Fischer v. Ken-Mac Metals (In re Pace Am. Enters., Inc.)

Decision Date21 March 2013
Docket NumberCASE NO. 11-33416 HCD,PROC. NO. 12-3002
PartiesIN THE MATTER OF PACE AMERICAN ENTERPRISES, INC., DEBTOR. REBECCA HOYT FISCHER, TRUSTEE, PLAINTIFF, v. KEN-MAC METALS, A DIVISION OF THYSSENKRUPP MATERIALS, NA, INC., DEFENDANT.
CourtU.S. Bankruptcy Court — Northern District of Indiana

CHAPTER 7

Appearances:

Rebecca Hoyt Fischer, Esq., counsel for Trustee, Laderer & Fischer, P.C., 401 East Colfax, Suite 305, South Bend, Indiana; and

Anne E. Simerman, Esq., Cathleen M. Shrader, Esq., and Thomas P. Yoder, Esq., counsel for defendant, Barrett & McNagny LLP, 215 East Berry Street, Fort Wayne, Indiana 46802.

MEMORANDUM OF DECISION

At South Bend, Indiana, on March 21, 2013.

Before the court are the cross-motions for partial summary judgment filed by the plaintiff Rebecca Hoyt Fischer, Trustee ("plaintiff" or "Trustee") of the chapter 7 debtor Pace American Enterprises, Inc. ("debtor" or "Pace"), and by the defendant Ken-Mac Metals ("defendant" or "Ken-Mac"), creditor of the debtor. Each party asserts that it is entitled to judgment as a matter of law with respect to Count I of the Plaintiff's Complaint.1 The Complaint was filed pursuant to 11 U.S.C. § 544(a)(1) and § 548(a)(1) to recover certain property that the Trustee determined was avoidable and was fraudulently transferredimmediately prior to the filing of the bankruptcy proceeding. For the reasons that follow, the Trustee's Motion for Partial Summary Judgment is granted and Ken-Mac's Motion for Partial Summary Judgment is denied.2

BACKGROUND

The parties agree that there are no material facts in dispute. They have presented to the court, as attachments to their briefs, the relevant contract between the parties, price quotes, answers to interrogatories, and affidavits. Based upon these documents, the court sets forth the uncontested factual background to the legal dispute.

Pace, a manufacturer of enclosed trailers with its principal place of business in Middlebury, Indiana, and Ken-Mac, a processor and distributor of aluminum and stainless steel products (designated herein as "the Metal") with its principal place of business in Cleveland, Ohio, entered into a "Supply Agreement" on December 29, 2010. The Agreement was premised on Pace's desire to receive a reliable supply of high-quality Metal to provide to its manufacturing locations and Ken-Mac's desire to secure a substantial portion of Pace's Metal business. See R. 30, Ex. A, p. 1. "[T]o establish a stable and mutually advantageous long-term strategic supply relationship," the Agreement set forth the obligations and rights of each party, pricing policies, mill selection procedures, shipping and payment terms, and other provisions. Id. Of relevance to this proceeding is the section titled "Consigned Inventory," which stated the following:

Buyer [Pace] and Seller [Ken-Mac] may agree to establish an inventory consignment program at some of [Pace's] facilities whereupon the following conditions will apply:
1. [Pace] and [Ken-Mac] shall jointly determine the mix and quantity of consigned inventory, generally intended to constitute no more than a 60 day supply.
2. [Pace] will promptly notify [Ken-Mac] of all withdrawals [of Metal from inventory]. Opening of any banded skid or coil by [Pace] shall constitute withdrawal of the entire skid or coil. [Ken-Mac] may immediately invoice for all withdrawals.
3. [Ken-Mac] may invoice [Pace] for any consigned inventory not withdrawn within 180 days, from the date placed into inventory.
4. [Pace] is responsible to [sic] for maintaining adequate storage conditions and shall provide [Ken-Mac] adequate protection against loss, damage, fire and theft of inventory.
5. [Ken-Mac] retains a purchase money security interest in all consigned inventory until withdrawn by [Pace]. [Ken-Mac] shall be granted reasonable access during regular business hours for inspection of consigned inventory.

Id., pp. 4-5. Ken-Mac did not file a UCC financing statement with respect to Pace or the Metal.

Ken-Mac sent its first shipment under the consignment program on February 28, 2011, and additional shipments were made beginning on April 4, 2011. Under the consignment program, Pace stored Ken-Mac's inventory on Pace's property and would, from time to time, withdraw inventoried Metal to use in the manufacturing of its trailers. Pace would break open the banded skid or coil and move the Metal into its production facility. It then would notify Ken-Mac of the withdrawal. Upon notification, Ken-Mac would then generate an invoice and bill Pace for the Metal withdrawn from inventory.

However, Pace failed to make timely payments on its account. On August 15, 2011, Pace was in possession of approximately 290,000 pounds of metal coils located at six different Pace warehouses. Ken-Mac informed Pace that it would pick up its remaining inventory on Pace's premises. The Metal transferred back to Ken-Mac was the banded skids or coils that Pace had not opened. Although there is some dispute about whether Ken-Mac notified Pace of the inventory withdrawal or which Ken-Mac employee informed Pace of the pick-up, that fact is not material to the resolution of the legal issues herein.3 The parties agree that Ken-Mac removed its inventoried Metal from Pace's premises by August 17, 2011, and did not list the Metal on any invoice sent by Ken-Mac to Pace. They also confirm that Ken-Mac paid no money or other consideration to Pace for the transferred Metal.

On August 31, 2011, an involuntary bankruptcy petition for relief under chapter 7 was filed by three creditors of Pace, including Ken-Mac.4 Pace's schedules showed debt of $18,408,619.23 and assets of $7,072,451.12 when the involuntary petition was filed.5 Pace's financial condition did not substantially change between the date of the transfer, August 17, 2011, and the date the involuntary petition was filed, August 31, 2011.

DISCUSSION

Each party has filed a motion for summary judgment. This court renders summary judgment only if the record shows that "there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); Fed. R. Bankr. P. 7056; see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). The moving party bears the initial burden of demonstrating that no genuine issue of material fact exists. See Celotex, 477 U.S. at 323. If the moving party satisfies its initial burden, then the nonmoving party must "go beyond the pleadings and by [its] own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'" Id. at 324 (quoting Fed. R. Civ. P. 56(e)). The court neither weighs the evidence nor assesses the credibility of witnesses. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).

When, as in this case, the parties have filed cross motions for summary judgment, the court must examine the evidence and "construe all facts and inferences therefrom 'in favor of the party against whom the motion under consideration is made.'" In re United Air Lines, Inc., 453 F.3d 463, 468 (7th Cir. 2006) (quoting Kort v. Diversified Collection Servs., Inc., 394 F.3d 530, 536 (7th Cir. 2005)). Summary judgment must be granted "against a party who fails to make a showing sufficient to establish the existence of anelement essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.

The Trustee seeks to avoid Ken-Pac's transfer of Metal under 11 U.S.C. § 548 of the Bankruptcy Code6 by exercising her "strong-arm powers" under 11 U.S.C. § 544.7 The Trustee's position is that the transfer of the Metal from Pace to Ken-Mac about two weeks before the Pace bankruptcy filing was a transfer that the Trustee, as a § 544 judgment lien creditor, can avoid as an unperfected lien or as an actual or constructive fraudulent transfer under § 548. The Trustee seeks to recover the value of the Metal for the benefit of the estate pursuant to 11 U.S.C. § 550. She asserts that a trustee, as lien creditor under § 544(a)(1),has priority over Ken-Mac, a consignor that failed to perfect its security interest by filing a UCC financing statement. She requests summary judgment on the issue of liability, and states that the parties will accept mediation concerning the amount of damages, if necessary.

A. 11 U.S.C. § 544(a)(1)

Ken-Mac claims that § 544(a)(1) is inapplicable to the facts in this case. It points out that a § 544 hypothetical judicial lien arises at "the commencement of the case." However, when this case commenced, the defendant notes, the Metal was no longer in the debtor's possession or control. For that reason, it argues, "there was nothing over which a hypothetical Pace creditor could obtain judicial lien rights." R. 32 at 9. Although the result would have been different if the Metal had been in Pace's possession on the date of the bankruptcy petition, Ken-Mac admitted, in this case the Metal had been reclaimed before bankruptcy and thus no hypothetical judicial lienholder could have reached it. See id.

The court agrees with Ken-Mac that the bankruptcy filing is the event that triggers the trustee's ability and right to assume the position of hypothetical lien creditor. At the moment the petition is filed, the trustee becomes, hypothetically, a creditor with a perfected lien who has the power to avoid any competing claims over which she has lien priority. "The purpose of [§ 544] is to equip the trustee with the ability to gather property of the estate for the benefit of unsecured creditors." In re Couillard, ___ B.R. ___, 2012 WL 6924391 at *2 (Bankr. Nov. 9, 2012).

However, in gathering the property of the estate the Trustee is not limited to only the property in the debtor's possession on the date of the bankruptcy petition. Section 544(a) authorizes a trustee to...

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