Defendant |
| Court | U.S. Bankruptcy Court — District of New Hampshire |
Clifford Gallant, Jr., Esq., Beliveau, Fradette, Doyle & Gallant, PA, Manchester, New Hampshire, Attorney for Plaintiff
Matthew R. Johnson, Esq., Devine, Millimet and Branch, P.A., Manchester, New Hampshire, Attorney for Defendant
Michael S. Askenaizer, the chapter 7 trustee (the "Trustee") of the bankruptcy estate of Catco Recycling, LLC ("Catco" or the "Debtor"), filed a two-count complaint against Recore Trading Company, LLC ("Recore") (Doc. No. 1) (the "Complaint"). At issue in this case is whether Recore owed money to the Debtor on the petition date that is property of the estate and must be turned over to the Trustee. The Court conducted a trial of this matter on June 14, 2016, and took the matter under advisement. This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334and 157(a) and Local Rule 77.4(a) of the United States District Court for the District of New Hampshire. This is a core proceeding in accordance with 28 U.S.C. § 157(b).
In 2005, Donald Belisle III ("Belisle III") formed the Debtor, a business that recycled catalytic converters, other metals, and scrap produced by salvage yards. Belisle III's father, Donald Belisle ("Belisle"), owns a similar company, Recore, but it operates on a much larger scale. In the spring of 2013, Belisle III approached his father to see if Recore would be interested in purchasing Catco's assets as Belisle III indicated that his company was in financial trouble and would be going out of business. Belisle III wanted $250,000.00 for Catco's assets, but Belisle agreed that Recore would pay only $150,000.00. On July 12, 2013, Belisle III, the sole member of the Debtor, and Belisle, the sole member of Recore, executed a document titled "Preliminary Purchase And Sale Agreement" (the "P & S Agreement"), which states in its entirety:
Preliminary Purchase And Sale Agreement
Seller Donald Belisle III (Catco Recycling)
Buyer Recore Trading Co LLC.
Seller agrees to sell all assets of "CatcoRecycling" To Buyer including but not limited toPeterbilt dump truck, Isuzu box truck, Nissanfork lift, Baler, Cat shear, wire stripper misccontainers and shelving, customer lists,company name and rights. Buyer agrees to payseller $150,000.00 total with $50,000.00 due atsigning, $50,000.00 due in 60 days and thebalance of $50,000.00 due in 120 days. Thisagreement is preliminary and will besuperseded by final agreement when it isprepared by buyers attorney.
Donald Belislelll
Buyer
The P & S Agreement was drafted by Belisle, who testified that this agreement was only preliminary and was to be superseded by legal documents to be drafted by his attorney. While other documents were drafted by Recore's attorney after July 12, 2013 (including documents that would have required Belisle III to cease operating Catco and work exclusively for Recore), they were never signed. The reason why those documents were never signed was not clear from the record as the testimony of Belisle and Belisle III conflicted on this point. The parties do not dispute, however, that the P & S Agreement is the only document memorializing the sale that was executed by both Recore and the Debtor. The P & S Agreement does not contain any provision indicating that Recore was buying or assuming Catco's liabilities as part of the transaction.
Belisle testified that the most important asset being purchased by Recore was Catco's customer list, which in the parties' business really means suppliers, i.e., companies that could supply Catco and Recore with product to be recycled. Belisle III testified that the equipment was the primary asset being sold.
Pursuant to the terms of the P & S Agreement, Recore issued and delivered to Belisle III the first $50,000.00 payment due under the P & S Agreement on July 12, 2013. The check was made payable to Belisle III, instead of the Debtor, at Belisle III's request.1 Recore described this payment as "goodwill" in its financial records.
On or about the date the P & S Agreement was executed, Belisle III also became a full time employee of Recore. Belisle III and his father had agreed that Belisle would come work for Recore and bring Catco's customers/suppliers with him. Belisle testified that this was the most important part of the deal to him. Belisle III testified that he was paid $2,000.00 per week in salary as a Recore employee, with $1,000.00 being paid through Recore's payroll account and the second $1,000.00 being paid through Recore's operating account, in order to keep from Recore's longtime general manager the fact that Belisle III was receiving a higher wage than he was. Recore's records show that only the $1,000.00 payments from the payroll account were subject to tax withholdings; these checks from the payroll account were in the net amount of $844.68.2 They were categorized by Recore as "payroll expenses" in its financial records.
Belisle testified that Belisle III was paid $1,000.00 per week in salary and an extra $1,000.00 per week because, during the first week of his employment, Belisle III requested additional monies so that he could pay his bills. Belisle testified that the second $1,000.00 per week payment was to be deducted from the final installment due under the P & S Agreement, i.e., they were to be treated like an advance. Like the initial $50,000.00 installment payment, these separate $1,000.00 per week payments were described as "goodwill" in Recore's financial records and not as "payroll expenses."3
At trial, Belisle III disputed Belisle's contention that the second $1,000.00 payments were not salary. He stated his expenses could not be covered by weekly wages of $1,000.00, as his child support payments were $320.00 per week and his mortgage was $3,500.00 per month, or roughly $807.00 per week. However, this assertion is consistent with Belisle's testimony that Belisle III needed additional funds in order to meet his expenses.
Recore suggested at trial that Belisle III continued to operate Catco after the execution of the P & S Agreement. Recore offered a transaction spreadsheet from Rebuilders Automotive Supply Co. ("RAS") that shows multiple transactions between Catco and RAS during July and August. Belisle III testified that the transactions shown on RAS's spreadsheet during this time period reflect only payments for material that was purchased or delivered before the execution of the P & S Agreement. Belisle disputes Belisle III's explanation and contends that the spreadsheets instead show additional "advances" to Catco and not simply "final payments."
Between September 13 and 17, 2013, Recore issued three more checks made payable to Belisle III, which together totaled $50,000.00. These checks represented the second $50,000.00 installment due from Recore to Catco under the P & S Agreement. In its financial records, Recore again described these payments as "goodwill."
In November 2013, while attending an out-of-state trade show, Belisle met a representative of RAS, who informed Belisle that Catco owed his company $75,000.00. The representative further informed Belisle that RAS was aware of the asset sale between Catco and Recore. He indicated that Recore was liable for this debt, and he threatened Recore with legal action. Belisle testified that he was shown some documentation from RAS at the trade show that caused him to believe that the assets he purchased from Catco had potential liens on them. Belisle stated he never would have purchased the assets from Catco if the assets were encumbered with liens.
On June 18, 2013, prior to Catco and Recore executing the P & S Agreement, Catco executed an advance agreement and a promissory note in the amount of $75,000.00 pursuant to which RAS would advance money to Catco to purchase inventory and Catco would be liable to RAS for the amounts advanced. The advance agreement called for the execution of a security agreement. Unlike the advance agreement and accompanying note, the security agreement is dated a month later, on July 18, 2013, after the P & S Agreement was signed. The security agreement granted a continuing security interest in "all tangible and intangible personal property of the Debtor ... in which the Debtor may now have or hereafter acquire an interest."
After learning this information, and believing that RAS held a valid lien on the assets Recore purchased from Catco and that Recore could potentially be liable for the money Catco owed RAS, Belisle contacted his son via telephone from the convention. Belisle informed Belisle III that Recore would be withholding the remaining payment due under the P & S Agreement, which was due on November 9, 2013, until the matter with RAS was resolved. Following this telephone conversation, Belisle III immediately left Recore's employ and never returned. Belisle III testified that his father also told him during their conversation that he would be withholding payment of his wages as well; Belisle denied that and said he would have paid Belisle III for his work if he had remained with the company.
Recore did not make the third installment payment when due on November 9, 2013. Shortly thereafter, Recore received a letter dated November 19, 2013, from counsel for RAS, which asserted that as a result of Recore's purchase of "the entire business of Catco," Recore was liable as a corporate successor for Catco's debts. RAS informed Recore that it was owed $77,116.67 and demanded payment by November 22, 2013. RAS further informed Recore that it was prepared to file suit against it and included with the letter a copy of a draft complaint. Neither the letter nor the draft complaint alleged that RAS held a...
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