Chesapeake Trust v. Chesapeake Bay Enter., Inc. (In re Potomac Supply Corp.), Case No. 12-30347-DOT

CourtUnited States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
Writing for the CourtDouglas O. Tice
Decision Date31 December 2013
PartiesIn re: Potomac Supply Corporation, Debtor Chesapeake Trust, Plaintiff, v. Chesapeake Bay Enterprise, Inc. Defendant.
Docket NumberAdv. Pro. No. 13-03073-DOT,Case No. 12-30347-DOT

In re: Potomac Supply Corporation, Debtor
Chesapeake Trust, Plaintiff,
v.
Chesapeake Bay Enterprise, Inc.
Defendant.

Case No. 12-30347-DOT
Adv. Pro.
No. 13-03073-DOT

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF VIRGINIA Richmond Division

Signed: December 30, 2013
Entered on docket: December 31, 2013


Chapter 7

MEMORANDUM OPINION

Introduction.

Debtor Potomac Supply Corporation filed a chapter 11 petition in this court on January 20, 2012. It was primarily represented by attorneys Patrick J. Potter and Jerry Lane Hall of the law firm Pillsbury Winthrop Shaw Pittman LLP (Pillsbury). The chapter 11 case was converted to chapter 7 on January 24, 2013.

The instant adversary proceeding arises from a complaint filed by Chesapeake Trust against Chesapeake Bay Enterprise, Inc. (CBE) and concerns an asset purchase agreement entered into by the debtor with CBE on September 21, 2012. In response to the complaint, defendant CBE filed a motion for the district court to withdraw the reference as to the adversary complaint and also filed a Third-Party Complaint (the "Third-Party Complaint") against Pillsbury, Potter, Hall, and Regions Bank. On August 14, 2013, CBE filed an Amended Third-Party Complaint.

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In this opinion, the court rules upon the motion of third-party defendants Pillsbury and Potter to dismiss counts VII and VIII of CBE's Third-Party Complaint. (Counts VII and VIII of the Third-Party Complaint are identical to counts VI and VII of CBE's Amended Third-Party Complaint.) For reasons stated in this opinion, Pillsbury's and Potter's motion to dismiss these counts is granted with prejudice.

Background.

Debtor, which was founded in 1948, operated as a sawmill and building supply company that over the years of its operations came to include pallet manufacturing, wood preservation, home specialty product manufacturing and woody biomass processing for alternative home heating energy. In 2009 debtor entered financing arrangements with Regions Bank, which included several multi-million dollar loans by Regions to debtor. On January 20, 2012, the total amount due on the loans was greater than 17 million dollars. On that date, because debtor's financial difficulties prevented it from continuing to service the Regions debt, debtor filed the chapter 11 bankruptcy petition in this case.1 Debtor's assets consisted of its plant, equipment and machinery, inventory, accounts receivable, and real estate. Most of the assets were encumbered by the Regions loans.

Because debtor's business operations could not be sustained in the chapter 11, debtor's counsel filed motions to provide for an auction of substantially all of

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debtor's assets. Under the auction procedures put in place, the due date for bids was September 17, 2012. However, on the due date, debtor, its counsel Pillsbury, Regions, and the official committee of unsecured creditors believed that all bids that had been received were "woefully inadequate." On September 20 debtor's counsel filed an auction supplement stating that the auction process "was adjourned without date . . . ."

CHEASPEAKE BAY ENTERPRISE (CBE)

Plaintiff Chesapeake Trust pleads in its complaint in this adversary proceeding that CBE is a Virginia Corporation formed in February 2012 and that at least one of its purposes was to acquire the assets of the debtor Potomac. CBE's officers are Merthia Haynie, president, and Philip J. Haynie, vice-president. Townsend Jackson served as lead negotiator for CBE in negotiations to acquire debtor's assets in the bankruptcy case. Craig Jackson, a relative of Townsend Jackson, was also involved in these negotiations.

On April 5, 2012, CBE retained counsel to represent it in connection with a potential purchase of debtor's assets. Between April and September 2012, CBE and debtor negotiated an arm's length asset purchase agreement. During this period, CBE sought financing for the purchase. On September 21, 2012, CBE and debtor signed an asset purchase agreement that had been prepared by Pillsbury and CBE's counsel at the time. Pursuant to this agreement, on September 17 and 18, 2012, CBE wired a total of $500,000 to Pillsbury, which deposited the funds in its trust account.

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For reasons that are the subject of the underlying adversary proceeding, the asset purchase agreement between debtor and CBE did not close, and on November 6, 2012, debtor's assets were sold to Potomac Supply LLC, an affiliate of American Industrial Products.

Pillsbury has retained CBE's purchase deposit of $500,000, and a major issue in the underlying adversary proceeding is whether CBE is entitled to the return of the deposit. The deposit was the subject of an order entered by the court in the chapter 11 case on November 13, 2012. (Docket 485) This order, entitled "Order On Agreed Motion To Settle Superpriority Administrative Claim of Regions Bank And Approve Distribution of Sale Proceeds", provided for distribution of funds received from the liquidation of assets in the case.

Paragraph 5 of the November 13 order also provided for distribution of the CBE deposit. It stated that all of debtor's interest in the CBE deposit would be assigned to Pillsbury, subject to the following: a) from the deposit Pillsbury was entitled to its reasonable fees and expenses incurred in prosecuting or defending litigation to recover the CBE deposit; b) after recovery of the deposit, Pillsbury was entitled to recover up to $240,000; c) any excess recovery from the deposit would be divided equally by Pillsbury, Regions, and unpaid administrative expenses; any remaining excess would be paid to unsecured claims.

On January 24, 2013, the court entered a consent order converting debtor's case to a chapter 7. The order converting the case stated that conversion would not affect the rights of the parties to the Settlement Order of November 13, 2012, and

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specifically preserved those rights. Paragraph 8 of the conversion order further provided that:

[t]o ensure that the provisions of the Settlement Order are honored, all right, title and interest in and to any cause of action, claim or defense relating to funds held and owned by Pillsbury (as provided in the Settlement Order) against Chesapeake Bay Enterprise, Inc. or any person claiming ownership of or an interest in such funds shall be placed in a trust over which Pillsbury shall be trustee and subject to the trust agreement attached at Exhibit A. To avoid any misunderstanding, all such causes of action, claims or defenses are not and shall not be deemed property of the estate (and shall be deemed contributed to the Trust upon entry of this Order and signing of the Trust Agreement by Pillsbury), but shall remain subject to the Court's jurisdiction pursuant to the Settlement Order and this Order.

The order specifies that these funds are not property of the estate. Exhibit A incorporated a liquidating trust agreement and declaration of trust dated January 24, 2013, entered into by debtor, Pillsbury, as trustee, and Regions Bank and the unsecured creditor's committee as beneficiaries. The trust agreement created a trust referred to as the Chesapeake Deposit Liquidating Trust (Chesapeake Trust).

ADVERSARY PROCEEDING 13-03073

The instant adversary proceeding was initiated on April 9, 2013, by complaint filed by Chesapeake Trust, plaintiff, against Chesapeake Bay Enterprise, Inc., defendant. The gravamen of the complaint is Chesapeake Trust's asserted entitlement to retain the CBE deposit of $500,000, plus $500,000 additional deposit that plaintiff asserts was to be paid by CBE pursuant to the asset purchase agreement. On April 23, 2013, CBE filed its answer to the complaint and also filed a motion to the district court for withdrawal of the reference. CBE's motion to

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withdraw the reference remains pending in the district court.2

Also on April 23, CBE filed the eight count Third-Party Complaint against Pillsbury, Hall, Potter, and Regions. (Docket 7) The third-party defendants filed motions to dismiss all counts. After the court held hearings and heard argument on the dismissal motions, the court ordered dismissal of certain counts, allowing CBE leave to amend its third party complaint. On August 14, 2013, CBE filed its Amended Third-Party Complaint.

Motion To Dismiss Counts VII and VIII.

Pillsbury and Potter are the named defendants in Counts VII (defamation per se) and VIII (insulting words) of the Third-Party Complaint. On June 12, 2013, these defendants filed a motion to dismiss both counts. (Docket 35). The court heard argument on the dismissal motion on July 9, 2013, and reserved ruling. Subsequently, the parties have filed briefs.

Additional Findings of Fact.

Except where otherwise indicated, the court takes judicial notice of the additional facts below. See, e.g., Katyle v. Penn Nat'l Gaming, Inc., 637 F.3d 462, 466 (4th Cir. 2011) ("We may consider as well other sources that courts ordinarily examine when ruling on a Rule 12(b)(6) motion to dismiss . . . 'in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.'" (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007))); see also Burke v....

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