Cox v. Nostaw, Inc. (In re Cent. Ill. Energy Coop.), 09–81409
| Decision Date | 12 March 2015 |
| Docket Number | No. 09–81409,Adv. No. 09–8143,09–81409 |
| Citation | 526 B.R. 786 |
| Parties | In re: Central Illinois Energy Cooperative, Debtor. A. Clay Cox, not individually but as Trustee for the Estate of Central Illinois Energy Cooperative, Plaintiff, v. Nostaw, Inc., an Illinois Corporation, Defendant. |
| Court | U.S. Bankruptcy Court — Central District of Illinois |
OPINION TEXT STARTS HERE
Alan L. Fulkerson, Chicago, IL, for Plaintiff.
Thomas W. O'Neal, Howard & Howard Attorneys, PLLC, Peoria, IL, Kevin D. Tippey, Petersburg, IL, for Defendant.
The Plaintiff moves for reconsideration of the grant of summary judgment in favor of the Defendant, Nostaw, Inc. (NOSTAW). The Plaintiff, A. Clay Cox (TRUSTEE), is the Trustee for the chapter 7 estate of the Debtor, Central Illinois Energy Cooperative (DEBTOR).
The DEBTOR spearheaded the development of an ethanol production plant near Canton, Illinois, and retained NOSTAW as general contractor to build an adjacent grain handling facility to supply grain necessary for the production of ethanol. The ethanol plant was to be built by a separate entity, Central Illinois Energy, LLC (CIE), in which the DEBTOR owned a majority 71% interest via a holding company. The entire project failed, leading to CIE'S bankruptcy on December 13, 2007, and an involuntary bankruptcy petition against the DEBTOR on May 1, 2009.
In June, 2007, the DEBTOR executed a rescue plan with Green Lion Biofuels, LLC, whereby Green Lion bought the unfinished grain handling facility assets with the agreement that its lender, Ridgestone Bank, would finance the completion of the construction, after which the completed grain handling facility was to be either repurchased by the DEBTOR or sold to CIE. When Green Lion's lender balked, and NOSTAW threatened to stop the project, the DEBTOR stepped back in and agreed to pay NOSTAW so that NOSTAW would finish the construction of the grain handling facility. The DEBTOR and NOSTAW executed the “Second Agreement” dated September 28, 2007, whereby the DEBTOR agreed to pay NOSTAW $988,859.83, with a down payment of $300,000, and the balance to be paid “as agreed upon as work progresses.” NOSTAW continued its work and the DEBTOR paid NOSTAW three payments of $300,000 each.
Granting summary judgment in favor of NOSTAW, this Court in its Opinion of November 20, 2014 (the “First Opinion”) applied the rule that where a debtor makes a transfer in satisfaction of its own liability, the transfer is not constructively fraudulent. The TRUSTEE concedes that rule of decision. The TRUSTEE'S sole argument here is that the DEBTOR'S three payments to NOSTAW, totaling $900,000, did not discharge a liability of the DEBTOR because the Second Agreement was unenforceable for want of consideration. This argument could be successful only if the TRUSTEE would also prevail on his argument that the Green Lion purchase agreement in June, 2007, was a novation that released the DEBTOR from its then existing liability to NOSTAW under the construction contract. The Court noted but declined to decide that issue in the First Opinion.
The Court determined in the First Opinion that the Second Agreement embodied a contractual obligation enforceable by each party against the other, for the DEBTOR to pay NOSTAW in exchange for NOSTAW'S continuation and completion of the construction work on the grain handling facility necessary to make it operational. When the DEBTOR paid $900,000 to NOSTAW pursuant to that agreement, the payments were in satisfaction of its contractual liability. As such, the payments could not have been constructively fraudulent as a matter of law.
In his motion to reconsider, the TRUSTEE claims that the Second Agreement was “unenforceable” for want of consideration, that no debt was created by the Second Agreement, so that any payments thereunder were gratuitous and constructively fraudulent. The Court erred, argues the TRUSTEE, by determining that the Second Agreement was a valid contract supported by adequate consideration.
The terms of the Second Agreement itself and all of the testimony of the witnesses in the record support the Court's conclusion. The DEBTOR'S promise of payment was made in exchange for NOSTAW'S promise to perform work. These mutual promises are adequate consideration for each other. Therefore, a valid bilateral contract was formed.
The TRUSTEE does not contend that these mutual promises were not exchanged. Instead, he focuses on Green Lion's purchase of the grain handling assets in June, 2008, and its accompanying assumption of the DEBTOR'S obligation to pay NOSTAW for the work already performed and yet to be performed by NOSTAW. The TRUSTEE contends that the June, 2008, purchase resulted in a novation whereby Green Lion was substituted for the DEBTOR as to its obligation to pay NOSTAW under the original construction services agreement and that the DEBTOR was released from its liability to NOSTAW. Therefore, he argues, when the DEBTOR later paid NOSTAW $900,000, it was gratuitously paying the debt of Green Lion, that the DEBTOR received nothing of value in return for its payment, that the absence of value received by the DEBTOR means consideration was absent, so that the Second Agreement was unenforceable and the payments were constructively fraudulent. The TRUSTEE'S argument is unsupportable as a matter of fact and wrong as a matter of law, as hereafter explained in this Second Opinion.
In its motion for summary judgment, NOSTAW argued that the payments it received in October and November, 2007, were in satisfaction of the DEBTOR'S liability evidenced by the Second Agreement and accordingly could not be avoided as constructively fraudulent. The TRUSTEE responded by alleging that the Second Agreement was itself avoidable as a fraudulently incurred obligation under section 544. In its Opinion, the Court rejected that argument because the limitations period for such actions had expired several years ago. The TRUSTEE does not contend that the rejection of that argument was in error.
Although the TRUSTEE does not dispute any particular finding of fact and agrees that the material facts are undisputed, he contends that he, not NOSTAW, is entitled to judgment as a matter of law. This is an unusual situation where the legal effect of undisputed facts is the subject of the dispute. So it is important to reiterate the undisputed material facts.
In conjunction with the TRUSTEE'S motion for partial summary judgment, filed July 11, 2014, as Document 68, he filed a statement of material facts as to which there is no dispute. In that statement, at paragraphs 42 and 43, the TRUSTEE represents as undisputed facts that in September 2007, a dispute arose between Green Lion and NOSTAW regarding non-payment by Green Lion (Doc. 68–1, ¶ 42), and that as a result, in September, 2007, the DEBTOR undertook the obligation to repay the Green Lion debt (Doc. 68–1, ¶ 43). He further represents as an undisputed fact that the DEBTOR'S undertaking was predicated on the fact that CIE needed the grain handling facility to be operational so that it could be supplied with corn to make ethanol (Doc. 68–1, ¶ 44). He further represents as an undisputed fact that the DEBTOR'S Board of Directors authorized a $1,000,000 loan from Whitebox Advisors to pay the Green Lion Note and fund ongoing construction of the grain handling facility (Doc. 68–1, ¶ 45). The TRUSTEE also represents as an undisputed fact that the three payments to NOSTAW of $300,000 each were made by the DEBTOR pursuant to its undertaking evidenced by the Second Agreement (Doc. 68–1, ¶ 51).1
As noted in the First Opinion, the Court rejected the TRUSTEE'S impleaded theory that the Second Agreement was avoidable as a fraudulently incurred obligation because he had not filed a complaint to do so within the time required by law. It is widely recognized by courts that where a debtor makes prepetition payments on a contractual debt, in order for those payments to be avoidable as constructively fraudulent, it is necessary for the trustee to first avoid the underlying contract as a fraudulently incurred obligation. In re Tanglewood Farms, Inc. of Elizabeth City, 487 B.R. 705 (Bank.E.D.N.C.2013); In re Incentium, LLC, 473 B.R. 264 (Bankr.E.D.Tenn.2012); In re TSIC, Inc., 428 B.R. 103 (Bankr.D.Del.2010); In re All–Type Printing, Inc., 274 B.R. 316 (Bankr.D.Conn.2002). Absent avoidance of the underlying contract, the payments discharge the obligation and are, by definition, for reasonably equivalent value.
In the Court's view, not having sought to avoid the Second Agreement, the TRUSTEE'S theory that it is unenforceable for want of consideration is a fall-back position that was not well-developed in his motion for summary judgment. While the Court determines the want of consideration theory to be meritless as a matter of fact and law, since summary judgment is being granted against the TRUSTEE this Second Opinion will set forth as thorough and clear an explanation of this Court's reasoning as possible. Additionally, the Court gives the TRUSTEE the benefit of addressing several alternative arguments that were not actually asserted in his motion to reconsider and accompanying memorandum.
The TRUSTEE'S attack on the Second Agreement as unenforceable is first raised in the briefing related to the summary judgment motions. As noted, the TRUSTEE never filed a complaint to avoid the Second Agreement as a fraudulent undertaking under section 544 or section 548 and it is now too late to do so. This begs the question as what exactly is the source of the TRUSTEE'S power to attack the Second Agreement? 2
A trustee in bankruptcy draws his rights and authority from the Bankruptcy Code. That authority falls into two broad categories: (1) rights and claims held by the trustee as successor to the debtor's interests included as property of the estate under 11 U.S.C. § 541, and (2) actions brought under one of the...
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